This year has been chaotic for the finance industry, and that’s putting it lightly. After concerns over a bank run on Silicon Valley Bank, a chain reaction occurred that sent the industry into a panic. Significant sell-offs and stock price swings were rampant.
While most major banks are down for the year, Capital One (COF 1.95%) has been on the opposite path, and is up almost 15% year to date. Although it’s been a decent year for Capital One so far, there’s a lot of uncertainty in the economy that could make the rest of 2023 challenging.
Despite what the rest of the year may throw at Capital One, I believe it can make it through and provide good long-term value to investors.
Capital One is being proactive with risk management
Because it deals primarily with consumer banking and credit, Capital One’s business is more sensitive to economic conditions than many of its banking peers. The worse the economy is, the more likely it is customers will default on loans and credit card payments, costing Capital One in the process.
Capital One charged off (essentially throwing in the towel on uncollectible debt) $1.7 billion in the first quarter, which was 4.1% of its loan portfolio. This was a huge jump from the $845 million (2.2% of its loan portfolio at the time) it charged off in Q1 2022.
In anticipation of a potential recession, Capital One added an additional $1.1 billion to its reserve for credit losses, which should be a good sign for investors worried about a potential credit or delinquency crisis. Capital One’s management is being proactive with its risk management instead of reactive.
Capital One also had a Common Equity Tier 1 (CET1) capital ratio of 12.5% as of Q1. The CET1 ratio is an important financial metric banks use to determine their financial stability and strength. For perspective, banks are required to have a CET1 of at least 7%, so 12.5% is a good ratio considering the economic conditions.
Berkshire Hathaway bought a stake in Capital One
In its latest holdings filing, it was revealed that Warren Buffett and Berkshire Hathaway (BRK.A 0.81%) bought more than 9.9 million shares, currently valued at about $1 billion. After a shaky Q1 for the banking industry, Berkshire’s investment offered some reassurances about Capital One for many investors.
One of Buffett’s most famous quotes is “Be fearful when others are greedy, and greedy when others are fearful.” Given investors’ current sentiment about financial and bank stocks, it’s safe to say others are fearful, and this investment is on par with that philosophy.
This move could also be an indication Berkshire believes the market is undervaluing Capital One.
Capital One is fairly valued
Even with its 2023 growth, Capital One seems to be fairly valued when you look at its forward price-to-earnings (P/E) ratio, which tells you how expensive a stock is relative to its future earnings. With a P/E of about 8.2, Capital One is in line with comparable banks.
Add in Capital One’s roughly 2.3% dividend yield, and there’s seemingly much more long-term upside with the company than downside.
Bank of America is an advertising partner of The Ascent, a Motley Fool company. Wells Fargo is an advertising partner of The Ascent, a Motley Fool company. JPMorgan Chase is an advertising partner of The Ascent, a Motley Fool company. Stefon Walters has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Bank of America, Berkshire Hathaway, Goldman Sachs Group, and JPMorgan Chase. The Motley Fool has a disclosure policy.