Sterne Agee Downgrades Capital One Financial To Underperform

Sterne Agee CRT analysts, Henry Coffey, Jason Weaver, Pedro Saboia and Yi Fu Lee downgraded Capital One Financial Corp. COF to Underperform from Neutral. The analysts have established a price target of $67.50.

The brokerage cited four issues for believing Capital One's stock will continue to underperform its major financial competitors. The first issue is that all business lines remained challenged. The analysts pointed out the 6 percent drop in first quarter EPS reflecting not only the provisioning costs in connection with its ongoing card portfolio growth, but also issues in both the consumer and commercial business lines.

The second issue is Energy lending, which is 1.8 percent of its total loans though it has noticeable impact on credit cost. Sterne analysts believe increased oil prices should help though other parties didn't see the stress abating the sector. However, there still existed risk of secondary declines.

The third issue is lower spreads in auto sector. The brokerage said, "A look at the company's monthly credit data suggest that the move away from subprime lending is finally having a positive effect on year-over-year credit metrics. The offset, at lease so far, has been lower yields and a 55 bps drop in year-over-year loss adjusted spreads."

The fourth issue is about long-term structural ones. The analysts believe Capital One Financial is no longer the profitable firm with ROEs consistently above 20 percent. They also said that on a PE basis, the stock might look cheaper than DFS by a factor of 5–6 percent.