COVID-19-pandemic-related disruption has been one of the most serious challenges ever faced by the financial services industry. A decline in demand, lower incomes and production shutdowns adversely affected business in this sector. While accommodative monetary policy and fiscal stimulus measures helped stabilize credit markets, these policies to a degree reduced the traditional sources of revenue for companies in the financial services space.
The pandemic has accelerated digital transformation in almost every sphere of financial services and capital markets. Financial institutions are increasingly making strategic investments in technology to swiftly shift their business models to new digital protocols. Although ultra-low interest rates are squeezing lending institutions’ interest margins, provisioning requirements are gradually declining. Also, financial institutions are undertaking various measures, such as redeploying personnel and consolidating branches, to manage costs. This is improving their profitability prospects.
Renowned financial services companies Capital One Financial Corporation (COF), Discover Financial Services (DFS), and Ally Financial Inc. (ALLY) have effectively managed the low interest rate environment to deliver impressive earnings growth. These companies are focusing on aggressive digitization plans to garner operational efficiencies and deliver superior customer experiences. Their strong fundamentals position them well to deliver superior returns in the long run.
Capital One Financial Corporation (COF)
With approximately $421.60 billion in total assets, COF is a diversified financial holding company that offers a broad spectrum of financial products and services to consumers, small businesses and commercial clients through a variety of channels. The company operates through three segments: Credit Card, Consumer Banking, and Commercial Banking.
Earlier this month, COF Bass Pro Shops and Cabela’s announced a multi-year extension of their CLUB credit card program agreement. The extension allows the companies to continue their strategic partnership, thereby enabling COF to deliver its industry-leading digital capabilities and award-winning products and experiences to millions of Bass Pro Shops’ and Cabela’s customers.
COF’s net interest income has increased 5.7% sequentially to $5.87 billion in the fourth quarter, ended December 31, 2020, yielding a net interest margin of 6.05%, up 37 basis points versus the previous quarter. . Its adjusted efficiency ratio has risen 738 basis points from the previous quarter to 55.1%, while adjusted EPS has improved 4.8% to $5.29 over the same period.
A consensus EPS estimate of $3.75 for the current quarter (ending March 31, 2021) represents a 221% improvement year-over-year. Analysts further expect COF’s EPS to rise at a CAGR of 4.2% over the next five years. The stock has gained 80.7% over the past six months.
COF’s strong fundamentals are reflected in its POWR Ratings. The stock has an overall B rating, which equates to Buy in our proprietary rating system. The POWR Ratings are calculated by considering 118 different factors with each factor weighted to an optimal degree.
COF has a B grade for Growth and Momentum, and an A for Sentiment. Of the 49 stocks in the Consumer Financial Services industry, the stock is ranked #7.
In total, we rate COF on eight different levels. Beyond what we’ve stated above, we have also given COF grades for Quality, Value, and Stability. Get all of COF’s ratings here.
Discover Financial Services (DFS)
DFS, a digital banking and payment services company, issues the Discover Card–America’s cash rewards pioneer. It also offers private student loans, personal loans, home loans, checking and savings accounts and certificates of deposit through its banking business. The company operates the Discover Global Network; PULSE, an ATM/debit networks, and Diners Club International, a global payments network.
Yesterday, DFS and Payments Network Malaysia Sdn Bhd (PayNet) signed an agreement that will greatly expand acceptance for Discover, Diners Club International and network alliance cardholders in Malaysia. The agreement is expected to be a crucial factor in opening the Malaysian market to the company’s partners around the globe.
Last month, Cashback Debit, the online checking account from DFS, was certified by the national non-profit organization Cities for Financial Empowerment (CFE) Fund. This marks the first digital bank to meet Bank On’s certification standards with its no-fee Cash Back Debit account.
In February, DFS was named a Best Place to Work for LGBTQ Equality for the eighth consecutive year and earned a perfect 100 score from the Human Rights Campaign’s Annual Corporate Equality Index (CEI).
DFS’ revenues, net of interest expense, have increased 4.1% sequentially to $2.82 billion in the fourth quarter, ended December 31, 2020. Its net income has increased 3.6% from the previous quarter to $799 million, while its EPS has improved 5.7% to $2.59 over the same period.
Analysts expect DFS to report an EPS of $9.27 in the fiscal 2021 (ending December 31), up 157.5% year-to-year. A consensus revenue estimate of $11.54 billion for the current year represents a 4.1% improvement from the previous year. The stock has gained 73.8% over the past six months.
It is no surprise that DFS has an overall B rating, which translates to Buy in our POWR Ratings system. DFS has a B grade for Growth, Momentum and Sentiment. It is ranked #10 in the same industry.
Click here to see the additional POWR Ratings for DFS (Stability, Quality and Value).
Ally Financial Inc. (ALLY)
ALLY is a digital financial services company that serves primarily consumers, commercial, and corporate customers. The company operates through the Automotive Finance Operations, Insurance Operations, Mortgage Finance Operations, and Corporate Finance Operations segments. In addition, it offers securities-brokerage and investment-advisory services through Ally Invest.
Last month, Ally Lending teamed-up with Western Dental & Orthodontics to provide its financing solutions to patients. The relationship expands ALLY’s financing offerings across one of the largest Dental Service Organizations in the U.S.
ALLY’s adjusted total net revenue has increased 15.8% year-over-year to $1.88 billion in the fourth quarter, ended December 2020. Its adjusted efficiency ratio has risen 40 basis points from its year-ago value to 49.8%, while its adjusted EPS has improved 68.4% to $1.60 over the same period.
Analysts expect ALLY’s revenues to grow 23% year-over-year to $1.74 billion in the current quarter (ending March 31, 2021). A consensus EPS estimate of $1.07 for the first quarter represents a 343.2% improvement from the year-ago value. The company has an impressive earnings surprise history; it beat the Street’s EPS estimates in three of the trailing four quarters. The stock has gained 86.9% over the past six months.
ALLY’s POWR Ratings reflect this promising outlook. The stock has an overall B rating, which equates to Buy in our POWR Ratings system. ALLY has a B grade for Growth, Momentum and Sentiment. It is currently ranked #12 of 49 stocks in the same industry.
Click here to see the additional POWR Ratings for ALLY (Stability, Quality and Value).
The POWR Ratings are calculated by considering 118 different factors with each factor weighted to an optimal degree.
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COF shares were trading at $121.90 per share on Tuesday morning, down $3.32 (-2.65%). Year-to-date, COF has gained 23.74%, versus a 5.20% rise in the benchmark S&P 500 index during the same period.
About the Author: Rishab Dugar
Rishab is a financial journalist and investment analyst. His investment approach is to focus on quality stocks, trading at low prices, with business models that he readily understands. More...
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