Sunday, March 26, 2023

How Does Capital One Make Cash? — It’s Extra Than Simply Credit score Playing cards

Capital One Financial institution is without doubt one of the 20 largest banks by assets in the United States. To be exact, it’s #10 as of September 30, 2022.

It makes some huge cash too. In 2021, the newest yr for which we now have full information, Capital One Financial institution reported greater than $12 billion in revenue earlier than taxes. 

The place does all that cash come from? The large image really isn’t that sophisticated. Capital One earns the overwhelming majority of its revenue from curiosity on bank cards, shopper loans, and industrial loans, and from debit and bank card transaction charges. Right here’s the way it all matches collectively.

Capital One Revenue

How A lot Cash Does Capital One Make?

Capital One Financial institution earned $12.39 billion in 2021.

The financial institution’s revenue and bills fall into two main classes: curiosity and noninterest. 

Capital One’s Curiosity Revenue Sources

Capital One earned $25.77 billion in gross curiosity revenue in 2021

Most of that curiosity revenue comes from funds lent to prospects. That features:

Capital One additionally treats revenue it earns from funding securities as curiosity revenue. Lastly, it earns a really small quantity of curiosity on working money held in its personal accounts as nicely.

Curiosity Revenue Supply % of Curiosity Revenue
Bank cards 60%
Shopper banking loans 23%
Business banking loans 8%
Different loans 3%
Investments and money 6%
Whole 100%

Capital One’s Curiosity Bills

Capital One had $1.6 billion in curiosity bills in 2021.

Capital One’s curiosity revenue dwarfs its curiosity bills, however these bills do nonetheless lower into its revenue. After accounting for them, Capital One netted $24.2 billion in curiosity revenue in 2021.

Capital One’s largest curiosity expense is the curiosity it pays on buyer deposit accounts, like savings accounts and certificates of deposit. (It’s a financial institution, in any case.) The remaining goes to Capital One’s personal debt service — that’s, the curiosity it pays on beforehand borrowed funds.

Curiosity Expense Sort % of Curiosity Bills
Curiosity paid on deposits 60%
Securitized debt obligations 7%
Senior and subordinate notes 31%
Different varieties of debt and liabilities 2%
Whole 100%

Capital One’s Noninterest Revenue

Capital One earned $6.26 billion in noninterest revenue in 2021.

Most of that (62%) comes from interchange charges, also referred to as swipe charges. Interchange charges are transaction processing charges paid by retailers to bank card issuers like Capital One. Each time you utilize your Capital One bank card, Capital One will get a small lower of the quantity paid — sometimes 1.5% to three.5%, relying on the cost community and whether or not the transaction happens on-line or in particular person.

Many of the remainder of Capital One’s noninterest revenue comes from service costs and different charges charged to prospects. As banks and bank card issuers go, Capital One isn’t identified for charging excessive fees, and it doesn’t cost overdraft charges in any respect on shopper checking accounts. However the charges it does cost nonetheless add up:

  • Bank card annual charges
  • Installment mortgage origination charges
  • Wire switch charges
  • Financial institution verify charges
  • Paper assertion charges
Noninterest Revenue Sort % of Noninterest Revenue
Interchange charges 62%
Service costs and different buyer charges 25%
Different charges 13%
Whole 100%

Capital One’s Noninterest Bills

Capital One had $16.57 billion in noninterest bills in 2021.

This expense class encompasses all of the bills Capital One incurs to run its enterprise:

  • Salaries, wages, and advantages
  • Actual property, often called “occupancy” in accounting parlance
  • Workplace tools
  • Advertising and marketing actions
  • Telecommunications and information processing
  • Skilled companies
  • Numerous overhead bills

The sheer dimension of Capital One’s noninterest bills reveals simply how vital the financial institution’s curiosity revenue is for its backside line. Had been it not for curiosity revenue, Capital One’s noninterest bills would go away it deep within the crimson — interchange charges and repair costs merely aren’t sufficient to maintain tempo.

Noninterest Expense Sort % of Noninterest Bills
Salaries and advantages 45%
Occupancy and tools 12%
Advertising and marketing 17%
Skilled companies 9%
Communications and information 8%
Different bills 9%

Capital One’s 2021 Provision Credit score

Capital One had one different vital supply of noninterest revenue in 2021: a provision credit score.

A provision credit score is an accounting artifact that offsets unhealthy debt from earlier years. Annually, banks like Capital One preserve observe of unpaid money owed — past-due bank card balances and loans, largely — and make their finest guess as to how a lot cash they’ll really lose on these money owed. They write off the quantity as a loss.

These losses don’t all the time materialize. When the financial institution determines they’ve written off an excessive amount of for phantom future losses, they use a provision credit score to recuperate the distinction.

In 2021, Capital One took a provision credit score of $1.94 billion. That credit score accounted for six% of its complete revenue.

Revenue Sort % of Whole Revenue
Curiosity revenue 76%
Noninterest revenue 18%
Provision credit score 6%
Whole 100%

The place Did We Get This Knowledge?

We received all the information for this report from Capital One’s 2021 Annual Report, which covers the fiscal yr that ended on December 31, 2021.

As a publicly traded firm, Capital One is required by legislation to file an in depth annual monetary assertion with the Securities and Change Fee. The assertion, often called a 10-Okay, runs greater than 200 pages and breaks down Capital One’s property, liabilities, and revenues in excruciating element.

The ten-Okay makes up the majority of Capital One’s annual experiences. You’ll find the 2021 model on the hyperlink above, starting on web page 19.

For those who don’t have time to pore over tons of of pages of numbers and authorized jargon, we now have the highlights for you right here.

Closing Phrase

It’s spectacular that Capital One earned over $12 billion in 2021, a yr marked by traditionally low interest rates and comparatively low charges of credit card utilization

In 2022, rates of interest have been a lot greater and shoppers leaned on bank cards greater than they’ve in years. Regardless of a tougher financial surroundings total, it stands to motive that Capital One took benefit of the favorable rate of interest surroundings and continued printing cash.

Or possibly not. We’ll have to attend for the financial institution’s subsequent annual report to make sure.

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