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Big Banks: Fiscal Cliff Deal Winners (Update 1)

Updated with market close information and a discussion of Capital One.

NEW YORK ( TheStreet) -- Capital One Financial (COF - Get Report) was winner among the largest U.S. banks on Wednesday, with shares rising 6% to close at $61.23.

The Dow Jones Industrial Average was up over 2%, while the S&P 500 (SPX.X) rose 2.5% and the NASDAQ Composite rose over 3%, following the passing by the House of Representatives late on Tuesday of a spending bill that was earlier passed by the Senate, resulting from a compromise worked out by Vice President Joe Biden and Senate Minority Leader Mitch McConnell (R., Ken.). The budget compromise limited income tax rate increases to couples with combined annual incomes of more than $450,000, while also raising capital gains and dividend income tax rates for the same group of people to 20% from 15%, and raising estate taxes to 40% from 35%.

Most working taxpayers will still see a tax increase in 2013, as the temporary 2% cut in the combined payroll tax for Social Security and Medicare was allowed to expire.

The next last-minute drama in Washington that can be expected to cause a market see-saw as members of Congress play another game of brinksmanship is the federal debt ceiling, which will likely be reached in February. KBW analyst Brian Gardner on Wednesday wrote that "most of that drama will likely wait until after President Obama's second inauguration on January 20 (public celebration on the 21st)."

The strength of bank stocks continued to build as the day went on. The KBW Bank Index KBW Bank Index (I:BKX) was up over 3% to close at 52.93, with the 24 index components all showing gains of more than 2%. Bank of New York Mellon (BK - Get Report) was up 5% to close at $26.88. Index components showing 4% gains included Bank of America (BAC - Get Report), which closed at $12.03; Citigroup (C - Get Report), which closed at $41.25; Fifth Third Bancorp (FITB), at $15.77; KeyCorp (KEY), at $8.78; and Commerce Bancshares (CBSH), closing at $36.34.

Looking to the Next Clean Quarter


On Monday, at the last minute, as investors grew more confident that the ridiculous Fiscal Cliff negotiations would end in a deal that would at least kick the federal spending can down the road, Capital One's shares recovered sufficiently to come out on top of the 2012 stock-picking contest at InvestorPlace.

Capital One ranked fifth among the 24 components of the KBW Bank Index, with shares returning 37.5% in 2012 through Monday's close at $57.93, following a flat return in 2011.

The shares now trade for 1.6 times tangible book value, according to Thomson Reuters Bank Insight, and for and for 8.7 times the consensus 2013 EPS estimate of $7.01. The consensus 2014 EPS estimate is $7.38.

2012 was a year of major transitions for Capital One, which in February acquired ING Direct (USA), followed by a $1.25 billion common equity raise in March, and the purchase of HSBC's (HBC) U.S. credit card portfolio in May, for a premium of $2.5 billion. The ING deal included roughly $80 billion in deposits gathered over the Internet, along with $41 billion in loans, providing plenty of liquidity for the $28.2 billion in credit card loans acquired from HSBC.

The third quarter was the company's first "clean" quarter in 2012, with a return on average tangible common equity of 21.48%. FBR analyst Paul Miller on Dec. 19 included Capital One among his list of "stocks to own for 2013," with a price target of $72, saying the company is "one of our favorite names due to its compelling valuation ($72 target = 10x our FY13 EPS estimate and 1.1x book value), expected resumption of the dividend, and increased earnings power."

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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