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Capital One Financial Corporation (NYSE:COF)
December 5, 2013Valerie Chan, Hisham Haider Dewan
Caleb Pierson, Harout Sahakian
Agenda
2
• Introduction• Company overview•Macro-economic overview• Industry analysis• Financial analysis and projections• Valuation• Recommendation
5
COF Subsidiaries & Business Segments
• Capital One Bank, National Association (COBNA)• Capital One, National Association (CONA)
Source: 2012 Capital One 10K Page 1
Credit Card Consumer Banking
Commercial Banking
Assets by Segment
9Source: Bank of America Merrill Lynch 2013 Banking & Financial Services Conference November 12, 2013
Recent Developments
Source: COF 2013 3Q 10Q. Pg. 11. http://www.bloomberg.com/news/2013-11-21/capital-one-ceo-sells-44-million-of-stock-in-november.html?cmpid=yhoo
12
Credit Card Issuing
Commercial Banking
18Source: 1) IBISWorld Industry Report 52221, Credit Card Issuing in the US, October 20132) IBISWorld Industry Report 52211, Commercial Banking in the US, August 2013
Capital Ratio
Balance Sheet as of: Sep-30-2012 Sep-30-2013
Tier 1 Capital Ratio % 12.7% 13.1%
Total Capital Ratio % 15.0% 15.3%
Leverage Ratio % 9.9% 10.1%
25Source: Capital IQ
Tier 1 Capital Ratio vs. Competitors
26Source: Bank of America Merrill Lynch 2013 Banking & Financial Services Conference, November 12, 2013
Asset Quality
27Source: Capital IQ
2008 2009 2010 2011 2012Sep-30-2013
Nonperforming Loans / Total Loans %
0.8 1.4 1.0 0.8 0.5 0.5
Nonperforming Assets / Total Assets %
0.6 0.9 0.8 0.6 0.4 0.4
Nonperforming Assets / Equity %
3.6 5.8 5.8 4.2 3.2 2.8
Allow. for Credit Losses / Total Loans %
4.5 4.5 4.5 3.1 2.5 2.3
Net Charge-offs / Total Avg. Loans %
3.5 4.6 5.2 2.9 1.9 NA
Loan Loss & Write-Offs
28
Income Statement 2008 2009 2010 2011 2012 Sep-30-2013Provision For Loan Losses
5,101 4,230 3,907 2,360 4,415 3,647
Balance Sheet 2008 2009 2010 2011 2012Sep-30-
2013Gross Loans 101,342 90,767 125,947 135,892 205,889 191,814Allowance For Loan Losses
(4,524) (4,127) (5,628) (4,250) (5,156) (4,333)
Transforming Source of Funds
Source: Bank of America Merrill Lynch 2013 Banking & Financial Services Conference, November 12, 2013 29
Profitability & Margin Analysis
For the Fiscal Period Ending 2008 2009 2010 2011 2012
LTM12 months30/092013
ProfitabilityReturn on Assets % 0.1% 0.6% 1.7% 1.6% 1.4% 1.5% Margin AnalysisEBT Margin % 17.5% 17.6% 36.6% 34.2% 30.9% 35.9% Net Income Margin% (0.5%) 10.1% 22.4% 22.6% 21.5% 22.0%
30Source: Capital IQ
Technical AnalysisCurrent price $72.35* | P/E (ttm): 10.23*| P/B 1.009*
31Source: Yahoo Finance http://finance.yahoo.com/q/ta?s=COF&t=1y&l=on&z=l&q=l&p=m50%2Cm200&a=&c=As of 12/4/2013
COF Stock Performance vs. Competitors
32Source: Yahoo Finance http://finance.yahoo.com/q/ta?s=COF&t=1y&l=on&z=l&q=l&p=m50%2Cm200&a=&c=As of 12/4/2013
Residual Income Valuation
36
2014 2015 2016 2017 2018Beginning Common Equity: $41,750 $45,188 $49,152 $53,540 $58,450
Plus: Net Income to Common:
4,567 5,160 5,657 6,218 6,853
Plus: Stock Issuances: 264 267 270 272 275Less: Stock Repurchases: (700) (700) (700) (700) (700)Less: Common Dividends: (693) (762) (838) (880) (924)Ending Common Equity $45,188 $49,152 $53,540 $58,450 $63,954
Residual Income = (Net Income to Common Equity) – (Beginning BV of Equity) X (Cost of Equity)
2014 2015 2016 2017 2018
Net Income to Common Equity $4,567 $5,160 $5,657 $6,218 $6,853Beginning BV of Equity $41,750 $45,188 $49,153 $53,541 $58,451(Beginning BV of Equity) X (Cost of Equity)
$4,577 $4,954 $5,389 $5,870 $6,409
Residual Income -$11 $205 $268 $348 $444
Residual Income Assumptions
37
Cost of equity using CAPM
Beta 1.256Market risk premium (Rm-Rf) 6.50%10 year treasury yeild 2.80%Cost of equity using CAPM 10.964%
Current Value of Common Equity $41,750 Sum of PV of Residual Income from 2014 to 2018 $847 PV of Res. Inc. Terminal Value $2,407
Present Value of Equity $45,004 Shares Outstanding 577.4 Implied Share Price $77.94
Terminal Value CalculationTerminal NI Growth Rate 2.5%Estimated Year 6 NI to Common 7,355 Return on Common Equity - Long-Term 11.5%
Monte Carlo Simulation
Provision For Loan Losses as % of Gross LoanMaximum Extreme distribution with parameters:Likeliest 2.50%Scale 0.50% 39
Public Comparable Company
Company Name Weights on multiple
American Express Company (NYSE:AXP) 5.00%BB&T Corporation (NYSE:BBT) 10.00%Discover Financial Services (NYSE:DFS) 25.00%Fifth Third Bancorp (NasdaqGS:FITB) 15.00%Regions Financial Corporation (NYSE:RF) 15.00%The Allstate Corporation (NYSE:ALL) 10.00%The Bank of New York Mellon Corporation (NYSE:BK) 5.00%
The PNC Financial Services Group, Inc. (NYSE:PNC) 10.00%
U.S. Bancorp (NYSE:USB) 5.00%SUM 100.0%
40
Comparable Company Valuation
Multiple Multiple value Weight
Implied Price per Share
Market Cap/Total Revenues 2.83 20% $92.23Market Cap / Forward Total Revenues (Capital IQ) 2.63 15% $85.55
P/Diluted EPS Before Extra 13.05 15% $96.29Forward P/E (Capital IQ) 11.73 15% $81.91Market Cap / EBT Excl Unusual Items 7.61 20% $88.99
P/BV 1.78 0% $128.71P/TangBV 2.22 15% $98.63Implied Price per Share $90.60
41
Benjamin Graham’s Formula
Current (normal earnings, $Mil.) 4,143
Expected annual growth rate (%) 2.5
Number of shares 577.4
Estimated price per share $78.92
43
Valuation Summary
Price per shareResidual Income $77.94Relative Valuation $90.60Benjamin Graham formula $78.92Current market price 12/05/2013 $72.35
44