Read
the case study below and make an overview that summarizesthe following
component for your report:
1- a. Identify the executives from
Capital One who you expect to be in your audience. What can you establish about
the key members of Fairbank’s management team?
2-Your report and overview should
address the following key strategic issues, followed by a recommendation:
a. Conduct an
External Environmental Analysis, and identify key environmental
forces that have immediate strategic implications for Capital
One.
b.
Conduct an Internal Environmental Analysis, and identify the
capabilities and weaknesses within Capital One that have immediate strategic
implications.
c.
Basedon your analysis of the external and
internal environments what would be your recommendation to the Chairman?
3. Based
on these strategic inputs, define Capital Oneâs business-level and
corporate-level strategies, and evaluate their potential for continued success.
4. Assess Capital One’s international position.
5. Evaluate the strategic fit of Capital One’s
recent acquisitions, and discuss the key strategic issues raised by the
company’s acquisition strategy.
6.
Based on your complete analysis, recommend actions for Capital One
to sustain growth and ensure maximum performance and value for shareholders.
7.
Assignment help – Discuss the ethical ramifications of sub-prime lending at high
interest rates, (discuss pros and cons).
Capital One: The American Credit card Companyâs Growth
Strategies
Susmita Nandi, Sumit Kumar Chaudhuri
ICFAI University
In consumer
lending, every product is evolving in the same direction as credit cardsâtoward
large, national-scale consolidators replacing local, face-to-face lending. That
evolution has happened in credit cards. Itâs well under way in auto finance,
mortgages, and home equity. Its coming more slowly in installment lending. So
consumer lending, a major part of the asset side of banking, is all flowing
toward national consolidators like Capital One.
âRichard D.
Fairbank,
CEO and Chairman,
Capital One
Financial Corporation1 Capital One Financial Corporation is a diversified bank holding
company, with a 2005 market value of $18.92 billion. It provides a gamut of
financial services through its main subsidiariesâCapital One Bank, Capital One
F.S.B. (which offers consumer and commercial lending and consumer deposit
products), and Capital One Auto Finance Inc (COAF). From a small local bankcard
issuer in 1995, the company has transformed itself into one of the largest
financial institutions in the United States by continually introducing a steady
stream of products. It features one of the most recognized brands in the
industry, which it leverages along with its strategies of direct marketing,
risk analysis, and information technology to grow and diversify into other
businesses. Ranked 206th in the Fortune 500 list in 2005, 2 the company has
been gradually transforming itself from a credit card company to an institution
that provides banking and other financial services to consumers. By January
2005, it was the 31st largest deposit institution in the United States with
$25.6 billion3 in interest-bearing deposits. Capital One has been on the path
of diversification from the late 1990s and has made three acquisitions between
2004 and 2005: Onyx Acceptance Corporation, eSmartloan, and Hibernia National
Bank. It has also acquired a home equity brokerage company in the United
Kingdom, the Hfs Group, to strengthen its Global Financial services (GFS)
subsidiary in the British market. As of April 2005, it possessed sufficient
liquidity ($21 billion) and capital ($9.2 billion)4 to enable its famous brand
to expand into new markets and seize the right opportunities for profitable
growth. Although the companyâs acquisition of Hibernia in March 2005 provided it
an opportunity to enter the fast-developing Texas markets of Houston and
Dallas, it might face stiff competition from other large credit companies, such
as Citigroup and J.P. Morgan.
Capital One: The Background
Capital One is the fifth largest credit card provider
in the United States5 and one of the largest issuers of
MasterCard and Visa credit cards. It was founded as a
wholly owned subsidiary of Virginia-based Signet Bank when Richard D. Fairbank,
CEO and chairman of Capital One, was invited by the bank to head its bankcard
division. It began its operations in
1953, the same year MasterCard International was formed. Fairbank and the
former vice chairman of Capital One, Nigel Morris, realized that traditional banks
offered loans without focusing on the customersâlike analyzing their risk
characteristics. They decided that by using technology and data mining
techniques in the decision-making process of providing credit, the bank could
charge the appropriate interest rates more accurately and earn greater profits.
In 1994, Capital One was spun off from Signet as a public credit card company
and established itself in McLean, Virginia. It had an initial public offering
of 7,125,000 shares of common stock in the United States and Canada, at a price
of $16 per share,6 which was managed by J.P. Morgan Securities Inc., Goldman,
Sachs & Co. and Barney Inc. It is a part of the S&P 500 index, and also
trades on the New York Stock Exchange with the symbol COF.
Between 1994 and
2004, the company grew at an annual compound rate of 29 percent, 7 both in
terms of its EPS and the number of customers. In 2004, its earnings were $1.5
billion, and the EPS was at 6.21.8 At the end of 2004, the company and its
subsidiaries held 48.6 million accounts and $79.9 billion9 in managed loans
outstanding, which grew by 12 percent ($8.6 billion) over the previous year
(see Exhibit 1). It had 17,760 employees in March 2005. The bank offers 7,00010
variations of its MasterCard and Visa cards, each one is customized to appeal
to different customer preferences and needs by combining product features such
as different backgrounds and colors, along with varied annual percentage rates,
credit limits, fees, and rewards programs. Capital Oneâs pricing strategy is
based on the risk level of its customers. It offers platinum and gold cards to
its preferred customers with excellent credit history and a wide range of
secured and unsecured cards to customers with limited or poor credit history.
The company also provides a range of consumer products like auto financing,
mortgage services, credit insurance and home-equity loans. Customizations of
credit cards at Capital One are made with the support of its Information-Based
Strategy (IBS), which uses sophisticated data-mining techniques to match its credit
cards (its combination of interest rates, fees, rewards, and other conditions)
with targeted customers based on their credit scores, credit uses, and other
parameters. IBS is the fusion of one of the worldâs largest databases,
information systems, a well-trained team of analysts and statisticians, and
advanced scoring models. The companyâs decision-making process is made
efficient by bringing together marketing, credit, risk, and information
technology. It selects its most profitable customers and the appropriate rate
by using the rigorous testing of econometric and time series models. The credit
ratings of customers are based on the Fair Isaac Corporation (FICO) scores,
which are used to predict payment risk by looking at several variables,
including credit history. The IBS system uses FICO scores to divide its
customers into three groups of super-prime (with excellent credit history),
prime (average credit history), and sub-prime (with poor or very little credit
history). Through the use of IBS, the company has been able to locate a group
of students who were not included in the mailing lists of other credit card
companies because these students, mostly unemployed and little or no credit
histories, were considered high risk. Capital Oneâs strategy of sending credit
card applications, which were tailored to the needs of these students, proved
effective, as 70 percent of the applications were filled and mailed back, thus
creating a new market for the company. IBS has also helped Capital One avoid
customers who do not pay interest charges on loans. The charge-off rate (for
bad debt) of Capital One is the industryâs lowest, and for 2004 was at 4.37
percent, compared to 5.32 percent in the previous year. Capital Oneâs GFS
segment offers a portfolio of diverse products to both domestic and
international consumers. In the domestic market, the GFS segment includes
installment lending, health care finance, mortgage lending services, and small
business lending services. GFS has been on a growth curve and in 2004, it
accounted for 27 percent of Capital Oneâs total managed loans, which are
comprised of reported loans and off-balance sheet securitized loans. It also
accounts for 14 percent of its earnings. Its international portfolio primarily
consists of credit card business in the United Kingdom and Canada, valued at
$8.2 billion and $2.4 billion, respectively. Capital One is the United
Kingdomâs seventh largest credit card issuer, and among the top ten of the same
in Canada. In January 2005, the company completed the formalities to acquire a
British equity brokerage firm called Hfs Group to strengthen its position in
the United Kingdom. Although Capital One had holdings in France and South
Africa, it exited these markets due to lack of growth opportunities.
Growth Strategies
Capital One
generated strong earnings and loan growth again in 2004, as it has each year
since its initial public offering ten years ago. The company is well positioned
for continued success in 2005 in both our U.S. credit card and our growing and
profitable diversification businesses.
âRichard D.
Fairbank,
Chairman and
CEO,
Capital One
Financial Corporation
Capital One grew
at 30 percent14 (see Exhibit 2, on page 68) between 1994 and 2004 by issuing
credit cards at attractive interest rates. Most of its business is conducted
via direct mail (junk-mail solicitations), although it also markets its
products through television and Internet (https://monkessays.com/write-my-essay/capitalone.com). It
expanded its credit card operations in Canada, Europe, and South Africa in the
late 1990s. At the same time, the company also made strategic moves toward
diversifying its portfolio by entering into financing of automobiles and other
motor vehicles, mortgage and home equity loans, insurance, and other consumer
lending products. Although 60 percent of its total managed loans is in its
credit cards business (see Exhibit 3, on page 68), the company is gradually
increasing its operations in other business segments.
In 1998, Capital One bought Amerifee, a company that
provided financing for elective surgeries such as orthodontic, vision, and
cosmetic procedures. It became a wholly owned subsidiary of Capital One in May
2001. Amerifee is a market leader known for introducing Orthodontists Fee and
Dental Fee plans in 1993 and 1998, respectively. These fee plans are the
largest patient payment plans in the sectors of Orthodontics and Dentistry. In
2001, it pioneered the Family Fee plan, which was specifically designed for
treatment of infertility and are offered through Reproductive Endocrinologists
and infertility clinics.
The subsidiary formally became Capital One Healthcare
Finance in April 2005.
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Capital One soon
realized that the auto financing market is double that of the credit card
market, and therefore it has a strong growth potential in that segment. This
market is highly fragmented and no company holds more than 20 percent of the
market share. It provided an opportunity to Capital One Auto Finance Inc.
(COAF) to introduce innovative offers and increase its market share. COAF added
$163.8 million to the companyâs earnings in 2004, and has continued to be on a
high growth curve. To strengthen its market position in the automobile finance
segment, the company acquired ONYX Acceptance Corporation (Onyx) for $191
million (in an all cash transaction) on January 11, 2005. It also acquired
InsLogic, an insurance brokerage firm, from Onyxâs management team. The
purchase strengthened the Auto Finance subsidiary of Capital One and enhanced
its dealer relationships, coast to-coast market penetration in the United
States, and its product line among the prime borrowers. Onyx is based in
Foothills, California, and provides automobile loans to certain independent and
franchise dealerships all over the United States. Onyx claims to have purchased
and securitized $10 billion in auto loans since its inception in 1993, and will
add 12,000 new dealerships to Capital Oneâs list. According to David R. Lawson,
Capital Oneâs executive vice president, and president of COAF, âThis
transaction combines two strong franchises with complementary strengths. Onyxâs
significant and long-standing presence with California dealerships coupled with
its strong prime product offering fills out both COAFâs product line and
geographic footprint. Together, we expect to realize significant revenue and
cost synergies.â This acquisition may make COAF the second largest auto lender
in the United States. COAF has announced that it has raised its car loan limit
to $100,000 (previously $75,000) for direct-to-consumer vehicle loans that have
originated from its Website (http://capitaloneautofinance.com) in February
2005.
This move was made in response to the growing
demand for luxury cars such as Corvette by Chevrolet, so that the company can
get more business from this customer segment. This extension is limited to only
those with excellent credit histories (super-prime customers). The vice
president of COAF, Brian Reed, said, âCar buyers have more choices than ever
today at the higher end of the car spectrum, so weâve adjusted our limit to
offer consumers greater flexibility.â The competitive advantage of COAF is that
the loan process takes place on the Internet and requires no legacy fees. Also,
its IBS system allows it to charge varying interest rates depending on the customerâs
risk levels. In February 2005, Capital One purchased eSmartloans.com for $155
million,23 one of the largest online providers of home equity loans mortgages
in the United States. Headquartered in Overland Park, Kansas, the company
offers a variety of products that are marketed and delivered directly to
homeowners. The purchase is meant to broaden Capital Oneâs offering of consumer
loans and deepen its position in the growing U.S. home equity market. Larry
Klane, Capital Oneâs executive vice president of Global Financial Services,
said, âeSmartloan has succeeded in building a scalable technology platform, a
highly skilled sales team, and an outstanding reputation for customer service
and speed to close. By combining these strengths with Capital Oneâs powerful
national brand, access to 47 million accounts, and expertise in direct
marketing, we will enhance the growth of our home equity lending business.â In
early March 2005, Capital One announced its decision to purchase Hibernia
National Bank. Hibernia is the largest bank in Louisiana,25 with 316 branches
in Louisiana and Texas, and $17.4 billion in deposits. It provides a wide
assortment of financial products and services through its banking and
non-banking subsidiaries that ranges from deposit products, small business,
commercial, mortgage, private and international banking, to trust and
investment management, brokerage, investment banking, and insurance. Capital
One paid a 24 percent
