Capital One Financial (NYSE:COF) is among the cheapest big bank stocks out there, and the second half of 2012 looks to be relatively clean following a rocky second quarter.
Back in December, I made Capital One my pick for InvestorPlace‘s Ten Best Stocks for 2012 contest, and the shares have returned 32% through Wednesday, which beats three of the “big four” U.S. banks — the exception being Bank of America (NYSE:BAC) which has returned 46% year-to-date. Rounding out the big four, Wells Fargo (NYSE:WFC) has gained 24% YTD, Citigroup (NYSE:C) is up 15% and JPMorgan Chase (NYSE:JPM) has returned 13%.
Of course, Bank of America’s strong year-to-date performance follows a 58% decline — and Citigroup’s follows a 44% drop — during 2011, when Capital One had a flat return that compared rather well with a 25% decline for the KBW Bank Index. The index was up 21% through Tuesday’s close, with all but two of the 24 index components showing year-to-date gains.
JPMorgan has bounced back from a 20% decline — although the shares are down 7% since May 10, when the company’s “London Whale” scandal came to light. While second-quarter trading losses ended up totaling $4.4 billion, JPMorgan reported earnings of $5 billion, and the company now expects to restart its share repurchase program in 2013.
Wells Fargo fared relatively well during 2011, with shares declining 10%, and is among the best earnings performers among large U.S. banks, with returns on average assets ranging between 1.27% and 1.4% during the past four quarters, according to Thomson Reuters Bank Insight.
Looking at current valuations, Capital One still is one of the cheapest of the large banks, relative to earnings estimates. The shares trade for 8.2 times the consensus 2013 earnings estimate of $6.92, among analysts polled by Thomson Reuters. Among the 24 components of the KBW Bank Index, only two stocks have lower forward price-to-earnings ratios: Citigroup trades for 6.8 times 2013 EPS estimates of $4.54, while JPMorgan Chase trades for 7.3 times 2013 estimates for $5.23. BAC is more expensive, trading at 8.9 times 2013 EPS estimate of 92 cents.
Capital One had a messy second quarter, as the company completed its purchase of HSBC‘s (NYSE:HBC) $27.6 billion credit portfolio and reported “an expense of $174 million to establish a finance charge and fee reserve for estimated uncollectible billed finance charges and fees and loan premium amortization expense of $63 million.”
The company also was hit with $60 million in civil penalties related to credit card settlements with the Consumer Financial Protection Bureau and the Office of the Comptroller of the Currency, along with $150 million in refunds to the company’s credit card customers. The two regulators had accused Capital One of failing to properly monitor third-party vendors selling add-on credit protection and credit monitoring services to credit card customers.