Aditi Das Pien-Cheng WeiSashikanth Yenika Yanan Tan Yin Jen Kao (NYSE: COF) Investment Managers: AGENDA o Macroeconomic Review o Capital One Industry and Business Review o Relevant Stock Market Prospects and Analysis o Key Assumptions o Valuation o Recommendation MACROECONOMIC FACTORS Total Pool of Credit Demand Consumer CreditsCommercial Credits Home Loans Car Loans Credit Cards Total Business Sentiments PMI, Industrial Production, Durable Goods orders, Interest Rates Home Sales, Permits, Price Index Sentiments, Salary, Retail Sales, Expenditure Car Sales, Oil Price, Salary MACROECONOMIC REVIEW oCoCommercial and Industrial Loans Federal Reserve Bank of St. Louis; Institute for Supply Management, 10/17/15 MACROECONOMIC REVIEW oBoBusiness Sentiment Federal Reserve Bank of St. Louis; Institute for Supply Management, 10/17/15 MACROECONOMIC REVIEW Federal Reserve Bank of St. Louis; Institute for Supply Management, 10/17/15 oBoBusiness Sentiment MACROECONOMIC REVIEW oPoPersonal Consumption Federal Reserve Bank of St. Louis; Institute for Supply Management, 10/17/15 MACROECONOMIC REVIEW Federal Reserve Bank of St. Louis; Institute for Supply Management, 10/17/15 oPoPersonal Consumption MACROECONOMIC REVIEW oPoPersonal Loans Federal Reserve Bank of St. Louis; Institute for Supply Management, 10/17/15 MACROECONOMIC REVIEW oIoInterest Margins Federal Reserve Bank of St. Louis; Institute for Supply Management, 10/17/15 MACROECONOMIC RISKS o Future deterioration of business sentiments can limit companies from borrowing from banks o Consumer credits growth will get compressed if salaries do not increase o Decrease in demand in the housing market causes a negative effect on the consumer lending business INDUSTRY REVIEW Key Statistics Revenues$117.8 Billion Annual Growth2.4% Expected Growth2.1% Profit$40.3 Billion Businesses454 INDUSTRY EXTERNAL DRIVERS Aggregate Household Debt Prime Rate Unemployment Rate Direct Relationship Indirect Relationship PORTERS FIVE FORCES Rivalry among existing competitors Power of Suppliers Entry to Barriers Power of Buyers Threat of Substitute Products Low High Low High COF BUSINESS REVIEW o Established in 1994, headquarters in McLean, Virginia o Three Business Segments: Credit Card, Consumer Banking and Commercial Banking o No acquisitions or dispositions in 2014 o Revenue Source: Consumer and Commercial Lending o Expense Source: Operating expenses and Provision for credit losses 2014 Annual Report Pages 1-3 CURRENT HOLDING # of ShareCost ValueCostMarket Value 100 Shares$7,310$73.13$7,490; 5.6% Yahoo Finance! 10/22/2015 TECHNICAL ANALYSIS Last Trade: (1.66%) Oct 22, 10:08AM EDT 20-day moving average: day moving average: Yahoo Finance! 10/17/ /17/2015 FINANCIAL ANALYSIS Return on Assets Tier 1 Leverage RatioTier 1 Common Ratio Efficiency Ratio 2014 Annual Report Pages Basel 1 Basel 3 COMPARISON ANALYSIS Implied Share Price: $84.00 Big in size Diversified Financial Services Output Big in size Diversified Financial Services Presence in similar business Big in size Diversified Financial Services Big in size Diversified Financial Services Similar size No banking operation Presence in similar business Comparable analysis Yahoo! Finance; respectively from comparable companies financial statement KEY ASSUMPTIONSAssumptions by segments KEY ASSUMPTIONS (CONT.) I/S PROJECTION Net interest income will continue increasing from 2015 to 2019 Net Income will decrease first because the provision for credit losses and non- interest expense will increase RATIO ANALYSIS Net Interest Spread Return on Equity Performance Ratios Assets Interest Yield8.5%8.3%7.4%7.2%7.1%7.3%7.5%7.8% Liabilities Interest Yield1.5%1.2%0.8%0.7% 0.8% 0.9% Net Interest Spread7.0%7.1%6.6%6.5%6.4%6.5%6.7%6.8%6.9% Return on Equity 10.3%11.2%10.0% 10.2%9.5%9.1%8.6%8.4% DIVIDEND DISCOUNT MODEL 1.Calculate the cost of equity and discount rate 2. Calculate projected dividends and the present value of dividends 3. Calculate the terminal value DDM RESULTS Implied Stock Price: $75.65 Yahoo Finance! 10/22/2015 SENSITIVITY ANALYSIS FINAL IMPLIED PRICE MethodShare PriceWeights Dividend Discount Model$ % Comparable Analysis$ % Weighted Average$ Current Price$ Upside(Downside) Potential 4.3% Yahoo Finance! 10/22/2015 RECOMMENDATION # of ShareCurrent ValueCostMarket Value 100 Shares$7,313$73.13$7,490; 5.6% HOLD Yahoo Finance! 10/22/2015 oWoWe recommend HOLD due to the following factors oSoShare price increase due to the acquisition of GEs health care loan business USD $9bn oIoIncreased expected dividends with dividend yield increasing from 2.2% in 2015 to 3.3% in 2019 while current Fed Funds rate is close to 0% Q&A Aditi Das Pien-Cheng WeiSashikanth Yenika Yanan Tan Yin Jen Kao THANK YOU!