Capital One Acquires Beech Street Capital To Boost Commercial Real-Estate Portfolio

by Trefis Team
Capital One
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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. [1]

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.

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 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
Credit Card:
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
Consumer Banking:
Automobile 18,025 18,753 19,757 21,101 22,582 24,487 25,923 26,881 27,477 28,677
Home Loan 11,960 11,534 11,126 10,683 29,502 48,966 47,262 45,250 43,023 40,532
Retail Banking 4,251 4,154 3,979 4,007 4,179 4,153 4,086 3,967 3,786 3,721
Total consumer 34,236 34,441 34,862 35,791 56,263 77,606 77,271 76,098 74,286 72,930
Commercial Banking:
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
Small-ticket CRE 1,818 1,726 1,598 1,547 1,480 1,388 1,296 1,249 1,173 1,096
Total Commercial banking 30,027 30,578 31,615 32,843 34,032 35,227 36,767 37,598 38,576 38,416
Other Loans 228 206 195 183 173 137 162 158 183 174
Total Loans 125,077 127,916 129,043 131,581 152,900 192,632 202,856 202,944 195,997 190,562

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.

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  1. Capital One Expands Multifamily Banking Business with Acquisition of Beech Street Capital, Capital One Press Releases, Aug 16 2013 []
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