If you have been following Capital One (NYSE:COF) over the past decade, you would be aware of the rather dramatic transformation of the company’s business model over the years. Founded as a monoline consumer lending company in 1988, Capital One remained heavily focused on credit cards for a large part of its history and even after it turned into a full-fledged retail bank in 2005. In fact, credit card lending made up nearly half of Capital One’s loan portfolio until late 2011. The bank’s business model witnessed a drastic change with the acquisition of ING Direct in early 2012.
Today, consumer loans (mortgages, auto and other retail loans) and credit card loans form roughly equal proportions of the bank’s loan portfolio, whereas commercial loans form the smallest component of the portfolio at about half the size of each of the other two categories. But Capital One seems to be looking for more rounded growth across its portfolio, as can be inferred from its recent announcement to acquire Beech Street Capital – a prominent multi-family commercial loan originator and servicer. 
In this article, we outline the trend witnessed in Capital One’s loan portfolio over the last two years and forecast the outlook for its commercial lending business over the coming years.
We are currently in the process of updating our $72 price estimate for Capital One’s stock, and reckon that the bank’s share is likely worth close to $74 apiece if the acquisition goes through as planned.
The table below highlights the changes in Capital One’s average loan balances for each quarter over the last 10 quarters 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||Q2 2013|
|Domestic credit card||51,889||53,868||53,668||54,403||54,131||71,468||80,502||80,718||74,714||69,966|
|International credit card||8,697||8,823||8,703||8,361||8,301||8,194||8,154||8,372||8,238||7,980|
|Total Credit Card||60,586||62,691||62,371||62,764||62,432||79,662||88,656||89,090||82,952||77,946|
|Commercial real-estate (CRE)||13,579||13,859||14,291||14,920||15,514||15,838||16,654||17,005||17,454||18,084|
|Commercial and industrial||14,630||14,993||15,726||16,376||17,038||18,001||18,817||19,344||19,949||20,332|
|Total Commercial banking||30,027||30,578||31,615||32,843||34,032||35,227||36,767||37,598||38,576||38,416|
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 thanks to an exponential jump in home loans handed out. Capital One then completed its other opportunistic acquisition of HSBC’s credit card business in the U.S. in Q2 2012. Since these 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.
Quite notably, Capital One’s commercial lending division has seen strong organic growth over the period shown above – swelling nearly 30% despite not being benefited much by the two major acquisitions in the recent past. Although we believe that Capital One will focus largely on card lending in the future, its recent decision to acquire Beech Street Capital leads us to believe that it will also not ignore any opportunity to grow the other components of its loan portfolio.
The deal catapults Capital One’s presence in the commercial real estate (CRE) industry as Beech Street Capital is one of the largest providers of government-insured mortgage loans through Fannie Mae, Freddie Mac and FHA, and the combined entity will be ranked sixth in the industry. Once complete, the acquisition will add $10 billion in CRE loans to Capital One’s portfolio. Beech Street Capital’s scalable mortgage origination platform should also help faster loan growth in the future – the impact of which on Capital One’s share price can be understood by making changes to the chart below.Notes:
- Capital One Expands Multifamily Banking Business with Acquisition of Beech Street Capital, Capital One Press Releases, Aug 16 2013 [↩]