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Capital One (COF) is the eighth largest bank in the U.S. and will report its Q3 earnings on Thursday. U.S. banking sector stocks have taken a beating in the past quarter and Capital One is no exception. In the first two quarters of this year, the company reported better than expected results primarily because of higher revenues and lower provisions for loan losses resulting from an improved credit performance. However, in Q3 2011 it will be hard for the company to beat market expectations as the provisions for loan losses slowly begin to climb. Recently both Citigroup (C) and Wells Fargo (WFC) have reported decline in revenues for Q3 2011 because of which banking sector stocks declined sharply on Monday.

See our full analysis of Capital One

(Chart created by using Trefis' app)

Little or No Decline in Provision for Loan Losses

Delinquencies at Capital One have started to increase after falling for most part of 2011. The company reported higher delinquencies for its U.S. credit card business in September to 3.65% from 3.43% making it 2 months in a row of worsening credit. Its charge off rate dipped to 3.9% in September after rising to 4.1% in August. [1] These numbers suggest that Capital One’s provisions for loan losses may not decline any further in Q3 2011 and could start to increase going forward.

(Chart created by using Trefis' app)

Rising Credit Card Loans

Banks have started issuing credit cards to sub-prime borrowers and have issued 5.4 million credit cards in the first half of the year which is a jump of 64% from the previous year. Steep declines in late payment and loan-loss rates have caused many banks to grow more confident and are lending to sub-prime borrowers in an attempt to accelerate growth. [2] Thus we expect Capital One to report an increase in its credit card loans in Q3 2011.

We have a price estimate of $57.90 on Capital One’s stock which is nearly 40% above the current market price.

Notes:

  1. Capital One Sept. credit card delinquencies rise, Market Watch
  2. Card issuers circling subprime borrowers again, Market Watch

Disclosure: No position

Source: Capital One Q3 Preview: What We're Watching Thursday