Why Capital One's Decelerating Card Growth Is A Good Thing

Chris Spahr of CLSA said the declining card growth at Capital One Financial Corp. COF is good as it reduces provision headwinds.

Capital One's US card loan growth has been decelerating slightly each of the past five months, falling from a high of 14.2 percent year-over-year growth in February 2016 to 11.4 percent in August.

This decline was expected given heightened competition at JPMorgan Chase & Co. JPM, U.S. Bancorp USB, Wells Fargo & Co WFC and Citigroup Inc C. The analyst also noted that COF's card portfolio had been growing at more than two times the industry, which was unsustainable over time without taking unnecessary risks.

"Decelerating card growth translates to slightly less marketing and provision headwinds (both of which are front-loaded) and accelerating earnings as a greater percentage of its spread revenues from the existing portfolio fall to the bottom line," Spahr wrote in a note.

Meanwhile, Capital One said it was acquiring Cabela's $5 billion card portfolio upon completion of the Bass Pro Shops-Cabela's merger, which is expected to close in the first half of 2017.

The card deal should be slightly accretive to COF's 2018 earnings helped by COF's existing scale and Cabela's high-quality book.

"We believe the deal is a good tactical use of excess capital without stretching for risks. Maintain BUY and $86 target price," Spahr continued.

"Given that credit card ROAs are typically around 2.2-2.5% (or 3.5-4.0% pretax), we expect the Cabela's deal to be accretive to ROE and ROTCE by about 10bps all else equal," the analyst added.