NEW YORK ( TheStreet) -- Morgan Stanley analyst Betsy Graseck on Monday resumed her firm's coverage of Capital One ( COF) with an "overweight" or "buy" rating, with a $60 price target. That's implied upside of 50% from Capital One's closing price of $39.81 on Friday. With the extended public comment for Capital One's agreement to purchase ING Direct from ING Groep ( ING) set to end this week, Graseck expects the merger to be approved by the Federal Reserve and for the acquisition and a subsequent deal to purchase HSBC's ( HBC) U.S. credit card portfolio "to be accretive in 2013."
Capital One agreed to purchase ING Direct in June for roughly $9 billion. The company agreed in August to pay a $ $2.6 billion premium for the HSBC card portfolio. Capital One was the eighth-largest U.S. bank by domestic deposits as of June 30, according to SNL Financial, with $125 billion in domestic deposits as of June 30. The ING Direct deal is expected to be completed during the first quarter of 2012, bringing on an additional $80 billion in deposits and providing additional liquidity before the HSBC deal is completed in the second quarter of 2012. In resuming coverage of Capital One, Graseck increased her 2012 earnings estimate for the McLean, Va., lender to $6.08 a share from Morgan Stanley's previous estimate of $5.62, from before the two acquisition deals were announced. The EPS estimate for 2013 was increased to $6.33 from $5.65. Graseck said she expected "the ING Direct and HSBC card portfolio acquisitions give COF more levers to drive EPS growth than peers," and that after going through a period of thinner net interest margins because of "temporarily high cash balances held post ING acquisition to fund HSBC acquisition" and " from non-card businesses given Operation Twist," Capital One will eventually substitute "lower yielding securities and mortgage portfolios acquired from ING Direct for higher yielding card and auto" loans. The net interest margin is essentially the difference between a bank's average yield on its loans and investments and its average cost for deposits and borrowings. "Operation Twist" is the Federal Reserve's attempt to further lower long-term rates by shifting its investment focus, while keeping short-term rates near zero.
Capital One in July priced a $2 billion offering of common shares at $50 a share, subject to the ING deal being completed by February 15. The company plans to raise an additional $1.25 billion in common equity before completing the HSBC card deal. Graseck believes the Federal Reserve will approve the Capital One/ING Direct merger, despite opposition from consumer groups and concerns raised by Representative Barney Frank (D-Mass.) that the deal could create another bank considered "too big to fail," because the combined company will have strong asset and liquidity, and because other potential bidders for ING Direct are even larger than Capital One. "If limiting concentration risk is important to regulators, we think it makes more sense to allow COF (#10 in asset size) to buy ING Direct," she said. The analyst sees the two acquisitions as making Capital One a more efficient company, with ING Direct enabling the combined company to "penetrate new markets without opening as many branches as it would otherwise need, thus significantly reducing costs of entering new markets," and the HSBC card portfolio enabling "COF to begin to leverage its excess deposits sourced in the ING acquisition quickly." -- Written by Philip van Doorn in Jupiter, Fla. To contact the writer, click here: Philip van Doorn. To follow the writer on Twitter, go to http://twitter.com/PhilipvanDoorn.