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Investment Analysis of Capital One Financial Corp.

This investment analysis provides an overview of Capital One Financial Corp., including its current holdings, company overview, macro-economic and industry analysis, strategic analysis, financial analysis and projections, valuation, and recommendation.

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Investment Analysis of Capital One Financial Corp.

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  1. Investment Analysis By: Devopama Pant Qiao Du Tianlin Fu Date of Presentation:11/18/2014

  2. Agenda • Current Holdings • Company Overview • Macro-Economic Overview • Industry Analysis • Strategic Analysis • Financial Analysis and Projections • Valuation • Recommendation

  3. Current Holdings • 100 shares bought on Dec 09, 2013 @ $73.13 • Current Price: $81.14 (11/17/2014) • Gain (as on 11/17): 10.95% • Portfolio share(MV): 4.35%

  4. COF: Overview • U.S. based bank holding company, specializing in credit cards, auto loans, retail banking and mortgages • A Fortune 500 companywith more than 45M customers • One of US top 10 largest banks based on deposits • Founded in 1994 by Richard Fairbanks & Nigel Morris • Headquartered inMcLean, Virginia • Richard Fairbanks is current CEO and President • 41K employees with businesses in US, UK and Canada Source : http://www.capitalone.com/about/

  5. COF: History Source : http://commercialobserver.com/2012/06/capital-one-grows-minus-pains/ 2011,12,13 Annual Reports

  6. Experiments • USPS negotiated services at bulk discount mailing agreement • Softcard (formerly Isis Mobile Wallet) Payment (Feb/2012) • Clear Exchange (Feb 2014)~ P-2-P money transfer • Decoupled Debit Cards (May/2007)~ opened with “merchant” financial institution

  7. Credit Card Growth after 2008 Source : http://www.nilsonreport.com/publication_newsletter_archive_issue.php?issue=1035 /

  8. COF: Lines of Business

  9. COF: Lines of Business (contd..) Loan Portfolio Composition $B $206 $197 $136 $126 $80 $4 Source :COF Annual Reports

  10. Industry Review • Primary Activities: Providing credit through credit cards • Industry participants make money by collecting interest on debt and fees from card owners and merchants. • Major Products & Services: • Cardholder Fees (34.2%) • Interchange Fees (34.3%) • Interest Income (31.5%) • Major Markets: • Young Adults & College Students (15%) • Adults aged 26 to 60 (59%) • Business & Adults aged 60+ (26%) • Source: Carusotto, Daniel. "Credit Card Issuing in the US: Market Research Report." Credit Card Issuing in the US Market Research. IBISWORLD, • 1 Oct. 2014. Web. 18 Nov. 2014. <http://www.ibisworld.com/industry/default.aspx?indid=1293>.

  11. IndustryReview(Cont’d) Source: Carusotto, Daniel. "Credit Card Issuing in the US: Market Research Report." Credit Card Issuing in the US Market Research. IBISWORLD, 1 Oct. 2014. Web. 18 Nov. 2014. <http://www.ibisworld.com/industry/default.aspx?indid=1293>.

  12. Government Regulation & Legislation • Bank Holding Company Act (1956) • Truth in Lending Act (1968) & the Schumer Box • The Credit Card Accountability Responsibility and Disclosure (CARD) Act (2009) • The Dodd-Frank Act (2010) • Basel III source: Carusotto, Daniel. "Credit Card Issuing in the US: Market Research Report." Credit Card Issuing in the US Market Research. IBISWORLD, 1 Oct. 2014. Web. 18 Nov. 2014. <http://www.ibisworld.com/industry/default.aspx?indid=1293>.

  13. Major Competitors • American Express Co. (20.2%) • Bank of America Corp. (17.5%) • JPMorgan Chase (16.9%) • Citigroup Inc. (9.4%) • Discover Financial Service Inc. (7.2%) (Capital One Corp. 14.2%) HHI=1554.9 ∈(1500, 2500) CR4=68.8∈(50, ∝) Moderately Concentrated Market & Tight Oligopoly Industry Source: Carusotto, Daniel. "Credit Card Issuing in the US: Market Research Report." Credit Card Issuing in the US Market Research. IBISWORLD, 1 Oct. 2014. Web. 18 Nov. 2014. <http://www.ibisworld.com/industry/default.aspx?indid=1293>.

  14. Management • Richard D. Fairbank, Founder, Chairman and CEO • Founding Belief: the power of information, technology, testing and great people could be combined to bring highly customized financial products directly to customers. (1988) • Recognized for his community and industry leadership • Used to serve MasterCard International’s Global Board of Directors and Chairman of MasterCard’s U.S. Region Board • Company Culture : • Two Key Values: • Excellence • Do the Right Thing • Widely recognized for entrepreneurial culture, progressive work place, and community engagement • Risk Management: “Three Lines of Defense” risk framework Source: "Leadership." Capital One. Capital One. Web. 18 Nov. 2014. <http://www.capitalone.com/about/corporate-information/leadership/?Log=1&EventType=Link&ComponentType=T&LOB=MTS::LCTMJBE8Z&PageName=Corporate Information&PortletLocation=4;4-8-4-col;1-1-1&ComponentName=secondary_nav&ContentElement=7;Leadership&TargetLob=MTS::LCTMJBE8Z&TargetPageName=Leadership&referer=https://www.capitalone.com/about/corporate-information>.

  15. Total US Debt Source : Federal Reserve Bank of New York (http://www.newyorkfed.org/householdcredit/2014-q1/)

  16. Unemployment Rate % Source : Bureau of Labor Statistics (http://data.bls.gov/timeseries/LNS14000000)

  17. Credit Card Delinquency Rates Source : Card Hub (http://www.cardhub.com/edu/credit-card-charge-off-delinquency-statistics)

  18. Interest Rates Source : Trading Economics (http://www.tradingeconomics.com/united-states/interest-rate)

  19. Consumer Confidence & Spending Consumer Confidence Consumer Spending Source : Trading Economics (http://www.tradingeconomics.com/united-states/consumer-spending; http://www.tradingeconomics.com/united-states/consumer-confidence)

  20. COF : Strategic Analysis

  21. Porter’s Five Forces • Bargaining Power of Suppliers (Low) • Bigger banks have significant leverage due to their bigger asset bases • Fed controlled interest rates are at a historically low level • Threat of new Entrants (Low) • Only 2 new banks started in last 3 years • Extensive capital, legal and regulatory requirements for a new entrant • Dominant position of existing players • Difficult to grow quickly in a highly competitive market • Threat of Substitutes (High) • Threat from newer players like credit unions, technology companies and growth in cash/debit card payments • Difficult to achieve product differentiation • Industry Rivalry (High) • Large no. of banks offering competitive products • High volatility in market share • Banks need to respond quickly to integrate rapidly evolving technology into financial products • Bargaining Power of Borrowers (Medium) • Competitor banks continuously try to woo customers by offering promotional offers • Customers can shop for best product/pricing very easily

  22. COF : SWOT W W S S eaknesses eaknesses trengths trengths • Big Subprime lending results in negative market perception • Lack of geographical diversification – based primarily in one market, U.S. • Lesser brand recognition in Prime and Super Prime space • Significantly lower card satisfaction rates • Strong returns across multiple years • Full spectrum card lender with diversification in auto and home loans • Proven track record of successfully managing credit risk in downturn • Virtual monopoly in Subprime card market • Resilient performance in stress tests • Known for data-driven analytics T O hreats pportunities • Loss rates and interest rates are at all time lows, and are bound to go up • Further regulations in Credit Cards • Volatility in financial markets • Privacy and customer data breach • Growth potential in Private Label credit card space, post HSBC acquisition • Expansion of international business in UK and Canada • Expand in mortgage and home equity business

  23. Ratio Analysis Source: Bloomberg and Capital IQ

  24. Comparable Analysis Source: Capital IQ

  25. Technical Analysis (3 years) Source: Bloomberg

  26. Financial Valuation Forecast Assets, Debt(liabilities) and Equity growth based on company’s historical data and macro economy Calculate Interest Income, Non-Interest Income, Interest Expense and Non- Interest Expense Forecast and calculate Net Income for common-shareholders Calculate EPS Calculate and Forecast Dividend per share Calculate the Payout Ratio Calculate WACC Select terminal Growth Rate Discount Dividend per share of Future to calculate the Present Value using Dividends Discount Method (DDM) 10) Compare with other methods

  27. Weighted Average Cost of Capital(WACC)

  28. Dividend Discount Method(DDM) Valuation

  29. Institutional Investors/Analysts’ Recommendation Source: Bloomberg

  30. Recommendation • Current Price: $81.14 (11/17/2014) • Implied Intrinsic Value: $ 92.86 BUY 100 Stocks at market price

  31. Credit Card Companies : Stock Prices pre- and post-recession Change in Stock Prices for leading Card Issuers AMEX CHASE COF KBW Bank Index Bank of America CITI Source : Google Finance

  32. Credit Card Outstanding $B Source : Federal Reserve (http://www.federalreserve.gov/releases/g19/HIST/cc_hist_r_levels.html)

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