Capital One: How I Beat the Best With a 37% Stock Rocket

With gains on the purchase of ING Direct, a temporary liquidity bump in advance of the HBCB card deal, and special loan loss reserve provisions during the second quarter for the acquired credit card loans, Capital One's "first clean quarter" for 2012 was the third quarter, when the company reported earnings available to common shareholders of $1.17 billion, or $2.01 a share, excluding income from discontinued operations.

Capital One's third-quarter return on average assets was 1.6% and its return on average tangible equity was 21.5%, compared with ROA of 11.8% and ROTCE of 22.6% a year earlier.

The company's net interest margin -- the average yield on loans and investments minus the average cost for deposits and borrowings -- was 6.97% in the third quarter, increasing from 6.04% the previous quarter (when the company's margin shrank because of the ING acquisition, without yet realizing a full quarter's benefit from the HSBC cards), but narrowing from 7.4% a year earlier. The year-over-year narrowing of the margin is in line with the industry, in the prolonged low-rate environment.

So Capital One is ready to continue outperforming most of other big banks, simply because the credit card business is more profitable than other lending operations.

Shares of Bank of America and Citigroup are still cheaper to book value, but more expensive to forward earnings.

Bank of America trades for 0.9 times tangible book value, according to Thomson Reuters Bank Insight, and for 12 times the consensus 2013 earnings estimate of 96 cents, among analysts polled by Thomson Reuters. The consensus 2014 EPS estimate is $1.25.

Citigroup trades for 0.7 times tangible book value and for 8.5 times the 2013 consensus EPS estimate of $4.65. The consensus 2014 EPS estimate is $5.13.

Capital One trades for 1.5 times tangible book value, but for only 8.2 times the consensus 2013 EPs estimate of $7.03. The consensus 2014 EPS estimate is $7.39

So there you have it. On a forward P/E basis, Capital One's shares are still cheaper than the shares of Bank of America and Citigroup, and Capital One has unbeatable earnings power.

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.

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