Capital One 2001 Annual Report Download - page 27

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RISK ADJUSTED REVENUE
AND MARGIN
The Company’s products are designed
with the objective of maximizing
customer value while optimizing
revenue for the level of risk
undertaken. Management believes that
comparable measures for external
analysis are the risk adjusted revenue
and risk adjusted margin of the
managed portfolio. Risk adjusted revenue is defined as net interest
income and non-interest income less net charge-offs. Risk adjusted
margin measures risk adjusted revenue as a percentage of average
earning assets. These measures consider not only the loan yield and net
interest margin, but also the fee income associated with these products.
By deducting net charge-offs, consideration is given to the risk
inherent in the Company’s portfolio.
The Company markets its card products to specific consumer
populations. The terms of each card product are actively managed to
achieve a balance between risk and expected performance, while
obtaining the expected return. For example, card product terms
typically include the ability to reprice individual accounts upwards or
downwards based on the consumer’s performance. In addition, since
1998, the Company has aggressively marketed low non-introductory
rate cards to consumers with the best established credit profiles to take
advantage of the favorable risk return characteristics of this consumer
type. Industry competitors have continuously solicited the Company’s
customers with similar interest rate strategies. Management believes
the competition has put, and will continue to put, additional pressure
on the Company’s pricing strategies.
By applying its IBS and in response
to dynamic competitive pressures,
the Company also concentrates a
significant amount of its marketing
expense to other credit card product
opportunities. Examples of such
products include secured cards, lifestyle
cards, co-branded cards, student
cards and other cards marketed to
certain consumer populations that the
Company feels are underserved by the
Company’s competitors. These products
do not have a significant, immediate
impact on managed loan balances;
rather they typically consist of lower
credit limit accounts and balances that
build over time. The terms of these
customized card products tend to
include membership fees and higher
annual finance charge rates. The profile
of the consumer populations that these
products are marketed to, in some cases, may also tend to result in
higher account delinquency rates and consequently higher past-due
and overlimit fees as a percentage of loan receivables outstanding than
the low non-introductory rate products.
Table 3 provides income statement data and ratios for the Company’s
managed consumer loan portfolio. The causes of increases and
decreases in the various components of risk adjusted revenue are
discussed in further detail in subsequent sections of this analysis.
md&a 25
table 3: Managed Risk Adjusted Revenue
Year Ended December 31 (Dollars in Thousands) 2001 2000 1999
Managed Income Statement:
Net interest income $3,492,620 $ 2,614,321 $ 2,174,726
Non-interest income 3,337,397 2,360,111 1,668,381
Net charge-offs (1,438,370) (883,667) (694,073)
Risk adjusted revenue $5,391,647 $ 4,090,765 $ 3,149,034
Ratios:(1)
Net interest income 9.04% 10.71% 10.83%
Non-interest income 8.63 9.67 8.31
Net charge-offs (3.72) (3.62) (3.45)
Risk adjusted margin 13.95% 16.77% 15.69%
(1) As a percentage of average managed earning assets.