While the average consumer may think of Capital One (COF 0.67%) as only a credit card issuer, a string of recent acquisitions means that the 12th biggest bank holding company in the United States does much more than peddle plastic.
In 2012, Capital One spent $1.3 billion on advertising , as Jimmy Fallon, Alec Balwdin, Charles Barkley, and a whole host of Vikings asked, "What's in your wallet?" That amount trailed other well-known companies American Express and Bank of America in the financial services industry and placed it 26th in the U.S. Capital One even eclipsed the combined spending of Wells Fargo at $580 million and Visa's $480 million.
Source: Capital One annual report.
Through this expansive advertising to the public, Capital One may be thought of and portrayed as exclusively as a credit card issuer, but investors need to know it attributed roughly 47% of its net income in the most recent quarter to its traditional consumer and commercial banking operations vs. just 45% at better-known "bank" US Bancorp (USB 0.87%). The company provides and offers to investors much more than simply the plastic you would find in your wallet.
In 2011, Capital One acquired online bank ING Direct and the U.S. credit card portfolio of HSBC. This marked the beginning of its concerted effort to transform into an all-encompassing bank, allowing it to deliver on the full-service banking model that many consumers are accustomed to. In the most recent annual report, Capital One CEO Richard Fairbank highlighted:
The acquisitions we completed in 2012 were important to this transformation, giving us the core deposits, national banking reach, access to assets, and enhanced digital and customer capabilities that will help us compete successfully for years to come.
Instead of offering only credit cards, Capital One can now provide checking and savings accounts, auto loans, and mortgages to consumers while also offering commercial loans to companies. Understanding the success and progress of this transformation of its business will be vital before determining an investment decision.
With the acquisitions completed in the first and second quarter of 2012, it will be helpful to look at the previous four quarters compared to the years prior to the acquisition to see how the bank has changed the composition of its income:
|
Capital One (COF) Pre-Tax Income | ||||||
|---|---|---|---|---|---|---|
|
|
2013 Q2 |
2013 Q1 |
2012 Q4 |
2012 Q3 |
FY 2011 |
FY 2010 |
|
Commercial Bank |
14% |
16% |
17% |
17% |
16% |
6% |
|
Consumer Bank |
33% |
30% |
32% |
28% |
22% |
27% |
|
Credit Card |
53% |
54% |
51% |
55% |
62% |
67% |
Source: Capital One 10-Qs.
While Capital One is often considered to be less of a bank than its peers PNC and US Bancorp, consumer banking contributed more to its bottom line at nearly 33% than PNC (PNC 0.76%) (14%) and US Bancorp (22%) in the most recent quarter.
Source: Company SEC Filings.
The credit card industry can be immensely profitable when economic conditions are favorable, so there is the potential that Capital One's returns could be reduced. However, becoming less dependent on credit card lending should also reduce the risk profile of the company as it transitions toward a business model more reliant on safer and secured loans made to businesses.
While the business mix may be more diversified, the bank will need to show investors that it can compete against PNC and US Bancorp from an operational perspective. PNC and US Bancorp both boast much larger physical branch networks and years of expertise "cross-selling" multiple products to customers across their consumer- and business-facing segments.
As Capital One continues to shift toward a more traditional banking model, investors need to consider the valuation and potential returns for Capital One along the lines of better-known banks as opposed to companies that only focus on issuing credit cards.
