On Thursday, Capital One Financial (NYSE:COF) was downgraded by Evercore ISI from Outperform to In Line, with a price target adjustment to $142 from $160. The downgrade reflects concerns about the regulatory approval uncertainties surrounding Capital One's deal with DFS, the potential for tangible book value (TBV) earnback period, and the prospect of significant dilution.
The firm's stance has shifted to a more cautious outlook due to the lack of immediate catalysts that could drive the stock's performance. The analyst noted that while the long-term implications of the deal are seen as positive, including network synergies and increased competitiveness in the card market, the path to regulatory approvals could be challenging. Capital One requires consent from both the Office of the Comptroller of the Currency (OCC) and the Federal Reserve for the transaction to proceed.
Evercore ISI highlighted that Capital One has kept regulators in the loop as the deal has advanced, with approximately 150 on-site regulators. Nevertheless, the firm expressed skepticism over the likelihood of Capital One having received implicit approval before initiating the transaction. The approval process may be complicated by existing consent orders that Capital One must satisfy.
Additionally, the Department of Justice's antitrust approval remains uncertain. While Capital One's acquisition could position DFS as a stronger competitor against Visa (NYSE:V) and Mastercard (NYSE:MA), concerns arise from the merger of the fourth and fifth largest card issuers in a market that is already highly consolidated.
The report also pointed to moderating consumer card volumes and a forecasted peak in net charge-offs (NCOs) by mid-2024 as factors contributing to the limited near-term catalysts for Capital One's stock. Despite these challenges, the analyst remains optimistic about the long-term benefits of the deal.
This article was generated with the support of AI and reviewed by an editor. For more information see our T&C.