We reiterate our long term 'Neutral' recommendation on
Capital One Financial Corp.
(
COF
) to reflect continued synergies from its geographic
diversification and the recent acquisitions - ING Direct USA from
ING Groep NV
(
ING
) and U.S. credit card business from
HSBC Holdings plc
(
HBC
). However, the company's second quarter adjusted earnings,
excluding the impact of the acquisition of HSBC's credit card
business, were slightly below the Zacks Consensus Estimate.
Capital One's second quarter results benefited from higher net
interest income. Moreover, steady improvement in credit quality and
capital as well as profitability ratios were among the positives.
Nevertheless, enhanced non-interest expenses and reduced fee
revenue more than offset the results.
Capital One remains fundamentally strong with respect to its credit
card businesses. Though deposit market is becoming increasingly
competitive, total customer deposits augmented nearly 70% year over
year to $213.9 billion in the first half of 2012. Also, U.S. Card
operations continue to deliver strong returns on a risk-adjusted
basis, with continuous expansion in revenue.
Additionally, Capital One continues to grow inorganically. In the
first six months of 2012, the company wrapped up two major deals
that are expected to bolster the top line going forward. Moreover,
HSBC's U.S. credit card business deal is anticipated to create a
valuable banking franchise, taking advantage of a large number of
branch banking in attractive high-growth markets, while ING Direct
USA would enable the creation of a large online banking franchise
with a national reach.
Further, Capital One's capital deployment activity through dividend
payment reflects its capital strength. We expect the company to
continue building capital, resulting in a better financial position
that will help meet the Basel III requirements.
On the flip side, ever-increasing operating expenses remain a major
concern for Capital One at this point. Though expense management
initiatives have significantly aided in offsetting higher credit
losses in the last few years, operating expense has been
continuously increasing. We anticipate operating expenses to remain
high over the next few quarters as the company has to integrate its
latest acquisitions and will focus on organic growth through
improvement of its loan portfolio and enhancement of new client
base.
Moreover, despite progressions over the last few quarters, we
expect credit quality to remain under pressure as the weak state of
the economy is expected to persist for a while. Also, net
charge-offs and nonperforming loans are expected to fluctuate over
the next few quarters due to the continuing economic volatility and
the recent acquisition of HSBC's card unit.
Capital One currently retains a Zacks #3 Rank, which translates
into a short-term Hold rating.
CAPITAL ONE FIN (COF): Free Stock Analysis
Report
HSBC HOLDINGS (HBC): Free Stock Analysis Report
ING GROEP-ADR (ING): Free Stock Analysis Report
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