Capital One is a fun bank to write about because of the unique make up of their loan portfolio. Pulling some numbers from their 4th Quarter Balance Sheet:
- Credit Card period-end loans increased 9% to $137.7 billion (!)
- Consumer Banking period-end loans decreased 2% to $79.9 billion.
- Commercial Banking period-end loans decreased 1% to $94.7 billion.
Did your eyes catch what stands out in those numbers? Capital One generates a lot of interest income off of credit cards. What do we know generally about credit cards? They are intended for short term funding, usually unsecured, and for that reason have higher interest rates than other products. We’d expect the above to impact other parts of the bank with the understanding that average credit card balances are rising giving macro factors like inflation. If Capital One expects the increases in these balances to also lead to delinquencies and charge offs on their credit card portfolio, then we’d expect the bank to increase loan loss reserves (hurting profitability because that money sits idle). Other numbers from year end 2022:
- Total net revenue increased 13% to $34.3 billion (driven by interest on higher credit card balances and rising variable interest rates)
- Net interest margin of 6.67%, an increase of 46 basis points (Capital One has consistently had a large NIM relative to banks of similar size, but it still shocks me when I see it. Compare this to NIMs around 2.3% for other large banks. The credit card biz is a money printer.)
- Provision for Credit Losses increased $7.8 billion to $5.8 billion. (There’s a lot to unpack here. First, the numbers look off, right? The reason is the Provision for Credit Losses in ’21 was a negative number. Yes, GAAP accounting at its finest and accepted by regulators and can have a big impact on profitability. Likely another post needed to dive deeper into this number. The important point to take away from this number is the bank is bracing for a negative credit impact give the macro headwinds we are all aware of).