Capital One: Financial Winner

NEW YORK ( TheStreet) -- Capital One ( COF) was the winner among the largest U.S. financial names on Monday, with shares rising over 4% to close at $58.14.

The broad indexes all saw 2% gains, after The National Association of Realtors reported that sales of existing homes increased in October by 2.1% to a seasonally adjusted annual rate of 4.79 million, from a downwardly revised 4.69 million in September.

October existing home sales were 10.9% above the annual rate of 4.32 million-unit level in October 2011. Economists, on average had expected an annual rate of 4.75 million existing home sales in October, according to

Investors continued to anticipate a deal between leaders of Congress and President Obama to avert the "fiscal cliff," an its combination of an expiration of tax cuts that were enacted when George W. Bush was president and extended in 2010 by President Obama, as part of a deal with Republicans to raise the federal debt ceiling. Without a new deal, many economists believe that the tax increases and concurrent required cuts in federal spending cut push the U.S. economy back into recession.

KBW economist Maury Harris early on Monday wrote that "among recently polled economists, 84%--including ourselves--expect a deal. However, only 38% of polled adults anticipate an agreement, with that sentiment being echoed in a very worried stock market."

Harris added that even some of the big government spenders are worried: "Meanwhile, in Washington DC, the Defense Department is apparently taking no chances and is feverishly spending funds before they possibly become sequestered."

Then again, Harris indicated that the Federal Reserve could see quite a boost to its suffering credibility in the event that there is no deal to resolve the fiscal cliff, because "tighter fiscal policy might become a positive, not just for the positive impact on the deficit, but also because it could allow the Fed to become the first central bank to successfully."

the KBW Bank Index ( I:BKX) rose over 2% to close at 48.20, with all 24 index components showing gains.

Banks with fortunes closely tied to the housing market showed gains of nearly 4%, including Bank of America ( BAC), which closed at $9.49, and SunTrust ( STI), closing at $26.99.

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."

Interested in more on Capital One? See TheStreet Ratings' report card for this stock.


-- Written by Philip van Doorn in Jupiter, Fla.

>Contact by Email.

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.

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