EUR 850.00 For Business Accounts Only

Morningstar | We Expect Capital One to Achieve Significant Operating Leverage on Its Technology Investments

We believe Capital One is one of the best-run banks and does not receive the respect it deserves. Under founder Richard Fairbank’s leadership, the bank has grown from offering only credit cards into a diversified lender specializing in three businesses: credit cards (42% of loans), consumer lending (31% of loans), and commercial banking (28% of loans). Although credit cards are not as important as before, this segment still accounts for approximately 59% of income. While much of its success can be attributed to an unrelenting focus on technology, operations and organic growth, Capital One has periodically created significant value by acquiring businesses opportunistically and, most important, at attractive prices. We believe the acquisitions of HSBC's cobranded card business and ING Direct exemplify the company’s aim to acquire good strategic assets cheaply. Though we'll concede some of the company's acquisitions prior to 2008 were mistakes. But overall, using its patient acquisition philosophy, Capital One has become a stronger, diversified consumer lender.We believe the bank understands that returns arise not only from acquisitions and share repurchases but also from internal investment in operations and IT systems, and investors are missing this. We believe the bank’s focus on IT and data has enabled it to be a leader in measuring and forecasting consumer credit quality, customer behaviour, resulting in better credit performance and lower customer acquisition cost and result in significant operating leverage. During the crisis, the company remained profitable and charge-offs peaked at 5.9% of loans, significantly outperforming rivals whose charge-offs exceeded 8%. In addition, Capital One was early to warn about the dangers of subprime auto lending where the company has partly limited its exposure.We believe investors focusing on near-term expenses are missing the value of these investments. Marketing expenses frequently aren't commercials or advertising, but variable expenses tied to successful account openings and customer acquisitions. Investors should be awarding Capital One for winning customers and building out its national banking franchise.