Because Capital One (NYSE:COF) has been one of the best-performing financial stocks over the past two decades, it's well worth an investor's time to learn how it approaches the business of banking. And there's no better way to do so than listening to its chairman and CEO, Richard Fairbank.
The 64-year-old executive sat down last week to answer questions from analysts and investors at the 2015 Barclays Global Financial Services Conference. Here are three of the most important things he discussed:
1. Investments in digital banking
Capital One has long been at the forefront of digital banking. It purchased online banking platform ING Direct in 2012, later changing the unit's name to Capital One 360. It was one of only a handful of banks that were included in the launch of Apple Pay last September. And it's been a perennial leader in the mobile banking space, earning high praise for its mobile application.
"This is the biggest transformative thing that I've seen in my many years of being around this business," noted Fairbank. "Every single part of banking, inside banks and how they work and outside banks in terms of how people interact and experience them, every single aspect of that is going to be dramatically changed by digital."
With this in mind, Capital One is continuing to invest heavily in expanding its digital and mobile capabilities. More specifically, as Fairbank discussed, it's focusing on five areas:
- Infrastructure: "There is a set of basic infrastructure that any company that wants to be effective in digital needs, and it's not mostly what banks have at the moment. So we're talking about basic enterprise platforms. We're talking about cloud computing. We're talking about rebuilding the middleware of a bank to -- in terms of really modern APIs and a services-oriented kind of a business model."
- Talent: "We're talking about bringing in the kind of talent that can do that, which is talking about bringing in the 4 most highly sought out jobs in America right now, which are software engineers, data scientists, product managers and designers."
- Marketing: "We're talking about investing in digitally based Internet marketing."
- New products: Specifically ones that focus on improving the customer experience.
- Big data: "We're investing in the information foundational capabilities to leverage big data."
2. Capital One's growth philosophy
One of the things that's most remarkable about Capital One was its performance throughout the financial crisis. Although it took a hit like the rest of the industry, seeing its return on equity dip into negative territory in 2008, its loss that year was nominal compared to many of its competitors and it recovered quickly. This is impressive because Capital One focuses on credit card loans more than any other major bank. And credit card loans tend to default at higher rates than all any other type of loan, be it consumer or commercial.
According to Fairbank, Capital One has performed so well despite its concentration in the riskiest corner of the credit industry by staying nimble:
One of our philosophies at Capital One is when we see a growth opportunity, we really invest in it. When we're cautious about stuff, we pull back quite a bit. So in a sense, we kind of have 2 speeds, 1 and 0. We don't have a 0.5 kind of in our arsenal.
3. Credit quality
In the second quarter, Capital One set aside 60% more money to cover future loan losses than it did in the same quarter last year. But this shouldn't be interpreted as a problem; it's instead a reflection of Capital One's rapid growth and the rock-bottom level of credit losses experienced by banks after the dust from the financial crisis finally settled.
Fairbank addressed these points by explaining:
We have signaled to investors that just as a simple matter of growth math, our charge-offs, and then following that the allowance, we'll be going up from here. So new originations tend to just have higher loss content in general. New originations also have loss curves that spike early and then settle out later. So for Capital One, as we accelerate with our growth, along with that has come higher losses.
This is all growth math. This is not a worsening of the consumer. In fact, the consumer is in a great place and we feel really good about our credit card originations and the loan quality of that.
In sum, lest there be any doubt about Capital One's stellar performance over the past two decades, there seems to be every reason to believe that its winning streak is bound to continue.