Core profitability measures are important 

There are two core profitability measures for a bank. The measures are net interest income and net interest margin. Net interest income is similar to gross profit for normal companies. The net interest margin is similar to the gross profit margin.

Capital One (COF) focuses on lending as a primary source of earnings. It needs to have a good pipeline of loans. These loans should lead to a growing net interest income stream. The best situation for a bank would be if the net interest income growth is accompanied by an increase in the net interest margin.

Why Capital One’s net interest margin is above the sector average

Blip in net interest income in 2014

Net interest income is like bread and butter for retail banks. Over the years, Capital One’s net interest income has been increasing. It’s in line with the increase in the bank’s loan book. However, there was a minor fall in the net interest income in 2014. In 2014, Capital One’s net interest income stood at $17.89 billion. It was $18.22 billion in 2013.

Net interest margin fell in 2014

The credit card business has high margins. Capital One entered into many new businesses since its early days. This led to falling net interest margins. However, the net interest margins still remain much higher than the sector average.

In an environment of falling net interest margins, Capital One has been able to hold on to its margins. At the end of 2014, the net interest margin was at 6.17%. This was almost double the sector-wide average net interest margins of 2.91%. This is due to Capital One’s presence in high net interest margin loans.

Wells Fargo (WFC), U.S. Bank (USB), and PNC Bank (PNC) have much lower net interest margins than Capital One. Capital One has one of the highest net interest margins among the banks in the Financial Select Sector SPDR (XLF).

Latest articles

German chip maker Infineon Technologies has reportedly raised 1.55 billion euros (~$1.74 billion) in capital by selling its shares to fund its acquisition of Cypress Semiconductor (CY). Infineon has sold ~113 million new shares at 13.70 euros each.

As of June 18, Dunkin’ Brands (DNKN) was trading at $80.07, an 8.9% rise since reporting its first-quarter earnings on May 2. Also, DNKN was trading at a premium of 29.8% from its 52-week low of $61.69 and a discount of 1.6% from its 52-week high of $81.40.

19 Jun

Are Lower Oil Prices Weighing on ExxonMobil Stock?

WRITTEN BY Maitali Ramkumar

ExxonMobil (XOM) stock has fallen 7.1% in the second quarter so far. Let's review ExxonMobil's stock performance in comparison to oil price changes and equity market movements in the quarter.

19 Jun

As Facebook Unveils Libra, MSFT and CRM Join a Blockchain Group

WRITTEN BY Mayur Sontakke, CFA, FRM

On June 18, Facebook (FB) launched Libra, its own cryptocurrency. On the same day, CoinDesk published another piece of blockchain news that didn’t receive as much fanfare as Facebook’s Libra news. Was the timing a coincidence? We think not.

Uber Technologies (UBER) has picked Melbourne as another test site for its flying taxi service known as UberAir. The Australian city is the first international test site Uber has chosen for its flying taxi service. The addition of Melbourne brings the number of test locations Uber has picked for its UberAir service to three.

Lyft (LYFT) and Uber Technologies (UBER) are pushing back against California legislation that would require them to recognize their drivers as employees rather than independent contractors. The legislation would require companies like Lyft to give their drivers the compensation and benefits spelled out under California’s employment regulations.