Capital One's Acquisition Of Discover Won't Save It From Declining ROE & ROA

2026-03-12 11:56:40 ET

Investing Thesis

Capital One Financial Corporation’s ( COF ) return on equity (“ROE”) and return on assets (“ROA”) have been materially and steadily declining every year since FY2021, when they were 21.45% and 2.80%, respectively. They were respectively at 8.14% and 0.92% by the end of FY2024. Capital One then made a material acquisition of Discover Financial Services in May 2025. Once integrated into Capital One’s financial reporting, there was a drop in FY2025 ROE to 2.66% and in ROA to 0.38%. Even factoring in the potential to return over time to Capital One’s 5-year average ROE of 11.53% (ROA 5-year average is 1.44%), the Company’s excess returns in ROE above its cost of equity (“COE”) are short-lived as they will eventually decline to the COE, which I estimated will happen within 10 years in an Excess Return Model (the model is a form of discounted cash flow analysis generally used to value financial firms). Looking at the model’s output, I estimate the value per share at $160.90, 11.6% lower than COF’s current market price of $182.02 at the time of writing this article. Given the major, global economic shocks in the commodity and financial markets related to the new war on Iran that will soon be impacting the consumers that make up most of the clients of Capital One, and the ongoing chaos of trade wars uprooting global supply chains, the outlook for COF is even more bearish. I rate the stock as a Strong Sell....

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