Capital One Financial Corp. (COF), PNC Financial Services (PNC), U.S. Bancorp (USB): The Reason Behind 1 Bank’s Massive Margins

Page 1 of 2

Ask any investor to name key ratios and metrics for evaluating a bank, and you’ll probably find net interest margin on his or her list.

Net interest margin, or NIM, takes the money a bank earns in interest from its loans and investments, subtracts the interest it pays out on its deposits, and divides the result by its total earning assets. NIM gauges how well a bank is doing its core job: turning the money from its customers’ deposits into profitable mortgage, auto, and commercial loans.

While it’s effective at measuring one bank’s performance, NIM may not be as reliable a metric as your old finance textbooks might have led you to believe when comparing one bank with another. How much a bank can earn also depends largely on what kinds of assets it holds, and in what proportions.

Net interest margin trends

Banks have often recently claimed that low interest rates have hurt their net interest margin by preventing them from charging higher rates on loans. Yet somewhat surprisingly, as interest rates have risen, banks have seen their NIMs decrease.

anImage

Source: St. Louis Federal Reserve.

However, investors should note that bank’s liabilities (deposits) are short-term and their assets (loans) are long-term. As rates rise in the short term, they must pay more for short-term borrowing and to depositors. But in the long run, they’ll make more interest (and thus, money) from the loans they’ve written at higher rates.

So with all of that in mind, let’s dive in to a quick check of five banks’ net interest margins in the most recent quarter to see whether we can spot any examples of why you can’t rely exclusively on NIM to gauge a bank’s performance.

Bank Net Interest Margin
Wells Fargo & Co (NYSE:WFC) 3.46%
SunTrust Banks, Inc. (NYSE:STI) 3.25%
U.S. Bancorp (NYSE:USB) 3.43%
PNC Financial Services (NYSE:PNC) 3.58%
Capital One Financial Corp. (NYSE:COF) 6.83%

Source: Company SEC filings.

Wait a second. Capital One Financial Corp. (NYSE:COF) is the 13th largest bank holding company by assets, yet it somehow managed to double its peers’ net interest margin in the most recent quarter? Upon further digging, the data shows that while every bank reports a number called “net interest margin” in every earnings release, its composition isn’t uniform at all.

Think of net interest margin as a meat loaf. While everyone may call what they pull out of the oven “meat loaf,” the ingredients and amounts can vary dramatically from one recipe to the next. In that same way, many factors determine what a bank’s net interest margin will be, so it is important to see exactly how each bank “prepares its meat loaf.”

While Capital One Financial Corp. (NYSE:COF) has slowly begun its transformation into a more traditional bank over the last year, notice how the composition of its earning assets differs from its peers’:

Composition of Earning Assets by Business (FY 2012)

Wells Fargo Sun Trust US Bancorp PNC Capital One
Credit Card 2% <1%% 5% 2% 31%
Consumer Banking 39% 43% 29% 29% 28%
Commercial Bank 34% 37% 32% 42% 14%
Investment Securities 25% 15% 26% 25% 23%
Other 0% 5% 8% 3% 4%

Source: Company 10-Ks.

Capital One Financial Corp. (NYSE:COF)’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 SunTrust Banks, Inc. (NYSE:STI), U.S. Bancorp (NYSE:USB), and PNC Financial Services (NYSE: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.

Page 1 of 2
blog comments powered by Disqus
Insider Monkey Headlines
Insider Monkey Small Cap Strategy
Insider Monkey Small Cap Strategy

Insider Monkey beat the market by 44 percentage points in 21 months Learn how!

Lists

The Top 10 States With Fastest Internet Speeds

10 Best Places to Visit in USA in August

Top 10 Cities to Visit Before You Die

Top 10 Genetically Modified Food In the US

15 Highest Grossing Movies Opening Weekend

5 Best Poker Books For Beginners

10 Strategies Hedge Funds Use to Make Huge Returns

Top 10 Fast Food Franchises to Buy

10 Best Places to Visit in Canada

Best Summer Jobs for Teachers

10 Youngest Hedge Fund Billionaires

Top 10 One Hit Wonders of the 90s

Fastest Growing Cities In America

Top 10 U.S. Cities for Freelancers

Top 9 Most Popular Free iPhone Apps

Top 10 Least Expensive Private Business Schools in the US

Top 15 Most Expensive Countries in the World – 2014

Top Businesses to Invest In

Top 5 Things You Might Be Doing Wrong With Your Business

Top 5 Strategic Technology Trends in 2014

Top Rags to Riches Stories

Parenting Behavior That Promotes Future Leaders

Top 5 Mistakes Made by Small Businesses

Top 5 Most Common and Potentially Devastating Financial Blunders

Top 5 Highest Paying Jobs for Web Designers

Top 6 Most Respected Professions that Also Pay Well

Top 5 Pitfalls Investors Should Avoid

Top 6 Lawyers and Policy Makers Under 30

Top 6 New Year’s Resolutions for Entrepreneurs

Top 7 Locations to Check in on Facebook

Top 5 Mistakes made by Rookie eBay Sellers

Top 7 eBook Publishers in 2013

Top 6 Health Industry Trends in 2014

5 Lessons for Entrepreneurs from Seth Godin

Top 5 Success Tips from Jordan Belfort – the Wolf of Wall Street

Best Master’s in Finance Degree Programs

Top 6 Earning Celebrities Over 50

The most expensive sports to play

Top 7 Earning Celebrities Under 25

Best 7 Online Courses to Take: Free Finance MOOCs

Top 6 Bad Habits that Promote Failure

20 Most Valuable Soccer Teams in the World in 2013

12 Most Expensive Countries for Foreign Students

Top 30 Most Influential Women in the World

Top 20 Most Expensive New Year Eve Shows

Top 5 Best Vocational Careers

Top 10 Jobs for 2014 by Salary Gain (Predictions)

Top 5 Digital Trends for 2014

Top 6 Things You Can Do To Increase Your Productivity

Top 9 Trending Smartphones in 2013

Subscribe

Enter your email:

Delivered by FeedBurner

X

Thanks! An email with instructions is sent to !

Your email already exists in our database. Click here to go to your subscriptions

Insider Monkey returned 47.6% in its first year! Wondering How?

Download a complete edition of our newsletter for free!