- Capital One Financial (COF +1%) offers an attractive risk/reward profile as expense savings into 2021 should support earnings growth, writes Baird analyst David George, who adds COF as "Fresh Pick".
- Rates COF as Outperform with a $115 price target, implying a 24% upside potential to Tuesday's close of $92.78.
- George sees the sell-off in banks as overdone. "We would be adding to COF positions with shares trading at ~1.1x TBV and near-term fundamentals likely to remain solid," he writes.
- Notes that COF's digital banking offerings/infrastructure are ahead of its peers.
- Even with a challenging interest rate environment, COF sees improving operating efficiency in 2020 vs. ~44.8% on a core basis in 2019 and bigger improvements in 2021 to ~42% as it moves away from legacy data centers to cloud-based infrastructure, higher revenue share from Walmart co-branded card partnership, and incremental tech savings.
- COF is more insulated from net interest margin compression in a falling interest rate environment given its balance sheet interest rate sensitivity is closer to neutral, George said.
- Credit metrics remain solid, he adds.
- George's Outperform rating goes against the Neutral Quant rating and is even more optimistic than Sell-side average rating of Bullish (6 Very Bullish, 8 Bullish, 8 Neutral, 1 Very Bearish).