Capital One Financial Corp. (NYSE: COF) is on the verge of reporting its quarterly earnings for the fourth quarter, scheduled for Thursday. Market watchers are closely evaluating the bank's performance amid the looming threat of a legislative proposal by President Donald Trump that aims to cap credit card interest rates at 10%. This initiative has raised alarms among financial analysts, who warn that Capital One could be disproportionately affected compared to its financial industry peers.
According to a detailed analysis by CFRA Research, Capital One ranks among the banking institutions most susceptible to the impact of such a policy. The susceptibility stems largely from Capital One's substantial dependence on revolving credit card balances and the resultant net interest income that forms a significant portion of the bank's revenue streams.
Examining recent financial disclosures, Capital One reported total credit card loans amounting to $271 billion in the third quarter alone. This figure represents a sharp 70% increase compared to the previous year, a surge largely attributable to the acquisition of Discover Financial Services which was finalized at the beginning of last year. Notably, credit card loans constitute the largest segment within Capital One's overall loan portfolio, which stood at $443 billion at the close of the third quarter. This portfolio segment continues to be a vital revenue driver for the bank.
During the same period, Capital One achieved a net interest margin of 8.36%, a metric that had been bolstered by elevated yields across its credit card assets. CFRA Research equity analyst Alexander Yokum underscored the risks by noting that banks with sizable credit card portfolios, like Capital One, could experience earnings reductions of at least 10% should the proposed interest rate cap be enacted.
Despite these regulatory concerns, the general sentiment among analysts remains positive ahead of Capital One's upcoming earnings announcement. JPMorgan Chase has maintained its “Overweight” rating on Capital One's shares, signaling continued confidence, and simultaneously raised its price target from $280 to $300. This adjusted target implies anticipated upside potential of over 30% relative to current trading levels.
Adding to market enthusiasm, CNBC's “Mad Money” host and analyst Jim Cramer recently highlighted the banking sector's discounted valuations, pinpointing Capital One as the ``most undervalued'' institution with considerable upside prospects compared to its industry counterparts.
Reflecting these valuations, Capital One trades at a forward price-to-earnings ratio (P/E) of approximately 10.56 times, which is significantly lower than the P/E ratio of around 27.43 for the SPDR S&P 500 ETF Trust (NYSE: SPY), an exchange-traded fund that tracks the broader S&P 500 index.
In recent trading activity, Capital One’s share price experienced a decline of 4.36% on Tuesday, closing at $228.72, but exhibited a modest gain of 0.56% in overnight trading. The company's stock boasts strong momentum and quality scores, according to Benzinga’s Edge Stock Rankings, supported by favorable price trends over the medium and long term.