Capital One Has 21% Upside Off ING Deal: Citigroup (Update 1)

Updated with early afternoon market action.

NEW YORK (TheStreet) Citigroup analyst Donald Fandetti says that Capital One (COF) will see "~16% earnings accretion" from its pending acquisitions of ING Direct (USA) and HSBC's (HBC) U.S. credit card portfolio.

The Federal Reserve late Tuesday approved Capital One's purchase of ING Direct from ING Groep (ING) for roughly $9 billion in cash and stock, and Capital One said the merger would be completed "within the next few days."

Capital One's shares were up over 3% in early afternoon trading on Wednesday, to $49.42.

Capital One's shares were up 14% year-to-date, through Tuesday's close at $47.98. The shares trade for 1.4 times tangible book value according to HighlineFI, and for eight times the consensus 2012 earnings estimate of $5.84, among analysts polled by Thomson Reuters.

That's a healthy discount for a bank whose return on average assets (ROA) has been above 1.60% for three of the last four quarters. Rising expenses leading into the merger deals brought Capital One's fourth-quarter ROA down to 0.81%, according to HighlineFI.

The Federal reserve said that in approving the ING deal, it had also taken account Capital One's subsequent agreement to purchase HSBC's (HBC) $30 billion U.S. credit card portfolio, including Capital One's plan to issue common shares to partially fund the $2.6 billion purchase.

That sets the stage for approval of the HSBC card deal by the Office of the Comptroller of the Currency, which is the lead regulator for Capital One's main banking subsidiary, Capital One, NA.

Fandetti reiterated his "Buy" rating for Capital One, with a $58 price target, although he said that over the short-term, the shares "may be tempered somewhat by concerns around the planned $1.25 B common equity raise for HSBC and fears of structurally higher expenses as COF builds out infrastructure for risk [management] per the Fed's requirement around the deal approval."

The analyst said that the ING Direct purchase "bolsters COF's deposit franchise, bringing deposits north of $200B," and will "reduce COF's cost of funds which is around 1.4% currently and above many large bank peers."

Fandetti's earnings estimates factor-in a $1.25 billion common equity raise by Capital One, to complete the deal for HSBC's roughly $30 billion in U.S. credit card loans, which will grow Capital's One's card business by roughly 50%.

The analyst estimates that Capital One will earn $5.84 a share in 2012, followed by EPS of $6.71 in 2013.

Interested in more on Capital One? See TheStreet Ratings' report card for this stock.

-- Written by Philip van Doorn in Jupiter, Fla.

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Philip W. van Doorn is a member of TheStreet's banking and finance team, commenting on industry and regulatory trends. He previously served as the senior analyst for TheStreet.com Ratings, responsible for assigning financial strength ratings to banks and savings and loan institutions. Mr. van Doorn previously served as a loan operations officer at Riverside National Bank in Fort Pierce, Fla., and as a credit analyst at the Federal Home Loan Bank of New York, where he monitored banks in New York, New Jersey and Puerto Rico. Mr. van Doorn has additional experience in the mutual fund and computer software industries. He holds a bachelor of science in business administration from Long Island University.