VALUATION HIGHLIGHTS
- Credit Cards constitute 57% of the Trefis price estimate for Capital One's stock.
- Consumer Loans constitute 29% of the Trefis price estimate for Capital One's stock.
- Commercial Loans constitute 14% of the Trefis price estimate for Capital One's stock.
WHAT HAS CHANGED?
Latest Earnings
Capital One posted a better-than-expected set of Q4 2024 earnings. Adjusted earnings came in at $3.09 per share, up from $2.24 in the year-ago quarter. Growth was driven by higher net interest income as well as a rise in loans and deposits. Moreover, provisions also declined during the quarter
Deal To Acquire Discover
Capital One announced a deal to acquire Discover Financial for about $35.3 billion in early 2024. However, more than a year after its announcement, the merger remains delayed pending approvals from the Office of the Comptroller of the Currency, the Federal Reserve, and the Department of Justice. While the deal was initially expected to close by early 2025, Discover has now extended the deadline to May 2025.
POTENTIAL UPSIDE & DOWNSIDE TO TREFIS PRICE
Below are key drivers of Capital One's value that present opportunities for upside or downside to the current Trefis price estimate for the bank:
Credit Cards
- Provisions % of Outstanding Credit Card Loans: Capital One's credit card provisions stood at 3.54% in 2022 and rose to 6.72% in 2024. We estimate the figure to normalize at under 5% over our forecast period.
- Net Interest Yield on Credit Card Balances: Capital One's net interest yield on its credit card portfolio has remained between 13-14% over recent years, and we forecast it to stay at that level over the rest of the forecast period. However, if the yield figure falls to 12% for this period, then there would be a downside of around 10% to the current price estimate.
BUSINESS SUMMARY
Capital One is one of the largest banks in the United States, offering a wide range of financial products and services through its banking and non-banking subsidiaries. Its key subsidiaries include Capital One Bank National Association (COBNA), which provides credit and debit card products, personal and auto loans, and deposit accounts. Capital One National Association (CONA) serves consumers, small businesses, and commercial clients with a broad spectrum of banking solutions, including lending, treasury management, and wealth management services.
SOURCES OF VALUE
The Credit Cards division is the primary source of value for Capital One for the following reasons.
Largest revenue contributor
Capital One's Credit Card division accounted for 69% of the firm's total revenues in 2024, compared to 22% from the Consumer Loans division and 9% from the Commercial Loans division.
KEY TRENDS
Rise in Prime Loan Interest Rates Will Benefit Capital One
As a result of the Covid-19 crisis in 2020, the Federal Reserve reduced the interest rates to near zero level. That said, the Federal Reserve increased interest rates considerably over 2022-23 to combat the spike in inflation, which positively impacted the company's net interest income. With the Federal Reserve likely taking a more cautious approach to cutting interest rates in 2025, relatively high interest rates should largely benefit Capital One.
Fast Growth in Electronic Cashless Payment Solutions
Capital One also operates in the cashless payment solution market. This includes payments using credit cards. The market for such transactions is growing at a rapid pace. Consumers are moving toward cashless transactions in large numbers, particularly in international markets where credit and debit cards are becoming more prevalent. We expect significant growth in this segment soon as more customers and merchants embrace credit/debit card payment solutions.
