Capital One Earnings: Credit Costs Are a Headwind but Credit Card Loan Growth Remains Solid

Narrow-moat Capital One reported messy second-quarter earnings that were roughly in line with our expectations once adjusted for one-time expenses. Net revenue increased 1% from last quarter and 5% from last year to $9.5 billion. Diluted earnings per share decreased 56% from last year to $1.38, largely due to one-time expenses, the most significant of which was a $826 million increase in credit reserves from the end of its loss sharing agreement with Walmart. On an adjusted basis diluted earnings per share would have been $3.14, still down 11% from last year, mostly due to higher credit costs. As we incorporate these results, we do not intend to materially alter our $158 fair value estimate for Capital One, and we see the shares as slightly undervalued.