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Edited Transcript of COF earnings conference call or presentation 25-Apr-17 9:00pm GMT

Thomson Reuters StreetEvents

Q1 2017 Capital One Financial Corp Earnings Call

MCLEAN Apr 29, 2017 (Thomson StreetEvents) -- Edited Transcript of Capital One Financial Corp earnings conference call or presentation Tuesday, April 25, 2017 at 9:00:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* Jeff Norris

* Richard D. Fairbank

Capital One Financial Corporation - Founder, Executive Chairman, CEO and President

* Richard Scott Blackley

Capital One Financial Corporation - CFO, Principal Accounting Officer, SVP and Controller

* Stephen S. Crawford

Capital One Financial Corporation - Head of Finance and Corporate Development

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Conference Call Participants

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* Bill Carcache

Nomura Securities Co. Ltd., Research Division - VP

* Christopher Roy Donat

Sandler O'Neill + Partners, L.P., Research Division - MD of Equity Research

* Donald Fandetti

Citigroup Inc, Research Division - Director and Consumer and Specialty Finance Analyst

* Eric Edmund Wasserstrom

Guggenheim Securities, LLC, Research Division - MD and Senior Equity Analyst

* John G. Pancari

Evercore ISI, Research Division - Senior MD, Senior Equity Research Analyst and Fundamental Research Analyst

* Kenneth Matthew Bruce

BofA Merrill Lynch, Research Division - MD

* Manan Gosalia

Morgan Stanley, Research Division - Equity Analyst

* Matthew Hart Burnell

Wells Fargo Securities, LLC, Research Division - Senior Financial Services Equity Analyst

* Moshe Ari Orenbuch

Crédit Suisse AG, Research Division - MD and Equity Research Analyst

* Richard Barry Shane

JP Morgan Chase & Co, Research Division - Senior Equity Analyst

* Robert Paul Napoli

William Blair & Company L.L.C., Research Division - Partner and Co-Group Head of Financial Services and Technology

* Ryan Matthew Nash

Goldman Sachs Group Inc., Research Division - MD

* Sanjay Harkishin Sakhrani

Keefe, Bruyette, & Woods, Inc., Research Division - MD

* Shih-Wei Ho

Deutsche Bank AG, Research Division - Senior Research Analyst

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Presentation

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Operator [1]

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Welcome to the Capital One Q1 2017 Earnings Conference Call. (Operator Instructions)

I would now like to turn the call over to Mr. Jeff Norris, Senior Vice President of Global Finance. Sir, you may begin.

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Jeff Norris, [2]

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Thank you very much, Tulare, and welcome, everyone, to Capital One's First Quarter 2017 Earnings Conference Call.

As usual, we are webcasting live over the Internet. To access the call on the Internet, please log onto Capital One's website at capitalone.com and follow the links from there.

In addition to the press release and financials, we have included a presentation summarizing our first quarter 2017 results.

With me this evening are Mr. Richard Fairbank, Capital One's Chairman and Chief Executive Officer; Mr. Scott Blackley, Capital One's Chief Financial Officer; and Mr. Steve Crawford, Head of Finance and Corporate Development. Rich and Scott will walk you through the presentation. To access a copy of the presentation and the press release, please go to Capital One's website, click on Investors and then click on Quarterly Earnings Release.

Please note that this presentation may contain forward-looking statements. Information regarding Capital One's financial performance and any forward-looking statements contained in today's discussion and the materials speak only as of the particular date or dates indicated in the materials. Capital One does not undertake any obligation to update or revise any of this information, whether as a result of new information, future events or otherwise. Numerous factors could cause our actual results to differ materially from those described in forward-looking statements. For more information on these factors, please see the section titled Forward-looking Information in the earnings release presentation and the Risk Factors section in our annual and quarterly reports, which are accessible at the Capital One website and filed with the SEC.

Now I'll turn the call over to Mr. Fairbank. Rich?

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Richard D. Fairbank, Capital One Financial Corporation - Founder, Executive Chairman, CEO and President [3]

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Thanks, Jeff. Capital One earned $810 million or $1.54 per share in the first quarter. Excluding adjusting items, we earned $1.75 per share. Pre-provision earnings for the quarter were $3.1 billion, and we posted strong year-over-year loan and revenue growth across our businesses.

I'll begin tonight's call by discussing the major themes that are driving our overall first quarter results and our outlook for 2017, Domestic Card credit and total company efficiency ratio.

Based on portfolio dynamics and industry conditions we observed in the first quarter, we now expect that the full year Domestic Card charge-off rate will be in the high 4s to around 5%, with quarterly variability. That is up from our prior expectation of the mid-4s.

With the benefit of more data, we have refined the expected shape and timing of credit losses on our front book programs booked over the last few years. Our originations in 2014, 2015 and 2016 remained highly resilient. Even with our revised charge-off guidance, we continue to expect that these vintages will drive earnings for years to come and generate total NPVs at the high end of all the annual vintages we've booked since the early 2000s.

Over the past 1.5 years, we have seen increasing competitive intensity, a growing supply of credit and rising consumer indebtedness. As we move through 2016, we tightened our underwriting around the edges. Our actions over the past 4 quarters have led to a deceleration of our growth just as the industry is accelerating. We still think there is a growth window, but the window is gradually becoming smaller.

I want to turn now to another important driver of financial performance, and that is efficiency ratio. We have been working very hard to enhance the efficiency of the company as we grow the business and invest in our digital transformation. Over the past 2 years, we have lowered our annual efficiency ratio by nearly 200 basis points to 52.7%, net of adjustments.

We are continuing to drive hard for efficiency gains. We are converting customers to digital, using technology to simplify and automate our operations and driving out analog costs. On the third quarter earnings call last year, we guided to a near-term annual efficiency ratio in the 52s, net of adjusting items. We are now seeing the opportunity for even more progress in the near term, so we are revising that guidance. We now expect annual efficiency ratio for 2017 will be in the 51s, net of adjusting items and plus or minus a reasonable margin of volatility.

Efficiency is a key way our investors will get paid, and we will continue to drive hard on this lever. Over the longer term, we continue to believe we will be able to achieve additional efficiency improvement, driven by growth and digital productivity gains.

On the earnings calls in each of the past 2 quarters, we have stated that we believe we're in a position to deliver solid EPS growth in 2017, assuming no substantial change in the broader credit and economic cycles. The higher expected charge-offs and related allowance impacts put pressure on expected EPS this year, but the improved efficiency outlook partially offsets the earnings impact from credit. While there is a lower margin for error and based on what we see today, we should be in a position to deliver 7% to 11% adjusted EPS growth in 2017.

It's important to note that all of the guidance we're discussing on tonight's call excludes the potential impact of the announced Cabela's transaction.

So now I'll turn the call over to Scott to discuss first quarter results for the company. Scott?

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Richard Scott Blackley, Capital One Financial Corporation - CFO, Principal Accounting Officer, SVP and Controller [4]

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Thanks, Rich. I'll begin tonight with Slide 3. As rich mentioned, Capital One earned $810 million or $1.54 per share in the first quarter. Excluding adjusting items, we earned $1.75 per share. We had one adjusting item in the quarter, a $99 million build in our U.K. Payment Protection Insurance customer refund reserve, of which $70 million was an offset to revenue and $29 million was captured in operating expense. A slide outlining adjusting items and adjusted EPS can be found on Page 13 of the slide deck.

Pre-provision earnings were up from the prior quarter as slightly lower revenues were more than offset by lower non-interest expenses. Efficiency ratio in the quarter was 51.6%, excluding adjusting items.

Provision for credit losses increased from the prior quarter, driven by both a larger allowance build as well as higher charge-offs. An allowance roll forward by segment can be found on Table 8 of our earnings supplement.

Let me take a moment to explain the movements in the allowance across our businesses in the quarter. In our Domestic Card business, we built $441 million of allowance. This build covers the loss forecast change for 2017 that Rich just discussed.

In our Consumer Banking segment, allowance increased $61 million in the quarter, almost entirely driven by growth in our Auto business. Looking ahead, in our April monthly credit results, we expect a onetime increase in charge-offs of approximately $30 million due to accounting changes in the timing of charge-off of bankrupt accounts, which I discussed in our last earnings call. For the year, accounting changes will increase our Auto business' charge-off rate by approximately 20 basis points. These losses were fully provided for in our 2016 allowance.

In our Commercial Banking segment, we had a $32 million reduction in reserves, driven by the impact of continued improvement in our oil and gas portfolio. Recent reserve movements have been focused in our taxi and oil and gas portfolios, and we have provided details for those portfolios on Slide 15 and 16 in the appendix of the slide deck.

As you can see on Slide 4, reported net interest margin increased 3 basis points in the first quarter to 6.88%, as higher rates and mixed benefits more than offset day count in both linked quarter and year-over-year comparisons.

Turning to Slide 5. As of the end of the first quarter, our common equity Tier 1 capital ratio on a Basel III standardized basis was 10.4%, which reflects current phase-ins. On a standardized fully phased-in basis, it was 10.3%. We believe that we are now at the destination capital ratios appropriate for our current balance sheet mix.

And with that, let me turn the call back over to Rich. Rich?

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Richard D. Fairbank, Capital One Financial Corporation - Founder, Executive Chairman, CEO and President [5]

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Thanks, Scott. I'll begin on Slide 9 with first quarter results for our Domestic Card business. As I discussed earlier, loan growth and purchase volume growth decelerated in the quarter but remained strong. Compared to the first quarter of last year, our ending loans grew $6.5 billion or about 8%. Average loans were up $7.9 billion or about 9%. First quarter purchase volume increased about 7% from the prior year.

Revenue for the quarter increased 7% from the prior year. Higher revenue from loan growth was partially offset by revenue suppression associated with higher delinquencies and charge-offs. Revenue margin for the quarter was 16.3%.

Non-interest expense increased just under 3% compared to the prior year quarter. Our Domestic Card business continues to gain scale and improve efficiency. Charge-off rate for the quarter was 5.14%, up 48 basis points from the sequential quarter.

The 30-plus delinquency rate at quarter-end was 3.71%, down 24 basis points from the fourth quarter of 2016. In the first quarter, delinquencies began to turn down on a seasonal basis.

Pulling up, we continue to be concerned about the supply of credit in the marketplace. Revolving credit grew at about 6.5% year-over-year, the seventh consecutive quarter it has grown much faster than household income. Against this backdrop, we have been tightening our underwriting. We still see growth opportunities in our Domestic Card business, but our growth window is gradually getting smaller.

Slide 10 summarizes first quarter results for our Consumer Banking business.

Ending loans grew about 5% compared to the prior year. Growth in auto loans was partially offset by planned mortgage runoff. Ending deposits were up about 6% versus the prior year. First quarter auto originations were $7 billion, with strong growth in prime, near prime and subprime.

Competitive intensity in the auto finance marketplace softened a bit, which contributed to our growth. While we still see attractive opportunities for future growth, there are also reasons for caution in the auto industry, including declining auction prices and an increasingly indebted consumer.

Based on the competitive environment we see today, we expect to increasingly emphasize price and margin over volumes in our origination strategies. Our underwriting assumes a decline in used car prices. And we dialed back on some less resilient programs even as overall originations have grown.

As the cycle plays out, we expect the charge-off rate will gradually increase and the growth will moderate.

Consumer Banking revenue for the quarter increased about 6% from the first year -- the first quarter of last year. Higher revenue from growth in auto loans and higher deposit volumes was partially offset by margin compression in auto.

Non-interest expense for the quarter increased 5% compared to the prior year quarter, driven by growth in auto loans and an increase in retail deposit marketing.

First quarter provision for credit losses was up from the prior year, primarily as the result of charge-offs and additions to the allowance for loan losses for the auto portfolio.

Moving to Slide 11, I'll discuss our Commercial Banking business. First quarter ending loan balances increased 5% year-over-year as we continued to grow in selected industry specialties. Average loans increased 6% year-over-year.

Higher average loans as well as higher non-interest income in our capital markets and agency businesses drove revenue growth of 11% compared to the first quarter of 2016.

Non-interest expense was up 21%, driven by growth, technology investments and other business initiatives.

Provision for credit losses declined $230 million from the first quarter of last year, primarily as the result of the change in allowance as well as modestly lower charge-offs. The charge-off rate for the quarter was 14 basis points. Criticized and nonperforming loan rates were relatively stable in the quarter. The Commercial Bank criticized performing loan rate for the quarter was 3.7% and the criticized nonperforming loan rate was 1.2%.

Credit pressures continued to be focused in the oilfield services and Taxi Medallion portfolios. We've provided summaries of loans, exposures, reserves and other metrics for these portfolios on Slide 15 and 16.

I'll close tonight by recapping the key themes driving our outlook for 2017. We expect the full year Domestic Card charge-off rate for 2017 to be in the high 4s to around 5% with quarterly variability. We expect total company efficiency ratio, net of adjusting items, to be in the 51s, plus or minus a reasonable margin volatility. And we expect the improved efficiency outlook will partially offset the earnings impact from our revised credit outlook. While there is a lower margin for error and based on what we see today, we should be in a position to deliver 7% to 11% adjusted EPS growth in 2017.

Pulling up, we are struck by the amount of change that is coming in the marketplace and the opportunity to capitalize on that. We have invested heavily in transforming our company and driving growth opportunities. We are well on our way to rebuilding our infrastructure with a modern technology architecture. And along the way, we are redesigning how we work. We are delivering resilient growth across our businesses. We are driving improving efficiency, and we're building an enduring customer franchise and our momentum is growing. We continue to be in a strong position to deliver attractive growth and returns as well as significant capital distribution subject to regulatory approval. And now Scott, Steve and I would be happy to answer your questions.

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Questions and Answers

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Operator [1]

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(Operator Instructions) We'll take our first question from Eric Wasserstrom with Guggenheim Securities.

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Eric Edmund Wasserstrom, Guggenheim Securities, LLC, Research Division - MD and Senior Equity Analyst [2]

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Just in terms of the card growth outlook, what is the implication of that for rewards and marketing expense, Rich? Is there some possibility that perhaps that starts to plateau or even decline?

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Richard D. Fairbank, Capital One Financial Corporation - Founder, Executive Chairman, CEO and President [3]

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So Eric, we continue to be very positive about the success of our marketing and, frankly, the growth of our spender business -- frankly, the growth of all of our business. But my comments about gradually dialing back around the edges from an underwriting point of view is entirely related to the competitive environment and its impact with respect to credit and revolving credit and the choices that we make there. The rewards business is -- the top of the market spender business is a very competitive business, but we continue to be successful. Our actual growth rate in spenders and heavy spenders continues to be a very good number there. And so we will continue pretty much the way we are going with respect to our marketing and growth plans. My only point, and I don't want to overdose on this point, because in many ways, it's a gradual continuation of something that we've been doing probably since the beginning of 2016, and that is just dialing a little bit around the edges of our programs in response to what we see as an increasing amount of supply out there, an increasing amount of indebtedness. So we're still going hard for growth. Even frankly on the revolver side of the business, we think there are good growth opportunities. Our point is just that this is a continuation of a trend that's now, frankly, 5 quarters along.

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Eric Edmund Wasserstrom, Guggenheim Securities, LLC, Research Division - MD and Senior Equity Analyst [4]

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And just one follow-up, please, in Auto. The issue of residual value is one that's been talked about quite a bit. And one of the theories postulated in this quarter was that the delayed tax refunds were causing there to be incremental pressure on used cars value in the period. Any legitimacy to that in your view?

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Richard D. Fairbank, Capital One Financial Corporation - Founder, Executive Chairman, CEO and President [5]

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Well, we have ourselves speculated about that. I don't think we have a good way to know that. We -- our own observation has been just kind of pulling up on the used car values, Eric. While Manheim -- the Manheim Index has stayed pretty high, it's starting to fall now. We have always created our own index based on the cars that we deal in. And that metric was moving down earlier and farther than some of the metrics that people were looking at overall in the industry. With respect to therefore, shall we say, the Capital One index of used car prices, we have been expecting that to go down. We underwrite assuming it will go down actually quite a bit and stay down. That's an underwriting assumption. But even in terms of our own forecasting, it dropped below our forecast decline rate in the first quarter. So that certainly got our attention. Eric, well -- it's too early to know whether that might have been related to the tax thing, but we will see. But it certainly underscores a very important thing to monitor in the auto business. And really at the top of our list frankly in the auto business is used car values. And the fact that for so many years, they've been so high, in some ways, they only had one way to go from here.

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Operator [6]

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Our next question comes from Ryan Nash with Goldman Sachs.

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Ryan Matthew Nash, Goldman Sachs Group Inc., Research Division - MD [7]

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Maybe I could start off with credit. First, Rich, just what drove the net charge-off guidance change? Secondly, should we be using the $7.21 adjusted EPS from 2016 as the base for 7% to 11%? And then, look, I know it's very preliminary but just given that a lot of the growth from '14 and '15 are likely starting to peek out in terms of losses. '16, obviously, will get through a decent bulk over the next couple of quarters. Just wondering if you could give us any sense for where you would expect charge-offs to go from here given the fact that we have undergone Growth Math now for the better part of 2-plus years?

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Richard D. Fairbank, Capital One Financial Corporation - Founder, Executive Chairman, CEO and President [8]

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Right. So Ryan, a bunch of questions there. First of all, with respect to the base upon which you calculate the EPS growth.

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Richard Scott Blackley, Capital One Financial Corporation - CFO, Principal Accounting Officer, SVP and Controller [9]

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Yes. Eric, it's Scott. The table 15 of the earnings supplement has a schedule that shows the adjusted EPS. And you'll see the full year '16 and it is $7.21, so you're correct in that.

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Richard D. Fairbank, Capital One Financial Corporation - Founder, Executive Chairman, CEO and President [10]

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And Ryan, relative to Growth Math, yes, let me just talk about Growth Math and how that relates to the revision in the outlook that we have talked about tonight. So this revision is entirely related to the front book of Capital One, the growth book that is from 2014, '15 and '16. And so think of it this way basically. This is playing out from a slightly higher base than we had earlier expected, but the underlying dynamic is exactly the same. So right now, we're near the peak of the Growth Math effect in terms of the year-over-year impact on the loss rate of our Card business. That impact moderates over the rest of 2017, with only a small tail in 2018.

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Operator [11]

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That will be from Moshe Orenbuch with Crédit Suisse.

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Moshe Ari Orenbuch, Crédit Suisse AG, Research Division - MD and Equity Research Analyst [12]

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Along with the guidance on charge-offs, Rich, could you talk a little bit about how you see the reserve? Because there seemed to be a little bit of a disconnect this quarter compared to previous ones, given that you had both a slowdown in the dollars of loan growth and a slowdown of the dollars of delinquency growth and yet the provisions -- the reserve was built. What's the outlook for that? How long would you need to maintain that extra reserve given the comments you just made about the tail of charge-offs?

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Richard Scott Blackley, Capital One Financial Corporation - CFO, Principal Accounting Officer, SVP and Controller [13]

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Yes, Moshe, it's Scott. Going to the reserve, as you -- I've said a couple of times, there's really 3 components of the reserve loan balances that are as of the end of the period our loss expectations for the next 12 months and then qualitative factors, risks and uncertainties. The biggest driver in the -- what drove the Domestic Card allowance build in the quarter was the updated credit outlook that Rich discussed. So that was the primary driver. And then there's also growth in the quarter after you kind of back out the expected seasonal paydowns. And on top of that, as always, we have qualitative factors. So it's really being driven by the credit outlook but also by those other factors.

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Moshe Ari Orenbuch, Crédit Suisse AG, Research Division - MD and Equity Research Analyst [14]

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Right. But just to kind of follow up on that. The growth ex the seasonal factors would likely have been smaller than in prior periods, right? And so -- and maybe you could just also kind of -- Rich had talked about the tail of that credit really dissipating kind of as you get towards the end of this year and to next year. How long would it be that you would need to maintain the reserve kind of at that level? And at what point could it be kind of used to essentially kind of offset some of those charge-offs?

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Richard Scott Blackley, Capital One Financial Corporation - CFO, Principal Accounting Officer, SVP and Controller [15]

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Yes. So one, the allowance is definitely covering the losses that we anticipate for the next 12 months. So that's kind of the starting point of that. I think about where the allowance is going from here is a lot of, as Rich talked about, Growth Math. What you should anticipate with the allowance is that as the upward impact of -- on charge-off rates from Growth Math starts to moderate, I would expect that the allowance builds are going to start to be driven really by credit, our outlook on credit on the economy and growth. And so you'll start to see them moving a little bit more just in terms of those drivers as opposed to the Growth Math drivers. But Moshe, beyond those kinds of things, I don't think I'm going to get ahead to say that there's any part of the allowance that we're saving for later in the year or anything like that. It's all based on our outlook for the next 12 months.

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Operator [16]

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Our next question comes from Don Fandetti with Citi.

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Donald Fandetti, Citigroup Inc, Research Division - Director and Consumer and Specialty Finance Analyst [17]

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So Rich, in terms of the subprime card outlook in terms of moderating the growth, I guess, can you talk a little bit, is that being driven by more competition from other banks? Or are you just kind of -- you're a little more concerned around where your credits trended versus your models? Can you elaborate a bit more on the subprime side of cards?

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Richard Scott Blackley, Capital One Financial Corporation - CFO, Principal Accounting Officer, SVP and Controller [18]

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Yes, Don. So our -- we've been -- you've probably heard this for -- I would guess for -- this is like the fifth quarter now that we have been talking pretty vocally about supply out there in the marketplace. In the last few quarters, we have pointed out the pretty striking growth rate of subprime itself. I don't have the number right in front of me, but I believe it's 14% year-over-year subprime growth for an industry that's growing at kind of half that overall. Now again, Don, that's off of -- and I really want to stress this. It's off of a much lower base that retracted significantly after the Great Recession. But still, that certainly has our attention, that subprime growth. And so that -- the primary thing about the competition is not so much that it slows our growth down because fewer people respond, although I think there is that effect. Much more our focus on the competitive aspects in these lending marketplaces is what it does to selection, quality and what it does ultimately to the nature of credit. And so the gradual decline in our growth rate, this is really now speaking of the whole card business. And I think as you can also see with our subprime percentage, that is generally -- it has stayed flat or slightly actually grown over this period of time. But my point is a more universal point beyond subprime. The slowing of growth of Capital One has been probably minority parts affected by competition directly and majority parts just our own dialing back around the edges of our underwriting. And when I use this term dial around the edges, what I really mean by that, we have hundreds of programs that we launch every year. And as we watch these effects in the marketplace and study all of our little test cells and everything else, we don't so much go in and out of the programs and just stop doing things. What we do is we just tighten up a little bit and we take the marginal cuts around the edges and we just dial it back a little bit. And so pretty much, if you go back to the peak growth of Capital One on the outstanding side, it was probably what we announced about 1 year ago. And from that point, which was really way of the kind of the industry-leading growth, we have just gradually dialed back a little bit off of that thing, plus a little bit more competition leading us to where we are. The other thing I want to say is there's no dramatic kind of thing right now that there's a change in the shape -- slope of our trajectory with respect to this. This is more of a continuation of the same thing that we've been doing for an extended period of time. And the reason I made my comments about growth is I put together accelerating industry growth and sort of continuation for us dialing around the edges, still in the context of aggressive marketing, especially at the top of the marketplace. All that, I think, adds up to a -- some moderation of growth, but that's more of a continuation of the trends that we've seen as opposed to any new point that I'm making today.

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Operator [19]

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And that will be from David Ho with Deutsche Bank.

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Shih-Wei Ho, Deutsche Bank AG, Research Division - Senior Research Analyst [20]

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I just had a question around the vintage performance for the Domestic Card book. I know you had called out before that the 2016 vintages had been performing slightly better than 2015. In terms of the seasoning, is that still the case? And when -- and how large is the magnitude of the drop-off from some of the vintages that are kind of moving past peak? Is it towards -- does it tend to be flatter or more steep for subprime?

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Richard Scott Blackley, Capital One Financial Corporation - CFO, Principal Accounting Officer, SVP and Controller [21]

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Okay. So first of all, let me talk about 2016 and relative to '15. So as we just talked about over the last 1.5 years, we have been really starting kind of at the beginning of 2016, and increasing as we move through 2016, we were tightening our underwriting around the edges. As a result of these actions, we expected that credit losses on the 2016 vintage would come in lower than losses on the 2015 vintage. And the first indications were consistent with that. Given some of the trends in the industry and our latest data points in performance, we now believe that 2016 originations will come in on par with 2015 vintage losses. And I think there's an interesting thing I want to pull back on, a phenomenon I've seen a lot over the years, which is as you move into the parts of the cycle where growth is accelerating, you see effects that aren't exactly the same as you see in the rearview mirror. Now we try to anticipate that and get in front of that. And as you can see ironically, our -- and it's not ironic, I mean, it's a fine outcome, but our -- what we thought was getting around it to such an extent '16 was going to be lower than '15. And in fact, the early -- the very, very early reads on the vintages would be consistent with that. It turns out that the sort of offsetting effects ended up that we're on par between the 2. But that's just to us so typical of how markets work. And our dialogue with you over time is trying to continually give you our view of the marketplace in which we operate. We then make our choices in anticipation of that and then calibrate as the results come in. So we feel great about all of our growth programs, 2014, '15 and '16. And even on this day when we're actually doing an upward recalibration of the loss guidance, I again want to say these are -- these 3 years of outsized growth are going to really pay handsomely in terms of the earnings power of the company over time. There was a -- you asked and I realized there was an earlier question I didn't answer on, how are the vintages from the beginning of this growth spurt doing? So let me just talk a little bit about our 2014 vintage because those are the first originations in our accelerated growth period. And we can already see evidence of delinquencies and losses peaking and starting to moderate. So that's -- again, this is the dynamic we've seen over and over for 20 years. What this call is about is calibrating when you have -- in this case, 3 years of growth vintages piled on top of each other, to see how the actual timing and shape of the curves plays out for hundreds of programs. There are recalibrations along the way, and this is one of those recalibration and it's a recalibration upward. But it takes nothing away from the dynamic of how well these growth programs work, the incredible earnings power that they carry. And I think also we're going to look back and be really, really appreciative that we -- and this was a conscious choice, of course, but really accelerated our growth in the period when the industry was not growing. And in fact, it's an interesting thing that we're a little bit decelerating into the industry's acceleration at this point. And the performance of the 2014 vintage is typical of the way these vintages will turn and really be the basis for the earnings power in the future.

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Operator [22]

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We'll move to Bill Carcache with Nomura-Instinet.

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Bill Carcache, Nomura Securities Co. Ltd., Research Division - VP [23]

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I appreciate you taking my question. If I'm understanding your guidance correctly, the charge-off rate and the allowance as a percentage of loans that we now see are both at about 5.1%, and Domestic Card should not keep rising and basically can hold at or below these levels? Is that a correct interpretation? And then separately, is it reasonable to assume that both of those metrics, the charge-off rate and the reserve rate, can both remain at or below these levels that we saw this quarter, if labor markets remain healthy as we look out at the rest of this year and into next?

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Richard D. Fairbank, Capital One Financial Corporation - Founder, Executive Chairman, CEO and President [24]

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Well, Scott, do you want to answer that? You go ahead and start and then I'll add.

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Richard Scott Blackley, Capital One Financial Corporation - CFO, Principal Accounting Officer, SVP and Controller [25]

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Yes, let me talk a little bit about the allowance and then, Rich, you can kind of talk about kind of where rates are going. So in terms of the allowance, remember that the allowance is always based on our ending outstandings and balances that exist as of the end of the quarter. So some of the charge-off guidance that we've given also incorporates -- the guidance, by definition, incorporates the charge-offs that we may incur on growth throughout the year. So there's a little bit of that that's baked into there. But pulling up on the allowance, just to reiterate a few things. So one, implicit in our EPS guidance is our view that the Q1 allowance build is going to be the peak quarterly build for 2017. I mentioned that for Domestic Card, as we've talked about the upward pressure from Growth Math is starting to moderate as we work through 2017. And so with that type of pressure gone, we should see the allowance then starting to just being moved by more macro types of things as well as growth. So changes in those factors, all of them can certainly cause things to move around. But at this point, we're -- based on the guidance, what we see today, we think that, that was the peak for allowance build in 2017.

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Richard D. Fairbank, Capital One Financial Corporation - Founder, Executive Chairman, CEO and President [26]

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And Bill, just to comment about your question about where losses go from here. We have -- we've been very focused on trying to share with investors the impact of growth on credit metrics. There's always the economy and other things that can affect things, and we don't really -- we're not really trying to be in that prediction business. But we're in -- in the Growth Math story, we're actually at an important moment here because this is the peak of the Growth Math effects. Now that's not the same thing to say, this is the peak of losses in a sense that, I mean, we've got seasonality and a lot of things going on that help here, too. But growth Math is, by definition, the upward pressure on losses that come from an outsized burst of growth. So we're talking about upward pressure, but here's the key thing. This is the peak of those Growth Math effects. As I saw in one of the analyst articles speaking nerdily, if you talk about second derivative, we are now the rate -- the rate of growth is going down from here. And in fact, the Growth Math effect will moderate over the course of this year and just has a small tail in 2018. And what you're left with, of course, is with respect to credit is just all of the other factors that drive credit, the industry factors, the economy factors and everything else. But the Growth Math story from this big burst of growth will have mostly played out over the course of this year.

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Bill Carcache, Nomura Securities Co. Ltd., Research Division - VP [27]

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That's extremely helpful, Rich. If my squeeze in my follow-up. I wanted, Rich, to follow up around your earlier comments around lower recovery rates impacting severity and subprime auto. But I was hoping to kind of ask you if you could please focus your thoughts a little bit more on the frequency side. There has been obviously a lot of concern in subprime auto in recent months that's trickled into subprime card. And I was just hoping that you could discuss whether in your view, delinquency rates in subprime auto and subprime card are highly correlated in this market? Or are there differences between subprime delinquency trends in card versus auto? I would love to hear your thoughts on that.

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Richard Scott Blackley, Capital One Financial Corporation - CFO, Principal Accounting Officer, SVP and Controller [28]

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Yes. Well, the first thing I want to say is that card delinquencies are a lot more telling than auto delinquencies. And so that's kind of point number one. So whenever you -- I always just take as one part of a lot of pieces of information when you're looking at auto what's happening to delinquencies. Because the way that people pay -- and frankly, really, what happens is they wait -- a lot of people wait until the moment before a car would be repossessed. And then the key thing is the payment rate at that point, and that's a lot more telling than what -- than sort of the delinquency patterns that precede that. So that's just more of a general observations. Whereas in the card business, delinquencies tend to just march on their way to charge-offs in fairly predictable ways. There has been a lot written about and talked about the auto business. And we have been one of the vocal commentators about the auto business for a long period of time. And I want to say, you may notice, Bill, that we actually grew. We grew in our originations in the quarter. This was a pretty solid year of growth for Capital One. And so how -- our actions in each of these businesses, I think, are reflective of our view of these. We've looked with some quite a bit of concern on the card side about the growth of supply, and that's been a key driver for us to kind of dial back there. In the Auto business, the underlying consumer is the same, the economy, FX and various things are the same. There's one anomalous difference that's going in the opposite direction of the card business, and it is the thing that has led us to be growing despite being so vocal about concerns about this marketplace. And that is what's happening on the supply side. There are at least a couple of big players in the marketplace that are pretty significantly dialing back and have done so gradually over the course of the last year. And as I've always said, for however important you think supply matters on the card side, it matters even more on the auto side because there's an auction marketplace there and the supply and the pricing, when you have auctions going on one dealer at a time, really pressures the performance of growth and ultimately can have ripple effects on credit. So here we are with all our concern about used car prices, our concern about consumer indebtedness that is growing, and we're trying to also incorporate the supply side that is moving in the opposite direction. That's led us to have a surge of growth here. We're actually now stepping in more to probably take that in terms of price and margin, less so in volumes just because we continue to share the macro concerns about progressively moving along in the cycle relative to consumer indebtedness.

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Operator [29]

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We'll move to Sanjay Sakhrani with KBW.

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Sanjay Harkishin Sakhrani, Keefe, Bruyette, & Woods, Inc., Research Division - MD [30]

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Sorry to keep asking this question. But just on the charge-off rate as we look out to the next year. Rich, taking all your comments together, as we look out to next year into the first quarter, in the absence of some kind of macro weakness or macro impact, it would appear, given that you have a small tail related to Growth Math, that you wouldn't see significant pressure year-over-year in the charge-off rate. Obviously, there's seasonality through the year this year. But as we look out to next year, it would seem like there shouldn't be much of a upward bias to the rate. Is that correct?

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Richard D. Fairbank, Capital One Financial Corporation - Founder, Executive Chairman, CEO and President [31]

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Well, Sanjay, I'm going to stick with the comments that we have made on that topic. But with respect to Growth Math, the story is, really, it just has a small tail next year. And it's really mostly going to be a story about where the industry -- the card industry is and the economy are at that time. And we won't probably be talking that much about Growth Math anymore.

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Sanjay Harkishin Sakhrani, Keefe, Bruyette, & Woods, Inc., Research Division - MD [32]

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Yes, fair enough. And then I guess, when we look at this range of EPS growth that you guys have called out for this year, is the delta just what the provision might be? Or are there other factors that we should consider?

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Richard D. Fairbank, Capital One Financial Corporation - Founder, Executive Chairman, CEO and President [33]

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Look, I think that the range represents -- I mean, this is not like a massively scientific exercise. Obviously, there are judgment calls. This represents the range that we believe that we can do, even despite the credit pressures on earnings this year. And I think it's a reflection of the underlying earnings power of the business, the continuing momentum of efficiency, but that's the range that we chose there. It's not massively scientific.

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Richard Scott Blackley, Capital One Financial Corporation - CFO, Principal Accounting Officer, SVP and Controller [34]

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I'd just add in. I think that the range certainly takes into account the charge-off guidance range that we gave you, but also the fact that other parts of the income statement can move up and down and that we're not expecting to -- as long as we're inside that charge-off range that, that's a direct path through either way, and that there's going to be puts or takes to kind of land inside that EPS range.

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Richard D. Fairbank, Capital One Financial Corporation - Founder, Executive Chairman, CEO and President [35]

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Probably, I just want to say one other thing about that one. We don't usually -- I mean, usually, but we rarely. I have to think back when's the last time we gave EPS growth or EPS guidance at Capital One? It was a long time ago, so a little bit, probably all of you should be wondering what on Earth are we doing stepping out and doing something like this. But the reason for doing it is that we really did want to show the underlying earnings power of the business, the momentum we have on the efficiency side and in the sense, demonstrate that even with the kind of pressure in -- the front-loaded pressure that happens whenever you have a credit event because then you bring all the allowance effects for it and it gets to be pretty intense, that there is still earnings power at a time like this that the business can generate. And I think that we -- that's really the point that we're making here. We're also making the point that this doesn't have, like, an infinite capacity to absorb surprises from here, and we want to be clear about that but we're certainly all-in driving to generate that EPS growth.

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Operator [36]

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We'll take that from Bob Napoli with William Blair.

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Robert Paul Napoli, William Blair & Company L.L.C., Research Division - Partner and Co-Group Head of Financial Services and Technology [37]

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Rich, what is -- the ROE has come down over the last couple of years and I guess, driven in part by the Growth Math. But your capital ratios have come down to where you've targeted. So we shouldn't see returning of capital beyond earnings. What is the right ROE for Capital One, the return on tangible equity? Where would you like it to be? What kind of a range is proper as the business mix has shifted?

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Richard D. Fairbank, Capital One Financial Corporation - Founder, Executive Chairman, CEO and President [38]

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Well, Bob, one thing that's very clear right now, there are a couple of things that are pressuring ROE. At the top of the list is growth. And with growth comes a double whammy on the credit side. One, because of originations have front-loaded loss curves, so you have that effect. And then of course, on the allowance side, you're bringing forward everything even more so. And the other thing is the significant investment that Capital One has been doing on the -- in transforming our company in response to the biggest revolution in the history of mankind and something that's going to absolutely transform banking and is only in the very early stages of doing that. So those 2 effects collectively have pulled down the earnings power from Capital -- of Capital One relative to what you might more say is the more inherent earnings power. So where do we go from here? I'm not going to give a specific guidance on that number, but both of these things we're investing in are going to be good guys in terms of the returns of the company. The tremendous growth over the last few years in the card business as we pass through the seasoning of the vintages turns into a significant good guy on the earnings side, and that's a pretty sustainable kind of earnings stream there. And there's a striking thing that's been happening on the tech side, and that is that while we continue to invest heavily in technology, and we will continue to do so, the -- we also keep a meter of what are the savings that are directly attributable to this. And this meter is growing, and it's growing pretty darn significantly. So it's very clear where that's headed over time, and that's going to become a more of a good guy over time. So the very thing that's holding down earnings in the recent time period and sort of like now is the very thing that over time is going to be the things that I think will propel both the returns to be higher and frankly, put Capital One in a position to be at the higher end of the league tables in terms of growth.

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Robert Paul Napoli, William Blair & Company L.L.C., Research Division - Partner and Co-Group Head of Financial Services and Technology [39]

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And my follow-up question is just on rewards. And are you seeing any signs? Do you think rewards competition has peaked as credit losses start to move up a little bit? Does that put some pressure on the ability to offer rewards for the industry? So do you expect to see -- have you seen competition stabilize? And do you expect it to pull back at all on the rewards side?

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Richard D. Fairbank, Capital One Financial Corporation - Founder, Executive Chairman, CEO and President [40]

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I wouldn't -- I would not invest on any thesis that reward competition is going to get to be less. I'm going to predict it will increase. Now the rate of increase may lessen. There have been some -- there has been a lot of competition in the last year, but I don't see any evidence that rewards competition is declining. I think what you might see is maybe it's going to settle out more. I think that's the optimistic case that it settles out. I think a lot of -- frankly, I really think if you go back and talk about how do you win? I want to give you my own view. How do we win in the heavy spender marketplace? So much of the conversation and what's on TV and everything is about product, and product, of course, is very -- it's an important thing and it's a thing that there's a lot of sort of arms race going on about. But winning is about product, it's about marketing, it's about customer experience, it's about brand. And it's hard to snap your fingers and sort of get a lot in a great place with respect to those. But a comment about each, I think maybe over time, the product competition might settle out a little bit because that's where it has been most intense. Marketing, we spent 2 decades -- more than 2 decades building this company around, in a sense, the science of marketing, as well as the art of marketing. But what you see in terms of TV marketing and so on, the behind the scenes, the even, in many ways, more important thing is the whole world of digital marketing, the power of information-based strategies to do that, that's a very important part of this. The customer experience, that's classically thought of in terms of things like the call center servicing experience, and companies like Capital One have invested heavily in that and have really, really I think now high performance with respect to that. But there's a whole new world coming on the customer experience side, and that's, of course, the digital customer experience where we're going all-in on that, and that's going to be a real competitive battleground of differentiation. And finally in the end, the hardest one to buy, but maybe the most important one is brand itself. And I think the companies that have really gone all-in on quality and sustain their investment in this part of the market for a long time are going to be rewarded by that. That's certainly what we're doing. So If I pull way up on that, certainly, we're all watching the competition around product. I think this will be a competitive marketplace. In the end, I think competitors are going to fully internalize to win. You've got to win across all those dimensions, and the best ones will.

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Operator [41]

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We'll take Matt Burnell with Wells Fargo Securities.

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Matthew Hart Burnell, Wells Fargo Securities, LLC, Research Division - Senior Financial Services Equity Analyst [42]

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Rich, you've mentioned several times tonight your focus on efficiency and improving the efficiency down to 51% this year, around that area, from 52% previously. Can you give us a little more color as to what initiatives or what areas would be most likely to benefit from that focus relative to where you might have been 3 to 6 months ago?

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Richard D. Fairbank, Capital One Financial Corporation - Founder, Executive Chairman, CEO and President [43]

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Yes, Matt, let me -- well, yes, Matt, first of all, I want to clarify, the guidance is in the 51s, the prior guidance was in the 52s. So I just want to be clear about that. So first of all, what has been -- we've been very, very focused on this. And it is clear to us, in many ways, back to the earlier question that was asked about the return profile of the business, it's very, very clear that a central way that our investors will get paid is through operating efficiency. And so we have been very, very focused on that. Where have we been generating that? First of all, just plain old-fashioned operating leverage. If you look at the card -- the numbers in the card business, you can see that on the technology side, the relentless pursuit of efficiency, even though I've said many, many times, the technology investments are not motivated first and foremost in order to save money, frankly, it's for a lot of the other benefits that of a great customer experience, the ability to transform how the business works and so on. But along the way, the cost side is going to be an important beneficiary as we drive out analog cost and bring down the cost of our technology infrastructure and things like computing, storage, software development. Also benefiting the efficiency side, I think, has been opportunities we've seen on the -- frankly, on the, old-fashioned again, on the pricing and margin side. We've had some opportunities across our business on that side as well. All of these things have been moving in the same direction and with a lot of driving from us. But all of it is manifesting itself in the ability to lower by a whole notch the efficiency ratio for the very year that we are now entering.

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Matthew Hart Burnell, Wells Fargo Securities, LLC, Research Division - Senior Financial Services Equity Analyst [44]

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That's helpful. And Rich -- or actually, maybe Scott, let me go on that idea of the pricing and margin side. You actually grew average interest-bearing deposits this quarter by about $6.5 billion, didn't see much of an increase in the cost of those deposits. Can you give us a sense as to sort of how you're thinking about deposit beta going forward? And if there's anything unusual in that growth in the interest-bearing deposit base?

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Stephen S. Crawford, Capital One Financial Corporation - Head of Finance and Corporate Development [45]

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Yes, Matt, it's Steve Crawford. There's nothing unusual. The growth, there was a little bit of mix difference in the growth which drove the increase in deposit cost in the quarter, but really, kind of performance as expected.

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Operator [46]

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We'll go to Chris Donat with Sandler O'Neill.

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Christopher Roy Donat, Sandler O'Neill + Partners, L.P., Research Division - MD of Equity Research [47]

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Just wanted to go back over one other issue related to operating expenses and debt on the marketing side. As, Rich, you've talked about the window kind of getting smaller here. Does that mean you're likely to have to spend more on marketing to get the customers you like? Or because the window is going to be tougher, you might just give up on some of the opportunities? I'm just trying to think if we should think about marketing maybe having some upward pressure on it or not in coming quarters.

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Richard D. Fairbank, Capital One Financial Corporation - Founder, Executive Chairman, CEO and President [48]

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Yes. Well, so the first thing -- I'm glad you asked the question. The first thing that I have found over time and I think we're seeing it now, as the competitive cycle moves along and we start trimming around the edges as we've been doing for a while, that thing doesn't directly translate into marketing because we still are doing the same programs and we still want our customers to sign up for those and we still very much want to make sure we get positive selection relative to that. And so what tends to happen as you move through the more competitive part of the cycle is that marketing, you just get a little bit less for a similar investment in a lot of ways. So that's kind of point one. But that's a very important distinction. It's not like we're not getting good return on it. We are very, very pleased with the return and we measure that -- we have metrics all over the place about the different denominators, the return on this marketing. And I think we feel very, very good about and is very comfortably above kind of a threshold. The second point I want to make is a bunch of the marketing costs is for going right at the top of the marketplace. That's the rewards part of the business. That is a business that it's competitive in the classic business sense of competitive, but it's not -- it doesn't have that second overlay of the credit impacts of so much supply. So there, we just -- we continue to actually see a lot of success in what we would call the spender and heavy spender part of the marketplace. We're happy with our investment and our returns there, and we're continuing to market there. So the only thing that's really getting trimmed around the edges is the underwriting cuts for our various credit programs that's going to lead to a continuation of -- the slight deceleration you've seen over the last 4 quarters doesn't really have a lot of impact on marketing. But I would also say that we're not looking at this and saying, "Oh my gosh, we've got to now massively ramp-up the marketing to try to stay competitive."

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Operator [49]

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We'll take John Pancari with Evercore ISI.

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John G. Pancari, Evercore ISI, Research Division - Senior MD, Senior Equity Research Analyst and Fundamental Research Analyst [50]

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Richard, I heard you restate about a 2016 vintages being on par with 2015, but a couple of your peer card players have actually indicated that '16 is actually heading above '15 levels. And I just want to get your thoughts on that. Is there a risk that 2016 could actually be higher than '15?

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Richard D. Fairbank, Capital One Financial Corporation - Founder, Executive Chairman, CEO and President [51]

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Well, first thing I want to say is whenever we are -- on any statement that I would make about our portfolio, the more recent stuff is always more subject to uncertainty and therefore, to change than things that are older, obviously, because the more -- the older it is, the more established the vintage curves are and it's really not going anywhere in that sense, right? Even this revision that we've been talking about here, in some ways, '16 had the most revision on a percentage, on a proportional basis probably than '15, a lot less so '14 and so on. It's just that same principle. The closer you are to having just been originated, the more information is still coming in that makes it subject to revision. Now the -- I think the right way to look at 2016 vintages and their performance is what our competitors are saying. Because not only have competitors said that, we have looked at credit bureau data. And if you construct vintage curves out of credit bureau data, you can find that exact effect that in 2016, the vintage curves, in many ways, starting kind of around the second quarter, started -- industry-wide, started gapping out relative to earlier ones, okay? Now to us, this shows up in a different way, which is the thing I said that where we were headed to be have '16 better than '15 because we had made anticipatory cuts with a tighter credit box, the -- that effect that you're referring to, Jonathan (sic) [ John ], actually led to an offset of these 2 effects. So it's kind of a wash and we -- our '16 is -- appears to be on par with '15.

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John G. Pancari, Evercore ISI, Research Division - Senior MD, Senior Equity Research Analyst and Fundamental Research Analyst [52]

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Okay. And then separately, just in terms of the Growth Math impact. I mean, I guess, that's implying you still expect a degree of earnings leverage as this plays out. I mean, how -- what type of magnitude of leverage do you expect? Is this something you'd still call a coiled spring? And then now, do you think that, that could materialize?

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Richard D. Fairbank, Capital One Financial Corporation - Founder, Executive Chairman, CEO and President [53]

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We've used the term coiled spring to describe the creation of earnings power from our card growth. And as the -- and it will. Basically, as we're growing rapidly, the near-term returns, of course, are pressured by these high upfront costs. And with vintage curves with higher upfront losses and allowance build, that brings it all forward, and then you -- then you put several years of growth and succession and that further amplifies and extends this effect. So that's basically what we call the coiled spring and it remains in a very coiled position. The precise timing of uncoiling depends, in many ways, on the actual shape and timing of the vintage curve from hundreds of programs, but the key thing that -- that the first thing to look for is, as we now take one metaphor of coiled spring and turn to another term called Growth Math, the thing to look for is when the rate of increase in charge-offs starts to decline, and that is happening basically as we speak. So what happens as this -- as the Growth Math effect plays out over the course of this year, and there's a small tale of that in next year, that puts us in a position to enjoy more of the benefits of the spring uncoiling. But to be fair, the uncoiling is not a moment in time. This is a phenomenon that happens as the vintage curves from a bunch of programs gradually settle out, gradually -- the loss curves gradually decline, and there's just a sort of continual uncoiling that goes on as that happens.

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Operator [54]

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We'll take Betsy Graseck with Morgan Stanley.

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Manan Gosalia, Morgan Stanley, Research Division - Equity Analyst [55]

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This is Manan Gosalia on for Betsy Graseck. A quick question. Can you speak to what impact the Cabela's portfolio would have on your NCO outlook?

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Richard Scott Blackley, Capital One Financial Corporation - CFO, Principal Accounting Officer, SVP and Controller [56]

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Could you repeat the question? Sorry, I couldn't hear the last part there.

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Manan Gosalia, Morgan Stanley, Research Division - Equity Analyst [57]

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Could you speak to what impact the Cabela's portfolio acquisition would have on your NCO outlook?

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Richard Scott Blackley, Capital One Financial Corporation - CFO, Principal Accounting Officer, SVP and Controller [58]

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Sure. Well, one -- let's just go through a few things. One, remember that our -- all of our guidance excludes Cabela's. And so until we actually are able to have a really firm data to when that thing is going to close, we're excluding it from our guidance. So just a reminder on Cabela's, there are -- that deal still requires regulatory approval, and just not for us, but for others. And so as soon as that regulatory approval happens, we'll be looking to close as quickly as possible. And at that point, we would anticipate providing more information about the impact of that deal on the company's outlook.

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Manan Gosalia, Morgan Stanley, Research Division - Equity Analyst [59]

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Okay. And separately, your tax rate was a lot lower this quarter. Was that related to the accounting change on RSUs?

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Richard Scott Blackley, Capital One Financial Corporation - CFO, Principal Accounting Officer, SVP and Controller [60]

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Yes, this is Scott again, and that's absolutely right. We did have a reduction of around $24 million of a benefit that went through the tax line item that was associated with the new accounting standard.

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Operator [61]

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We'll take Rick Shane with JPMorgan.

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Richard Barry Shane, JP Morgan Chase & Co, Research Division - Senior Equity Analyst [62]

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I'd love to reconcile a few things here. When we look at the NCO guidance for 2017, it's essentially been raised twice since you first laid out the framework for 2017 about 15 months ago. The second thing that we're trying to understand is, and Moshe alluded to this, there was a pretty significant and atypical reserve build in the first quarter. And you saw the normal seasonal runoff. You saw the improvement in delinquencies. And Scott alluded to the fact that other factors drove reserve build. When we sort of parse through all of this, I think the takeaway that everybody's coming -- that you led everybody to is that the 2016 vintage is seasonally worse than you expected previously. That's great. Now we need to understand why that's happening. I mean, I think that's really the crux of what's going on here. And I'd love to -- we know what, now let's try to delve into why.

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Richard D. Fairbank, Capital One Financial Corporation - Founder, Executive Chairman, CEO and President [63]

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Rick, so first of all, this is not entirely just about 2016. Proportionally, just -- well, like I said earlier, the more recent -- the thing we're looking at -- and in many ways, this is just something I've seen before in the past because obviously, we don't have a lot of data preceding that. But the more recent, the more there has been an adjustment. So proportionally, the '16 vintage was adjusted the most, but there was an adjustment in '15 and even an adjustment in '14 as we're watching the various vintage curves play out. So I just wanted to make that clarification. This is not an entirely a '16 story. So I don't think that we -- I don't think we're in a position to put a precise finger on this effect that we -- that was commented on earlier that a few other players had talked about something in '16. We see in credit bureau data, there's definitely some gapping out a little bit in terms of vintage curves, but we go back to watching the marketplace evolve. The trends that we saw 6 quarters ago start to accelerate in terms of this -- the supply side of the business. And we have been pretty vocal about that there are a natural set of things that happen when the industry supply increases. One can't predict exactly when they are or what magnitude, but they tend to happen. So we're not really, in a sense, surprised by any of these effects. In terms of precision on what's going on, I don't think we've got a great explanation. But I think that this is, in many ways, what happens as markets get more supply. And we've got to also remember, we're coming off the bottom of the most seasoned, and we probably won't see this again for -- hopefully, not for a long, long time in terms of what happened with the Great Recession, but the seasoning of everybody's portfolio and the survivorship of everybody's portfolio and sort of what has happened now as the industry, off of that base, starts growing and then frankly, accelerates into a higher level of growth. For us, it's all part of a natural process of our actually decelerating into their acceleration.

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Richard Barry Shane, JP Morgan Chase & Co, Research Division - Senior Equity Analyst [64]

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Hey, Rich, and look, we start with the premise that you guys are really good at credit. That's been our thesis on the stock. And I guess, what I'm hearing is that x post factors in terms of competitive behavior have had a material impact on credit performance on vintages that you thought you had a pretty tight understanding of.

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Richard D. Fairbank, Capital One Financial Corporation - Founder, Executive Chairman, CEO and President [65]

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Well, I think competition for 20 -- more than 20 years, Rick, I have seen the competitive environment effect how -- credit performance. And so I'm not sure that there's any new point that I'm making here. I think that -- and nor are we saying, "Gosh, there's some big industry effect." I want to go back to what we said before. We made a conscious choice to grow way above market rates, not only in 2014, but again, in '15 and again -- and well into '16. That's a lot of growth on top of each other. Growth programs have an inherently -- inherent uncertainty about how the actual vintages precisely play out on their shape and their timing, not their ultimate outcome and the returns, which we feel fabulous about. In many ways, what we're talking about here is a refinement with the benefit of more data that has led to an overall modest upward revision in terms of the overall loss rate that we expect in 2017. And that's just a reflection of how the management of the business works. And this time, unfortunately, it's an upward adjustment and that hurts in terms of the allowance build associated with that. But the underlying story is really the same. The earnings power of the growth, the opportunity we see in the card business, including in the subprime part of the marketplace, the coiled spring, the earnings power and in fact, even at a time like this, we still like our chances to get pretty good EPS growth in the 7% to 11% range.

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Richard Scott Blackley, Capital One Financial Corporation - CFO, Principal Accounting Officer, SVP and Controller [66]

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Rick, I got to come back just real quick on your allowance question and make sure that we have this really clear. Because the allowance build in the quarter was principally driven by the change in charge-off guidance. That is vastly the build. We always add qualitative factors on top of that. And when you've got an environment where there's a lot of competitive activity going on, those are factors that typically get captured in your qualitative factors. So like every period, we added those on top, but growth is a factor there, too. So I wanted to make sure that it was clear that the primary factor was the change in charge-off guidance.

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Operator [67]

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And our final question comes from Ken Bruce with Bank of America Merrill Lynch.

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Kenneth Matthew Bruce, BofA Merrill Lynch, Research Division - MD [68]

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Look, I really appreciate all the commentary you're trying to provide around credit. I have a -- really 2 questions that I'm hoping you might be able to give us a very blunt or factual answer around. In terms of losses, there's this concept of cumulative losses. I know you're familiar with it. Is there a way to frame '14 or '15 vintages in terms of cumulative losses in subprime credit cards? I mean, everybody's looking at growth curves and they may understand that the peak a couple of years after the vintage. But it'd be really helpful if we kind of knew what the end state of those losses would be within kind of what Capital One's doing on subprime credit cards. If not for Capital One specifically, what would your assessment be of the industry cumulative losses?

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Richard D. Fairbank, Capital One Financial Corporation - Founder, Executive Chairman, CEO and President [69]

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Yes, Ken, the very concept that, that has a lot of power in auto because it's a -- a term loan doesn't really work so well in the -- on the card side. And also depending on where people play in the subprime marketplace, the losses can vary by a multiple of each other. So we have spent 2 decades building, in a sense, the information base and database capability to identify in the subprime marketplace who are the diamonds and the rough, if you will, the people that look like maybe they are not so good credits but turn out to be a lot better than that. And that's a couple of decades worth of investment, including making it through the Great Recession successfully. But the cum loss concept is not -- isn't really the probably the operative thing, where, well, I will say is most importantly, we measure this in terms of the net present value of the -- of our programs. And to go back to something I said earlier, we go and we measure before, during and after every program, what the net present -- what is the net present value of that program. And we have hundreds and hundreds of programs. We add those all up by year and then look at what the entire value created for that year is. And we have done that. We continue to revise that all of the time. Our current view is, even including these -- the latest data on credit, is that 2014, 2015 and 2016 vintages, the total net present value of these is really at the very high end from all -- you have to go all the way back to the early 00s to find the -- something kind of in the -- at these -- exceeding these levels. And so to us, it's about the value creation, and the other critical variable is the resilience. How do these perform under stress? And I think what we like about this collectively, all the things we're originating, is I think there's a lot of earnings power there. The resilience, I think, has been well-demonstrated. And I think the growth programs that we're talking about today are the foundation of a lot of earnings power for Capital One for years to come.

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Kenneth Matthew Bruce, BofA Merrill Lynch, Research Division - MD [70]

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And just finally, you pointed out that other credit card companies are growing and obviously, get you in a little bit of situation where they're potentially increasing leverage on the same customers that you in essence, kind of capped out yourself. How do you protect yourself in that environment where there could be increasing indebtedness on the -- in the U.S. card book so that you could try to, I guess, mitigate some of that risk?

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Richard D. Fairbank, Capital One Financial Corporation - Founder, Executive Chairman, CEO and President [71]

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Well, Ken, it's a great question and it's a question we obsess about every single day. Because in this business, customers can -- they don't just say I've got 1 credit card and that's all they do. We can do all of our underwriting and have it just seem perfect and then the customer can take on a lot of debt, big high lines and other things, even in cards or beyond cards, and then that could kind of spoil what we had planned. Our -- look, there are no guarantees in this business. What we do is try to watch a few decades worth of experience in doing this and try to build in, most importantly, the resilience for things that might happen. How do we build resilience? Be very, very careful on credit line. How do we build resilience? Build it into the margin of the business. Build it into the way that we manage the accounts over time, and do this in the context of being absolute students of what is now more than 2 decades worth of experience in the good times, in the bad, the good decisions, the mistakes, the whole thing, the Great Recession. And while there are no guarantees, that is basically what we do. But your question, I think, goes to the heart of why, in the end, this isn't an actuarial science. This is a dynamic risk management business.

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Jeff Norris, [72]

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Well, thank you, Ken. Thank you, everyone, for joining us on this conference call today. And thank you for your continuing interest in Capital One. The Investor Relations team will be here this evening to answer any questions you may still have after the call. I wish everybody a good evening.

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Operator [73]

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Everyone, this concludes the call for this evening. Thank you for your participation. You may now disconnect.