Strong Loan Growth for Capital One in Third Quarter, but Costs Continue to Rise

Narrow-moat Capital One reported decent third-quarter results, as strong loan growth was offset by higher provisioning and operating expenses. Net revenue increased 12% from last year and 7% from last quarter to $8.8 billion. Diluted earnings per share fell 38% to $4.20, which translates to a return on tangible equity of 18.59%. The EPS decline was due to substantially higher provisioning for future credit losses as the company built $734 million in reserves during the quarter versus a $770 million release last year. We see the increase in reserves as primarily a return to normal provisioning behavior, not a sign of sudden credit deterioration, as write-offs remain well below normal levels. As we incorporate these results, we do not expect to materially alter our $155 fair value estimate; we see the shares as undervalued at current prices.