Q3 2019 Earnings Call
Welcome to the capital one third quarter 2019 earnings conference call. All lines have been placed on mute to prevent any background noise. After the speaker's remarks, there will be a question and answer period, if you'd like to ask a question. During this time simply press the star Keith and the number one on your telephone keypad, if he would like to withdraw your question first.
Starkey than the number two thank you I would now like to turn the call over to Mr., Jeff North Senior Vice President Finance, Sir you may begin.
Thanks, very much Leann and welcome everyone to capital ones 100 quarterly earnings call.
As usual were webcasting live over the Internet.
To access the call on the Internet. Please log on to capital one's website at capital one dot com and falls away from there.
Listen to the press release in the financials. We've included a presentation summarizing our third quarter 2020 were 19 result.
Me today are Mr., Richard Fair Bank, copper ones, Chairman and Chief Executive Officer.
Mr., Scott Blackley capital one's Chief Financial Officer.
Richard Scott will walk you through this presentation.
That's a copy of the presentation and press release. Please go to couple of months website click on investors back click on quarterly earnings release.
Please note that this presentation may contain forward looking statements.
Cremation 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 from 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 press release presentation.
The risk factor section in our annual and quarterly reports accessible what the capital one website and filed with the FCC.
With that I'll turn the call over to Mr. Buckley Scott.
Thanks, Jeff I'll begin Tonight with slide three.
Capital, one earned 1.3 billion or $2.69 per share in the third quarter.
Net of adjusting items Ari Pos in the quarter was $3 spent 32 cents.
We had three adjusting items in the quarter, which are outlined on slide 13 up our earnings presentation.
There was a 212 million or 45 cents per share build in our UK payment protection insurance customer refund reserve in our credit card segment, driven by higher than expected complaints volume.
About 140 of this build was recognized as contra revenue.
Split across evenly between that and non interest income.
And 72 million was recognized in operating expenses.
The UK regulators previously established a deadline to file PPI complaints, which was August 29 2019.
We received a significantly elevated volume up complaints in the months, leading up to the complaint deadline.
We're now when the process of determining the eligibility and compensation related to the total complaints.
Next we had 84 million or 14 cents per share a launch and related integration costs associated with our Walmart partnership in our domestic card segment.
We continue to expect approximately 225 million of cumulative launch costs with the residual occurring in the fourth quarter.
And finally, we recognized 49 million of charges associated with the cyber incident that we announced at the end of July .
These charges will partially these charges were partially offset by an insurance receivable of 27 million, resulting in a net charge of 22 million or four cents per share.
The timing recognizing all of the expected insurance reimbursements will lag related charges.
We disclosed last quarter that we expected 102 150 million in certain incremental direct costs associated with the cyber incident response, and then we expected to record these costs in 2019 and treat the mats and adjusting item.
We now expect to be at the low end of the range and we expect that some of the adjusting item costs will be incurred in 2020.
We continue to expect that a significant portion of these costs will be covered by insurance and that the insurance reimbursements will also be adjusting items and again the timing of insurance reimbursements may lag the occurrence of costs.
Beyond the adjusting items, we continue to invest heavily in cyber security as we have done for years.
We expect to make incremental investments in cyber security related to the cyber incident, and we expect to absorb the estimated incremental investments within our existing operating efficiency ratio guidance.
Moving to the quarterly results relative to a year ago adjusted pre provision earnings increased 6% with revenue increasing 4% in noninterest expense growing 3%.
Compared to the prior year quarter provision for credit losses increased 9% Oh into a smaller allowance release and a modest increase in charge offs.
Let me take a moment to discuss the quarterly movements and allowance across our businesses, which are detailed in table eight of the earnings supplement.
Our card business saw an allowance release of 64 million wrote largely driven by stable underlying credit and the strong economy.
In our consumer business. There was released a 48 million, which was driven by our auto business.
Reserves in our commercial business increased by 33 million primarily related to syndicated credits in the energy sector.
Turning to slide four net interest margin was 6.73% in the quarter 28 basis points lower than the prior year quarter, excluding the impact of UK PPI reserve build that I mentioned earlier net interest margin was 6.81%.
The remaining 20 basis points up year over year decline was largely driven by higher average deposit costs as we continued to see growth in and mix shift towards our capital one 360 deposit products.
Going forward, while we continue to keep an eye on interest rates in the near term, we have a relatively neutral pasta CIT posture to changes in implied forwards.
Turning to slide five I will cover capital.
In the third quarter, we purchased approximately 466 million or 5.3 million common shares of our 2.2 billion 2019 see car authorization.
Our common equity tier one capital ratio on a bottle three standardized basis this quarter was 12.5%.
We continue to believe that our long term capital need is around 11% see do you want.
Let me take a minute to talk about the factors impacting our capital need.
In the 2019 see car.
The feds implementation of a new card lost model created a headwind to our capital under stress.
Conversely, the effects of the recently approved tailoring role were published will provide a tailwind to our capital reduction under stress.
We also believe there's an opportunity for further capital relief under the stress capital buffer framework, but we continue to keep an eye on the implementation of see solvency car.
How when when the fed implements decent <unk> new rules in see car will be a key factor in when we when we will be able to manage C.T., one closer to our 11% long term capital need.
Let me move on to the new allowance accounting standard.
We are preparing to adopt sea salt on January Onest 2020.
We currently estimate that the implementation of the Cecil framework framework will result in a 30% to 40% increase in our corporate allowance largely driven by our consumer businesses. As a result, we believed that the impact of adopting Cecil which is phased in over four years will reduce our 2020 see each one.
Ratio by 13 to 18 basis points.
I'd like to take a moment to discuss movements in our preferred stock levels. In September we issued 1.5 billion of series I preferred stock, which has a 5% dividend that is paid quarterly subject to board approval. Additionally, we will redeem our outstanding preferred series C and D. In December reserve.
In a onetime charge that will reduce net income available to common shareholders by approximately 30 million.
The replacement of series C. N series D with series I will save approximately 15 million per year and ongoing preferred dividend expense.
With that I'll turn the call over to rich rich.
[laughter] thank Scott.
Begin on slide eight.
Which summarizes third quarter results for our credit card business.
Pre tax income for the quarter [noise].
It was $969 million, including the 212 million dollar UK PPI reserve build that Scott discussed.
Beyond the PPI impact credit card segment results and trends are largely driven by the performance of our domestic card business, which is shown on slide nine.
[noise] domestic card ending loan balances increased by $3.1 billion or about 3% compared to the third quarter of last year [noise].
Average loans were also up 3%.
The growth of branded card loans, which exclude private label and co branded cards continued to accelerate.
In the third quarter branded card loans grew 5.7% from the prior year quarter [noise].
We posted another quarter of strong purchase volume growth as we continued to grow our heavy spend or franchise.
Year over year domestic card purchase volume growth was 11%.
Normalized for two additional processing days in the third quarter of 2019 year over year purchase volume growth was about 9%.
Net interchange revenue for the total company grew 11%.
[noise] revenue increased 2% from the third quarter of 2018.
Noninterest expense was up 10% about half of the increase in the noninterest expense was driven by the Walmart adjusting items, Scott discussed as well as some run rate Wal Mart operating expenses in the quarter.
Beyond the Walmart impact other drivers include continuing technology investments and normal quarter late variability.
Domestic card credit performance.
Remained stable.
Charge off rate for the quarter was 4.12%, a 23 basis point improvement year over year.
The actual improvement was about 10 basis point when normalized for the impact of the accelerated recognition of a state charge offs, which added 13 basis points to the charge off rate in the third quarter a year ago.
The 30, plus delinquency rate was 3.71% down nine basis points from the prior year quarter.
Pulling up [noise].
In the third quarter, our domestic card business continued to deliver strong results and gain momentum.
Before moving on to consumer banking.
I'll briefly discuss the Walmart partnership.
On September 24th we launched the new Walmart co brand in private label cards and on October 11, we completed the acquisition of the existing Wal Mart card portfolio.
We onboarded $8.1 billion in loans.
We estimate our initial allowance build to be approximately $85 million, which will be part of our a part of our fourth quarter allowance.
We're excited to partner with the world's largest retailers to deliver compelling products and a great digitally enabled customer experience to Walmart customers.
Other than the adjusting item that Scott discussed the Walmart partnership did not meaningfully affect third quarter results.
Like other card partnerships. We will include Walmart program results as a part of our overall domestic card business rather than break them out separately.
Driven by the revenue and loss sharing provisions.
We expect that the acquired Wal Mart portfolio will affect several domestic card metrics.
We estimate that the acquired portfolio will reduce the domestic card charge off rate by about 25 basis points in the fourth quarter of 2019.
And reduce full year 2020 charge off rate by a similar amount with some quarterly variability.
We estimate that the acquired portfolio will reduce the domestic card revenue margin by about 35 basis points in the fourth quarter.
About 50 basis points in the first three quarters of 2020.
And after the revenue share on the acquired portfolios steps up.
In October of next year.
About 35 basis points in the fourth quarter of 2020.
We expect the charge off rate and revenue margin impacts to diminish over time as the acquired portfolio runs off.
Delinquency metrics are not affected by the loss sharing agreement.
We estimate that the existing Walmart portfolio will increase domestic card delinquency rate by about 25 basis points at the end of the fourth quarter and by about 15 basis points at the end of 2020.
Slide 10 summarize this third quarter results.
For our consumer banking business.
Ending loans increased about 5% compared to the prior year quarter.
Average loans grew 3%.
In a marketplace with increasing competitive intensity.
Our auto business delivered strong year over year originations growth and a modest acceleration of loan growth along with stable credit results at a modest pick up in loan yields.
Digital innovation is a key driver of our increasing momentum.
In the auto business.
Ending deposits in the consumer bank.
Were up 5% versus the prior year quarter with a 31 basis point increase in average deposit interest rate.
The sequential quarter increase in deposit interest rate was five basis points.
Both increases were primarily driven by deposit mix.
Powered by the rollout of our National banking strategy, our deposit growth has been in capital one threesixty products, which has resulted in a product mix shift toward higher rate deposit products.
While we expect this mix shift to continue our average deposit rate going forward will depend on.
Several factors, including the market interest rate environment, our deposit mix and competitive dynamics.
Consumer banking revenue increased about 3% from the third quarter of last year.
Non interest expense was up less than 1%.
Third quarter provision for credit losses increased $19 million year over year, primarily because of a smaller allowance release in the third quarter. This year compared to the allowance release in the third quarter last year.
The auto charge off rate improved 13 basis points compared to the prior year quarter to 1.60%.
[noise] better than expected auction values and the but nine economy continue to support strong auto credit.
We continue to expect that the annual auto charge off rate will increase gradually as the cycle plays out.
Moving to slide 11.
Discuss our commercial banking business.
Third quarter, ending loan balances were up 7% year over year.
Growth in average loans was also 7% our growth is concentrated in select industry segments with lower risk lower margin and the potential to generate fee income.
Overtime.
Commercial bank, ending and average deposits were both relatively flat compared to the prior year.
Third quarter revenue was up 1% from the prior year quarter.
The revenue benefit of higher average loan balances was offset by lower loan margins.
Noninterest expense was also up 1% compared to the prior year quarter.
Provision for credit losses increased compared to the third quarter of 2018, largely driven by weaknesses in our energy portfolio.
About two thirds of the increase was from higher charge offs and as Scott discussed we also built allowance in our commercial banking business.
Outside of the energy portfolio commercial banking credit performance remained strong.
The charge off rate for the quarter was 0.33%.
And criticized loan rates were relatively stable compared to both the prior year and sequential quarters.
The criticized performing loan rate for the third quarter was 2.8%.
And the criticized nonperforming loan rate was 0.6%.
Pulling up we're keeping a watchful eye on market conditions unregulated competitors continue to put pressure on pricing loan spreads and loan terms for non banks and banks alike.
Against that backdrop, we're carefully choosing our spots and staying disciplined in our underwriting and origination choices.
Okay.
Following up on the third quarter capital one continued to post solid results as we continue to.
Invest.
To grow and drive our digital transformation.
Our marketing and technology investments are building, our momentum and creating great value our domestic card business delivered strong year over year growth in purchase volume and branded card loans in our consumer banking business, our national advertising brand and compelling digital customer experience.
Enabled us to post strong year over year growth in retail deposits.
With the momentum we have in domestic cards and retail deposits. We continue to expect full year marketing for 2019 to be modestly higher than <unk>.
<unk> in full year 2018.
Looking at quarterly trends third quarter marketing was flat year over year and down slightly sequentially, but that was essentially a timing issue with some planned third quarter marketing shifting to the fourth quarter.
We remain all in on our technology transformation and our progress continues to accelerate.
We continue to expect that we'll complete the exit of our data centers by the end of 2020.
Which should generate significant cost and efficiency improvement beginning in 2021.
Until then we'll continue to drive for operating efficiency improvement, even with the elevated costs of straddling both the datacenter and cloud environments.
Well the market interest rate environment.
Creates and efficiency head wind for most banks, including capital one.
We still expect to achieve modest improvements in full year operating efficiency ratio net of adjustments in both 2019 and 2020.
With a bigger moved down to.
To 42% in 2021.
We expect the improvement in 2021 to be aided by the impacts of our datacenter exit and growth in the Walmart partnership revenue both of which show up in late 2020.
As well as continuing technology innovation.
And we expect this operating efficiency improvement to drive significant improvement in total efficiency ratio by 2021 as well.
As the many benefits from our technology transformation continue and increase we are well positioned to succeed in a rapidly changing marketplace and create long term shareholder value.
Now Scott and I will be happy to answer your question.
Thank you rich will now start to cure in a session.
As a courtesy to other investors and analysts who may wish to ask your question. Please limit yourself to one question a single follow up.
If you have any follow up questions. After the Q and a session the investor relations team will be available after the call.
We end please start the QNX.
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And our first question today will come from Sanjay Sakhrani with KBW.
Thanks, Scott I was hoping to get a little more clarity on the NIM expectations going forward I heard you said, you're sort of rate neutral as rates are going down, but then you've got like the move to 360, and then Walmart says we think as we think through future rate cuts and obviously these moving factors could you just give us some.
Dimensions on how to think about the NIM migration and then I'll ask my second one upfront rich.
Scott talked about this at a conference, but I just wanted to get your perspective on the cyber security incident I know there's been some questions on the cloud migration as a result of it and I was just.
Wondering if you could just give us your updated views. Thanks.
All right Sanjay will I'll start off on NIM, So as I think about where NIM might be headed I got a few thoughts for you.
The first is that we've seen deposit rates and mix that had been creating to had been a that's been created a headwind to NIM sense really late last year now those deposits are a great source of stable funding for the bank and we're really happy to have them more recently, though we've been seeing some easing in NIM headwinds from rates and even a bit on mix.
So on the liability side, while we've seen some headwinds I'm starting to see some signs that those are bidding a little bit and then on the asset side Walmart is modestly positive to NIM.
Card and auto are growing at attractive rates and so on the asset side, we're certainly seeing some momentum on that end.
And then when you talk about just rates in general as you mentioned, we have a modest near term exposure to movements and implied forwards. So in the near term I think that rates aren't going to be a big driver. So when I pull up and I look at all the different forces that are impacting them from both directions. It doesn't look to me that any of them.
Our particularly outsized compared to the others.
As Sanjay with respect to the public cloud and ER and the cyber incident.
While the event occurred in the cloud.
The vulnerability that led to our breach is not specific to the cloud and could have happened in it on premises datacenter environment.
We remain absolutely committed to our digital strategy and our technology transformation and the public cloud is an essential element of that strategy.
I mean, the the benefits of the cloud are pretty comprehensive including.
Agility innovation resiliency security.
And cost benefits.
And in fact, we believe our tech transformation in our move to the cloud in particular provided some important benefits.
In this cyber situation.
For example, as part of the cloud journey, we were able to Tokenize critical data at scale.
Also the cloud was essential to our being able to quickly diagnose and respond to the incident. So.
So.
Naturally as.
Within event like this you know we're pouring a lot of energy into make sure we get all the learnings and harnessing the energy from an experienced like that too.
Really further strengthen our cyber security and.
[noise].
And our capabilities are broadly across the board but.
We.
We are reminded even through this event of the benefits and power.
The public cloud.
Next question please.
And our next question comes from Moshe Orenbuch with credit Suisse.
So I guess, Scott I was sort of hoping you could expand a little bit on the deposit pressures that you saw abating or the consumer bank I think they were still kind of going up.
You know.
Third quarter, albeit at a lower level lower rates given Q2.
What areas, you're seeing and what you know what might we see.
In the balance of the year and into early 2020.
Yep Moshe well we've seen.
When I look at the competitive landscape, we've seen a number of competitors, who been lowering rates. We've had some of our products with lowering rates and so we're starting to see deposits being more responsive to two rates going down.
And with that we're seeing a little bit of you know a reduction to the headwinds that we had been experiencing on NIM.
Got you just as a a follow up Richard you highlighted the acceleration on the credit card balanced shrunken, maybe just to kind of give us a little more a little more color. There obviously the consumer you know who stole his still kind of continue to grow but how you are seeing better in terms of unit balance.
Grossing risk.
[noise] [noise], yes, so in our branded card business.
We separated that out just because that number.
Was.
Quite a bit different from the overall kind of domestic card number, but it's a reflection of the continued traction that we're getting.
Across the board and I think it's you know the continuing success, we're having in marketing the traction we're having at the top of the market place.
And our spender business.
But also we continue to have traction really across the board that tractions coming from continued strong origination of accounts, but also.
Continuing to lean in a little bit more.
Each quarter on that on the credit lines.
Just as we continue to validate by looking.
In the at the performance of recent vintages.
And continued with an eye on the economy all of that is contributing to some acceleration on the.
Branded card growth.
With respect to the consumer how do we feel about that.
I think the U.S. economy, and the U.S. consumer is in pretty good shape.
Consumers are.
Obviously benefiting from strong labor market rising wages.
And last year's tax cuts.
All of which are driving up disposable incomes.
The savings rate is solid the rate of borrowing is is reasonable.
Servicing burdens are stable and well below the levels that we saw before the great recession.
Retail sales growth is down a bit from a year ago, but still.
Solid.
When we look inside our portfolio, we see that.
Delinquencies and charge off rates or.
Are low payment rates our.
Continue to sort of gradually rise and that is.
Sort of the flipside of of or another manifestation of of.
Credit strength and the confidence and strengthen the consumer.
One metric we watch as a leading indicator is the proportion of customers who are paying only the minimum payment on their cards.
And over the past year that metric has been stable to slightly improving.
Now you know of course, the consumer is a resident in our broader economy.
And not only the U.S., but the world economy.
And implications and things like growing to government deficit trade related issues and the intense political environment.
Though are something we certainly keep an eye on.
You know, there's also pockets within lending that that we are watching.
Such as installment loans installment loans.
Our growing at 15%.
And.
Some lenders are not reporting to the credit bureaus, so I'm not sure that we actually knows the size of that number.
Well, we know it's pretty big and you know that can have spill we're not.
In the installment loan that business, but we can be affected by those things.
So.
And most importantly is not loss than us we're deep into the economic cycle, and we underwrite with a focus on resilience and if you pull way up what that means is.
While still being.
You know very obsessive about those about the the risks out there we continue to see an opportunity to grow our business, we see a stability in the consumer and on the credit side and that that augurs well for continued opportunity.
And card.
Next question please.
And our next question comes from Betsy Graseck with Morgan Stanley .
Hi, good evening.
Hi, Beth I Betsy.
I just wanted to dig in a little bit on the outlook comments that you gave around the back book Walmart portfolio.
And wanted to understand.
How do you are thinking about the.
Decay rate of the 8.1 billion.
Over how many years, we should expect that to you know take and then the second thing was I know you gave a lot of color on dance. He has delinquencies in the RAF margin.
How do you see that Trajecting in that 13, 14 month, because you have a different.
Set up right economically with Walmart and in the first 12 to 13 months and then and then month 13 on maybe could go through you know your broader outlook as well thanks.
[laughter].
Okay. So.
Let's see.
The Walmart.
All of our.
Guidance about.
How the metrics were going to be affected is I want to stress.
As you indicated it's about.
The portfolio that we bought bought from Walmart.
We of course also are originating business with Walmart, but that's much more of a kind of business as usual as usual thing and the impact on the metrics will be much more you know in the business as usual category.
This portfolio stands out for a number of reasons I mean, it's all at one moment it arrives or on our balance sheet. So we wanted to flag what happens with the metrics. This is also a portfolio with a significant loss share.
As as well as a revenue share and it has some pretty.
Striking impacts on some of the metrics that we outlined outlined.
It is a portfolio that historically has had a.
As has had a well the run off rate.
The attrition rate starts with the pretty high charge off rate that that we've talked about in that and then of course, there's natural attrition as well. So we are inheriting a portfolio that runs off.
Reasonably quickly if you isolate it from new originations, which we are here with this guidance.
The one thing that makes it kind of hard to predict how fast the attrition will go is that.
This value proposition, including 5% on Walmart Dot com, 2% off on everything bought in the store. This is a significant.
Improvement in the in the value proposition relative to what.
The customers had before and we are giving that to all existing.
Customers of this portfolio. So hopefully that will help on the attrition side, we don't have any data on that but what what we wanted to stress is that.
The the impact on our metrics will happen all at once like we talked about and then we should we should all assume a run off a gradual run off the bat driven especially by the fairly high charge off rate.
The only other event of note is.
The step up in the revenue share that happens with respect to this.
Portfolio starting in October .
2020, so that's a single event.
And we will be the beneficiary of a higher revenue share same lost share, but a higher revenue share and that will continue over the life of the portfolio. That's why we gave our guidance in a series of steps.
Nobody.
The only other thing that I wanted just.
Saver.
The delinquency that the it I.
I know everybody looks you know with understandably with magnifying glass at delinquency in credit and charge off numbers and it's really important to us that we were able to talk about the differential impacts that come from that.
Back book.
The.
Charge off numbers will be net charge off numbers, because we are reporting only the charge offs for our loss share portion of the total charge offs.
The delinquencies.
We that's on our balance sheet. So we have the entire the delinquencies we will report in their entirety, even though and important portion of the losses will be taken by Walmart. So that's why.
Particularly on the delinquency side there'll be some you know striking impacts that we wanted to flag.
Next question please.
And we'll take our next question from Eric Wasserstrom with yes.
Okay. Thank you just one quick clarification, and then I have a real question just the.
On the on the PPI given the August deadline as you know has now passed.
Is this the end of the build or could this could you see incremental building into the into the first quarter.
Yeah, Eric Thanks So.
As outlined in my prepared remarks, the deadline was as you mentioned August 20, 919, 2019, and we've now passed that PPI deadline. So we now know the total volume up complaints that we can receive.
What we're doing right now is going through all those complaints and trying to determine which of them are valid complaints and what the appropriate level of compensation is on those complaints that process given the elevated level of claims that we incurred is going to take around six months to complete the reserve that we built in.
This quarter. We included an estimate of how many of those claims we thought would be valley valid and the portion of compensation that we would have to pay we did that based on kind of the our history of what we've seen it stands to reason that when you have a spike in claims right before a deadline you may not have.
The as many claims that are valid as you've seen over a long history.
But we didnt take that into account. So we feel at this point well reserved for everything we know and we're not going to be getting any claims.
Great. That's very clear. Thank you and then my my real question is is a is about the.
The marketing spend it was about a year ago that rich that you signaled that.
You were entering this investment cycle and I would just love to get an update on how you're feeling about the efficacy of that spend at this point in sort of what the short to medium term outlook might be as we as we look to the new year.
[noise], Eric we use the continues to be at a very positive story for us we.
In in in card the marketing is a strengthening our heavy spend or franchise is driving strong growth in in new accounts purchase volume net interchange revenue.
And now increasingly loans as well.
On the bank side, the increase marketing is.
Really basically the tip of the spear of our organically building a national bank and that's fueling deposit growth and also moving a lot of the.
Sort of metrics associated with cafes are.
And our brand on the National banking side. In fact, you know speaking of brand. This is one of the big beneficiaries overall of.
The marketing that we're doing we're seeing a lot of traction across the company in our brand metrics.
In hard to move brand equities.
That really are critical to building a franchise. So we continue to be enthusiastic.
As we have been for a number of months.
One thing, that's just a little different versus a year ago. The.
A year ago, we had such a big step up because we were launching a couple of.
New programs.
But the.
We don't have that at this very moment, new launches, but except of course, a walmart here, but oh, we continue to be a bullish and in fact now that I mentioned, Walmart we will be.
Sharing with Walmart a.
A pretty.
Active and positive campaign associated with.
This card and.
Again, we will be underwriting or.
A portion of that.
Next question please.
And we'll take our next question from Don Fandetti with Wells Fargo.
Cecil it's interesting with all the talk about the impacts over the last year, so really the increases in two buckets, where you're.
Not that dissimilar actually from from Amex and I was just wondering if you could talk about some of the offsets I guess, maybe under commercial Saudi your portfolio and then Scott is it fair to say, there's only a pretty modest impact downward bias in terms of the impact 2020.
Cool and without Cecil.
Yep.
Let me just start off kind of talking about the longer term impacts some seasonal so obviously cecil creates a onetime reduction in our capital ratios that adoption and its permanently increasing the amount of capital that will hold against those losses.
In terms of future allowance builds I think in times of you know slow and stable growth a stable economic outlook.
I'd expect that Cecil is going to look.
Fairly similar to what we see with allowance moves today I don't think that we'll see a lot of violence. Then however, I think when you see periods of accelerated growth significant changes in the economic outlook.
I feel confident that we're going to see amplified allowance moves and increased provision volatility.
So when I pull up I think it's it's completely appropriate just to to mentioned that Cecil is not going to change the way that we approach our businesses and how we conduct you know that business of lending.
I kind of look back at the fact that we don't yet know how the fed will incorporate cecil and to see car. That's still a few years away ultimately that could impact capital levels for us and for all banks and the other thing I'd say is as we've been saying I think in periods of stress in a deep recession I continue to be worried.
That Cecil will make it more difficult for the banking industry to land.
When you after a record lifetime expected losses before you get a record any of the related revenue and so you know I'm I'm anxious about that.
And then dawn your other question about the puts and takes you know, it's really difficult to unpack other bank Cecil disclosures I don't really have good insights to you know what's driving there.
Cecil numbers I can tell you that are 30% to 40% estimate of the increase in allowance at adoption represents our balance sheet next the business practices that we follow and the accounting policy elections that we've made and in order of magnitude the add on the initial adoption of Cecil.
From lowest a highest it's commercials the lowest cards. The second and then auto is third and that's in terms of magnitude of the allowance build from lowest the highest.
Okay, and then one last shifting to auto how we're origination yields are they holding up pretty well it looks like yields are coming in obviously still a bulk of portfolio yield.
Have you seen any shift in competition.
Looks like your subprime mix continues to go up a tiny bit auto.
Yes so.
The.
The auto the competitive environment.
He is.
Ah continues to be.
Ah, it's pretty intense but its still offers.
I think quite a bit of opportunity, let me talk about the parts of the marketplace.
In.
Subprime auto.
Weve.
Seen a rapid growth actually of small independent lenders.
Although there are more focused on deep subprime high loss business.
We also see some increased competition from some lenders who had previously pulled back.
And we remain vigilant on that but definitely the subprime opportunity is there.
In a near prime.
We the competition from some who had you know pulled back in the past or certainly has intensified quite a bit.
We still see opportunity, but it's definitely intense.
The the competition there.
And in the prime market.
We have seen some reversal in the trend of increasing market share of credit unions.
Although the market continues to be competitive.
When we look at margins in general the margins.
I have.
Are actually pretty healthy.
And even a little healthier in Prime then they have been.
In.
In in some past periods.
So the <unk>. So we continue to see a growth opportunity I would just also say that while we don't have any way to quantify this I think we've been benefited by.
The technology investments that we have made in the business investments.
On the underwriting side, the sort of real time.
Creating real time.
Underwriting and real time pricing capabilities that that are enabled by our.
Cloud strategy and our overall technology transformation.
In in product design in.
Sort of Ah things to help dealers.
And things to make our operation.
Be just.
So much.
More effective.
In real time.
And.
All of these are things we've worked hard to create I think they're very beneficial they they don't transcend the competitive.
And cycle.
Conditions that will will still dominate.
Our our metrics.
But I think underneath it all there is a growing strength that we have in the auto business and I'm just one of the.
Many benefits that is that is growing.
Related to our tech transformation.
Next question please.
And our next question will come from Rick Shane with JP Morgan.
Hey, guys. Thanks for taking my question I.
It was actually a little worried that wasn't get get to participate on the hundreds call. Congratulations itself, it's really quite an achievement just one clarification, Scott Youve talked about the Cecil reserve.
I just want to make sure that we all understand that in the context of the Walmart.
In addition, should we think of that 30% to 40% increase not as versus September 30 at the day zero today one change.
Yeah, you should think of that is our estimates for the January Onest 2020 adoption, which would include all of the assets that are on balance sheet outs of that date. So Walmart would be included in that as with all of the other assets at that point.
Got it okay. Most of the company's we follow talked about in the context of September Thirtyth I just wanted to make sure given the sizable acquisition, we're thinking about that in the right way.
That's it for now we tried that we've tried to make an estimate for the total impact of the company.
Given kind of where we are where we would expect b.
Perfect. Thank you.
Next question please.
And our next question comes from Kevin Barker with Piper Jaffray.
Thank you I'm just a follow up on some of the comments around them.
And some of your.
Explanation.
For help US understand you know where you see the trajectory the securities portfolio, especially.
With a little bit of stabilization the tenure that we've seen recently.
Yeah, just a few thoughts there. So you know NIM in the quarter was pretty modestly impacted by the fact that we were holding some additional cash on Walmart.
In preparation for acquiring the Walmart portfolio. So we'll we'll be as we go ahead and have executed that will be replacing that with.
The higher yielding assets of the Walmart portfolio. So that's that's going to be a net positive in terms of the trajectory of NIM in terms of the securities portfolio, you know in its been trending down a little bit which is mainly a liquidity.
Assessment in terms of what we need for liquidity in that portfolio I don't think theres going to be as significant change too to NIM in terms of what we see coming out of that portfolio.
It was there any outsized amount of premium amortization this quarter and could you give us an idea where your new money yields or on the securities portfolio.
I don't think that a in terms of.
I don't think Theres really anything meaningful in any of those areas for me to share with you in terms of the impact on the quarter going forward.
Next question please.
And our next question comes from Brian Hogan with William Blair.
Thank you. My first question is actually on the growth of your employee base, so spin accelerating and it was up 9.5% year over year.
And I guess I mean, it's going in conjunction with your shifted technology and focus on that digital transformations I guess.
Why the significant growth in personnel, what do they are doing what through your investments.
<unk>.
Hey, Brian It's Scott I think the thing that that's probably most impactful right now on head count is that we're ramping up for the Walmart launch and integration. We started doing that a a couple of quarters ago, that's really been the largest growth in.
Head count most recently and as you mentioned the our technology investments in work there have been overtime been adding to total head count, but I think just in general the growth of the company and Walmart had been a major factor as well.
Should we expect that level often right.
Well in terms of the Walmart personnel that that's a group that we have brought onto to deal with that account. So I would expect that we wouldn't have further increases in headcount associated with Walmart and then the rest of kind of the trajectory, there's going to be driven by normal business activity.
Brian but to your point the.
The.
42 by 21.
A enabler of that and in fact without this we wouldn't be.
You know, saying 42 by 21, a central enabler of this.
Is that benefits that have come from our heavy.
All in Tech transformation, where we are.
Approaching the end of this seven a year of Arotech transformation and.
You know for much of that transformation it costs more before it costs less and we continue to invest and we will.
Invest.
You know.
On a continuing basis, because I think increasingly.
Technology is what a sort of the tech company does but that said our confidence to.
Shingle ourselves.
As far in advance is we did too a pretty bold efficiency ratio target is.
Powered by efficiencies that come.
[noise] from.
The the tech investments.
And cost saving you know on the on the on the on there.
Cost saving opportunities from changing how we work driving customers to digital driving really the company to digital driving down technology costs themselves as we move away from a lot of expensive proprietary.
Technology.
As we consolidate our technology reduce a lot of duplications.
And really moved to just a better way of operating.
So.
Just one dimension that [noise].
Next question please.
Our next question will be from Brian Foran with autonomous.
[noise], Ohio, I mean, you've addressed a lot already I mean, maybe I guess most struck by people are always focused on your overall tone on these conference calls.
And if I just kind of go down the things that matter I mean sounds like you're feeling a little better about some of the leading indicators on credit little better online size increases and thus branded card growth little less worried on interest rates still confident on the opex and maybe.
Maybe them over reading it but felt like maybe the excess capital position was becoming a little bit clear or less uncertainty there.
I mean is it fair if someone just as you know with capital one more or less positive I mean, it sounds like you're a little more positive on on all the key fronts.
Is that a fair assessment or are there some negatives that maybe.
Leaving out.
Brian I think I was writing it down as you as you were doing it I would go in credit and them yet.
The line increases I mean again, there were still in the overall motive of cautious where we are in the economy, but line increases check.
I would add a continuing bullishness about the marketing and the success of the traction in the card business overall interest rates now again on interest rates.
It's hard to.
You know be bullish on that but but we are relative to the.
The that the.
Some of the seismic impacts that have happened in interest rates I think it's a combination of how the markets responding and.
The tools that we have.
In our portfolio to two to adapt.
I think we have increasing bullishness about that operating expenses.
If you pull up the kind of our point was that.
We got a delta curve ball that wasn't in our plans when we announced the.
42 by 21.
I remember the pacing the meeting when.
We first you know somebody brought in well.
A this is the this is going to be the impact that sort of gross impact.
This on on are what could be with respect to revenues.
And with on interest rates and after we caught our breath.
We continued to just worked incredibly hard and the traction on operating expenses.
And all matters around the efficiency ratio continues to be.
Positives such that despite the interest mate rate move we are you know.
Continuing to reaffirm our guidance the capital there's a there's a strong excess capital thing you know position there.
And the other one I would add on the list is the.
Continued you can feel it inside the company it's hard.
For the outside world to see this.
Partly because we don't always proclaim some of the things that are proprietary that that that we're doing but the tech transformation that started at the bottom of the technology stack a place that is the hardest work shows the least immediate payoff and in fact it.
Transform yourself from the bottom of the technology stack. It doesn't really do much for you, but but I I I've said over the years and then the end I know really the proof ultimately is in the putting in what what investors you know c., but what I want to say is.
It's a very unusual thing that capital one is done bye bye.
So heavily starting at the bottom of the tech stack and working up I think most companies when they do a tech transformation started at the top of the tech stack, meaning.
Innovating on the the part of the technology that is customer or associate facing.
And it's very natural thing to do because that by definition, the only thing that people.
Can see and that's where competitors a you know put pressure customers are clamoring et cetera.
But we have.
In transforming from the bottom of the technology stack, but as we continue to move up.
The tech stack more and more will be visible overtime the benefit.
We'll become greater the agility.
A greater and the opportunity to.
You know create great things at the top of the tech stack the of the ability to transform how we work the ability to.
And you know.
That makes him a significant.
Differentiated capabilities on the risk management side.
And ultimately too.
Create a great customer experience.
And better and better economics.
That is what we've been driving for for years and I think we continue to have a bullishness about that so.
So.
What's the Yonkers, along the way, it's just a lot of work there a lot of.
No things that happened on the way to work, but this is we continue to feel a.
And the increase in momentum on these things that are long time in the making but I think are at the heart of winning in the.
In the very different place, where the world is going.
Next question please.
And our final question. This evening comes from Chris <unk> with Sandler O'neill.
Hi, Thanks for squeezing my question here just wanted to ask about the pricing strategy for capital on 360 in an environment, where you have seen some of the the large call them cyber deposit gathers decrease their rates.
How do you feel about strategy in terms of both competitors and in terms of fed funds and other benchmarks as far as what factors really determine where you said that deposit rate.
Well.
Chris.
The.
It would be a fairly straightforward thing I wouldn't never had never used the word easy, but it would be if it's a very fairly straightforward thing.
To build a direct bank.
That goes to the top of bank rate monitor and builds deposits that way.
And.
What that's not.
The business that we have wanted to build and the term I always use is we want to build a franchise.
And.
The you know that's that's a much.
That's a much.
Higher calling and there's a lot that goes into that.
The one of the benefits over time.
Of building a franchise.
Is one doesn't have to chase rates at the top of the marketplace.
But rather is providing really good deals for people, who believe in the company and where we can have enduring relationships and that's that's what this has been about so.
With every passing year.
We partly measure our success by how far you know, we're able to distance ourselves from just.
The you know the very.
The players who are just absolutely chasing rates at the top of the rate table and that's not only an economic benefit but it actually really helps in terms of the kind of customers that we are attracting the selection dynamics that are critical.
In terms of.
The the longevity of the deposits themselves so.
We we have so that's that's sort of the already the state of mind and where we have been as now a new thing comes along which is the bottom falls out of the interest rate marketplace.
We have noticed the number of players or on the direct space.
Moved we also lowered our price at the end of the a quarter.
And we will.
You know, we will continue to watch the marketplace, but we certainly you know our strategy is not to chase.
The the hot money our strategy is really to provide great deals to consumers and have the streamlined economics and the digital model to support that.
And that's what.
We will continue to do.
And.
That.
I think it will serve us well.
Through this part of the cycle and I think over the longer term.
Well it concludes our.
A question and answer period and our call for this evening. Thank you for joining US on this conference call today and for your continuing interest in capital. One reminder of the Investor Relations team will be here. This evening. If you have further questions. Thanks, everyone have a great evening.
And that does conclude today's conference. Thank you for your participation you may now disconnect.