Capital One To Be Exclusive Card Issuer For Hudson’s Bay Company

Capital One (NYSE:COF) has signed a new credit card program agreement with the Hudson’s Bay Company (HBC) to become the exclusive issuer for both private label and co-branded credit cards at all HBC-owned retailers. ((Capital One And Hudson’s Bay Company Announce New Credit Card Program Agreement, Capital One Press Releases, Dec 4 2014)) The deal adds Hudson’s Bay, Saks Fifth Avenue, OFF 5TH and Home Outfitters to the list of multinational retailers to which Capital One provides exclusive card services, and will also add Lord & Taylor to this list in June 2015. While HBC expects to gain by providing its customers flexible payment options and being able to extend benefits across its various brands, the partnership is a good avenue for Capital One to grow its credit card portfolio in the future.

We maintain a $85 price estimate for Capital One’s stock, which is slightly above the current market price.

See our full analysis for Capital One

The importance of Capital One’s cards business to its business model is demonstrated by the chart above, which shows that nearly 60% of its total value comes from the cards business according to our estimates. It is therefore no surprise that the bank continues to work hard on finding ways to grow its card portfolio. Over the years, Capital One has relied primarily on two methods to grow its card business organically: making use of analytics to understand consumer spending patterns so that it can come up with products and offers best suited to the requirements of various consumer groups; and tying up with a string of companies in order to issue private label (which can only be used at partner outlets) and co-branded credit cards (cards branded with a partner’s name which can be used anywhere). The announced partnership with HBC is the second such deal by Capital One with a retail giant this year, with the bank also inking a similar deal with Kohl’s in May. ^[1]

Capital One’s relationship with HBC can be traced back to early 2011, when the card-focused banking group acquired HBC’s credit card portfolio and related assets from GE Capital Retail Finance. ^[2] The acquisition nearly tripled Capital One’s customer base in Canada at that time, and brought in $1.3 billion in receivables to the bank’s balance sheet. Assuming a modest 5% annual growth in this portfolio since early 2011, the HBC card portfolio should have grown to around $1.6 billion now.

This is a sizable part of Capital One’s $80.6 billion global credit card portfolio at the end of Q3 2014. More importantly, HBC is expected to remain a great avenue for growth over coming years – something that will contribute to an increase in the bank’s card portfolio in the future. It must be noted that Capital One has been picky about its card partners since its acquisition of HSBC’s U.S. card business in early 2012. It chose to sell off a portfolio of Best Buy (NYSE:BBY) loans to Citigroup (NYSE:C), as the lucrative partnership was not in line with its long-term strategy (see Citi Snaps Up Capital One’s Best Buy Credit Card Portfolio).

We capture growth in card loans in our analysis of Capital One as shown in the chart below, and you can see how a faster or slower growth in loans in the coming years can affect the bank’s share price by making changes here.

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1. Kohl’s and Capital One Announce Extended Contract for Private Label Credit Card, Capital One Press Releases, May 15 2014 [↩]
2. Capital One Completes Acquisition of Hudson’s Bay Company’s Credit Card Portfolio, Capital One Press Releases, Jan 11 2011 [↩]