Capital One 1996 Annual Report Download - page 6

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4
specialty segments, include secured
cards, college student cards, affinity
cards and a variety of cards for under-
served markets. These products tend to
have lower credit limits, slower asset
growth, higher operational costs, and
somewhat higher delinquencies and
charge-offs. But their most salient
characteristic is their high profitability,
due to our customized pricing and the
fact that competition is less intense in
these specialty markets.
Strong Gains in a
Difficult Credit Environment
These new products, coupled with
introductory-rate repricings, have con-
tributed to a dramatic surge in rev-
enue. In 1996, Capital One’s total rev-
enue (managed net interest income
plus non-interest income) grew 63% to
$1.5 billion from $906 million in 1995.
Put another way, risk adjusted revenue
(total revenue less charge-offs) rose to a
record 8.02% of average earning assets
in 1996 from 6.99% in 1995. While our
margins expanded, many of our com-
petitors suffered shrinking returns.
Our information-based strategy
also gives us the ability to make oppor-
tunistic moves even with mature prod-
ucts. Despite decreasing our market-
ing emphasis on the balance transfer
product in 1996, we continued exten-
sive research and testing in this arena.
Out of these efforts came a number
of important breakthroughs, which we
have begun to market.
Conservative
Risk M anagement
Consumer credit is a cyclical business
and, unlike many industry observers,
we believe that the problems of the
current cycle have yet to peak. Our
information-based strategy gives us
the data and the tools to manage risk
effectively. We use sophisticated mod-
els to analyze risk, and we base
our decisions on highly conservative
forecasts.
To minimize total credit exposure,
our average credit lines are well below
the industry average ($3,100 versus
$5,700). Products are also priced and
structured to provide appropriate risk
coverage at the individual customer
level. Anticipating a rise in credit loss-
es again in 1997, we added to our
reserves. And our margins are suffi-
ciently large to cushion the impact of
Our information-based
strategy gives us the
data and the tools
to manage risk effec-
tively. We use sophis-
ticated models to
analyze risk, and we
base our decisions on
highly conservative
forecasts.