Underlying Trends In Capital One’s Loan Portfolio

by Trefis Team
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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.

See our full analysis for Capital One

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
Credit Card:
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
Consumer Banking:
Automobile 18,025 18,753 19,757 21,101 22,582 24,487 25,923 26,881 27,477
Home Loan 11,960 11,534 11,126 10,683 29,502 48,966 47,262 45,250 43,023
Retail Banking 4,251 4,154 3,979 4,007 4,179 4,153 4,086 3,967 3,786
Total consumer 34,236 34,441 34,862 35,791 56,263 77,606 77,271 76,098 74,286
Commercial Banking:
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
Small-ticket CRE 1,818 1,726 1,598 1,547 1,480 1,388 1,296 1,249 1,173
Total Commercial banking 30,027 30,578 31,615 32,843 34,032 35,227 36,767 37,598 38,576
Other Loans 228 206 195 183 173 137 162 158 183
Total Loans 125,077 127,916 129,043 131,581 152,900 192,632 202,856 202,944 195,997

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.

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