Risk Management Strategies for Growth, Term Paper Example
Strategic Picture
Capital One Financial Corporation is one of the largest financial institutions in the United States. The company was incorporated in Delaware on July 21, 1994. Principal subsidiaries of the corporation include: 1) Capital One Bank (USA), National Association (“COBNA”) a credit and debit card product division, other lending products, and deposit products; and 2) Capital One, National Association (“CONA”) which offers a broad spectrum of banking products and financial services provider to consumers, small businesses and commercial clients.
At the end of the fourth quarter, December 31, 2009, Capital One had $115.8 billion in deposits and $136.8 billion in managed loans outstanding. The company is the fourth largest issuer of Visa® (“Visa”) and MasterCard® (“MasterCard”) credit cards in the United States. In terms of managed credit card loans outstanding the corporation is the eighth largest depository institution in the country. Internationally, through Capital One Bank (Europe) plc, an indirect subsidiary of COBNA the United Kingdom (the “U.K. Bank”), Capital One accepts deposits and provides credit card and installment loans to customers. Through a branch of COBNA in Canada, the subsidiary is authorized to provide credit card loans. The corporation’s common stock is listed on the New York Stock Exchange under the symbol COF. On January 31, 2010, Capital One’s common stock was held by 16,955 shareholders (Capital One 2010). Amidst the global economic crisis beginning in 2008, Capital One has adhered to a policy of risk management that identifies, assesses, and mitigates risks that have the potential to affect the company’s future. Part of the strategy already employed is to target financial returns commensurate with potential ‘risk appetite,’ toward avoidance of excessive risk-taking. The following are the results from the precedent Quarter (Q409).
Q4 09 Results www.capitalone.com | |
Domestic Card | Revenues declined modestly from Q409, but were up modestly from Q109 |
Declining loan balances partially offset by modest increase in revenue margin in the quarter | |
Redistribution between non-interest income and net interest income continued | |
Delinquency rate improved nearly 40 basis points from Q409 | |
Loans declined $4.1 billion in the quarter | |
Purchase volumes declined seasonally, but were up modestly vs. Q109 | |
International Card | Revenues relatively stable compared to Q409, and up from Q109 |
Seasonal decline in non-interest expenses | |
Significant improvement in provision expense, resulting from:
Significant pull backs and management actions in the UK and Canada Stabilizing to improving economic |
|
Delinquency rate improved 16 basis points from Q409 | |
Loans declined $646 million in the quarter | |
Purchase volumes declined seasonally, but were up modestly vs. Q109 | |
Commercial Banking | Revenues declined modestly from Q4 |
Relatively stable loan balances, modest decline in loan yields | |
13% sequential growth in average deposits, modest improvement in deposit expense rate | |
Provision expense declined from Q409, but remains elevated | |
Non-performing asset rate continued to Increase | |
Revenue improvement from Q409 driven by sale of I/O bonds and deconsolidation of certain mortgage trusts | |
Significant improvement in provision expense, driven by Improving credit performance and outlook in Auto Finance business | |
Finance business
Loans declined as a result of: Continuing impact of repositioning the Auto Finance business earlier in the recession Continuing run off of mortgage Portfolio Auto originations increased 32% from Q409, but down modestly from Q109 |
|
Average deposit growth of $2.1 billion,
or 3%, with disciplined pricing and improving interest expense rate |
Organizational Strategy
Articulation of strategic intent in the form of a viable organizational plan that includes Capital One’s company mission statement, strategic goals and objectives is essential to sustainability and growth of the corporation. Without an actionable agenda, and researched directives at all functionary levels, aspects critical to asserting market and investor interests will meet inevitable and potentially avoidable pitfalls to competitive positioning. The forthcoming strategic recommendations outline a formula for exceeding the expectations of our organization and its stakeholders.
In response to the recent acquisition of Chevy Chase bank, and the current transition in management and systems, risk management is the paramount procedural policy of our study. The organization relies upon three (3) core principles pertain to this policy: 1) subsidiaries manage risk in pursuit of strategic, financial, and other objectives; 2) independent risk management organizations (i.e. consultants and standards bodies) support individual businesses through provision of risk management tools and policies based on aggregated risks; and 3) company decision is under the direction of the Board of Directors and executive management in review of the corporation’s aggregate risk position and determination of the risk appetite within the current climate. Liquidity and other major risks are subject to the following Enterprise Risk Management Program and its framework of six (6) operational factors:
- Objective Setting
- Risk Assessment
- Control Activities
- Communication and Information
- Program Monitoring
- Organization and Culture
Business Strategy
The focus of Capital One’s business strategy is on consumer and commercial lending and deposits. The principal business segments are Credit Card, Commercial Banking and Consumer Banking. Risks to the Company’s strategic growth are outlined here with attention to four (4) main categories of financial risk:
- Liquidity Risk: is the primary risk factor within the four (4) business strategy considerations, with future financial obligations unmet future asset growth cannot occur due to an inability to obtain funds at a reasonable price within a reasonable time. The CFO is accountable for liquidity risk and is assessed by way of balance sheet metrics, and stress testing is used to ensure that Capital One can withstand significant degradation in the funding markets; and particularly in the wholesale funding markets. Regular evaluation in this area must continue as exposure immediately following acquisitions is especially high.
- Credit Risk: addresses the risk of loss from a borrower’s failure to meet the terms of any contract or failure to otherwise perform as agreed. Capital One’s position on this risk is stringent, and follows portfolio and CFO level decision monitoring, and includes stress test implementation. Credit risk objectives establish credit governance priorities toward mitigation of the four (4) primary sources of credit risk: (1) changing economic conditions; (2) a changing competitive environment; (3) underwriting strategies and standards; and (4) the quality of our internal controls.
- Reputation Risk: all aspects of corporate reputation related to ‘value, recruitment, and retention of talented associates and a loyal customer base due to the negative perceptions of Capital One’s internal and external stakeholders regarding Capital One’s business strategies and activities’ is subject to oversight by the Company’s General Counsel (Capital One 2010).
- Market Risk: risk monitoring of earnings or the economic value of equity by the CFO maintains Capital One’s position in the market, and controls Company decision making regarding interest rates, foreign exchange rates (market rates), or other financial market asset prices. Management of market risks contributes to the total capital management picture.
In the current climate, strategies toward sustainable growth popular amongst corporate executives include the constancy of research and development as the single most viable source of competitive ‘capital’ in companies attempting to do prosper in a global market. The equity of ‘value’ as either a price impact statement or ‘proposition’ does much as a methodology identity management through demonstrated performance of products and services. At Capital One, consumer satisfaction is an essential element to decision making regarding forthcoming financial and investment service transformations. Capital One has a unique approach to its customers. The reputation that cardholders have come to know is one of individual service. The two tiers of analysis within the study focus on: 1) external or environmental analysis; and 2) internal or organizational analysis serve to ground hypotheses in customer segmentation and integrated recommendation of Capital One’s product(s) life-cycle, and the viability of investment in those futures based on portfolio adaptation.
Competitive Landscape
KEY: Best of Group. Companies listed are Top Competitors. www.hoovers.com
Key Numbers | Capital One | American Express | Bank of America | Discover | ||
Annual Sales ($ mil.) | 15,950.7 | 26,730.0 | 150,450.0 | 7,985.7 | — | — |
Employees | 28,000 | 58,300 | 284,000 | 10,500 | — | — |
Market Cap ($ mil.) | 18,681.4 | 46,897.2 | 154,507.4 | 7,156.7 | — | — |
Profitability | Capital One | American Express | Bank of America | Discover | Industry2 | Market3 |
Gross Profit Margin | — | — | — | — | 10.22% | 28.77% |
Pre-Tax Profit Margin | 16.97% | 14.08% | 2.91% | 26.05% | 20.02% | 8.48% |
Net Profit Margin | 7.84% | 10.23% | (1.89%) | 14.59% | 15.84% | 5.53% |
Return on Equity | 4.7% | 19.8% | (1.2%) | 16.6% | 15.5% | 10.1% |
Return on Assets | 0.6% | 1.9% | (0.1%) | 1.8% | 1.5% | 1.5% |
Return on Invested Capital | 1.8% | 3.0% | (0.3%) | 5.5% | 2.2% | 4.4% |
Valuation | Capital One | American Express | Bank of America | Discover | Industry2 | Market3 |
Price/Sales Ratio | 1.27 | 1.83 | 1.15 | 1.03 | 1.53 | 3.18 |
Price/Earnings Ratio | 10.24 | 17.86 | 25.51 | 6.60 | 10.93 | 23.36 |
Price/Book Ratio | 0.77 | 3.49 | 0.73 | 1.22 | 1.39 | 6.18 |
Price/Cash Flow Ratio | 5.48 | 7.12 | 1.35 | 1.65 | 14.29 | 19.76 |
Operations | Capital One | American Express | Bank of America | Discover | Industry2 | Market3 |
Days of Sales Outstanding | — | — | — | — | — | 34.66 |
Inventory Turnover | — | — | — | — | — | 8.1 |
Days Cost of Goods Sold in Inventory | — | — | — | — | — | 45 |
Asset Turnover | 0.1 | 0.2 | 0.0 | 0.1 | 0.1 | 0.3 |
Net Receivables Turnover Flow | — | — | — | — | — | 10.5 |
Effective Tax Rate | 26.7% | 27.3% | — | 40.0% | — | 37.9% |
Financial | Capital One | American Express | Bank of America | Discover | Industry2 | Market3 |
Current Ratio | — | — | — | — | 1.41 | 1.33 |
Quick Ratio | — | — | — | — | 6.3 | 1.2 |
Leverage Ratio | 6.38 | 8.61 | 11.45 | 6.32 | 8.65 | 7.13 |
Total Debt/Equity | 0.79 | 4.21 | 2.62 | 0.33 | 4.80 | 1.37 |
Interest Coverage | — | — | — | — | 87.06 | 17.33 |
Per Share Data ($) | Capital One | American Express | Bank of America | Discover | Industry2 | Market3 |
Revenue Per Share | 32.15 | 21.36 | 13.42 | 12.76 | 15.59 | 7.60 |
Fully Diluted Earnings Per Share from Total Operations |
2.55 | 2.19 | (0.26) | 1.89 | 2.49 | 1.08 |
Dividends Per Share | 0.20 | 0.72 | 0.04 | 0.08 | 0.18 | 0.25 |
Cash Flow Per Share | 7.46 | 5.48 | 11.45 | 7.97 | 1.67 | 1.22 |
Working Capital Per Share | — | — | — | — | 1.01 | 0.64 |
Long-Term Debt Per Share | 46.03 | 43.57 | 43.71 | 4.46 | 74.13 | 4.06 |
Book Value Per Share | 53.39 | 11.18 | 21.12 | 10.76 | 17.25 | 3.91 |
Total Assets Per Share | 371.60 | 103.30 | 221.60 | 84.62 | 157.45 | 27.90 |
Growth | Capital One | American Express | Bank of America | Discover | Industry2 | Market3 |
12-Month Revenue Growth | (6.5%) | (13.5%) | 64.4% | 40.1% | (4.7%) | 31.9% |
12-Month Net Income Growth | — | (21.1%) | 56.6% | 37.6% | 854.0% | (27.7%) |
12-Month EPS Growth | 600.0% | (37.9%) | — | 8.6% | 86.1% | (50.0%) |
12-Month Dividend Growth | (65.0%) | 0.0% | (98.2%) | (50.0%) | (51.4%) | — |
36-Month Revenue Growth | 2.4% | (1.8%) | 18.1% | 10.0% | 0.5% | 14.3% |
36-Month Net Income Growth | (28.5%) | (16.9%) | (33.3%) | 5.8% | (26.2%) | (5.6%) |
36-Month EPS Growth | (49.5%) | (20.0%) | — | 78.5% | (30.7%) | (14.7%) |
36-Month Dividend Growth | 70.0% | 8.1% | (73.4%) | — | (22.4%) | — |
The Merger
February 27, 2009, Capital One acquired all of the outstanding common stock of Chevy Chase Bank F.S.B., (“Chevy Chase Bank”), one of the largest retail depository institutions in the Washington DC region for a total value of $475.9 million. The stock purchase agreement allocated $445 million in cash and 2.56 million shares of Capital One common stock to Chevy Chase Bank common shareholders. The acquisition has expanded the Company’s benchmark position as a commercial banking and retail financial services entity.
Since the acquisition, Capital One has made immediate progress. As articulated by an independent banking consultant, Bert Ely, “They’re to be commended for being careful about this. There have been some horror stories back in ’90s acquisitions [involving other banks] that went too fast and were disastrous” (Washington Post 2010). In April 2010, the Chevy Chase operations performed according to projections with its overall banking segment averaging deposits up 12.6 percent, to $21.9 billion, from 2009’s final quarter. Negative performance was also present and domestic and international credit card segments declined, but total charge-offs fell in the first quarter of 2010 in response to heightened commercial, auto and retail banking performance improvement which offset the higher charge-off rate on domestic credit cards.
Risks in the Transition
Risk elements to consider in the forthcoming months in regard to the Capital One’s new market share acquired through the merger with Chevy Chase will be defined by Operations and Legal strategies and are in direct relation to the large scale interests and overall revenue prospectus. Exposure to external events and attendant risks will be managed through our top executive staff, and the Company’s Counsel. Internal risk factors in the operation realm include three key factors: 1) Management in transition; 2) Product line development and coherency in the market; and 3) Systems alterations to networks to incorporate Chevy Chase Bank’s data, and to shore up faulty ATM stations that were a critical aspect of loss to the acquired entity in consumer confidence during the takeover. A crucial bridge between the internal and external environments rests in Capital One’s ability to mitigate risk in the area of compliance. Joint oversight by the Chief Compliance Officer and Division Presidents ensures that application of risk management protocols and procedures will follow each step in the transition. Capital One’s legal counsel is responsive to complaints in this area.
Capital One Global
At Capital One, the Chief Executive Officer, Richard Fairbank is responsible for oversight of all short and long-term aspects of the Company’s Strategic Plan. Products, capabilities and competitive position of the company must be responsive to shifts in the international financial market almost impromptu. Capital One’s continued success relies upon coherent values and consumer confidence. In coordination with the Company’s legal counsel, adequate risk mitigation response to contracts and to regulatory scrutiny is imperative now more than ever. The range of jurisdictions that Capital One negotiations currently and propose to conduct business in are inevitably subject to new and changed laws and regulations, new interpretations of policies of governance, and even political impacts that might affect the market. The nature of capitalization in today’s more flexible economy makes Capital One Financial Corporation’s strategic leadership essential to the forthcoming strategies and ultimately its competitive ability to manage risk appetite.
Works Cited
Capital One Financial Corporation (2010). Hoovers. Retrieved from: http://www.hoovers.com
Annual Report (2009). Capital One. Retrieved from: http://www.capitalone.com/
Haynes, Dion V. (2010). Capital One appoints new local team to oversee integration of Chevy Chase Bank. Washington Post, Monday, May 17, 2010; A09. Retrieved from:http://www.washingtonpost.com/wp-dyn/content/article/2010/05/16/AR2010051602705_pf.html
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