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  Finance  What the Discover merger approval means for Capital One and 2 other financials
Finance

What the Discover merger approval means for Capital One and 2 other financials

AdminAdmin—April 22, 20250
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Capital One secured approvals from banking regulators Friday for its $35 billion acquisition of Discover Financial — a deal that analysts believe could have far-reaching benefits beyond just the Club holding. The news Wells Fargo research analysts said the greenlights from the Federal Reserve and the Office of the Comptroller of the Currency highlight a softer regulatory environment under the Trump administration. That bodes well for investment banking businesses in large U.S. banks such as fellow portfolio name Goldman Sachs . In a Sunday note, the analysts described the Capital One-Discovery merger as a “clearing event” for more bank deals that should likely “kick off further bank consolidation.” They added, “The approval is a down payment on the improved regulatory environment from the new administration.” Research analysts at Wells Fargo said the Discover acquisition will not only boost Capital One’s earnings potential but also provide “more than enough cushion to protect” it from an uncertain macroeconomic environment. The analysts reiterated their buy-equivalent rating on shares of Capital One, which said it has all the necessary approvals now and plans to close the Discover purchase on May 18. Capital One, which reports earnings after Tuesday’s closing bell, has three main segments: credit cards, consumer banking and commercial banking. It gets most of its revenue from credit cards. The merger development was not enough to boost financial stocks as concerns about President Donald Trump’s so-called reciprocal tariffs continue to rattle the market. Capital One shares, which shot up more than 5% shortly after Monday’s open, reversed lower and spent the afternoon around the flat line. Goldman was little changed after the open but saw declines accelerate as the S & P 500 sank more than 3%. COF 1Y mountain Capital One 1 year Big picture Coming into 2025, investors had high hopes that Trump’s more lenient stance on antitrust issues would lead to more mergers and acquisitions (M & A) and initial public offerings (IPOs). But with tariff and recession concerns gripping the market, deal activity has not rebounded as much as expected during the president’s first few months in office. Investment banks make money by offering M & A advisory services and IPO underwriting. Case in point: Heightened uncertainty about the outlook for the economy has disrupted plans for big-name IPOs like fintech firm Klarna and ticketing platform StubHub over the past month. Last week, Goldman also posted weaker-than-expected revenue for its investment banking division during the first quarter . CEO David Solomon acknowledged that dealmaking expectations have not panned out yet. “We are entering the second quarter with a markedly different operating environment than earlier this year,” Solomon said during the post-earnings conference call. Corporate clients are “concerned by the significant near-term and longer-term uncertainty that has constrained their ability to make important decisions,” the exec said. Bottom line We’re thrilled that bank regulators have decided to move forward with the Discover deal. It’s a key reason the Club first started a position in Capital One. The acquisition should support earnings growth and price-to-earnings multiple expansion over the long run. Upon completion of the transaction, Capital One, a major credit card issuer in its own right, will own Discover’s payment network, which will decrease its reliance on Mastercard and Visa . On Monday, we added to our Capital One position . “We got the catalyst we wanted in Capital One,” Jim Cramer said during the Morning Meeting. “The stock didn’t move [much]. That’s an opportunity.” GS 1Y mountain Goldman Sachs 1 year Like analysts, we’re also hoping this is a positive sign about the U.S. regulatory backdrop. Fewer deals blocked by regulators means more upside for Goldman’s crucial investment banking business. But for a material rebound, more clarity on tariff policy is needed. “What Goldman excels at is helping clients in a time of turmoil, and they did great there,” Jim said after the firm’s earnings last Monday. “But .. when you take a look at investment banking, they’re just not making a lot of money.” Thankfully, the weakness was offset by Goldman’s trading business due to the stock market’s volatility. WFC 1Y mountain Wells Fargo 1 year Finally, Club holding Wells Fargo also stands to benefit from a more lenient regulatory regime. Wells has been working to convince the Fed to lift the $1.95 trillion asset cap imposed in 2018 for misdeeds at the bank that predated CEO Charlie Scharf’s tenure. We think Scharf and his team have done a great job cleaning things up. It’s only a matter of time until the asset cap is lifted, which would allow Wells to expand its balance sheet. When that happens, Wells can grow its budding fee-based business like investment banking and not rely so heavily on interest-based revenues, which are at the mercy of the Fed’s monetary policy decision. (Jim Cramer’s Charitable Trust is long COF, GS, WFC. See here for a full list of the stocks.) As a subscriber to the CNBC Investing Club with Jim Cramer, you will receive a trade alert before Jim makes a trade. Jim waits 45 minutes after sending a trade alert before buying or selling a stock in his charitable trust’s portfolio. If Jim has talked about a stock on CNBC TV, he waits 72 hours after issuing the trade alert before executing the trade. THE ABOVE INVESTING CLUB INFORMATION IS SUBJECT TO OUR TERMS AND CONDITIONS AND PRIVACY POLICY , TOGETHER WITH OUR DISCLAIMER . NO FIDUCIARY OBLIGATION OR DUTY EXISTS, OR IS CREATED, BY VIRTUE OF YOUR RECEIPT OF ANY INFORMATION PROVIDED IN CONNECTION WITH THE INVESTING CLUB. NO SPECIFIC OUTCOME OR PROFIT IS GUARANTEED.

Screens display the logos and trading information for Capital One Financial and Discover Financial as traders work on the floor at the New York Stock Exchange on Feb. 20, 2024.

Brendan Mcdermid | Reuters

Capital One secured approvals from banking regulators Friday for its $35 billion acquisition of Discover Financial — a deal that analysts believe could have far-reaching benefits beyond just the Club holding.

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