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) -- Sandler O'Neill analyst Michael Taiano on Monday upgraded

Capital One Financial

(COF) - Get Capital One Financial Corporation Report


Discover Financial Services

(DFS) - Get Discover Financial Services Report

to "buy" ratings.

Early in what appeared to be a strong session for the financial sector, shares of Capital One were up over 4% to $45.65, while Discover was up nearly 4% to $24.20.

In support of his upgrade for Capital One and 12-month price target of 58, Taiano said the company's

deal last week to acquire a $30 billion credit card portfolio




would be "highly accretive to EPS," as it would enable the company to "to swap lower yielding (~2%) loans/securities acquired in the ING Direct deal," for credit card assets yielding in the "high-teens."

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Capital One previously agreed to acquire ING Direct from

ING Groep

(ING) - Get ING Groep NV Sponsored ADR Report


Taiano also likes the HSBC deal as "a reasonably good strategic fit," as Capital One looks to expand its private-label card business. The analyst also sees the premium Capital One is paying to HSBC as "reasonable," and "most importantly," believes that the two large acquisitions make it "unlikely the company will pursue additional acquisitions of significant size in the near-term, removing what has been an overhang for the shares."

Sandler O'Neill estimates that Capital One will earn $7.51 a share for 2011 and $6.00 a share in 2012.

The analyst set a 12-month target for Discover of $28, saying that "the recent decline, which we attribute more to global macro issues than company specific concerns, has created an attractive entry point into the shares." Taiano also pointed out that Discover's shares were trading for "under 9x

his normalized EPS estimate of $2.65 and 7.3x our '12 EPS estimate."

Sandler O'Neill estimates that Discover will earn $3.82 a share in 2011 and $3.19 a share in 2012.

Taiano said that "investors should view Discover as a cleaner story and an attractive investment given the scarcity value of possessing one of the largest credit card portfolios in the U.S. and a scalable payments network." He also touted the company's "exceptionally strong capital and liquidity position and no direct exposure to residential mortgages or commercial real estate."


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Written by Philip van Doorn in Jupiter, Fla.

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Philip van Doorn


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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 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.