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10 Bank Stock Picks: Heroes vs. Zeros

7. Capital One Financial

Shares of Capital One Financial (COF) of McLean, Va., closed at $45.34 Friday, returning 12% since Sept. 3, 2010.

Capital One is awaiting Federal Reserve approval of its agreement to purchase ING Directfrom ING Groep (ING) for roughly $9 billion, following a series of three public hearings held by the Fed and completed in October, where various consumer groups voiced their opposition to the deal.

The Office of the Comptroller of the Currency has reopened its public comment period for Capital One's pending deal to acquire HSBC's (HBC) U.S. credit card portfolio for a premium of $2.6 billion.

Capital One still expects the ING deal to be completed late this year or early in 2012, and for the HSBC deal to close in the second quarter.

Third-quarter net income was $813 million, or $1.90 a share, increasing from $803 million, or $1.81 a share, in the third quarter of 2010. Capital One's net interest margin expanded to 7.39% from 7.21% a year earlier. The third-quarter ROA was 1.72% according to SNL, which was, by far, the highest ROA among this group of 10 banks.

Guggenheim Securities analyst Marty Mosby has a neutral rating on Capital One, with a $44.50 price target, saying on Nov. 14 that "a smooth integration" of the two merger deals will be "critical, as the value of combining these two acquisitions together is significantly higher than each one independently."

The shares trade for 7.4 times the consensus 2012 EPS estimate of $6.14 among analysts polled by FactSet, and for 1.4 times tangible book value, according to SNL Financial.

Out of 18 analysts covering Capital One, 13 rate the shares a buy, four have neutral ratings, and one analyst recommends selling the shares.

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