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Capital One: Financial Winner

Stocks in this article: BAC STI COF I:BKX

Stifel Nicolaus analyst Christopher Mutascio early on Monday upgraded Bank of America to a "Buy" rating, with an $11 price target, saying "we like the combination of the company's potential EPS growth trajectory, its improved capital position and likely dividend increase, leverage to what is working in the current environment (mortgage origination and debt underwriting) and our belief that it is under-owned."

Mutascio America will earn 92 cents a share in 2013, with EPS of $1.20 a share in 2014," and said that his estimate of 30% EPS growth in 2014 compares to a "median increase of less than 5% for the rest of our large-cap bank stock universe."

For SunTrust, Mutascio estimates 2013 earnings of $2.70 a share, increasing to $3.00 in 2014. That 11% earnings increase for 2014 is his second highest among large-cap banks.

Capital One

Capital One's shares have now returned 38% year-to-date, following a flat return during 2011.

The shares trade for 1.5 times tangible book value, according to Thomson Reuters Bank Insight, and for eight times the consensus 2013 earnings estimate of $7.03, among analysts polled by Thomson Reuters. The consensus 2014 EPS estimate is $7.40.

Capital One on Friday announced it would redeem $3.65 billion in trust preferred securities on January 2 of net year. , Out of that total, $10 million have floating rates, while the rest have fixed coupons. $1 billion of the trust preferreds to be redeemed have a fixed coupon of 10.25%, $1 billion have a coupon of 8.875%, $650 million pay 7.686%, and the remaining $500 million pay 6.745%.

Because the trust preferred shares will eventually be excluded from regulatory Tier 1 capital per the Federal Reserve's proposed rules to implement the capital enhancement provisions of the Dodd-Frank bank reform legislation, the redemption is considered a "capital treatment event," and investors will only receive par value for the shares, despite their above-market rates.

KBW analyst Sanjay Sakhrani rates Capital One a "Buy," with a $70 price target, and on Monday said that the trust preferred redemption "is a positive catalyst for COF and is in-line with the steps we expected the company to take in terms of capital management," and estimated that "redemption of the securities could be accretive to the company by close to 0.30/share (relative to our current estimates, all else equal) given that management expects to use mainly cash on hand and factoring in the full quarter's impact of preferred shares issued in August and recent $1 billion senior notes."

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