If the world's largest financial institution, Citigroup
In the fourth quarter, Capital One's year-over-year net income surged from $195.1 million, or $0.77 per share, to $280.3 million, or $0.97 per share. Wall Street's consensus called for earnings of $0.94 per share.
The looming problem for financial companies is the flattening of the yield curve, particularly if it stays flat or gets even flatter. Financial institutions profit by borrowing money from depositors at one rate, then lending the money to individuals and companies at another, higher rate. But as the difference in rates on deposits and loans shrink, the curve flattens, and profit margins dwindle.
Capital One's advantage lies in its focus on credit card borrowers, which means that it can still charge relatively high interest. Bear in mind that credit card debt is still nonetheless exposed to the yield curve, but the risk is eased when creditors can charge their customers higher interest rates.
Interestingly enough, though, Capital One is diversifying into the banking sector through its acquisition of Hibernia. Bad move? Not necessarily. The Katrina disaster allowed Capital One to snag Hibernia at a bargain price, and this accretive acquisition helped to boost its earnings in the fourth quarter. (Hibernia's contribution was $30.6 million.)
However, investors see the financial sector as problematic because of the flattening yield curve. As Capital One becomes more banklike, its stock price will also likely become a laggard as well.
Fool contributor Tom Taulli does not own shares mentioned in this article.
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