Capital One Financial (COF)

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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's decision to run-off and sell some of the loan portfolios helped provisions to fall to below 3.5% in 2014 before jumping to 5.1% by 2016. While we estimate the provision figures to normalize at around 5.75% over our forecast period, should the division perform worse than expected in coming years, the provisions could increase to 6.5%. If that were to occur, there would be a downside of 13% to the Trefis price estimate. On the other hand, if the bank focuses on improving credit quality of its loan portfolio, and the provisions reduce to 4% of the loans over the same period, then this would represent a 20% upside to the Trefis price estimate.
  • Net Interest Yield on Credit Card Balances: Capital One's net interest yield on its credit card portfolio has remained around 13% over recent years, and we forecast it to remain at that level over the rest of the forecast period. However, if the yield figure falls to 12% over this period, then there would be a downside of about 5% 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 a variety of 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 offer 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 loans 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 saving 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 main 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 2016 compared to 26% from the Consumer Loans division and 11% from the Commercial Loans division.

KEY TRENDS

Rise in Prime Loan Interest Rates Will Benefit Capital One

As a result of the economic downturn, the U.S. government decreased the prime loan interest rate (the interest rate that commercial banks charge their most credit-worthy customers) from levels of around 8.25% in late 2007 to 3.25% in 2008. The prime rate remained at this level for more than 7 years, before being hiked on four separate occasions - in December 2015, December 2016, March 2017 and June 2017 - by 25 basis points (0.25%) each to bring it to 4.25%. As economic conditions improve, interest rates will eventually return to historical levels, at which point Capital One's revenues will be positively impacted.

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 in the near future as more customers and merchants embrace credit / debit card payment solutions.

Recent Trefis Articles

How Have Credit Card Balances For The 10 Largest U.S. Card Lenders Changed Over The Last Twelve Months?

After having crossed the $1 trillion mark a year ago, the U.S. card industry has grown steadily over recent quarters after nudging lower over the seasonally weak first quarter to reach $1.04-trillion in size by the end of Q3 2018. ...More



Discover Makes The Most Of Upbeat Market Conditions To Report Strong Growth In Q3 Card Purchase Volume

The six largest U.S. card issuers reported total Q3 purchase volumes of $569 billion for their retail credit cards - representing just under 61% of the total credit card purchase volume of $934 billion for the U.S. in the quarter. ...More



Should Investors Be Worried About Capital One’s Aggressive Auto Lending Push?

The strong outlook for the U.S. economy, and the ongoing trend of customers choosing SUVs, larger cars and higher-priced models to traditional smaller cars, has had a positive impact on the country's auto industry for several quarters now. However, this helped auto lending volumes, with the U.S. ...More



Is Discover’s Below-Average Growth In U.S. Card Purchase Volumes A Cause For Concern?

The six largest U.S. card issuers reported total Q2 purchase volumes of $566 billion for retail cards issued by them - representing more than 61% of the total credit card purchase volume of $927 billion for the U.S. in the quarter. ...More



Capital One’s Strong Q2, Improved Outlook Justify A $117 Price Estimate

Late last week Capital One (NYSE:COF) reported a better-than-expected EPS figure for the second quarter of the year, with the card-focused banking giant making the most of upbeat economic conditions to report a jump in revenues even as its loan losses fell sharply. ...More



Should Investors Be Worried About Capital One’s Private Label Card Losses?

The latest issue of Equifax's National Consumer Credit Trends Report revealed that private label card delinquencies jumped 57 basis points from the figure in March 2017 to reach 4.65% in March 2018 - the highest since 2013. As one of the five largest private label card issuers in the U.S. ...More



Capital One’s Decision To Get Rid Of Its Remaining Mortgage Portfolio Is Good News For Investors

Earlier this week, Capital One (NYSE:COF) inked a deal to sell its portfolio of roughly $17 billion mortgage loans to DLJ Mortgage Capital, a subsidiary of Credit Suisse (NYSE:CS) in the U.S. The portfolio sale marks Capital One's exit from the U.S. ...More



What’s Behind The Recent Fall In Capital One’s Share Price?

Earlier this week Capital One (NYSE:COF) reported a much better-than-expected EPS figure for the first quarter of the year. However, investors were unhappy with the card-focused bank's performance for the quarter, as they led its shares 5% lower on the next trading d... ...More



Gauging Capital One’s Sensitivity To The Fed’s Planned Rate Hikes

To understand how the Fed's rate hike process directly impacts the financial performance of the largest U.S. banks, we have created a series of interactive models that quantify the gains or losses in these banks' share prices, revenues and profits based on whether or not the Fed follows through on i... ...More



Why Investor Concerns About Capital One’s Elevated Card Charge-Off Rates Are Justified

Charge-off rates for U.S. card lenders were notably elevated over 2017, as card loss figures began the process of normalization from the record lows they were at over 2014-15. ...More



Capital One Forced To Reduce Share Repurchases Due To One-Time $1.9 Billion Charge From The Tax Act

Capital One (NYSE:COF) recently resubmitted its capital plan for 2017 to the Federal Reserve - six months after being singled out by the regulator as the only major bank holding company (BHC) to receive only a conditional approval for its capital return plan (see Fe... ...More



JPMorgan’s Q3 Card Purchases Up 13%, Outpacing Industry Growth

JPMorgan's growing presence in the affluent card segment over recent years, coupled with its position as the largest card lender in the U.S., has helped its card purchase volumes grow at a faster rate than any of its competitors. The largest U.S. ...More



U.S. Card Charge-Off Rates Improve In Q3, Holiday Season Likely To Lead The Figure Higher In Q4

Card charge-off rates across the industry fell in Q3 2017 after remaining elevated over the first two quarters of the year, and the largest U.S. card lenders benefited from this trend to report a sequential decline in their card loan charge-offs. ...More



Ten Largest Card Lenders Account For More Than 70% Of The U.S. Card Industry

The U.S. card industry crossed the $1 trillion mark for the first time in Q3, as increasing penetration of credit cards in the country coupled with the overall shift towards cashless transactions helped card balances jump by a strong 5.3% over the last twelve months. While each of the ten largest U. ...More



Capital One Remains Aggressive About Auto Lending, Even As Most U.S. Banks Turn Cautious

The U.S. auto loan industry continued to witness strong growth over the third quarter, with total auto loans outstanding in the country scaling a record high of $1.1 trillion. But the spike in auto loan charge-offs since the beginning of this year has forced the largest U.S. ...More



Capital One’s Decision To Exit Mortgage Origination Business Will Add Value On Multiple Fronts

In what comes as the latest indicator of the secular shift in the country's mortgage industry over recent years, Capital One (NYSE:COF) recently announced that it is shuttering its mortgage origination unit. ...More



Capital One Stands Out Among U.S. Card Lenders With Highest Charge-Off Rate

Card charge-off rates have been elevated across the industry over the last two quarters, but Capital One is faring much worse than its peers with a figure in excess of 5% for Q2 2017. This compares with the average figure of 3.64% for the U.S. card industry for the same period. ...More



American Express Has Regained Ground In The U.S. Card Market, But Competition Remains Fierce

American Express is gradually recovering from the setback it experienced in mid-2016, when it lost out to Citi for the right to issue Costco cards. The card giant has done well to hold on to its market share of 10% over recent quarters despite facing stiff competition from JPMorgan and Citigroup. ...More



JPMorgan Grew Its Market Share In U.S. Credit Card Market In Q2

The U.S. card industry recovered in Q2 from the seasonal decline it witnessed over the first quarter to grow to $784 billion in size at the end of the period. And while each of the ten largest U.S. ...More



Capital One Continues To Push Auto Loans Despite Weakening Industry Conditions

JPMorgan Chase, Ally Financial, Wells Fargo, Capital One and Bank of America are the banks with the largest presence in the auto lending industry - together holding just under 25% of all outstanding auto loans in the country. ...More



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