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

2. 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
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Source: IBIS WORLD

3. 1% Market & Company Overview Microeconomic Drivers Industry Analysis
Welcome To COF
Market & Company Overview
Microeconomic Drivers
Industry Analysis
Valuation & Recommendation . 1%
MUSIC 
Conveniently iterate top-line alignments for wireless metrics.

4. 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
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5. 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
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6. 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
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7. 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
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8. 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
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9. Capital One Financial Corporation
Industry Overview
Capital One Financial Corporation
Revenue
2017
Annual Growth
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

10. 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

11. Capital One Financial Corporation
Macro Indicators
Capital One Financial Corporation
Income:
Estimated Value in 2018: $40,030.14
Compound Growth: 1.9%
Forecast Value for 2023: $43,977.23
Compound Growth: 1.9%
Unemployment rate:
Estimated Value in 2018: 4.0%
Growth: -3.4 percentage points
Forecasted Value for 2023: 4.3%
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

12. Capital One Financial Corporation
Macro Indicators
Capital One Financial Corporation
Aggregate Household debt:
Estimated Value in 2018: $14.33 trillion
Compound Growth: 1.3%
Forecast Value for 2023: $16.62 trillion
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

13. Financial Analysis RI Valuation Sensitive Analysis Ratio Analysis
Comparable Valuation

14. Ratio Analysis: Capital Adequacy
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15. Ratio Analysis: Asset Quality
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16. Ratio Analysis: Profitability
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17. Comparable Valuation: Companies Selection
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18. Comparable Valuation
Comparable Price: $95.34
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19. Residual Income Valuation
𝑅𝐼= 𝑁𝑒𝑡 𝐼𝑛𝑐𝑜𝑚𝑒 𝐴𝑣𝑎𝑖𝑙𝑎𝑏𝑙𝑒 𝑡𝑜 𝐶𝑜𝑚𝑚𝑜𝑛 𝐸𝑞𝑢𝑖𝑡𝑦 𝑡 − 𝐵𝑜𝑜𝑘 𝑉𝑎𝑙𝑢𝑒 𝑜𝑓 𝐶𝑜𝑚𝑚𝑜𝑛 𝐸𝑞𝑢𝑖𝑡𝑦 𝑡−1 ∗𝐶𝑜𝑠𝑡 𝑜𝑓 𝐸𝑞𝑢𝑖𝑡𝑦

20. 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 K
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21. 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 K
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22. 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.

23. 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.
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24. 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.
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25. Recommendations: Hold
$95
Comparable valuation
$101
Residual Income Valuation
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