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Capital One

Capital One

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Capital One is a leading consumer finance and banking company in the US, with a small presence in the UK and Canada. It established itself as one of the fastest-growing credit card lenders during the 1990s as a result of aggressive and high profile marketing, underpinned by sophisticated credit analysis systems. More recently Capital One has embarked on a strategy of diversification, designed to reduce not only the group's dependence on credit card lending, but also the likelihood of an unsolicited takeover. The group is now the last of a dying breed. Virtually all the other US specialist credit card lenders, such as Providian or MBNA, were acquired by larger groups and Capital One has in the past been flagged up an attractive potential target for a big bank seeking to expand its credit card business further. For now, though, the threat of an unwanted takeover has been reduced by the financial pressures affecting potential predators. Instead, Capital One has been the acquirer not the acquiree, snapping up businesses including the US operations of HSBC credit cards and ING Direct.

Advertising

Who handles advertising? Click here for agency account assignments from Adbrands.net. The company declared marketing expense of $1.67bn in 2017. In the US, Kantar (in Advertising Age) reported measured expenditure of $420m for 2016, out of an estimated total of $1.71bn.

Competitors

Rivals in the US credit card industry include Citigroup, JP Morgan Chase, Bank of America and other Visa and MasterCard issuers, as well as American Express and Discover. See Financial & Insurance Sector for other companies

Brands & Activities

Capital One is structured as three main businesses of cards, consumer banking and commercial banking. The most significant of these, and the engine for the group as a whole, is its US credit card business. This has long been regarded as one of the world's most innovative financial services companies. Its customer recruitment strategy is driven by a combination of traditional direct marketing and highly sophisticated screening, credit analysis and underwriting systems. Customers can choose from a wide variety of different reward schemes and card designs, including the Image Card service first introduced in 2007 which allows them to upload their own personal pictures for printing onto their credit cards. Inhouse brands include Venture, a rewards card offering bonus travel miles for high-spending customers; cash-back card Quicksilver; and business purchase card Spark, which offers a choice of miles or cash-backs.

Most importantly of all, Capital One's analytical tools allow it to customise each borrower's repayment terms, maximum balance, interest rate and benefits according to risk. It runs tens of thousands of test offers every month, trying out different rates and terms on new customers, and once claimed to offer no less than 6,000 different sorts of credit card.

As a result of this careful screening process, and despite its reliance on sub-prime customers, it was far less badly damaged by the credit crisis than rival lenders. However the group also indulged in some hard-selling tactics including mis-selling of ancillary credit-monitoring or payment protection services. In 2012 it was ordered to repay $140m to customers who were sold services they didn't require, and was fined an additional $70m by regulators. The company conducts almost all of its credit card business by direct mail, telesales and via the internet. Despite fierce competition and economic pressures, this division reported more or less stable performance through the crisis. More recently it has targeted less risky credit card owners, with high spending that is paid off in full each month.

The group has also expanded its coverage through acquisition, buying the Sony Card portfolio in 2010, followed by the store card operations of Canada's HBC and US discount retailer Kohl's. However the biggest deal to-date was the acquisition of the US credit card division of HSBC in 2011 for around $33bn. The portfolio, with 27m cardholders and outstanding loans totaling $30bn, includes a mixture of prime and sub-prime brands. Among the more prestigious cards includes in the deal are the store cards for Neiman Marcus and Saks, as well as the co-branded GM card for General Motors. The Best Buy portfolio acquired as part of HSBC was subsequently sold to Citibank. Capital One is now the #3 Visa and Mastercard issuer in the US by outstanding balances. In July 2019, it will take over from Synchrony as Walmart's exclusive storecard issuer.

Combined purchase volumes in 2017 were over $336bn, up 10% on the year before, and the credit card division reported net income of $1.92bn on record revenues of $16.97bn. One of the group's biggest expenses is on rewards such as gift cards, airline tickets or other merchandise to incentivise its card customers. Those costs are rising, causing net income to fall in both 2016 and 2017. Expenditure on rewards hit a new high of $3.7bn in 2017, up around $500m year on year for the second consecutive year.

During the early 2000s, Capital One extended its US operations beyond credit cards into other services, cross-selling its cardholders other products such as auto finance, small business lending, savings and insurance. It built these offers through a string of consumer finance acquisitions, including auto loan company Onyx Acceptance Corporation, home loan lender eSmartloan and insurance broker InsLogic in the US, as well as home finance group HFS in the UK, all acquired in 2004 and 2005. The group also moved aggressively into local retail banking. In 2005 Capital One acquired Hibernia Corporation, Louisiana's oldest and biggest bank, for around $5.3bn. That deal gave it a branch network of around 300 outlets in Louisiana and Texas, and also provided an invaluable cash base to reduce its dependence on capital markets for funding. This proved crucial as the global financial crisis gathered pace later in the decade. In 2006 the group agreed a deal to buy North Fork, a banking group with 355 branches in New York, New Jersey and Connecticut, for around $14.6bn in stock and cash. Hibernia was rebrand as Capital One Bank in 2007; North Fork underwent the same process during 2008. At the end of 2008, the group announced plans to add to its network with the acquisition of Chevy Chase Bank of Maryland for $476m in cash and stock. That deal was completed in early 2009.

The credit squeeze which materialised during 2007 took a substantial toll on parts of the banking and consumer finance business. Sub-prime mortgage lender GreenPoint, acquired as part of North Fork, was shuttered during the year, resulting in a $1bn writedown of goodwill. Capital One has for the most part avoided re-entry into the mortgage market, but it acquired Beech Street Capital, a comparatively small mortgage originator with around $10bn in outstanding loans, in 2013.

In 2011, the group took a major step forward in the development of its banking business, acquiring the US arm of ING Direct for $9bn in cash and stock. That deal, completed Feb 2012, catapulted the combined business into the top five US banks by deposits, although a number of ING Direct customers subsequently closed their accounts and moved elsewhere. ING Direct had around 7m customers in the US at the time the deal was agreed, with deposits of almost $78bn, as well as $41bn of mortgages and $27bn of other assets. ING Groep ended up with around 10% of Capital One's equity, but sold those shares towards the end of 2012. ING customers were migrated into a new offering under the banner of Capital One 360. Another addition to the portfolio was GE's Healthcare Financial Services business, acquired in 2015. However, during 2017 it reiterated its plan to exit the residential mortgage market, citing the steep competition within the still-difficult market, as well as low interest rates. It stopped originating new home loans at the end of the year, and sold off a large parcel of existing mortgages in 2018.

Capital One remains one of the US top ten by both deposits and assets, and the single largest online deposit bank. For 2017, revenues from consumer banking were $7.13bn, with net income of $1.09bn. Commercial banking contributed a further $2.97bn in revenues and net income of $676m.

The group is a leading advertiser in both traditional media and below the line via direct mail. It first made its mark in the early 2000s with two ad series, one featuring comedian David Spade as an irate telesales operator, and another depicting a group of marauding Visigoths, demanding to know "What's in your wallet?". The Visigoths campaign, and variations on that theme, proved surprisingly successful and long-lasting. David Space has been succeeded by other brand ambassadors, including Jimmy Fallon (prior to his elevation to The Late Show), Alec Baldwin, Samuel L Jackson (sometimes partnered by director Spike Lee and retired NBA star Charles Barkley) for Quicksilver, and Jennifer Garner for Venture. Latest - and most surprising - addition to the roster is Taylor Swift, who signed a multi-year partnership with the brand in summer 2019.

The group sponsors a variety of college sports events in the US. It is "Corporate Champion" of the NCAA, title sponsor of the Capital One Orange Bowl football tournament and college playoffs, and offers the Capital One cup for college athletics. It's also offical partner of the SXSW entertainment and technology festival.

Financials

Revenues hit a new high of $23.41bn in 2015, up 5% on the year before and by 44% since the ING and HSBC acquisitions in 2011. Interest income accounted for more than 80% of revenues. Net income peaked in 2014 at $4.43bn, but slipped to $4.05bn in 2015 as a result of a $1bn jump in credit loss provisions, as well as significantly higher operating expenses. For 2016, topline rose by a further 9% to $25.50bn. However net income slipped 7% to $3.75bn as a result of another steep increase in credit loss provisions.

Revenues hit a new high in 2017 of $27.24bn. Pretax income was up only marginally year-on-year as a result of a further increase in credit loss provisions. A one-off tax charge of $1.8bn caused net income to almost halve to $1.98bn. Total deposits at the end of the period were $244bn, while total assets were $366bn. Less than 5% of revenues were generated outside the US.

Background

Capital One was conceived by Rich Fairbank while he was working for management consultancy Strategic Planning Associates during the 1980s. His idea was to combine credit card lending with a combination of screening and marketing techniques designed to tailor terms to individual customers based on credit risk. Together with partner Nigel Morris he approached several banks with the idea before eventually agreeing a partnership with Signet Bank in Virginia. The service was launched locally in 1988 under the Capital One brand.

In 1991 the company introduced the industry's first "teaser rate" balance transfer card, encouraging customers to transfer balances from their higher-rate cards to a Signet Capital One card which offered a much lower introductory rate. This and other innovations were widely copied by other lenders. Signet spun off the credit card business as Capital One Corporation in 1995. The bank was later acquired by First Union, now Wachovia. Meanwhile Capital One expanded into Florida and Texas in 1995, followed by other US states. The first operations in Canada and the UK launched in 1996. In 2001 the group moved into auto finance with the purchase of PeopleFirst, then the biggest online provider of vehicle loans; and into health insurance through Amerifee.

Last full revision 8th May 2018

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