Capital One May Find Reprieve in M&A

(Updated stock prices throughout)

MCLEAN, Va. (TheStreet.com) -- Capital One Financial's (COF Quote) sagging credit portfolio begs a fundamental question about its future: Should it be more of a bank or a credit card company?

The 21-year-old company, known for its ubiquitous "What's in Your Wallet?" credit card advertising campaign, faces pressure as its legacy credit card and other financing businesses struggle amid the recession and looming new credit card regulations.

Meanwhile, Capital One spent the last four years expanding its business by acquiring several mid-size banking outfits, stretching from New York to New Orleans. Some observers say Capital One will have to dig deeper into banking to remain a powerhouse company, as unemployment continues to rise and stricter card legislation passed this spring by President Obama will negatively affect all credit card businesses.

Even though Chairman and CEO Richard Fairbank has said the company is working to integrate its most recent acquisition, Chevy Chase Bank of Bethesda, Md., and is focusing on building "strong, local scale positions," at least one analyst says more bank acquisitions could eventually be in the cards, given the changing credit card environment.

The regulatory changes will "make it a lot harder for the credit card business in general to really recover, just because they're no longer able to re-price for risk," says Jason Arnold, an analyst at RBC Capital Markets. Credit card firms will do "a lot less lending or charge annual fees. ... Their banking presence will take a bigger piece of the pie."