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Capital One has announced plans to repurchase up to $16 billion of stock after reporting a profitable third quarter. The bank’s net income jumped 80% to $3.19 billion at $4.83 per share, with the adjusted earnings per share topping the estimated $4.39 to reach $5.95.
Capital One’s Founder, Chairman, and CEO, Richard Fairbank, stated that the bank is well-positioned to capitalize on opportunities like the stock repurchase, primarily due to the integration with Discover. He claimed Discover’s purchase volume helped the bank’s adjusted earnings, credit results, capital generation, and top-line growth to continue strongly in the third quarter.
Fairbank believes the full quarter of Discover in Q3 drove the net interest margin up by 45 basis points. He also pointed out that the partial quarter benefit from the acquisition of Discover was about 40 basis points in Q2. The bank’s Q3 financial report showed that the quarter’s net interest margin is 74 basis points higher than in Q2, at 8.36%.
Fairbank unveils plans to increase quarterly common stock dividends
The executive emphasized that the bank anticipated increasing its quarterly common stock dividend at the beginning of Q4 to $0.08 per share, up from $0.60 per share. The company’s shares have gained 22% this year. However, he emphasized that the decision still requires the board’s approval before it can be fully implemented.
Fairbank also pointed out that the stock repurchase authorization will take effect immediately, superseding the previous one. He justified this decision by claiming that the bank has many large opportunities that formed the basis of its sustained growth and strong returns over the long term.
However, Fairbank mentioned that he would not provide specific details about the bank’s plans, as they are subject to change. The CEO added that, at the very least, it is reasonable to assume that the bank will henceforth accelerate its plans.
“We identify opportunities and then it takes investment on the way to the payoff and that’s been our life story and our portfolio is a blend of things that are in different stages of the life cycle with respect to investments and their, value creation.”
–Richard Fairbank, CEO of Capital One
The CEO claimed that the bank’s opportunities are accelerating in many areas, but it will remain focused on nurturing and investing in the Discover network. He added that the Discover acquisition aligns with the company’s growth model since its founding days.
Capital One expects $2.5B in Discover revenue boost
The bank’s management expects Discover to boost revenue by $2.5 billion, primarily driven by transferring the bank’s debt business to the Discover network. Fairbank explained that Discover’s integration is likely to ramp up the bank’s revenue in Q4 and early next year.
However, the bank’s CEO warned the Discover portfolio could face near-term loan growth headwinds due to credit policy pullbacks. He also pointed out that the integration costs are likely to be higher than initially estimated, although progress remains on track.
Capital One delivered substantial margin expansion and growth in the first full month after the Discover acquisition. Fairbank reiterated that the bank’s board of directors is confident in the set targets.
The Capital One boss emphasized the dominant impact of Discover’s acquisition, revealing a 39% YoY increase in purchase volume in the credit card business. However, he noted that organic growth without factoring in the effects of Discover stood at only 6.5%.
Capital One’s CFO, Andrew Young, also said there were multiple adjusting items related to the Discover acquisition. He pointed out that the joint company’s revenue increased by 23% ($2.9B) compared to Q2, although non-interest expense increased by 18%.
Young revealed that the bank’s tangible capital ratios have remained healthy after the Discover merger. The Discover acquisition is fully digested, making Capital One the largest U.S. credit card issuer with approximately $683 billion in assets.
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