Capital One: A niche portfolio pick (Part 5 of 23)
Shift to lower-cost funding
We discussed deposits in the last part of this series. However, banks have another funding avenue—bonds and other wholesale funding. Many banks use bonds to fund their assets and expansion. Capital One (COF) started out as a credit card bank. These banks are funded largely by bonds. This was reflected in the type of funding the bank had in its initial years.
Capital One could afford higher-cost funding in its initial years. This was because credit card loans have higher interest rates.
When the bank expanded its branch network, it also started increasing its deposit base. An increased portfolio of products also meant the bank started getting into lower margin loans. Loans like mortgages, commercial loans, and auto loans carry lower interest rates. To maintain margins and the long-term health of the bank, it needed to expand its deposit base and change its funding mix.
Change in funding mix across years
In 2004, wholesale funding consisted of 70% of Capital One’s total funding. Deposits made up 30% of the remaining funding. Over the years, the strategic shift and branch expansion acted as catalyst to change the bank’s funding mix.
In ten years, the mix changed dramatically. Now, deposits account for 81% of Capital One’s funding base. Wholesale is only 19%. The changed pattern had a positive impact on the bank’s margins.
This took the bank closer to the large banks. Now, Capital One is closer to Wells Fargo (WFC), U.S. Bank (USB), and PNC Bank (PNC). These three banks account for 12.93% of the Financial Select Sector SPDR (XLF).
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