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What’s In Their Wallet?


Why is the bank Capital One’s 2015 NIM such an outlier relative to Bank Holding Companies (BHCs) of comparable and larger asset base? Capital One NIM is double the average bank NIM in 2016, Why is that? Press coverage over that past couple years attribute COF outperformance to going long risky credits and managing the write-downs. Maybe they are right and COF is just good at making and managing loans for a decade. On the other hand, maybe COF is running a very different quantitative model than its competitors. COF has 300+ BN of assets in 2016 and is making 300 more bps per year on their assets than the average competitor BHC makes on their assets. Banks NIM are at 30 year lows but not at COF. Maybe the competitors can learn from COF. We discuss some of the quantitative possibilities.

Capital One’s NIM

Bank NIM is down and Interest rates are expected to stay down (see Rieder). St. Louis Federal Reserve figures show that the current average BHC NIM is at a 30 year low.

Capital One’s NIM is not at a 30 year low. In fact they buy assets on the market from ING, GE, Chevy Chase etc. and still maintain their historic NIM levels. COF assets grew 8x from 2004 to 2015 yet the NIM level stayed in a narrow range, occasionally busting out top side. How do you do that? We will review the evidence that the correct figurative question is not “What’s in their Wallet” but “How do they choose what’s in their Wallet?” We will make the case that COF is running some sort of Dynamic Stochastic Optimization for implementing their capital allocation plan. COF’s Wallet is filled with securities through an LP/NLP optimization process and possibly some Dynamic Programming feedback control process. That is how they make 300 bps more than mostly everyone else in a punishingly low interest rate environment. Moreover, other than the competition for assets this more of an internal efficiency game than a zero sum game of someone has to lose for there to be a winner. COF has a free hand in this game at moment because no one else knows how to play.


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