A quick check of Capital One Financial Corp. (NYSE:COF)‘s top-line revenue reveals a dramatic change from the second quarter of 2012 to the second quarter of 2013:
Source: Company SEC filings.
Its 44% revenue growth year over year bested regional banking counterparts PNC Financial Services (NYSE:PNC) and U.S. Bancorp (NYSE:USB), which clocked in at 15% and -0.4%, respectively. It also topped the nation’s largest bank, JPMorgan Chase & Co. (NYSE:JPM), which saw revenue grow at 14%.
Source: S&P Capital IQ
How did Capital One Financial Corp. (NYSE:COF) generate that amazing growth? Let’s take a closer look.
Sources of Revenue
Banks generate revenue from two major sources: interest and non-interest income. Banks make interest income from loans to consumers and companies, while non-interest income comes from fees, trust and asset management services, and other ancillary activities.
An enormous percentage of Capital One Financial Corp. (NYSE:COF)’s revenue comes from the basic banking operations of interest income, rather than extra fees or special services.
| Revenue Type | Capital One | PNC | US Bancorp |
|---|---|---|---|
| Interest Income | 82% | 58% | 57% |
| Non-interest Income | 18% | 42% | 43% |
Source: SEC filings.
Over the past year, Capital One Financial Corp. (NYSE:COF) has seen impressive growth in its interest income from other loans and investments. That slice of its revenue has risen by 9%, while peers U.S. Bancorp (NYSE:USB) and PNC Financial Services (NYSE:PNC) have each seen their interest income fall over the past year.
Source: S&P Capital IQ
Still, remember that Capital One Financial Corp. (NYSE:COF) gets far more of its revenue from this interest income than its two rivals. To get a complete picture of these businesses’ growth, you also need to see how their non-interest income has measured up:
Source: S&P Capital IQ
How does 9% + 3% = 44%?
As we saw earlier, Capital One Financial Corp. (NYSE:COF)’s interest income grew by 9%, and its non-interest income increased by 3%. But how did those two numbers combine to equal the 44% growth in its total revenue? The answer lies in an often-overlooked income-statement line item.
“Provision for Credit Losses” is a forward-looking estimate of what the bank expects to lose on its loans; this number gets subtracted from a bank’s total revenue calculation.
If a bank has flat interest and non-interest income, but its provision for loan losses goes down, its total revenue will rise. In the last year, Capital One Financial Corp. (NYSE:COF) has seen its provision for credit losses plummet by more than $1 billion as the result of a safer, less-risky business climate, and the removal of a one-time charge. These lowered loss provisions have directly contributed to the company’s revenue.
Source: S&P Capital IQ
Capital One Financial Corp. (NYSE:COF)’s falling provisions for credit losses and rising revenue certainly look appealing. But you’ll get a clearer picture of any bank’s top-line growth by looking at its revenue before the provision for credit losses.
