Capital One Maintains an Aggressive Posture in Q2 as it Spends Heavily to Drive Loan Growth

Narrow-moat-rated Capital One reported mixed second-quarter results with strong loan growth being offset by heavy spending and a continued normalization of credit losses and provisioning. Preprovision net revenue grew 12% year over year to $8.2 billion, with net interest income being the primary driver of growth. EPS was $4.96, a 35% decline from $7.62 last year, which translates to a still strong return on tangible equity of 22.6%. The drop in EPS was primarily due to higher credit loss provisioning, with Capital One building $200 million in reserves versus a $1.16 billion release last year. We see this increase in reserves as primarily a return to normal provisioning behavior, as Capital One’s loan balance increased during the quarter, not a consequence of weak underwriting. As we incorporate these results, we are maintaining our $155 fair value estimate for Capital One, and we see the shares as modestly undervalued at current prices.