The latest figures released by the Federal Reserve show that consumer credit in the U.S. jumped by $20.4 billion in November 2011 to $2.48 trillion, its biggest jump since November 2001.  The increase was well above the median estimate of $7 billion by economists and nearly twice the highest estimate of $11.6 billion, demonstrating that U.S. consumers may be feeling more optimistic about economic growth and job creation.  Rising consumer spending should drive loan growth for credit card issuers and banks such as Capital One (NYSE:COF), Discover Financial (NYSE:DFS), Bank of America (NYSE:BAC) and JPMorgan (NYSE:JPM).
Consumer confidence improves
Consumer sentiment in the U.S. improved for the fourth straight month in December 2011, with the indicator rising from 64.1 to 67.7 according to the Thomson Reuters/University of Michigan survey. This is still, however, far behind the 90 to 100 range that signifies a strong economy.  Consumer confidence also received a boost when the Labor Department reported that U.S. employers added 200,000 jobs in December and the unemployment rate decreased to 8.5%, the lowest since February 2009.  Retailers also enjoyed the record end-of-year shopping season with record sales on Black Friday. 
All these are signs of an improving economy but it remains to be seen if this level of spending is sustainable. A large portion of the surge in borrowing was driven by car sales. Sales of light-vehicles reached an annual rate of about 13.6 million units in November 2011, up from 13.3 million in October and 12.3 million in November 2010.  While this growth may not continue, we do expect that this improvement in consumer confidence and auto sales will boost Capital One’s auto loans in the near-term.
We have a $48 price estimate for Capital One, which is slightly ahead of its current stock price.Notes:
- Consumer Credit – G.19, Federal Reserve, Jan 9, 2012 [↩]
- US consumer borrowing jumps in November, FT, Jan 9, 2012 [↩]
- US consumer confidence improves, FT, Dec 9, 2011 [↩]
- US unemployment rate declines to 8.5%, FT, Jan 6, 2012 [↩]
- Black Friday retail sales hit record, FT, Nov 27, 2011 [↩]
- Pickups drive US vehicle sales to yearly high, FT, Dec 1, 2011 [↩]