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On Jun 7, 2013, we reiterated our long-term recommendation on Capital One Financial Corp. (COF - Analyst Report) at Neutral based on the continued synergies from its geographic diversification, recent acquisitions and solid first-quarter 2013 earnings. However, we remain concerned about the company’s considerable exposure to the real estate markets.

Why the Neutral Stance?

Capital One’s first-quarter 2013 earnings of $1.79 per share substantially surpassed the Zacks Consensus Estimate of $1.63. Also, this was nearly 27% above the prior-quarter earnings of $1.41. Better-than-expected results benefited from a fall in operating expenses, partially offset by a decline in revenues. Moreover, strong profitability and capital ratios as well as continuously improving asset quality were the other highlights of the quarter.

Following the first-quarter 2013 earnings, the Zacks Consensus Estimate went up by 0.6% to $6.54 per share over the last 60 days. However, for 2014, the Zacks Consensus Estimate went down by 1.5% to $6.66 per share over the same time frame. The company currently has a Zacks Rank #3 (Hold).  

In May, 2013, Capital One increased its dividend by 500% to 30 cents per share following the approval of its capital plan in Mar 2013. Moreover, Capital One has a geographically diversified loan portfolio due its series of acquisitions that resulted in its entry into new geographic markets.

On the other hand, despite management’s initiatives to reduce costs, Capital One has been experiencing a continuous rise in expenses. Moreover, the company’s credit quality is expected to remain under pressure due to the sluggish economic recovery.

Additionally, stringent capital, liquidity and leverage ratio requirements under the financial reform law are apprehended to restrict Capital One’s ability to pursue business opportunities.

Other Banks to Consider

Some better performing banks include Enterprise Financial Services Corp. (EFSC - Snapshot Report), Old Second Bancorp Inc. (OSBC - Snapshot Report) and Privatebancorp Inc. (PVTB - Snapshot Report). All these carry a Zacks Rank #1 (Strong Buy).

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