Over the past several years, Capital One Financial Corp. (NYSE:COF) has transformed from a credit card juggernaut to a more traditional bank. If you’re concerned this shifting business might hurt its profitability, the trends revealed in Capital One Financial Corp. (NYSE:COF)’s latest numbers should ease your mind.
Phenomenal net interest margin
As detailed in a prior article, Capital One Financial Corp. (NYSE:COF) has an almost unmatched net interest margin, or NIM, thanks largely to the great returns its credit card unit generates:
| Bank | Net Interest Margin |
|---|---|
| Wells Fargo & Co (NYSE:WFC) | 3.46% |
| U.S. Bancorp (NYSE:USB) | 3.43% |
| PNC Financial Services (NYSE:PNC) | 3.58% |
| Capital One | 6.83% |
Source: Company Second-Quarter Earnings Reports
While we know it’s not apples-to-apples to compare Capital One’s NIM to those of the peers because of the differences in loan types, it might help us see how those numbers have grown over the last year:
Source: Company Earnings Reports.
How has Capital One Financial Corp. (NYSE:COF) bucked the trend of its peers, and in fact almost all U.S. banks, and grown its net interest margin year over year? Put simply, Capital One has managed to squeeze more money out of its assets while paying less on its liabilities.
The higher interest rate the bank is earning stems entirely from its credit card business, which saw its average interest rate earned grow 140 basis points over the last year.
| Q2 2012 | Q2 2013 | YOY Growth | ||||
|---|---|---|---|---|---|---|
| Business | Average Balance | Yield | Average Balance | Yield | Average Balance | BPS Growth |
| Domestic Credit Card | $72 | 13.3% | $76 | 14.6% | 6.1% | 130 |
| International Credit Card | $8 | 14.2% | $8 | 16.2% | -2.6% | 200 |
| Total Credit Card | $80 | 13.4% | $84 | 14.8% | 5.2% | 140 |
Source: SEC 10-Q. Balances in billions.
This increase in both the average balance and yield of Capital One’s credit card business produced an additional $433 million in interest income from this division. But Capital One Financial Corp. (NYSE:COF) as a whole only saw its interest income grow by $394 million, as the amount of interest collected on consumer and commercial banking loans fell.
On the other side of the balance sheet, Capital One had to pay out less on its borrowings and customers’ deposits, which reduced its net interest expense by approximately $150 million.
Not Only NIM
As a result of its very healthy and quickly growing NIM, Capital One also boasts a very healthy return on assets when compared to its peers:
| Bank | Q2 2013 ROA |
|---|---|
| Capital One | 1.66% |
| U.S. Bancorp | 1.70% |
| PNC | 1.49% |
| Wells Fargo | 1.55% |
Source: Company Earnings Reports.
The interest earned on its loans is an especially important factor for Capital One Financial Corp. (NYSE:COF) because it does not have as many fee-generating businesses as U.S. Bancorp (NYSE:USB) and its other regional competitors.
In addition to its strong return on assets, Capital One also has a robust efficiency ratio, which essentially measures how much money the bank must spend to generate $1 of revenue. Like golf, the lower the number, the better:
Source: Company Earnings Reports.
While Capital One is again bested by U.S. Bancorp (NYSE:USB) in this ever-important measurement, it still maintained a ratio that topped those of its peers.
It is important to note that Capital One does trail peers U.S. Bancorp (NYSE:USB) and Wells Fargo & Co (NYSE:WFC) in return on equity:
| Bank | Q2 2013 ROE |
|---|---|
| U.S. Bancorp | 16% |
| Wells Fargo | 14% |
| Capital One | 12% |
| PNC | 11.8% |
Source: Company Earnings Reports.
Its ROE doesn’t match that of its peers, but that’s partly because Capital One is not as leveraged as its competitors. Because of the inherent riskiness of credit card loans (Capital One’s largest loan type), the bank chooses to use slightly less leverage — which keeps returns on equity relatively lower.
Naturally, investors are often more willing to pay a premium for the equity of companies with higher returns on that equity base. One way to tell how much that premium is by checking a company’s price to tangible book value, or P/TBV. This measures the premium (or discount) investors pay compared to what tangible equity the company holds on its balance sheet:
COF Price / Tangible Book Value data by YCharts.
However, Capital One Financial Corp. (NYSE:COF)’s lower price-to-tangible book value should help ease any investor concerns. With a low P/TBV and margins on the rise, Capital One looks more and more each day like something you would not only want in your wallet, but also in your portfolio.
The article 1 Stock Crushing the Competition but Overlooked by Investors originally appeared on Fool.com and is written by Patrick Morris.
Patrick Morris owns shares of US Bancorp (NYSE:USB). The Motley Fool recommends Wells Fargo. The Motley Fool owns shares of PNC Financial Services (NYSE:PNC) and Wells Fargo.
Copyright © 1995 – 2013 The Motley Fool, LLC. All rights reserved. The Motley Fool has a disclosure policy.
