Capital One (NYSE:COF) has come a long way from being a monoline consumer lending company. The pioneer in the use of analytics to understand consumer spending patterns to come up with products and offers suited to their requirements, Capital One leveraged this strength to become one of the biggest credit card lenders in the country before turning to the retail banking industry through a series of acquisitions between 2005 and 2008. Notably, credit card lending continued to feature very prominently in the newly turned bank holding company’s business model – making up almost half of its loan portfolio till late 2011.
But Capital One’s business model witnessed a drastic change over 2011-2012 when the acquisition of ING Direct boosted the share of other retail loans (primarily home loans) in the bank’s portfolio. Today, consumer loans (mortgages, auto and other retail loans) and credit card loans form roughly equal proportions of the bank’s loan portfolio. In this article, we outline this trend witnessed over the last two years.
We maintain a $58 price estimate for Capital One’s stock, which is about 5% below the current market price.
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The table below highlights the changes in Capital One’s average loan balances for each quarter over the last two years and is based on information provided by the bank in its quarterly filings.
|(in $ mil)||Q1 2011||Q2 2011||Q3 2011||Q4 2011||Q1 2012||Q2 2012||Q3 2012||Q4 2012||Q1 2013|
|Domestic credit card||51,889||53,868||53,668||54,403||54,131||71,468||80,502||80,718||74,714|
|International credit card||8,697||8,823||8,703||8,361||8,301||8,194||8,154||8,372||8,238|
|Total Credit Card||60,586||62,691||62,371||62,764||62,432||79,662||88,656||89,090||82,952|
|Commercial real-estate (CRE)||13,579||13,859||14,291||14,920||15,514||15,838||16,654||17,005||17,454|
|Commercial and industrial||14,630||14,993||15,726||16,376||17,038||18,001||18,817||19,344||19,949|
|Total Commercial banking||30,027||30,578||31,615||32,843||34,032||35,227||36,767||37,598||38,576|
As is evident from the table above, the credit card business dominated Capital One’s loan portfolio until the end of 2011, with more than $62 billion worth of credit card loans outstanding as compared to under $36 billion in consumer loans and $33 billion in commercial loans. But once the bank completed the acquisition of ING Direct in the first quarter of 2012, the average balances of consumer loans outstanding jumped to almost $78 billion thanks to an exponential jump in home loans handed out from under $11 billion in Q4 2011 to almost $50 billion in Q2 2012 (see Capital One Completes ING Direct Deal, But Still Has to Win Over Its Customers)
Capital One then completed its other opportunistic acquisition of HSBC’s credit card business in the U.S. in Q2 2012 (see Capital One Rejigs Recently Acquired HSBC Card Unit). The deal added $28 billion in card loans to the bank’s balance sheet, pushing the outstanding card loan figure to nearly $90 billion.
Since the acquisitions, Capital One has kept itself busy paring down the acquired loan portfolio (both card loans and consumer loans) to ensure that it gets rid of low quality and strategically redundant loans. One of the more recent decisions in this regard was the bank’s sale of its Best Buy card portfolio to Citigroup (NYSE:C) earlier this year (see Citi Snaps Up Capital One’s Best Buy Credit Card Portfolio). Quite notably, the bank’s commercial lending division has seen strong organic growth over the period shown above. As a result, card loans, consumer loans and commercial loans make up Capital One’s loan portfolio in the ratio of roughly 40:40:20.
Going forward, we expect Capital One to continue focusing on credit cards more than other loans – something that leads us to the conclusion that the card business contributes to nearly two-thirds of the bank’s total share value. You can understand how future growth in card loans impacts Capital One’s share price by making changes to the chart below.