Introduction
Capital One Financial Corporation is a financial company which specializes in the offering of banking services, specifically credit cards, home loans, banking and savings products and auto loans. It is a member of the Fortune 500. The company was founded in 1988 and has since grown in stature by conducting several acquisitions over time. Some of its notable acquisitions are the acquisition of Chevy Chase Bank in 2008 and Hibernia National Bank in 2005. The company has two main divisions; auto finance and international operations. The company trades in the NYSE as COF (Capital One Financial Corporation website).
This paper seeks to make an analysis of Capital One Financial Corporation to determine its suitability as an investment vehicle by evaluating its performance and the operating environment of the company, the prevailing microeconomic and macroeconomic conditions and the regulatory framework that the company operates in.
The banking sector is one of the most profitable industries. However, this sector is plagued by accusations of misadventures with investor funds, which is one of the reasons given for the economic recession which was experienced in beginning in 2008. The company is faced with the dilemma of ensuring that the interest of the shareholders are protected while at the same time assuring that shareholder value is improved in the most efficient manner possible. This means that the company has to limit the extent to which it can take risks using shareholder funds so that a financial failure and a potential loss of investor funds is avoided.
There is also a growing environmental awareness in the business arena, and it is the social obligation of business entities such as Capital One Financial Corporation to ensure that this goal is sought and kept. This means that the company has to invest heavily on environmentally friendly projects and conduct its operations in an environmentally conscious manner so as not to develop an antipathy among the public due to its environmental policies.
Another ethical consideration that Capital One Financial Corporation needs to make is the privacy considerations for its customers. The company deals with a lot of private information from its customers and thus is tasked with the responsibility of ensuring that this privacy is protected, even if such a measure implies an increase in the operating costs of the company and may eat into its profitability.
Uncontrolled lending practices and aggressive acquisitions are another ethical consideration that Capital One Financial Corporation will have to deal with. Acquisitions usually result in the loss of employment for many employees of the acquired firm and a translated economic loss to many families. This presents an ethical dilemma for the company and it has to deal with it since it is involved in many acquisitions as it seeks to expand its market.
Regulatory Considerations
Since the advent of the economic crisis of 2008, there has been an increase in the expectations of accountability and disclosure by companies resulting from new regulatory framework and legislation. Legislation such as the Sarbanes-Oxley Act requires more disclosure from companies on many different aspects of accountability to ensure that the interests of stockholders and other investors in a company are not put into jeopardy. In conducting its operation, the Capital One Financial Corporation has to make considerations for these increased accountability and disclosure requirements be ensuring that all its dealings are within the provisions of the relevant regulatory frameworks and the law. Such disclosure will also act to boost investor confidence and improve the performance of the company’s stock in the capital market.
The need to keep abreast with the regulatory framework that governs the operations of the company is also essential. It is upon the company to make an investment to a process which will update it on the developments of the legal framework for the operations of the company so that it does not contravene them. Since the company operates in different legal jurisdictions, it should also put in place measures that keep it in compliance with all the regulations in such jurisdictions.
Macroeconomic environment
In the past few years, the economic world has been experiencing difficulties of a high magnitude which were occasioned by the global economic downtown. This situation saw the collapse of many banks, and the industry in which Capital One Financial Corporation operates was one of the most hit by the recession, to the extent that many banks had to get financial backing of the federal government to avoid their collapse. It is in this situation that Capital One Financial Corporation has been operating, and though it did not have to go deep into the effects of the recession, it was a player in the industry and was affected adversely by the effects of the global recession and benefitted from the federal government bailout. The adverse result of this, especially in terms of reduced customer numbers and bad debts as a result of the collapse of the mortgage market has put the company in a precarious economic position.
As a result of the financial crisis which was experienced in the last few years and was blamed on high risk actions by banks, there has since been an increased regulatory and legal action by both the SEC and other regulatory bodies. More accountability is expected of the banks and this translates into higher costs of doing business and thus the profitability of the bank is reduced. Increased regulations in the industry also mean that the risk capacity that the banks has to be increased, which translates into higher costs of operations which affect the profitability of the company.
The recovery of banks after recession has seen an increase in the competition that the company has to face. This includes the banks which operate in the core business of Capital One Financial Corporation; the issue of credit cards and this means that the business of the company is eaten into by these mushrooming entities. Also, traditional competitors of Capital One Financial Corporation are also attempting to increase their market share and this also presents a challenge to the growth of the company since it has to commit more funds to fight away completion and retain or grow its current markets.
On the other hand, the company is also facing a great opportunity in the increased growth of online trading which primarily deals with the use of electronic cards as the mode of payment. As internet penetration moves a notch higher in new markets, so does the market for Capital One Financial Corporation increase. The company is therefore has an opportunity to grow its markets and expand its earning in both its existing markets and in new and emerging markets.
There are new markets which are emerging and which Capital One Financial Corporation can tap into. A growing middle and upper class income households in Africa and Asia present a great opportunity for expansion which Capital One Financial Corporation can tap into and grow its earnings and profitability. This is an opportunity which the company can utilise to its benefit in the long term.
Microeconomic environment
Capital One Financial Corporation has four main product specializations; credit cards, home loans, savings products and auto loans. This gives the company a level of product diversification which is uncommon in the financial industry and thus offers the company an upper hand in the business. The offering of a diversity of products in the banking industry also means that the company bears lesser risk of insolvency due to a potential failure of one product. The company should thus seek to strengthen the performance of its various products so that it consolidates is position in the market and improve its earning capacity.
A weak demand for loans is also a factor to consider in evaluation of the company’s potential future performance. This, coupled with an exposure to commercial real estate, is bound to affect the company’s performance adversely and perhaps affect the profitability of the company in the near future.
The company also boasts of a highly qualified and experienced management team, led by the CEO of the company, Richard Fairbank. The expertise and experience possessed by the management of the company is a strength that gives the company a clout in the financial sector. The company is therefore expected to deliver on its mission through the strength of its management team.
Stock Performance
In the period from September 2012 to the performance of Capital One Financial Corporation has been mixed, with rises and fall in the volume of its stock traded in the capital market. At the beginning of September 2012, the price of the stock Capital One Financial Corporation that was traded was slightly higher than $ 56. Over the fall, the share performance has been fluctuating between a price of slightly lower than $ 54 but never rising higher than slightly below $ 62. Over the same period of time, the volume of the stock of Capital One Financial Corporation trade has largely maintained the same trend expect at the beginning of September when the volume of Capital One Financial Corporation shares traded rose from around five million to about thirty seven million shares traded.
For the third financial quarter of 2012, the company reported revenue of $ 5.78 billion. This may be seen as a result of the company’s acquisition of HSBC Holdings Plc which has substantial business card holdings in the country. The earnings per share in this third quarter of 2012 was $2.01 per share, a substantial improvement from what was predicted by market analysts at $1.75 per share.
Conclusion
Despite the prevailing difficult economic conditions and a high risk economic environment, an investment in the stock of the company is likely to pay off in the long run. This is because despite the increased regulatory control of the banking industry and the prevailing macroeconomic challenges that the company is facing, it also has excellent opportunities for growth and profitability presented by growth of the credit card market and a growth of the emerging markets which the company can take advantage of. The company seems to be recovering excellently from the adverse effects of the economic recession experienced on the last few years. The company is also pursuing a growth strategy through acquisitions and this is an indication of the financial soundness of its expansion policies and profitability opportunities in the future.
References
Goldfarb, Zachary A. and Appelbaum, Binyamin "Capital One To Buy Local Banking Icon Chevy Chase". The Washington Post. December 4, 2008. Print.
Capital one website. . Web.
Hubbard, Douglas. How to Measure Anything: Finding the Value of Intangibles in Business. Hoboken, NJ: John Wiley & Sons. 2007. Print.
Bhalla, V. K. Investment Management. New Delhi: S. Chand & Co. Ltd. 2010. Print.
Mandelbrot, B., and Hudson, R. L. The (Mis)Behaviour of Markets: A Fractal View of Risk, Ruin, and Reward. London: Profile Books. 2004. Print.
