Capital One Financial Corporation (NYSE:COF)

December 5, 2013Valerie Chan, Hisham Haider Dewan

Caleb Pierson, Harout Sahakian

Agenda

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• Introduction• Company overview•Macro-economic overview• Industry analysis• Financial analysis and projections• Valuation• Recommendation

COMPANY OVERVIEW

3

Introduction to Capital One

4Source: 2012 Capital One 10K

5

COF Subsidiaries & Business Segments

• Capital One Bank, National Association (COBNA)• Capital One, National Association (CONA)

Source: 2012 Capital One 10K Page 1

Credit Card Consumer Banking

Commercial Banking

Credit Card

Source: COF 2012 10K. Pg. 71, 183. 6

Consumer Banking

Source: COF 2012 10K. Pg. 78, 184. 7

Commercial Banking

Source: COF 2012 10K. Pg. 82, 190. 8

Assets by Segment

9Source: Bank of America Merrill Lynch 2013 Banking & Financial Services Conference November 12, 2013

Segment Revenue Trends

*in millions

Source: Capital IQ 10

Operation & Income Trends

Source: Capital IQ 11

Recent Developments

Source: COF 2013 3Q 10Q. Pg. 11. http://www.bloomberg.com/news/2013-11-21/capital-one-ceo-sells-44-million-of-stock-in-november.html?cmpid=yhoo

12

Regulation

Source: COF 2012 10K. Pgs. 9-17. 13

MACRO-ECONOMIC OVERVIEW

14

15

U.S. Household debt

Treasury Yield Curve

16

Source: ycharts.com

Source: federalreserve.gov

INDUSTRY ANALYSIS

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Credit Card Issuing

Commercial Banking

18Source: 1) IBISWorld Industry Report 52221, Credit Card Issuing in the US, October 20132) IBISWorld Industry Report 52211, Commercial Banking in the US, August 2013

Banking More Mobile and Online

19

COMPETITIVE POSITION OF COF

20

COF Porter's Five Forces Analysis

21Source: FDIC Statistics At A Glance Sept 2013

SWOT Analysis of COF

22

FINANCIAL ANALYSIS

23

24

Return on Assets vs. Competitors

Capital Ratio

Balance Sheet as of: Sep-30-2012 Sep-30-2013

Tier 1 Capital Ratio % 12.7% 13.1%

Total Capital Ratio % 15.0% 15.3%

Leverage Ratio % 9.9% 10.1%

25Source: Capital IQ

Tier 1 Capital Ratio vs. Competitors

26Source: Bank of America Merrill Lynch 2013 Banking & Financial Services Conference, November 12, 2013

Asset Quality

27Source: Capital IQ

2008 2009 2010 2011 2012Sep-30-2013

Nonperforming Loans / Total Loans %

0.8 1.4 1.0 0.8 0.5 0.5

Nonperforming Assets / Total Assets %

0.6 0.9 0.8 0.6 0.4 0.4

Nonperforming Assets / Equity %

3.6 5.8 5.8 4.2 3.2 2.8

Allow. for Credit Losses / Total Loans %

4.5 4.5 4.5 3.1 2.5 2.3

Net Charge-offs / Total Avg. Loans %

3.5 4.6 5.2 2.9 1.9 NA

Loan Loss & Write-Offs

28

Income Statement 2008 2009 2010 2011 2012 Sep-30-2013Provision For Loan Losses

5,101 4,230 3,907 2,360 4,415 3,647

Balance Sheet 2008 2009 2010 2011 2012Sep-30-

2013Gross Loans 101,342 90,767 125,947 135,892 205,889 191,814Allowance For Loan Losses

(4,524) (4,127) (5,628) (4,250) (5,156) (4,333)

Transforming Source of Funds

Source: Bank of America Merrill Lynch 2013 Banking & Financial Services Conference, November 12, 2013 29

Profitability & Margin Analysis

For the Fiscal Period Ending 2008 2009 2010 2011 2012

LTM12 months30/092013

ProfitabilityReturn on Assets % 0.1% 0.6% 1.7% 1.6% 1.4% 1.5% Margin AnalysisEBT Margin % 17.5% 17.6% 36.6% 34.2% 30.9% 35.9% Net Income Margin% (0.5%) 10.1% 22.4% 22.6% 21.5% 22.0%

30Source: Capital IQ

Technical AnalysisCurrent price $72.35* | P/E (ttm): 10.23*| P/B 1.009*

31Source: Yahoo Finance http://finance.yahoo.com/q/ta?s=COF&t=1y&l=on&z=l&q=l&p=m50%2Cm200&a=&c=As of 12/4/2013

COF Stock Performance vs. Competitors

32Source: Yahoo Finance http://finance.yahoo.com/q/ta?s=COF&t=1y&l=on&z=l&q=l&p=m50%2Cm200&a=&c=As of 12/4/2013

VALUATIONResidual Income, Comparable Company, Benjamin Graham

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Residual Income Model

Source: CFA Program 2013 Level 2 Volume 4 Page 373 to 386

Definition of Residual Income

35Source: CFA Program 2013 Level 2 Volume 4 Page 373 to 386

Residual Income Valuation

36

2014 2015 2016 2017 2018Beginning Common Equity: $41,750 $45,188 $49,152 $53,540 $58,450

Plus: Net Income to Common:

4,567 5,160 5,657 6,218 6,853

Plus: Stock Issuances: 264 267 270 272 275Less: Stock Repurchases: (700) (700) (700) (700) (700)Less: Common Dividends: (693) (762) (838) (880) (924)Ending Common Equity $45,188 $49,152 $53,540 $58,450 $63,954

Residual Income = (Net Income to Common Equity) – (Beginning BV of Equity) X (Cost of Equity)

2014 2015 2016 2017 2018

Net Income to Common Equity $4,567 $5,160 $5,657 $6,218 $6,853Beginning BV of Equity $41,750 $45,188 $49,153 $53,541 $58,451(Beginning BV of Equity) X (Cost of Equity)

$4,577 $4,954 $5,389 $5,870 $6,409

Residual Income -$11 $205 $268 $348 $444

Residual Income Assumptions

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Cost of equity using CAPM

Beta 1.256Market risk premium (Rm-Rf) 6.50%10 year treasury yeild 2.80%Cost of equity using CAPM 10.964%

Current Value of Common Equity $41,750 Sum of PV of Residual Income from 2014 to 2018 $847 PV of Res. Inc. Terminal Value $2,407

Present Value of Equity $45,004 Shares Outstanding 577.4 Implied Share Price $77.94

Terminal Value CalculationTerminal NI Growth Rate 2.5%Estimated Year 6 NI to Common 7,355 Return on Common Equity - Long-Term 11.5%

Return on Equity

38Cost of Equity using CAPM 10.964%

Monte Carlo Simulation

Provision For Loan Losses as % of Gross LoanMaximum Extreme distribution with parameters:Likeliest 2.50%Scale 0.50% 39

Public Comparable Company

Company Name Weights on multiple

American Express Company (NYSE:AXP) 5.00%BB&T Corporation (NYSE:BBT) 10.00%Discover Financial Services (NYSE:DFS) 25.00%Fifth Third Bancorp (NasdaqGS:FITB) 15.00%Regions Financial Corporation (NYSE:RF) 15.00%The Allstate Corporation (NYSE:ALL) 10.00%The Bank of New York Mellon Corporation (NYSE:BK) 5.00%

The PNC Financial Services Group, Inc. (NYSE:PNC) 10.00%

U.S. Bancorp (NYSE:USB) 5.00%SUM 100.0%

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Comparable Company Valuation

Multiple Multiple value Weight

Implied Price per Share

Market Cap/Total Revenues 2.83 20% $92.23Market Cap / Forward Total Revenues (Capital IQ) 2.63 15% $85.55

P/Diluted EPS Before Extra 13.05 15% $96.29Forward P/E (Capital IQ) 11.73 15% $81.91Market Cap / EBT Excl Unusual Items 7.61 20% $88.99

P/BV 1.78 0% $128.71P/TangBV 2.22 15% $98.63Implied Price per Share $90.60

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Price to Book Ratio Increasing

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Benjamin Graham’s Formula

Current (normal earnings, $Mil.) 4,143

Expected annual growth rate (%) 2.5

Number of shares 577.4

Estimated price per share $78.92

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Valuation Summary

Price per shareResidual Income $77.94Relative Valuation $90.60Benjamin Graham formula $78.92Current market price 12/05/2013 $72.35

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Recommendation

100 Shares of NYSE:COF @ Market Price

45

BUY

Cost: $7,235 (at Dec 4, 2013 closing price) Approximately 4.5% of portfolio