What's in Your Wallet? Maybe It Should Be Capital One
It looks more like a high-quality regional bank than a credit card company.
With its highly visible ad campaigns featuring a traveling Alec Baldwin or anachronistic Vikings pillaging the modern world, Capital One Financial (COF) has become a recognizable financial brand in U.S. households. While the popular perception is that Capital One is primarily a credit card company, we think its balance sheet looks more similar to a bank's, with lower-cost deposit funding and a diversified loan portfolio. We would point to Capital One's growth in commercial and consumer automotive lending as it replaces stagnant credit card receivables growth as evidence of that claim. With typical bank multiples at 11-12 times forward earnings, Capital One currently trades at 10.4 times our 2013 earnings forecast and less than 1 times book value, still a significant discount to our fair value estimate.
Capital One's Strong Franchise Contributes to Its Low-Cost Funding
We prefer to invest in banks with strong deposit bases, in part because deposits are an exceptionally low-cost form of funding and help produce excess returns year after year. That's one reason we're impressed by CapOne, which through bold acquisitions into traditional and nontraditional banking markets, has become the seventh-largest bank by deposits in the United States. These acquisitions have also helped Capital One enter more traditional commercial and consumer lines of banking and benefit from its lower-cost funding. With the acquisition of Hibernia in 2005, Capital One acquired $3 billion of noninterest-bearing deposits and established itself as the largest bank in Louisiana. When it acquired North Fork Bancorporation in 2006, Capital One gained a strong eighth deposit position in the New York metro area along with $8 billion of non-interest-bearing deposits and is currently the sixth-largest deposit gatherer in the New York metro area. In 2012, Capital One acquired ING Direct's U.S. operations, at the time the 15th-largest U.S. bank, and added 7 million customers and $80 billion in deposits. With national reach making it the largest online-only banking platform, this deal provided Capital One with significantly lower-cost funding than competitors using other funding methods, including securitizations, to fund its lending operations. We also think this acquisition will help reduce Capital One's need for high-cost branches in order to attract additional low-cost funding.
Dan Werner does not own (actual or beneficial) shares in any of the securities mentioned above. Find out about Morningstar’s editorial policies.