Capital One Sees What's In Market's Wallet (COF)

Capital One Financial Corp. (NYSE: COF) has come out with two announcements after the close.  It is reaffirming its 2008 financial targets, but it is also raising cash.  Capital One hired Citigroup and J.P.Morgan as joint book-runners for a proposed public secondary offering of 14 million shares of its common stock, and it will grant the underwriters for the offering an overallotment option to purchase additional shares of common stock. Net proceeds from the offering will be used for general corporate purposes.  As far as Capital One’s expectations, the following metrics are being offered:

• low single-digit decline in year-end managed loans, and double-digit growth in year-end deposits;   
• low to mid-single digit revenue growth;
• If revenue margins remain at or near second quarter levels, the companyexpects to be toward the lower end of this range for full year 2008;   
• efficiency ratio for full year 2008 to be in the
• mid 40% range or lower, with the quarterly efficiency ratio drifting up modestly in the second half of the year;
• revenue trends will be the biggest driver of efficiency ratio;
• expects 2008 operating expenses to be at least $200.0 million below their 2007 level;
• expects to continue its quarterly dividend of $0.375 cents per share,while maintaining its Tangible Common Equity ratio at or above its 5.5%to 6.0% target range through 2008.
• expects continuing weakness in the U.S. economy;
• expects the charge-off rate for its U.S. Card line of business to be inthe low 6% range for the third quarter of 2008, rising to around 7% inthe fourth quarter;
• expects to build its allowance for loan losses by approximately $200.0million in the third quarter, consistent with the company’s expectationof continuing weakness in the U.S. economy;
• expects an allowance for loan losses as of September 30, thatwould have the capacity to absorb the equivalent of approximately $7.2billion in managed losses over the next 12 months through the end ofthe third quarter of 2009.

Capital One closed down 1.3% at $53.72 today and its 52-week trading rangeis $30.82 to $73.55.  Shares are down only marginally after the closeby 0.1% or so.  If the company can hurry and close this financing inthe next day or two it will also be out ahead of its critics and shortsellers, who are barred from short selling shares of stock against them.

Jon C. Ogg
September 23, 2008