Capital One Financial Corp (NYSE: COF) Leads the Way as Investors Shift Focus to Earnings Power
A recent analysis by investment bank Keefe, Bruyette & Woods Inc, reported third-quarter core pretax, pre-provision earnings rose slightly from the second quarter. Capital One Financial Corp. (COF) topped the list with a 5.58% return.
The report, which looked exclusively at banks that make up the BKX benchmark bank stock index, suggests that pre-provision earnings bottomed in the second quarter, said Thomas Michaud, Keefe Bruyette’s president.
“I don’t know when the light switch turned” in investors’ minds, but investors began focusing on pre-provision earnings by the time third-quarter earnings rolled around, Mr. Michaud said.
With banks continuing to fail across the country and loan delinquencies remaining a significant point of concern on balance sheets, the report denotes a welcome shift in investor sentiment to focus on profits and earning, not failing loans. Pre-provision earnings are the gross profit, excluding taxes and money banks set aside to cover current and future loan losses. It’s a key gauge used by Wall Street to assess a bank earnings once loan losses abate.
“Nobody asked us about 2009 earnings,” said Huntington Bancshares, Inc. Chief Executive Officer Stephen Steinour. “Frankly, they want to know what 2011 looks like.”
As investors see the financial crisis losing momentum, they are starting to look beyond the reality of projected loan losses and focusing on the banks that are positioned for growth – provided they have enough capital to cover their loan losses.
In addition to Capital One, the list showed Wells Fargo & Co. (WFC) reporting a 3.49% return, propelling them into second place ahead of U.S. Bancorp (USB) which reported a 3.38% return. Huntington’s return was 1.59% placing the Columbus, Ohio bank at No. 15 – below Citigroup Inc. (C), but ahead of Bank of America Corp. (BAC).
Another bank receiving a lift from the news was Fifth Third Bancorp, who ranked 10th in the study with a return of 1.95%. Although reporting a $97 million third-quarter loss as opposed to an $882 million second-quarter profit, their pre-provision earnings totaled $530 million. Chief Financial Officer Daniel Poston told investors to expect pre-provision earnings in a normal economy to exceed $600 million.
The focus on future earnings power doesn’t mean investors ignore earnings shocks. Shares of Cullen/Frost Bankers Inc. fell more than 4% to $48.54 after it reported an 18% rise in third-quarter profit from the second period to $44.7 million.
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