Capital One Financial Corporation

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Capital One Financial Corporation




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Presentations text content in Capital One Financial Corporation

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Capital One Financial Corporation

Jeffrey Li, Tom Van Spankeren, Jake Stoiber and Yichen SunPresented March 10, 2015

Slide2

Agenda

Introduction

Company Overview

Macro-economic overview

Relevant Stock Market Prospects

Industry Analysis

Financial Analysis and Projections

Valuation

Recommendation

Slide3

Current Holding and Performance

Current Price: $79.84/share

Market Cap: 44.12B

Bought 100 shares on 12/9/2013 @ $73.13/share

Gain of $671

9.18% overall return

7.28% annualized return

1.50% dividend yield ($0.30/share quarterly

)

2014 10-K Page 30

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Company Overview

Diversified financial services firm with banking and non-banking subsidiaries Established in 1994 out of McLean, VirginiaOne of top ten largest banks based on total deposits and has a large presence in the Eastern United StatesFourth largest issuer of Visa® and MasterCard® credit cards in the United StatesDerives revenue from both interest and non-interest income2014 10-K Page 1

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Segments of Capital One

Capital One Bank, National Association “COBNA”Credit and debit card products, lending and deposit productsCapital One, National Association “CONA”Banking products and financial services to consumers, small businesses and commercial enterprises3 Segments: Credit Card, Consumer Banking and Commercial Banking2014 10-K Pages2

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Financial Breakdown

FY 2014 Loan Portfolio (in millions)Credit Card: $85,876Consumer Banking: $71,439Commercial Banking: $50,890FY 2014 Revenues (in millions)Credit Card: $13,621Consumer Banking: $6,432Commercial Banking: $2,201Other: $36FY 2014 Net Income (in millions)Credit Card: $2,479Consumer Banking: $1,195Commercial Banking: $659Other: $902014 10-K Page 46

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Recent Company Performance

 2014201320122011Net Interest Margin6.67%6.80%6.50%7.27%30+ Day Delinquency Rate2.91%2.96%3.09%3.95%Net Charge-Off Rate1.72%2.04%1.89%2.94%Allowance Coverage Ratio2.10%2.19%2.50%3.13%Efficiency Ratio54.6455.1955.1456.7

Credit Card: Slight decline in net income due to a portfolio sale in 2013 Strong growth in domestic credit card loan portfolio Consumer Banking: Decline in net income  compression in deposit spreads, declining home loan portfolio balances and margin compression in auto loans Strong growth in auto loan portfolioCommercial Banking: Lower net income due to increase in allowance for credit losses. Growth in net revenue attributable to Beech Street acquisition2014 10-K Page 32

 2014201320122011Net Interest Income$17,818$18,106$16,589$12,741Net Income Available to Common Shareholders$4,343$4,051$3,462$3,104Net Income per Diluted Common Share$7.59$6.89$6.11$6.76Dividends per Share$1.20$0.95$0.20$0.20

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Macroeconomic Overview

Consumer Sentiment RisingNew Home Sales – 481K annualizedBeat expectations prior 2 monthsPending Existing home sales near 2 year highsCar sales slower in February yet still at near all-time highs16.2 M annualizedCould possibly be in bubble territoryUnemployment down to 5.5%Low long term ratesTen Year Note at 2.25%

Thomson Reuters/University of Michiganhttp://www.bloomberg.com/news/articles/2015-02-25/new-homes-in-u-s-sold-at-faster-pace-than-forecast-in-januaryhttp://www.businessinsider.com/us-auto-sales-feb-2015-2015-3

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Macroeconomic Overview

http://www.bloomberg.com/bw/articles/2014-09-30/consumer-debt-hits-an-all-time-high

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Industry Porter’s Five Forces

2014 10-K Page 15

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Industry Outlook - Steady Growth

IBISWorld

Industry Report http://clients1.ibisworld.com.proxy2.library.illinois.edu/reports/us/industry/default.aspx?entid=1288

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SWOT Analysis

Strengths

Large market share Brand recognitionRelationships with retailersWide variety of services

WeaknessSubprime borrowingGeographic concentration

Opportunities- Macro recovery- Industry growth- Strategic acquisitions & partnerships Digital banking International expansion

Threats Increased regulationCompetition Cyber security Interest rate volatilityCredit losses

2014 10-K Pages 25-29

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Key Risks

Interest Rate RiskVery sensitive to rates in the economyA 2% increase in rates will increase net interest income 4.5%A 50 basis point fall in rates will decrease net interest income 2.1%Credit LossesAn increase in delinquencies and defaults will decrease net income substantially53% of auto-loans and 32% of credit cards are considered sub-prime Macro RisksA lower demand for money and credit will hurt bottom lineCompliance RiskDodd-Frank, Basel III, Federal Reserve Stress TestingTechnology RiskRecent hacks2014 10-K Page 98

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Product Segments

Consumer BankingDomestic/International Credit Card: Originator of prime and subprime credit cardsConsumer BankingAuto: Originator of auto loans typically with terms of 72 months or less, typically less than $75,000Home Loan: Typically acquire existing loans through acquisition however originate mortgages through branchesRetail Banking: Checking accounts, CD’s , etc..Commercial BankingCommercial and multi-family real estate: Loans secured by real estateCommercial and industrial: Fixed or variable interest rate loans to middle market commercial and industrial firms 2014 10-K Page 78

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Management

Richard Fairbank – Chairman/CEO/President/Founder- MasterCard International Global Board of Directors- Fifth Federal Reserve District representative on Federal Advisor Council 2010-2012Stephen Crawford – Chief Financial Officer- Stock price risen from $59.72 since appointment

Buysellsignals Monday, January 26, 2015 COF equity report

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Management Strategy

Deepen and expand relationships with commercial customersReflected in low net charge-off and nonperforming loan ratesDevelopment and use of technology and operational systemsReduce cost, improve quality and stay competitive Attract and retain a highly capable staff“Associates”Return value back to shareholders- Increase in dividends and share buybacks2014 10-K Pages 12, 13, 63

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M&A

Regularly explore and evaluate acquisition opportunitiesNo significant M&A in 20142013Beech Street Capital Acquisition: $10 billion Commercial real estate loansBest Buy Private Label Credit Card Disposition: $6.4 billion2012ING Direct: $40 billion loans, $84.4 billion depositsHSBC – U.S. Credit Card Business: $27.8 billion outstanding credit card receivables2011Hudson’s Bay Company – Credit Card Portfolio: significantly expanded credit card business in Canada, $1.4 billion outstanding credit card loan receivablesKohl’s – Credit Card Portfolio: $3.7 billion outstanding principal and interest balance2009Chevy Chase Bank: $0.48 billion, one of the largest retail depository institutions in the Washington DC2010 10-K Page 111, 2011 10-K Page 158, 2012 10-K Page 159, 2013 10-K Pages 1-2, 2014 10-K Pages 1-2

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Regulations

Basel IIICapital Requirement required for banks above $250 billion in assetsIncrease in bank capital requirementsDodd-FrankAnnual Federal Reserve Stress TestingDifficulty with acquisitionsWork in progress2014 10-k Pages 6-8https://samples-breakingintowallstreet-com.s3.amazonaws.com/60-BIWS-Bank-Regulatory-Capital.pdf

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Financial Analysis-Ratios

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Technical Analysis

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Financial Projections

P: Net Interest Margin Q: Loan Portfolio

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Cost of Equity & Discount Rate

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Residual Income Model

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Comparable Analysis

Financial Institution, Similar Market Cap, Similar Interest Income, Overlapping Service: Consumer, Commercial,

C

redit Card.

Fifth Third Bancorp (FITB)

Regions Financial Corporation (RF)

The PNC Financial Services Group, Inc. (PNC)

SunTrust Banks, Inc. (STI)

American Express Company (AXP)

Ally Financial Inc. (ALLY)

Discover Financial Services (DFS)

Synchrony Financial (SYF)

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Comparable Analysis

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Recommendation & Key Takeaways

HOLD!

Market

:

$79.84

Residual Income Model: $83.81

Comparable: $90.35

Well

e

stablished company

Offers exposure to the financial sector in our portfolio

Near fair value

Be vigilant of

Interest rates

Consumer spending

Subprime lending

Slide28

Questions?


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