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Why is Capital One’s Net Interest Margin so High?


Stephen Ellis, MorningStar, Capital One will benefit from a more stable U.S. consumer, July 2016, here.  Find this person Richard D. Fairbanks. These folks coil be optimizing while everyone else is running NIM Manual.

The bank charged off loans at a 2.01% annualized rate during the quarter, with card losses totaling 4.07% of balances. Commercial banking charge-offs reached only 0.37%.  We think that these rates, albeit manageable, demonstrate that Capital One may be reaching further out on the risk spectrum than its competitors. Of course, the company’s 6.73% net interest margin is more than double the U.S. bank industry margin, but Cap One’s 11.6% return on tangible equity is not overly impressive on a risk-adjusted basis.

We think Capital One’s stewardship of shareholders’ capital is Standard. Richard D. Fairbank, 64, has been chief executive officer since 1994. Management continues to be acquisitive in building the company. As it has demonstrated by diversifying into commercial banking through the Hibernia and North Fork acquisitions, Capital One has been very successful at integrating new businesses into its operations. But it has also shown that it is capable of acquiring assets that do not fit its competency, such as the $7 billion Best Buy credit card portfolio; Capital One sold this portfolio less than a year after it was acquired. In the past, we think management has done a fairly good job in identifying and acquiring portfolios and assets that help build Capital One’s business and brand. The most recent acquisition of $8.5 billion in health-care-related loans from General Electric Capital is a sizable deal that is largely outside Capital One’s core competency in consumer lending.

Saul Perez, Market Realist, Mar 2015, Why Capital One’s net interest margin is above the sector average, here.

Not all banks follow the same growth path. Some banks start as savings banks. They grow their network and then get into other financial products. Examples of such banks are Wells Fargo (WFC), U.S. Bank (USB), and PNC Bank (PNC). All of these banks are part of the Financial Select Sector SPFR (XLF).

Others banks start out primarily as investment banks and then move in as savings banks. However, there’s one bank that chartered a very different path. That bank is Capital One.

Roger Arnold, Real Money, These Banks Have Profitability in the Cards, Aug. 2013, here.

One of the indicators of profitability and earnings that investors in bank stocks watch most closely is the net interest margin, which is interest income minus interest expense.

Net interest margin in the U.S. banking system has been declining for the past three years, as the Federal Reserve has increased quantitative easing and has withdrawn longer-duration debt from the publicly available capital markets. This has affected banks of all sizes pretty evenly. Net interest margin at the top four is currently about 3.10%, and at the smallest local banks it is about 3.50%.

Some banks, however, have larger margins, and unsurprisingly, three of the four largest publicly traded ones with the highest NIM are those that are focused on credit cards: Discover Financial Services (DFS) at 8.6%, Capital One Financial (COF) at 6.5% and American Express (AXP) at 5.4%.

Interestingly, Bank United (BKU), the 82nd-largest U.S. bank, which has the third-highest NIM, 6.1%, of all publicly traded banks, carries no credit card assets. I will address Bank United specifically in a separate column.

Patrick Morris,, The Reason Behind 1 Bank’s Massive Margins, here. CAPital One is highly allocated in Cards.

Capital One’s asset composition is radically different from other banks of a relatively similar size. Knowing that each business within a bank has a different yield based on the risk associated with it, one would expect that Capital One has a higher net interest margin than peers such as Sun Trust, US Bancorp, and PNC, which all have greater than 60% of their assets in their consumer and commercial banking operations, which are often safer and lower yielding than the riskier, higher-margin credit card debt that’s at the forefront of Capital One’s portfolio.



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