A move toward increasing deposits could affect the level of securitization business done by Capital One, the company said during a presentation at last week's Investors Conference hosted by Friedman, Billings, Ramsey Group.

Cap One touted the benefits of funding through deposits. It appears a largely skeptical equity investor audience has impacted the lender's view of asset-backed securitizations as a primary source of funding, among other credit risk concerns. As those investors yelped, Capital One heard them quite clearly through a drop in its stock price, which has since leveled off.

While Vice Chairman Nigel Morris stated the company has a commitment to the ABS market by noting securitization is a major source of Capital One's funding - about 40% in 2003 - the lender is implementing a diversification play.

"We expect securitizations to be a substantial part of our funding mix going forward," said Morris. Of course, that could be affected by "increased deposits going forward," he added. Roughly 30% of all loans were funded by direct deposits this year.

With a goal of creating a national finance company, Morris stated Capital One looking at building a deposit franchisee. With brand awareness up, according to recently conducted survey figures displayed in the presentation - showing Cap One posting better brand awareness numbers than Citibank - a look at Cap One's portfolio in 2003 shows off-balance sheet securitizations drifted down while deposits drifted up. "Branding gives you a passport to offer products beyond credit cards," said Morris, adding the firm's diversification strategy is "working like a gangbuster."

Morris indicated Cap One would consider acquiring a bank with a retail presence in the future, but noted the effort is in the early phases.

"We are still in the early days in our thinking," he said. "We are just beginning the exploratory period...[and] will seriously look at this going forward." The acquisition of a bank lowers funding costs and moves a customer base into branches, where payments can be closed while other products can be marketed to customers.

Cap One has dramatically ramped up business in other areas of lending. One-third of its managed loan portfolio is outside of credit cards: $3 billion in small business; $5.3 billion in installment loans; $6.6 billion, international; and $8 billion, auto loans.

By growing its deposits, it appears Capital One benefits twofold: a lowered cost of funding and a reduced exposure to securitizations, satisfying equity investors to bolster a stock price that has been all over the map this year.

While no timing was announced for an acquisition, Morris noted the lender would prefer to make an acquisition/merger after the memorandum of understanding (MOU) Capital One has been operating under for the last 18 months was removed. "We don't control the time of the MOU but we would hope the MOU would be part of a distant past by the time we do an acquisition," Morris said, adding, however, that the MOU doesn't prohibit any type of acquisition.

In related forecasts, Morris stated investors should expect a slight bump in 4Q03 charge-offs, as the quarter is notoriously bad for recoveries as people focus on buying gifts rather than paying bills.


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