Maybe I Should Apply For Bank Holding Company Status

I mean, everybody else is, right? Now that many short-term funding sources have dried up it is amazing to see how many different types of companies are applying to become banks. First it was the investment banks (Goldman Sachs and Morgan Stanley), then credit card companies (American Express), and today we can add insurance companies (Hartford) to the mix. Who knew?

Well, Capital One (COF) for one. You may remember that COF bought Hibernia Bank of Louisiana right after Hurricane Katrina hit the Gulf Coast (and North Fork Bank of New York after that). Many analysts questioned the move, even before the storm forced COF to renegotiate the purchase lower, citing the riskiness of a pure credit card company venturing out into waters it was less familiar with (retail banking). Capital One management insisted, though, that deposits were a less risky and cheaper funding source that would allow them to more easily expand their financial service product offerings nationwide. And these conversations were taking place way back in 2005.

Now I am talking my own book here, as Peridot owns shares of COF in client accounts, but I think the company deserves kudos for being years ahead of this trend. Rather than needing to become a bank out of necessity, they did it because they saw the need to sure up their funding sources in a world awash in structured products.

Not surprisingly, Capital One has weathered the credit crisis far better than most. COF’s earnings should come in around $4 per share in 2008, on par with 2007 levels. Tangible book value per share has risen from $28 in 2006 to $30 in 2007 and to $32 today. COF shares have fallen along with the entire sector, but that has been due to multiple compression (they now trade slightly below tangible book value) not a deterioration in shareholder value.

The consumer credit environment will undoubtedly be rough in 2009 as the unemployment peaks for this cycle, but with a strong management team, there is little doubt that COF will be a long term winner when the storm passes.

Full Disclosure: Peridot was long COF at the time of writing but positions may change at any time