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

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

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

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

How A lot Cash Does Capital One Make?

Capital One Financial institution earned $12.39 billion in 2021.

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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 clients. 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%
Client 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 minimize into its revenue. After accounting for them, Capital One netted $24.2 billion in curiosity revenue in 2021.

Capital One’s greatest curiosity expense is the curiosity it pays on buyer deposit accounts, like financial 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 Kind % 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 employ your Capital One bank card, Capital One will get a small minimize 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 individual.

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

  • Bank card annual charges
  • Installment mortgage origination charges
  • Wire switch charges
  • Financial institution examine charges
  • Paper assertion charges
Noninterest Revenue Kind % of Noninterest Revenue
Interchange charges 62%
Service expenses 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, generally known as “occupancy” in accounting parlance
  • Workplace tools
  • Advertising actions
  • Telecommunications and knowledge processing
  • Skilled providers
  • Numerous overhead bills

The sheer dimension of Capital One’s noninterest bills exhibits simply how essential the financial institution’s curiosity revenue is for its backside line. Had been it not for curiosity revenue, Capital One’s noninterest bills would depart it deep within the purple — interchange charges and repair expenses merely aren’t sufficient to maintain tempo.

Noninterest Expense Kind % of Noninterest Bills
Salaries and advantages 45%
Occupancy and tools 12%
Advertising 17%
Skilled providers 9%
Communications and knowledge 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 dangerous debt from earlier years. Every year, banks like Capital One maintain monitor of unpaid money owed — past-due bank card balances and loans, principally — and make their finest guess as to how a lot cash they’ll truly lose on these money owed. They write off the quantity as a loss.

These losses don’t at all times 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 whole revenue.

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

The place Did We Get This Information?

We acquired 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 regulation to file an in depth annual monetary assertion with the Securities and Change Fee. The assertion, generally known as a 10-Okay, runs greater than 200 pages and breaks down Capital One’s belongings, 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.

In the event you don’t have time to pore over a whole bunch of pages of numbers and authorized jargon, now we have the highlights for you right here.

Last Phrase

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

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

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