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Why Capital One should maintain its strength in credit cards

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Core business is of immense value to a company

Most diversified banks have a core business. A core business can be a business that provides maximum revenue and net income. A core business can also be a legacy business that can be leveraged to get into other profitable businesses. For example, Wells Fargo (WFC) and U.S. Bank’s (USB) core business is residential mortgages.

Similarly, Capital One’s (COF) core business is credit cards. The bank started out as a monoline credit card bank. It used the excess capital generated from the credit card business to get into other profitable businesses. To this day, most of Capital One’s expansion is funded by the credit card business.

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Capital One should look at maintaining its strength in credit cards

Capital One is the largest credit card player outside the big four banks. It has the largest credit card loan portfolio outside the big four among the banks in the Financial Select Sector SPDR (XLF). PNC Bank (PNC) has a similar size as Capital One. However, Capital One has nearly 18 times the credit card loan portfolio of PNC Bank. This should give you an idea of the strength that Capital One enjoys in credit cards. The bank should continue to build on its great advantage in this business.

Challenge larger players and protect market share 

Capital One should look to fortify this moat. It needs to remain ahead of its competitors in the credit card business. The bank should challenge and getting closer to Bank of America. Bank of America is ahead of Capital One in credit card loans. It should challenge Bank of America while protecting itself from American Express, GE Capital, and Discover. They succeed it in credit card loans. Discover is growing its credit card business rapidly. Read What investors should know about Discover Financial Services to learn more.

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