Capital One's Acquisitions And Growth Strategy Justify $60 Value

| About: Capital One (COF)

Capital One (NYSE:COF) has finalized two acquisitions since the beginning of this year – the $9 billion acquisition of ING Direct U.S.A. and the $31.3 billion acquisition of HSBC's (NYSE:HBC) U.S. credit card business. While the ING buy boosted the bank's deposits by $80 billion, HSBC helped add credit card loans worth $28 billion to Capital One's balance sheet.

In light of the significant value added by these new additions to Capital One's business, as well as some performance and market-related factors, we have updated our price estimate for the bank's stock from $49 to $60, which is about 15% ahead of the current market price. Below we detail the reasons for the near-20% boost to our estimated value for Capital One.

See our full analysis for Capital One

Capital One has been bulking up its business in recent quarters through acquisitions. And the fact that many big banks – primarily those based in Europe – have put up many of their non-core business units for sale has given Capital One ample opportunity to shop for those that best fit its growth strategy. The deals with ING and HSBC are recent examples of this approach.

Deposits from ING Direct Provide A Cheap Funding Source

Capital One completed the integration of ING Direct U.S.A's business in the first quarter, adding $80 billion in deposits. The fact that these deposits are available to U.S. customers at very competitive interest rates means that Capital One will be able to use these deposits to fund its lending operations – on both the commercial and consumer side – at low costs.

This should result in an improvement in net yield figures for the bank's lending business in the years to come. We have captured this with an increase in our forecast for Capital One's net interest yield, as shown in the chart below.

Card Loans From HSBC Consolidate The Credit Card Business

The $28 billion in card loans which Capital One adds to its cornerstone credit card business from HSBC should raise the value of its outstanding credit card portfolio to well over $90 billion for the year. No doubt, the bank also stands to gain from the fact that this acquisition makes it the third largest provider of private-label cards after GE (NYSE:GE) and Citigroup (NYSE:C).

And in a hurry to monetize the synergies the acquisition had to offer, Capital One almost immediately announced a reduction of nearly 1,000 jobs in these card units. ((Layoffs to impact Buffalo, California, Buffalo News, May 5 2012)) This will significantly help non-interest expenses for the card business, as indicated below.

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