VALUATION HIGHLIGHTS

1. Credit Cards constitute 51% of the Trefis price estimate for Capital One's stock.
2. Consumer Loans constitute 37% of the Trefis price estimate for Capital One's stock.
3. Commercial Loans constitute 13% of the Trefis price estimate for Capital One's stock.

WHAT HAS CHANGED?

Latest Earnings

In Q4 2023, Capital One reported revenues of $9.5 billion, which was 5% more than the previous year. This could be attributed to a 4% y-o-y rise in Net-Interest Revenues, followed by an 8% growth in noninterest revenues.

In FY2023, Capital One reported revenues of $36.8 billion, which was 7% more than the previous year's figure. This could be attributed to an 8% y-o-y jump in Net-Interest Revenues, followed by a 6% rise in Non-Interest Income.

POTENTIAL UPSIDE & DOWNSIDE TO TREFIS PRICE

Below are key drivers of Capital One's value that present opportunities for upside or downside to the current Trefis price estimate for the bank:

Credit Cards

• Provisions % of Outstanding Credit Card Loans: Capital One's credit card provisions increased from 4.7% of the outstanding loan portfolio in 2007 to 8.3% in 2009 before declining to 3% by 2011. Major acquisitions pushed this figure to 5.1% for 2012 before Capital One decided to run off/sell some of the loan portfolios, helping provisions to fall to below 3.5% in 2014 before jumping to 5.9% by 2017. In FY 2018, provisions were 4.5%, which were reduced to 3.54% in 2022. We estimate the figure to normalize between 5-6% over our forecast period.
• Net Interest Yield on Credit Card Balances: Capital One's net interest yield on its credit card portfolio has remained between 13-14% over recent years, and we forecast it to stay at that level over the rest of the forecast period. However, if the yield figure falls to 12% for this period, then there would be a downside of around 10% to the current price estimate.

BUSINESS SUMMARY

Capital One is one of the largest banks in the United States, whose banking and non-banking subsidiaries market various financial products and services. The corporation's principal subsidiaries include Capital One Bank (USA) and National Association (COBNA), which currently offer credit and debit card products, other lending products, and deposit products; and Capital One, National Association (CONA) which offers a broad spectrum of banking products and financial services to consumers, small businesses and commercial clients.

Big-Ticket Acquisitions

In June 2011, Capital One bought the American banking operations of ING Direct for $9 billion, which significantly boosted Capital One's consumer and commercial loan portfolio.

Capital One also agreed to buy the United States credit card business of HSBC Holdings for $2.6 billion, which boosted Capital One's credit card loans by more than $30 billion. The company is also expected to realize cost savings of about $350 million from the business combination.

In late 2015, Capital One acquired GE's healthcare financing unit - adding $8.5 billion in healthcare loans to its total portfolio.

SOURCES OF VALUE

The Credit Cards division is the primary source of value for Capital One for the following reasons.

Largest revenue contributor

Capital One's Credit Card division accounted for 63% of the firm's total revenues in 2022, compared to 27% from the Consumer Loans division and 10% from the Commercial Loans division.

KEY TRENDS

Rise in Prime Loan Interest Rates Will Benefit Capital One

As a result of the Covid-19 crisis in 2020, the Federal Reserve reduced the interest rates to near zero level. That said, the Federal Reserve increased the interest rate in 2022, which will positively impact the company's net interest income.

Fast Growth in Electronic, Cashless Payment Solutions

Capital One also operates in the cashless payment solution market. This includes payments using credit cards. The market for such transactions is growing at a rapid pace. Consumers are moving toward cashless transactions in large numbers, particularly in international markets where credit and debit cards are becoming more prevalent. We expect significant growth in this segment soon as more customers and merchants embrace credit/debit card payment solutions.