Capital One Financial Corporation  Analyst Team Xiaoshu(Nikki) Liu Lu Zhao Wenlong Xu Kefei Zhu

Capital One Financial Corporation Holding Position Capital One Financial Corporation 46.23B 27.29 Market Cap P/E 95.07 2988 Current Price Net Revenue 3.48 1.6 Earnings Per share Dividend Yield 200 18.6% Currently we have 200 shares of stock, which is about 19% of the portfolio. Total Shares Owned Total Holding Period Return 100 shares bought @ $73.13 On 12/9/2013 100 shares bought @ $87.13 On 3/31/2017 // 01 Source: IBIS WORLD

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Company Business Credit Card 01 Consumer Banking 02 Commercial Banking 62% International Domestic-90% Source of revenue: interest income, net interchange income and fees collected from customers Expenses: provision for credit losses, operating cost and marketing expenses 02 Consumer Banking 26% Source of revenue: net interest income from loans and deposits and non-interest income from service charges and customer-related fees Expenses: provision for credit losses, operating cost and marketing expenses 03 Commercial Banking 11% Source of revenue: net interest income from loans and deposits and non-interest income from customer fees and other transactions Expenses: provision for credit losses, operating cost and marketing expenses Source: COF 2017 annual report // 01

Company History Began to expand beyond credit card services. Added to the Fortune 500 Acquired Chevy Chase Bank, ING Direct and HSBC US card. Spin-off from Signet banking and rename to Capital One, IPO at $16 1988 1995 1998 2000 05-06 09 -12 15-16 Fairbank and Morris began building the foundation for Capital One. . Acquired GE Healthcare Financial Services and Paribus The company acquired a US auto lending operation Acquired Hibernia National Bank and North Fork Bank Source: WIKIPEDIA // 01

Management Team Richard D. Fairbank Richard Scott Blackley CEO CFO President of U.S. card Richard D. Fairbank  Mr. Fairbank has been the CEO since the Company’s Initial Public Offering in November 1994 and has served as the Chairman and CEO since February 1995.  Richard Scott Blackley Mr. Blackley has been the CFO since May 9, 2016, Senior Vice President since joining it in March 2011 and also serves as its principle financial officer. Michael J. Wassmer In November 2016, Mr. Wassmer became President, Domestic Card and is currently responsible for leading the Company's consumer credit card business in the United States.  Source: Bloomberg // 01

SWOT Analysis Strength Weakness Opportunity Threat High reputation and one of the top 10 banks in the US Offer a wide range of financial services New technology support Strength Weakness Concentrated in limited regions with weak worldwide presence Opportunity Threat Can expand to other geographic regions Can expand to more services such as private banking and consulting services Acquire some small banks Banking operation depends on the economic outlook of the economy Sensitive to the regulation by the government and Fed Cybersecurity Not strong worldwide presence Source: MBASKOOL // 01

Porter’s Five Forces Analysis Supplier power Saturated market Low Degree of rivalry Face intense competition Reward program Competitors brand identity is strong and well known. Low switching cost Threat of substitutes New channels are available for customers Multiple large competitors with diversified services High High Barriers to entry The industry has tight regulation and is growing at slow pace. Brand recognition Buyer power The level of consumer spending is directly linked with the profitability. Customers can easily move to rivals bank High High Source: Investopedia // 01

Capital One Financial Corporation Industry Overview Capital One Financial Corporation Revenue 2017 Annual Growth 2018-2023 Profit 2017 Wage Level 2017 95.7B 2.7% 21.5B 5.6B Operators in the Credit Card Issuing industry provide credit services to consumers and businesses by issuing cards with available credit lines that must be repaid in full to the issuer, often in installments. Industry operators generate revenue from cardholders primarily through fees, interest and other charges agreed upon through contract. Issuers have increasingly adopted risk-based pricing models based on consumers' borrowing habits and ability to pay their balances. Industry operators compete by offering customers lower rates, flexible payment options and rewards based on spending. Source: IBIS WORLD

Capital One Financial Corporation Macro Indicators Capital One Financial Corporation Treasury Yield Curve PMI Index SPX Total Return US Economy Is Strengthening The prime rate is the underlying index for most credit cards and personal loans. And the most import factor we need to concern for COF’s business. As higher Interest rate will make loans more expensive thus result in decrease of loan volume, while increase the profitability as the interest spread will increase. Prime Rate 3-4 times hiking in 2018 Revenues: Volume change Cost: Funding & Allowance Profit margin: Higher fees charged Source: IBIS WORLD

Capital One Financial Corporation Macro Indicators Capital One Financial Corporation Income: Estimated Value in 2018: $40,030.14 2013-2018 Compound Growth: 1.9% Forecast Value for 2023: $43,977.23 2018-2023 Compound Growth: 1.9% Unemployment rate: Estimated Value in 2018: 4.0% 2013-2018 Growth: -3.4 percentage points Forecasted Value for 2023: 4.3% 2018-2023 Growth: 0.3 percentage points Over the five years to 2023, IBISWorld projects that the economy will exhibit consistent growth. However, growth is anticipated to be stronger at the outset then taper off. The unemployment rate is expected to continue declining on average through 2019, although, it is expected to bottom out. The Federal Reserve seeks to target a natural rate of unemployment, typically floating between 4.5% and 5.0%. As inflationary pressure increases, supported by wage gains and greater consumption, the Federal Reserve will enact increases to the target baseline interest rate. This is expected to reduce declines in the unemployment rate. In the latter half of the period, the unemployment rate is expected to trend toward 4.3% in 2023. Continuous Growth: - Tax Reformation - Unemployment Level Drive Demand & Profitability of Consumer Business Continuous growth: Construction Area High-Tech Talents Drive Demand & Profitability of Credit Card business Source: IBIS WORLD

Capital One Financial Corporation Macro Indicators Capital One Financial Corporation Aggregate Household debt: Estimated Value in 2018: $14.33 trillion 2013-2018 Compound Growth: 1.3% Forecast Value for 2023: $16.62 trillion 2018-2023 Compound Growth: 3.0% Debt Fuels Growth of Spending Debt increase varies in segments as Economy is Strengthening due to Prime Rate/Consumer behavior/Regulation Investment continuously increase in: External: Consumer experience Internal: Operation Efficiency Will keep heavy investment in next 5 years. Source: IBIS WORLD

Financial Analysis RI Valuation Sensitive Analysis Ratio Analysis Comparable Valuation

Ratio Analysis: Capital Adequacy // 01

Ratio Analysis: Asset Quality // 01

Ratio Analysis: Profitability // 01

Comparable Valuation: Companies Selection // 01

Comparable Valuation Comparable Price: $95.34 // 01

Residual Income Valuation 𝑅𝐼= 𝑁𝑒𝑡 𝐼𝑛𝑐𝑜𝑚𝑒 𝐴𝑣𝑎𝑖𝑙𝑎𝑏𝑙𝑒 𝑡𝑜 𝐶𝑜𝑚𝑚𝑜𝑛 𝐸𝑞𝑢𝑖𝑡𝑦 𝑡 − 𝐵𝑜𝑜𝑘 𝑉𝑎𝑙𝑢𝑒 𝑜𝑓 𝐶𝑜𝑚𝑚𝑜𝑛 𝐸𝑞𝑢𝑖𝑡𝑦 𝑡−1 ∗𝐶𝑜𝑠𝑡 𝑜𝑓 𝐸𝑞𝑢𝑖𝑡𝑦

Residual Income Valuation: Business Segment Percentage Yield Driver Credit card 67.27% 15.21% Disposable income Consumer banking 21.31% 6.66% Interest rate; Commercial Banking 11.25% 3.86% Interest rate Others 0.17% 30% (Revenue offered by each segment) Credit card earned the highest revenue and had the highest yield. Credit card is not the same sensitive to interest rate as consumer banking and commercial segment. Source: Capital One 2017 10K // 01

Residual Income Valuation: the Effect of Interest Rate Net interest income and EV will decrease as long as the interest rate change. The change of the interest rate has a negative effect on the stock price. Source: Capital One 2017 10K // 01

Residual Income Valuation: Assumption (Growth rate represents the volume growth) The credit card growth rate will have a jump in the following three years; then, it will return to normal. The transfer payment caused by tax deduction will make people get wealthier, people will spend more on consumption and use their credit card more often. In the following two years, Federal reserve will raise the interest rate. The borrow cost will be more expensive. For consumer banking, COF will quit the home loan market totally, but the consumption on auto will increase and offset this effect. The growth rate for this part should be flat. Commercial banking will be influenced by the interest rate raising.

Residual Income Valuation The equity beta is 5-years historical beta. The risk free rate is 10-year treasury. Risk premium is 8%. The terminal growth rate equals to the GDP growth rate. // 01

Sensitivity Analysis Terminal Growth rate Cost of equity When the cost of equity is below 14%, the stock price will increase as the terminal growth rate increase. When the cost of equity is above 14%, the stock price will decrease as the terminal growth rate increase. During recession, expending business is a negative signal for the stock price. // 01

Recommendations: Hold $95 Comparable valuation $101 Residual Income Valuation // 01