In a number of respects, the credit card industry is an unloved business these days. Morgan Stanley
A recent company presentation at the annual Lehman Brothers Financial Services Conference allowed Capital One a venue to update investors on how last December's acquisition of North Fork Bancorporation is proceeding. The purchase was on the heels of the 2005 buyout of Hibernia bank, collectively capping CapOne's bold move into banking.
Meet the new CapOne
CFO Gary Perlin opened his presentation by highlighting CapOne's "strategic journey" in its 15-year duration as a public firm as "the last couple of years has seen [a] dramatic transformation." Dramatic because recent banking acquisitions have catapulted the company to a leading bank focused on national lending and local banking activities.
Perlin also boasted that CapOne is a leading national lending provider as the fifth-largest credit card issuer and top direct auto retailer. Indeed, CapOne has a reputation as one of the savviest issuers of auto loans and credit cards, with subsequently lucrative interest income from the hapless souls who carry credit card debt.
The banking biz
CapOne is still learning the banking business, and the flat-to-inverted yield curve is hurting bread-and-butter banking activities such as net interest margins. It also had the misfortune of acquiring GreenPoint Mortgage company from North Fork, which has seen better days as current subprime woes are wreaking havoc in the mortgage industry.
CFO Perlin admitted CapOne is "confronting a number of near-term challenges" as it works to integrate the bank acquisitions, grapple with yield curve and mortgage challenges, and "simply mak[e] sure everybody has got the right perspective on this normalization of credit."
Credit cards and auto loans
As you might expect, CapOne is hanging in there with its core businesses and believes it's "pretty much at the head of the pack in the U.S. credit card business" with a leading return on managed assets and low charge-off rates. It also knows how to deal with subprime lenders after years of operating in the space. Fellow Fool Emil Lee also had favorable comments on the company's credit card operations, including the pioneering of now-common 0% teaser interest rates to capture new business.
CapOne's auto business is also an industry leader as the "third-largest indirect auto lender." Perlin cited the company's focus on taking less risk in the space than the competition, actively acquiring rivals to consolidate market share, and offering services on a national scale. He detailed that CapOne is now in front of dealerships that transact over 90% of new car business, and past buyouts have allowed it to capture both the subprime and middle markets of auto lending.
The Foolish bottom line
Clearly, CapOne must be commended for the dominance it has developed in the credit cards and auto loan businesses. But from a banking perspective, it's a work in progress. At first glance, one has to wonder why it would acquire North Fork and its 3%-3.5% net interest margins when the pre-bank CapOne posted net interest margins in excess of 7% annually.
However, back in 2002, net interest margins hovered closer to 9%, demonstrating that past dominance is eroding as commercial lending markets mature and grow more competitive. American Express
For related Foolishness:
- Fool on the Street: Comerica's Growth Markets
- Warren Buffett's Priceless Investment Advice
- The Best Financial Stock for 2007: Capital One
Fool contributor Ryan Fuhrmann has no financial interest in any company mentioned. The Fool has an ironclad disclosure policy. Feel free to email him with feedback or to discuss any companies mentioned further.