We recently compiled a list of the 7 Best American Bank Stocks To Buy According to Hedge Funds. In this article, we will look at where Capital One Financial Corporation (NYSE:COF) stands against the other American bank stocks.
According to the Labor Department’s Bureau of Labor Statistics, August marked a 142,000 increase in nonfarm payrolls, up from 89,000 in July but less than the 161,000 predicted by most analysts. As anticipated, the jobless rate dropped slightly by 4.2%. However, the “real” unemployment rate increased to 7.9%, the highest level since October 2021. Moreover, the average hourly wage grew by 3.8% over the previous year and by 0.4% over the previous month, exceeding the predicted increases by 3.7% and 0.3%.
Nonetheless, the U.S. market for digital banking platforms is growing rapidly, and it was estimated at $1.04 billion in 2024 and is projected to grow at a CAGR of 9.63% to reach $2.04 billion by 2031, according to Verified Market Research. Per the research, it is expanding due to a number of factors, including shifting customer preferences, the rise of mobile banking, technological advancements, and the need for customization.
On the other hand, according to the Research and Markets, the US retail banking market is expected to expand by $91.47 billion between 2023 and 2028, with a CAGR of 4.35% during that forecast period. The industry is being pushed by the further digital transformation of retail banking, the expansion of fintech company partnerships, and the increased emphasis on financial inclusion per the research.
In the United States, the average bank account balance increased from $5,300 in 2019 to $8,000 in 2022. In 2022, the median balance was $62,500, a 29% increase from 2019 as per the Forbes survey. The Federal Reserve’s Survey of Consumer Finances indicates that 98.2% of American families own a transaction account of some kind. As per the Federal Reserve: Economic Well-Being of U.S. Households in 2021, the percentage of people without banks is 6%, up 1% from 2020 to 2021. As of 2022, 78% of consumers preferred smartphone applications or websites over traditional in-person banking, revealing the dominance of digital banking according to the Forbes Advisor: 2022 Digital Banking Survey. For 57% of Americans, debit cards are their preferred mode of payment per the Forbes 2023 Banking Survey, and even though rates are likely to rise, only 48% of people have opened a certificate of deposit (CD) as per the survey.
According to the US Bank Market Report 2024, U.S. bank earnings are expected to fall 2.8% year on year, discounting gains from unsuccessful bank acquisitions in 2023. Pressure on net interest margins and rising credit costs are the causes behind this decline. As banks acknowledge losses on their commercial real estate portfolios and accumulate reserves, higher loan costs are expected. In 2025 and 2026, earnings are anticipated to grow despite these obstacles as loan loss provisions decline and profitability increases.
Looking forward, Deloitte’s “2024 banking and capital markets outlook” outlines that, amidst a volatile global economy, the banking and capital markets industry will confront significant challenges in 2024. The industry is changing as a result of tighter rules, rising interest rates, and a declining money supply. Digital identity and generative AI are two examples of how quickly advancing technology will change how banks function and provide for their customers.
Banks need to adapt to modest organic growth and discover new revenue streams even with a strong base. The increase in private capital is one of the rising competitive forces that trading and investment banking will need to adjust to. In addition, the industry is reevaluating its tactics in light of evolving business models and recent regulatory changes.
Methodology:
We sifted through holdings of bank ETFs and online rankings to form an initial list of 20 American bank stocks. Then we selected the 7 stocks that were the most popular among institutional investors. The stocks are ranked in ascending order of the number of hedge funds that have stakes in them, as of Q2 2024.
Why are we interested in the stocks that hedge funds pile into? The reason is simple: our research has shown that we can outperform the market by imitating the top stock picks of the best hedge funds. Our quarterly newsletter’s strategy selects 14 small-cap and large-cap stocks every quarter and has returned 275% since May 2014, beating its benchmark by 150 percentage points. (see more details here)
A smiling face of a customer as they make a deposit at this company’s branch.
Capital One Financial Corporation (NYSE:COF)
Number of Hedge Fund Investors: 65
The holding company for a variety of financial services, Capital One Financial Corporation (NYSE:COF), is based in McLean, Virginia. The company was founded in 1994 as a spinoff of Signet Financial’s credit card division, and its main business activities now include credit card lending, auto loans, and commercial lending.
The firm uses its online and mobile channels to acquire and service its customers while maintaining a smaller branch network than its traditional banking competitors. COF’s emphasis on online bank accounts has made it possible for it to have a wider national footprint than it would have otherwise been able to due to its limited branch network. The aforementioned phenomenon enables the financial services company to engage in the benefits of a major financial institution without incurring the costs associated with running a nationwide branch network.
In the second quarter of 2024, Capital One’s net interest income came from its consumer segment, which made up approximately 25% of the company’s total revenue. The bank’s credit card division provided a significantly bigger 70% of this. While credit cards are a significant business for most banks, Capital One Financial considers credit cards to be “the” business.
Donald Fandetti of Wells Fargo kept his Buy rating on the US-based company, attributing the company’s anticipated 13% profit increase by 2027 to its merger with Discover. The transaction is anticipated to improve Capital One’s valuation and promote growth through premium services and EPS accretion, despite a 16% dilution in tangible book value.
Capital One Financial Corporation (NYSE:COF) received a Buy rating from Jefferies analyst John Hecht, who also increased the price target to $170 from $165 as a consequence of the company’s solid Q2 earnings, improved operating costs, and better credit performance. Hecht additionally highlighted the strategic actions taken by Capital One to support future growth, such as the company’s attempts to acquire customers and its effective management of the Walmart agreement.
Ariel Global Fund stated the following regarding Capital One Financial Corporation (NYSE:COF) in its first quarter 2024 investor letter:
“We also added global financial services company, Capital One Financial Corporation (NYSE:COF). The company is the largest online consumer and commercial bank with a leading position in general purpose and small business credit cards. We view the company as competitively advantaged particularly due to their investment in technology. According to recent reports, COF is also rated as one of the leading banks within Artificial Intelligence (AI). Notably, the company recently announced an acquisition of Discover Financial Services (DFS) which we believe would produce significant long-term earnings accretion. COF will be able to leverage DFS’ proprietary payments network, enabling direct interaction with merchants and consumers. This closed loop dynamic should lead to higher volumes of credit card conversions presenting further upside for its shares. At current levels, we view the long-term outlook to be attractive, given favorable business trends, stabilizing delinquency rates within the credit card industry, synergies from the DFS acquisition and COF’s enhanced focus on technology.”
Natixis Global Asset Management’s Harris Associates is the largest shareholder in the company, with 15,180,437 shares worth $2.10 billion.
Overall COF ranks 7th on our list of the best American bank stocks to buy according to hedge funds. While we acknowledge the potential of COF as an investment, our conviction lies in the belief that some AI stocks hold greater promise for delivering higher returns, and doing so within a shorter time frame. If you are looking for an AI stock that is more promising than COF but that trades at less than 5 times its earnings, check out our report about the cheapest AI stock.
READ NEXT: $30 Trillion Opportunity: 15 Best Humanoid Robot Stocks to Buy According to Morgan Stanley and Jim Cramer Says NVIDIA ‘Has Become A Wasteland’.
Disclosure: None. This article is originally published at Insider Monkey.