Rising Consumer Credit in the U.S. Should Lift Capital One

Capital One (NYSE:COF) is one of the largest financial institutions in the United States, with banking and non-banking subsidiaries that market a variety of financial products and services. The company specializes in credit cards, home loans, auto loans, banking and saving products. Its main competitors are JP Morgan (NYSE:JPM), Bank of America (NYSE:BAC), Citigroup (NYSE:C) and American Express (NYSE:AXP).

We have a price estimate of $61.26 for Capital One, well above market price.

See our full analysis and $61.26 price estimate for Capital One

Rising Consumer Credit Outstanding

The Federal Reserve recently reported a $6.1 billion increase in total credit outstanding for December 2010, which follows a $2 billion increase in credit outstanding in the previous month. ^[1] Consumer credit is essentially the amount of credit used by consumers to purchase non-investment goods or services. The surge in U.S. consumer credit supports the view that economic activity is gathering momentum in the country.

December 2010 was the third consecutive month in which consumer credit grew; however, prior to these three increases, consumer credit had contracted for 20 straight months. The growth in consumer spending by 4.4% in the fourth quarter of 2010 sparked a rise in consumer credit towards the end of last year.

Consumer credit is closely linked to credit card debt. As unemployment is still high in the U.S., the primary method of financing new consumption is through credit cards. Thus, a rise in consumer credit leads to a corresponding rise in credit card debt. In December last year, credit card debt climbed by $3.5 billion, following declines since August 2008. This increase in consumer spending in December can also be attributed to the holiday shopping season from Thanksgiving through Christmas when consumers are more likely to turn to their credit cards for purchases.

Capital One Credit Card Balance Outstanding

Capital One’s total credit card balance outstanding increased from $18.4 billion in 2007 to $19.6 billion in 2008 at an annual  growth rate of 6.5%. The acquisition of Chevy Chase Bank in 2009 further boosted Capital One’s outstanding loans balance by 6.2% to $20.8 billion.

We estimate that a rise in consumer spending promoted by a growing economy will increase Capital One’s credit card balance outstanding to about $28 billion by the end of our forecast period.

1. US consumer credit rises, supports strong growth view, Reuters [↩]