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In Q4 2020, Capital One’s reported revenues of $7.3 billion, which was marginally lower than the previous year. This could be attributed to a 3% y-o-y drop in Net-Interest Income, partially offset by a 8% increase in Non-Interest Revenues. Further, the provision for credit losses increased to $10.3 billion for the full year 2020 as compared to $6.2 billion in the year-ago period, mainly due to expected losses on outstanding loans.
Capital One’s top-line has suffered due to lower consumer spending in 2020. The credit card giant derives most of its revenues from the card business and is very sensitive to changes in consumer spending patterns. The same has seen some improvement over the last few months. While the Q4 saw some increase in credit card loans and card purchase volume, it struggled due to lower net interest income. Overall, we believe the company’s revenues for Q1 FY2021 will follow the same trend as Q4 2020.
Below are key drivers of Capital One’s value that present opportunities for upside or downside to the current Trefis price estimate for the bank:
Capital One is one of the largest banks in the United States, whose banking and non-banking subsidiaries market a variety of financial products and services. The corporation’s principal subsidiaries include Capital One Bank (USA) and National Association (COBNA) which currently offer credit and debit card products, other lending products, and deposit products; and Capital One, National Association (CONA) which offer a broad spectrum of banking products and financial services to consumers, small businesses and commercial clients.
In June 2011, Capital One bought the American banking operations of ING Direct for $9 billion, which significantly boosted Capital One’s consumer and commercial loan portfolio.
Capital One also agreed to buy the United States credit card business of HSBC Holdings for $2.6 billion, which boosted Capital One’s credit card loans by more than $30 billion. The company is also expected to realize cost saving of about $350 million from the business combination.
In late 2015, Capital One acquired GE’s healthcare financing unit - adding $8.5 billion in healthcare loans to its total portfolio.
The Credit Cards division is the primary source of value for Capital One for the following reasons.
Capital One’s Credit Card division accounted for 64% of the firm’s total revenues in 2018 compared to 26% from the Consumer Loans division and 10% from the Commercial Loans division.
As a result of the economic downturn, the U.S. government decreased the prime loan interest rate (the interest rate that commercial banks charge their most credit-worthy customers) from levels of around 8.25% in late 2007 to 3.25% in 2008. The prime rate remained at this level for more than seven years, before a series of rate hikes by the Fed brought this figure to 4.75% at the end of 2019. However, the rates were slashed back to the 2008 level of 3.25% in May 2020, due to Covid-19 crisis. That said, As economic conditions improve, interest rates will eventually return to historical levels, at which point Capital One’s revenues will be positively impacted.
Capital One also operates in the cashless payment solution market. This includes payments using credit cards. The market for such transactions is growing at a rapid pace. Consumers are moving toward cashless transactions in large numbers, particularly in international markets where credit and debit cards are becoming more prevalent. We expect significant growth in this segment in the near future as more customers and merchants embrace credit/debit card payment solutions.