Richard D. Fairbank is the CEO of Capital One Financial Corporation (COF). COF reported strong third quarter earnings yesterday. The number I was waiting for was the updated Net Interest Margin which came in at 679 basis points in the presentation for 3Q2016 Earnings. The NIM has been relatively flat for the past year at COF with moves of around 6 bps max quarter over quarter. The reason this NIM number is so interesting is that it is at least two times larger than the NIM at JPM (oddly, does not actually quote a NIM number other than to say in a footnote it is flat QoQ), Citi (286 bps), or BofA (223 bps). I recently wrote a paper titled What’s in their Wallet discussing this observation. Fairbank appears to have quantitatively optimized parts of the COF capital plan implementation process while his competition runs a manual process. If banking books are like rockets, COF is using computer guidance while the competitors are mostly steering with a joystick.
There are two reasons this is interesting. First, Financial engineering is different than other numerical/computational engineering fields like fluid mechanics, light diffraction, or supersonic flow. In Finance there is no underlying physical reality for the models to calibrate, it is all business convention. Twenty years ago nearly all the quant models prohibited negative interest rates in any expectation calculation. Now negative yields on global government bonds is a reality and the quant texts are being rewritten. When a bank like COF establishes a quantitative methodology like NIM Optimization in the market by adding ~$10B in annual revenue they are doing their part to establish a new Financial engineering reality. Second, the time has come for banks to model each of the securities and contracts on the banking book just the same way as they model trades on the trading book. Sure a large bank might have a few billion positions in its accrual portfolio but with current technology that is a modest computational challenge. Moreover, with new FinTech these billions of securities are going to become computational devices like phones. Fairbank is simply ahead of the game in assembling the infrastructure to automate banking in this new FinTech world.