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Capital One Financial Corp. (COF), PNC Financial Services (PNC): One Number You Shouldn’t Ignore

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:PNCand 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

Capital One Financial Corp.As you can see, while Capital One Financial Corp. (NYSE:COF) has seen slight growth in this area, the real winner in this exploration appears to be PNC, whose Asset Management, Consumer Services, and Corporate Services divisions have all expanded. However, its second-quarter results in 2012 included a one-time charge of $470 million in its mortgage banking unit — excluding that charge, PNC Financial Services (NYSE:PNC) experienced much slower revenue growth.

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.

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