Banks are focusing on efficiency to drive profits
Previously in this series, we highlighted the importance of expense control for big banks in the prevalent low interest rates regime. In this sense, controlling overhead expenses has been a key focus for US banks (VFH) as they struggle to remain profitable while containing rising costs in an uncertain and volatile market environment.
Understanding efficiency ratios
Wall Street (SPY) analysts keep a close eye on efficiency ratios of big banks. This ratio is especially important in upcoming results because low interest rates and global events have encroached upon the revenues of giant banks like Capital One Financial Corporation (COF). Efficiency ratio is a measure of non-interest expenses as a percent of net revenues. The ratio shows how revenues fuel a bank’s operating expenses. Please note that with efficiency ratios, a lower percentage is better because it means lower expenses compared to revenues.
Capital One’s efficiency ratio was 56.2% for 4Q15, which is slightly lower than the 56.5% the company saw in 4Q14. Its non-interest expenses increased by 6%, compared to the $3.5 billion it saw one quarter previously. Still, the banking giant expects that the continued growth in its credit card business will create positive operating leverage. So far, digital investments by the company have materialized into productivity gains and cost savings.
Capital One’s ETF exposure
Investors seeking diversified exposure to the US banking sector would do well to consider investing in the Financial Select Sector SPDR ETF (XLF) or the Vanguard Financial ETF (VFH). Capital One Financial makes up 0.85% of the total holdings of XLF, and peers like Bank of America Corporation (BAC), American Express Company (AXP), Mastercard (MA), and Visa (V) are also well represented in both XLF and VFH.
That said, what makes Capital One stand out among these competitors? What are the company’s major strengths? Continue to the next part to find out.