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Capital One: How I Beat the Best With a 37% Stock Rocket

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The two acquisitions fit together beautifully, because ING Direct had over $80 billion in cheap deposits and about $41 billion in loans, leaving plenty of liquidity to fund the HSBC credit card loans.

The acquisitions promised to make Capital One the fifth-largest U.S. bank by deposits, raising an outcry among those concerned with the formation of another "too big to fail" bank, along with consumer advocacy groups who said it was a terrible thing for Capital One to pursue growth in its core competency: credit cards.

U.S. Rep. Barney Frank (D., Mass.), who was then the senior democrat of the House Financial Services Committee, requested in August 2011 that the Federal Reserve extend the public comment period before approving the ING deal, saying that "care should be taken to thoroughly examine the impact of this purchase with respect to the consolidation of banking assets, the provision of credit by the resulting bank and compliance with the Community Reinvestment Act."

The National Community Reinvestment Coalition was among the organizations pushing for the Fed to extend the comment period, and group CEO John Taylor said Capital One was aiming "to fund a larger credit card business and not to provide the safe, sound mortgages and small-business products that consumers need."

The Fed had three public hearings on Capital One's ING deal, and the Office of the Comptroller of the Currency also took plenty of time to analyze the HSBC credit card deal. The ING acquisition was completed in February, the $1.25 billion common equity increase was completed in March, and the HSBC card purchase was finished in May.

With gains on the purchase of ING Direct, a temporary liquidity bump in advance of the HBCB card deal, and special loan loss reserve provisions during the second quarter for the acquired credit card loans, Capital One's "first clean quarter" for 2012 was the third quarter, when the company reported earnings available to common shareholders of $1.17 billion, or $2.01 a share, excluding income from discontinued operations.

Capital One's third-quarter return on average assets was 1.6% and its return on average tangible equity was 21.5%, compared with ROA of 11.8% and ROTCE of 22.6% a year earlier.

The company's net interest margin -- the average yield on loans and investments minus the average cost for deposits and borrowings -- was 6.97% in the third quarter, increasing from 6.04% the previous quarter (when the company's margin shrank because of the ING acquisition, without yet realizing a full quarter's benefit from the HSBC cards), but narrowing from 7.4% a year earlier. The year-over-year narrowing of the margin is in line with the industry, in the prolonged low-rate environment.

So Capital One is ready to continue outperforming most of other big banks, simply because the credit card business is more profitable than other lending operations.