'Suboptimal' Risk-Return Triggers Capital One Downgrade

Capital One Financial Corp. COF's upside is fully priced in, according to Nomura, and the bank and credit card issuer has little room for multiple expansion. 

The Analyst

Nomura analyst Bill Carcache downgraded shares of Capital One from Buy to Neutral and lowered the price target from $111 to $109.

The Thesis

The upside from improving credit is fully discounted in the shares of Capital One and, given the company's slowing top-line growth, "little room" exists for upward revisions, Carcache said in a Wednesday note.

Delinquency rate formations have been improving at Capital One, but as the buy side has discounted this, it is difficult for the company to surprise to the upside on credit, the analyst said.

Nomura sees little room for multiple expansion due to the company offering regional bank returns with card issuer risk and its heightened volatility relative to other financials.

Discover Financial Services DFS is a much more efficient alternative to Capital One, capable of generating relative outperformance for the rest of 2018, Carache said. 

Capital One's card segment, though generating higher risk-adjusted loan yields relative to Discover Financial, is less efficient and generates lower risk-adjusted returns, he said. 

"Looking ahead, the fact that COF exposes shareholders to a suboptimal combination of risk vs. return relative to regional banks and card issuers leads us to expect relative underperformance." 

The Price Action

Capital One shares are up about 7 percent over the past year.

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Posted In: banksBill Carcachecredit cardsfinancialsNomura InstinetAnalyst ColorDowngradesPrice TargetAnalyst Ratings