Non-interest expenses are important
For banks, non-interest expenses are similar to operating costs for other companies. Interest expenses, or interest paid on deposits, are costs that a bank must incur to carry out its prime job of lending. However, non-interest expenses can be controlled. Controlling non-interest expenses helps a bank have higher net profitability.
Capital One is controlling non-interest expenses
Capital One (COF) managed its non-interest expenses better in the last few years. The bank was able to decrease its net interest expenses year-over-year, or YoY, for all of the quarters in 2014. Most of the decrease was achieved due to the increased use of technology.
Capital One has been able migrate an increasing number of its transactions to online or self-serviced modes. The acquisition of ING Direct, now renamed Capital One 360, also helped. This acquisition provided the bank with a ready-made platform. It helped control non-interest expenses. The integration HSBC’s US card operations also helped lower the non-interest expenses.
Efficiency ratio is improving
The efficiency ratio indicates the control of operating expenses. A value of 60% or below is considered satisfactory. Capital One’s efficiency ratio stood at 60.80% at the end of 2014. This is just above the 60% threshold. Capital One has been improving its efficiency ratio over last few years due to a reduction in non-interest expenses.
Wells Fargo (WFC) and U.S. Bank’s (USB) efficiency ratios are lower than 60%. Wells Fargo and U.S. Bank account for 11.31% of the Financial Select Sector SPDR (XLF). PNC Bank’s (PNC) ratio is slightly higher than Capital One.