Q4 2019 Earnings Call
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Welcome to the capital one fourth quarter 2019 earnings conference call all lines have been placed on mute to prevent any background noise.
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This conference is being recorded thank you I'd now like to turn the call over to Mr., Jeff Norris Senior Vice President of Global Finance, Sir you may begin.
Thanks, very much rock and welcome everyone to capital one's fourth quarter 29, <unk> earnings Conference call.
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In addition to the press release on financials. We've included a presentation summarizing our fourth quarter 2019 results.
With me. This evening are Mr., Richard Fairbank capital one's Chairman, Chief Executive Officer, Mr., Scott block the capital one's Chief Financial Officer, Richard Scott are going to walk you through the presentation.
To access a copy of the presentation or press release. Please go to capital one's website click on investors.
A quick on quarterly earnings release.
Please note that this presentation may contain forward looking statements.
<unk> regarding capital one's financial performance and any forward looking statements contained in today's discussion and materials.
He called me I was on a particular date or dates indicated any materials.
A couple of 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.
These factors could cause our actual results to differ from two different materially from those described in forward looking statements.
More information on these factors. Please see the section titled forward looking information in the earnings release presentation, and the risk factor section in our annual and quarterly reports accessible with capital one website and filed with the FCC.
With that I'll turn the call over to Mr. Walker Scott.
Thanks, Jeff I'll begin Tonight with slide three.
Capital, one earned 5.5 billion or $11 through five cents per diluted common share in 2019.
On an adjusted basis earnings per share were $12, a nine cents for 2019.
In the fourth quarter net income was 1.2 billion or $2 spent 25 cents per share net of adjusting items are it gets into quarter was $2.49 per share.
We had three adjusting items in the quarter, which are outlined on slide 14 of our earnings presentation.
First we had 848 million or eight cents per share.
Expense of launching integration costs associated with our Walmart partnership.
This brings the full year total expense to 211 million and concludes the onetime expenses related to the Walmart partnership launch.
Additionally, we had an allowance reserve build for the acquired Walmart portfolio of 84 million or 13 cents per share <unk>.
Reserve build as well as the launched integration costs are recorded in our domestic card business.
Lastly, we had 23 million of charges.
Related to the cyber incident that we announced at the end of July .
These charges were partially offset by an insurance reimbursement receivable of 7 million, resulting in the net impact of 16 million worth three cents per share.
We continue to expect portion of these charges and insurance recoveries will extend beyond 2019.
In addition to the adjusting items, we recognized 31 million and costs related to the redemption of our series C and D preferred stock on December 2nd.
We also had an incremental 17 million of dividend expense associated with the cost of carrying the new series I issuance. In addition to series C and D for most of the quarter.
Collectively these costs decreased Q4 earnings per share by 10 cents.
As a reminder, preferred dividends impact GPS, but they do not impact net income.
Moving onto a quarterly performance relative to a year ago adjusted pre provision earnings increased 17% with revenue, increasing 7% operating expenses, increasing 4% and marketing decreasing by 15%.
Compared to the prior year quarter provision for credit losses increased 11%, owing to a larger allowance build and a modest increase in charge offs.
Let me take a moment to discuss the quarterly loan balance in our allowance across our businesses, which are detailed in table eight of our earning supplement.
[laughter].
Our card business saw an allowance build of 107 million.
Essentially flat outside of the 84 million initial allowance reserve build for the acquired Walmart portfolio.
In our consumer business, there was a build a 31 million driven by continued growth in or out of business and lastly reserves, our commercial business declined by 4 million as charge offs in the quarter more than offset built in allowance related to our energy portfolio.
December 31st 2019 marked the end of the allowance accounting that we've all known for decades.
We estimate that the one 120 20 adoption of C.. So we'll increase our allowance by approximately 2.9 billion and reduce our C.T. one ratio by 16 basis points in the first quarter.
We have broken out the cease all allowance transition impacts by reporting segment on slide four.
Turning to slide Hot five net interest margin was 6.95% in the quarter and 6.83% for the full year 2019.
Relative to the prior quarter net interest margin was largely flat.
On a linked quarter basis, net interest margin increased 22 basis points or 14 basis points, excluding the negative impact in Q3 from UK PPI.
The 14 basis points of improvement was partly driven by asset mix, including the onboarding of the Walmart portfolio in the quarter, which reduced cash and securities and partly by the effects of seasonal loan growth.
We continue to have a relatively neutral near term posture interest rate changes over the longer term persistently low interest rates will be a headwind for us and the industry.
Turning to slide six I will cover capital.
Our common equity tier one capital ratio under Basel, three standardized basis this quarter was 12.2%.
In the fourth quarter, we purchased approximately 941 million were 10 million capital one common shares. We've now completed approximately 1.4 billion of our 2019 seat car authorization of 2.2 billion.
Recall that in October the fed finalized the tailoring rule within expected implementation in the first quarter of 2020, when we adopted rule, we expect to opt out are they have to guide for regulatory capital purposes. As a result on December 31st we transferred art held to maturity securities to available for sale, resulting in AOCI.
The increase of approximately 890 million.
Inclusive of this transfer our December 30, Onest AOCI Guy position for MFS Securities.
Craig C.T., one in the fourth quarter by about 30 basis points. Accordingly, when we opt out of Aaos dji into first quarter Q1, 2020, C.T., one will decrease by about 30 basis points all else equal.
As we are preparing for CCAR 2020, we still believe that our long term capital need it's around 11% GT one.
Let me take a minute to talk about the factors impacting our capital need in the 2019th see card. The feds implementation of the new card loss model created a headwind to our capital under stress. Conversely, the effects of the recently finalized tailoring rule 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 and we continue to keep an eye on the feds implementation of seasonal which will occur and she car 2022.
How and when the fed implement these changes in see car will be a key factor in when we will be able to manage RCT, one closer to the 11% long term capital need.
With that let me turn call over to rich rich.
Thanks Scott.
I'll begin on slide nine, which summarizes fourth quarter results for our credit card business.
The credit card business delivered solid results, then stable credit and strong growth in loans purchase volume.
And revenue.
Credit card segment results and trends are largely driven by the performance of our domestic card business.
Which is shown on slide 10.
Domestic card ending loan balances increased by $11.3 billion or 10.5% year over year driven by the addition of the acquired Walmart portfolio and strong growth of branded cards, partially offset by our choice.
To exit several small partnership portfolios in the second quarter.
Branded card loans, which exclude all private label and co branded card.
Grew 5.7% from the prior year quarter.
Domestic card average loans for the quarter were up 9.3% compared to the fourth quarter of 2018.
We posted another strong.
Quarter of purchase volume growth as we continued to grow our heavy spender franchise.
Year over year domestic card purchase volume growth was 10.7% net interchange revenue for the total company grew 9.2%.
Revenue increased 7.2% from the fourth quarter of 2018, driven by the growth in average loans.
Revenue margin declined 31 basis points.
More than 100% of the decline was driven by the revenue sharing agreement on the acquired Walmart portfolio.
Noninterest expense was essentially flat compared to the prior year quarter.
Domestic card credit remained strong and stable.
The charge off rate for the quarter was 4.32% 832 basis point improvement year over year, driven by the addition of the acquired Walmart portfolio.
Because the delinquency rate is not affected by the loss sharing agreement.
The addition of the Walmart portfolio put upward pressure on the fourth quarter 30, plus delinquency rate.
Despite this upward pressure the 30, plus delinquency rate improved 11 basis points from the end of the prior year quarter.
To 3.93%.
[noise] pulling up our domestic card business continued to deliver strong results with topline growth and strong and stable credit.
Slide 11 summarizes fourth quarter results for our consumer banking business.
Ending loans increased 6.5% year over year.
Average loans for the fourth quarter grew 5.5% from the prior year quarter.
Our auto business delivered strong year over year originations growth.
And a modest acceleration.
Loan growth.
Along with stable credit results and loan yields all in a marketplace.
With increasing competitive intensity.
Digital innovation is a key driver of our momentum in the auto business.
Powered by our National banking strategy ending deposits in the consumer bank were up $14.5 billion or 7.3% year over year.
Average deposit interest rate for the quarter increased 10 basis points compared to the prior year quarter.
The rate increase was primarily a result.
Have a product mix shift toward higher rate deposit products throughout the year.
The deposit interest rate declined 11 basis points from the sequential quarter driven by the market interest rate environment.
Our average deposit rate paid going forward will depend on several factors, including the market interest rate environment.
Deposit mix, our funding needs and competitive dynamics.
Consumer banking revenue decreased 1.8% from the fourth quarter of last year.
Underlying revenue growth from higher auto loans and retail deposit.
It was more than offset by two effects.
Differences and the timing of federal reserve rate cuts versus our deposit pricing moves pressured revenue in the fourth quarter.
And the fourth quarter of 2018 included a small tale of revenue from the legacy home loans and investing businesses.
There was no revenue from these legacy businesses in the fourth quarter of this year.
Non interest expense was up 2.3%.
Volume driven growth in expenses and are continuing investments to grow and transform were partially offset by the lack of expenses from the legacy businesses.
Fourth quarter provision for credit losses increased $32 million year over year.
Auto loan growth drove an allowance build.
The auto charge off rate improved eight basis points compared to the prior year quarter to 1.90%.
Better than expected auction values and the benign economy continue to support strong auto credit.
We continue to expect that the annual auto charge off rate will gradually increase as the cycle plays out.
Moving to slide 12, I'll discuss our commercial banking business.
Ending loan balances were up 5.9% year over year.
Quarterly average loan balances were up 6.5 per cent compared to the fourth quarter a year ago.
Average deposits increased 4.4%.
Fourth quarter revenue was up 7.5% from the prior year quarter, driven by growth in average loan balances and strong non interest income.
Non interest expense was up 1.6% compared to the prior year quarter.
Provision for credit losses increased compared to the fourth quarter of 2018, driven by our energy portfolio.
The commercial banking charge off rate for the fourth quarter.
Was 0.35% and criticized loan rates were relatively stable compared to both the cry prior year and sequential quarters.
Criticized performing loan rate for the fourth quarter was 2.9%.
And the criticized nonperforming loan rate was 0.6%.
And our commercial banking business, we're keeping a watchful eye on market conditions unregulated competitors continue to put pressure on pricing loan spreads and loan terms against that backdrop, we're carefully choosing our spot and staying disciplined in our underwriting at origination choice.
Okay.
Pulling way up in the fourth quarter and for the full year 2019 capital. One continued to post solid result, as we invest to grow and to drive our digital transformation.
Our marketing investments.
Continue to build momentum across our businesses.
In domestic card, we generated strong year over year growth in purchase volume and solid growth in loans.
Credit results were strong and stable.
And we successfully launched the Walmart partnership.
In consumer banking, our auto business delivered solid loan growth with stable credit and loan yields and our national banking strategy achieved strong year over year growth in retail deposits.
Looking ahead.
Marketing will as always depend upon our continuous assessment of opportunities in the competitive marketplace.
As we enter 2020.
We continue to see resilient growth opportunities in all of our businesses.
And we'll have a full year of marketing for the new Wal Mart partnership.
With a momentum we have in domestic cards national retail banking, plus the incremental Wal Mart marketing.
We expect full year 2020 marketing expense.
We'll be moderately higher than full year 2019 marketing expense.
We remain all in on our technology transformation and our progress continues.
We are realizing significant and growing benefit across the company.
Faster to market.
Better products.
Better customer experience.
Better risk management.
More growth.
Better economics.
We're on the home stretch of our transition to the cloud and we're on track to exit our data Datacenters near the end of this year.
Until then we continue to operate with one foot in the legacy datacenter environment and one foot in the cloud.
Along the way, we're working hard to improve operating efficiency, even with the elevated costs of straddling both the datacenter and cloud environment.
In 2019, we posted a 45 basis point improvement and annual operating efficiency ratio net of adjustments and we expect to achieve another year of modest improvement into it in 2020.
We continue to expect a bigger moved down in our annual operating efficiency ratio to 42% in 2021 net of adjustments.
We expect the larger improvement in 2021 to be aided by the full exit of the datacenters and the associated costs of straddling to environments.
In three increased traction in our businesses enhanced by technology.
And the step up in revenue share on the acquired Walmart portfolio.
Which will occur in the fourth quarter of 2020.
We continue to expect that the improvement in annual operating efficiency ratio will drive significant improvement in annual 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 the QNX session as a courtesy to other investors and analysts who may wish to ask a question. Please limit yourself to one question plus a single follow.
If you have any additional follow up questions. After the Q, an exception investor relations team will be available after the call.
Matt Please start your day.
Thank you once again, if you'd like to ask a question. Please signal by pressing star one on your telephone keypad. She was using a speaker phone. Please make sure. Your mute function is turned off to like your signature each of equipment.
Your first question will come from Ryan Nash with Goldman Sachs.
Hey, good evening guys.
Good evening Ryan.
Correct.
Maybe just started off question for Scott. So thank you for the moving pieces on Cecil across the different products I guess now the day one is behind US any color you can give us regarding to date to impact and maybe just talk about it across each of the different portfolios and I had one follow.
Yep.
Yeah.
Sure well when I think about day to I'm going to start off by just saying you know we gave.
Segment level multiples and I think they are a good foundation for you to use those multiples and apply them to what you would have been estimating under the prior regime for allowance builds on in 2020, So I think Thats you know.
In general a good place to start in terms of thinking about day too.
I think that the multiple that we've talked about could change gradually if performance you know the port portfolio performance or the portfolio mix really changes in the future, but I think those are going to be changes that happened over time. So you know the transition multiples are probably a good place to start.
Got it.
And rich maybe just a question on both operating and and overall efficiency. So you made nice progress in 2019, despite a handful of headwinds I guess what are the biggest swing factors that could impact reaching 42 or is it.
The fact that everything is coming offline in the fourth quarter that you have such a high degree of confidence and then I guess second just given where we are in the cycle you talked about marketing being up moderately this year.
Is there a scenario where you could see it accelerating or would you expect us to remain in and around these levels plus or minus like you articulated in your outlook. Thanks.
So Ryan.
Let's talk about the operating efficiency ratio.
We're.
You know like a year into when we set a this guidance and it was.
Certainly a stepping out of character for capital one to be so specific as so many years out.
And as we have talked all along the way.
The.
There are several things that have driven our confidence there are certain things that are.
You know to call them math is is a little bit understating, the sort of incredible work associated with doing it but in a sense getting out of the data centers is.
Something that a with the extraordinary achievement of doing it we have a you know I think a very good handle on what the cost.
You know of what straddling those environments have been and what the benefit of.
Just being all in on the cloud it.
The the math of the.
Wal Mart step up that that that is what it is that's contractual and so I think that you know a very reliable thing.
The.
You know and other thing that that age is the continued improvement here and the larger improvement in 2021.
Is.
The interim increased traction that we expect in our businesses that we can in fact, I see unfolding and that we expect to continue obviously that you know has uncertainty around it like like any.
Estimate of future business performance and growth, but you know a lot of that is sort of in the works. It can be affected by that changes in the marketplace changes in the economy changes in choices that we make but Oh. This is the product of a bunch of work that weve.
If they've been doing the the success and of our marketing and an account origination in prior years, which we've spent a lot of time talking about and the some of the technology.
Innovation that has been going on.
So we feel good about that obviously, you know that has uncertainty to it and the other.
The the other element in the uncertainty equation is what happens to operating costs of one minus the datacenter exit and the.
You know and all the associated.
Cost of straddling that will.
Be eliminated and you know there can always be a risks to cost estimates that we spent oh you know we've worked very hard and this is not like a new thing we worked hard for years deriving gradually driving down the efficiency ratio and being very.
Discipline on operating cost, we do have a sum.
Growing benefit that comes on the technology side here with respect to.
Technology cost savings and you know collectively when we when we put all that together while as always there is uncertainty in this here. We are we had our bold shingle that we hung out a year ago here.
We are a year into it and you know we feel.
As good as we did at the time that we launched it and I'm pretty struck by in a world where so many things change.
How you know what we had in mind is continuing to unfold and that's because it's the product of a lot of work for a long period of time.
With respect to marketing.
You know the first thing I want to say is you know, we we don't give precise willing in most years in many ways, we don't even give marketing guidance at all.
And Oh, we.
What I would say about marketing is and the impression I want to leave you with is.
We continue to feel very good about our marketing investments.
We you know in card marketing is strengthening our heavy spend or franchise.
Driving strong new account originations.
Growth in purchase volume net interchange revenue loans.
On the bank side, the increased marketing is fueling deposit growth along with cafe and brand awareness, we're seeing a lot of traction just overall in our brand metrics and brand equities that are critical to building a franchise.
And also you know we're a company that doesn't have you know 6000 branches, where a company that actually isn't that the top of the league table in terms of co brand partnerships and a lot of things. So we we have to build our business the old fashioned way kind of one customer at a time and you know our marketing.
Machine is a key part of that so what I would what I would leave you with is we continue to feel very good about the marketing we we that yeah. We've got a new addition here in terms of a full year of the Walmart marketing and so that's gonna be yet another factor.
That pulls up the the numbers there there's always a you know.
We will always make our final determinations based on the opportunities and necessities that we see in the marketplace, but I wanted to just give you that general.
A window into how we're feeling about the marketing.
Next question please.
Your next question will come from Sanjay Sakhrani with KBW.
Thanks, I wanted to follow up on the day to seasonal impacts Scott when you look at the street consensus provisions out there and I'm just looking at our own were assuming you know six percentage loan growth flat charge offs and we have the provision up 20% I mean does that look commensurate to sort of what you're articulating.
Or is it something else.
Oh, I'm, sorry, why don't I, just step back and give you.
Little bit of a picture of what's going to happen with see sole so.
Just to go back in ground out house useful is going to work allowance movements under Cecil are really driven by the same factors that drove the allowance under the prior regime. So you start off with loan balances that ended the period, you got expected future losses and recoveries on balances.
And then you know we have qualitative factors that that are not captured in our modeling and we out those on top.
But those three factors, it's really the second one that changes under seasonal and because we're now going to be holding on an allowance for the expected lifetime losses and importantly, we're also going to be having the lifetime recoveries and that's all come to that and just a minute as to why that's such an important factor. So that's the biggest the big.
A step change under Cecil Southern kind of just put this together 40 and seller tell you how we're going to do it we start with a 12 month loss outlook, which we forecast.
We then extend out into a lifetime forecast and when we do that we assume a gradual reversion of losses to hit to historical averages after that first year.
And then.
We overlay that with future recoveries and future recoveries are a big offset to our seasonal allowance prior to Cecil we offset our allowance with expected recoveries for only the next 12 months with diesel will be offsetting our allowance with the with all estimated future recoveries and relatively speaking.
Recoveries have a larger offsetting impact under Cecil then they did the under the prior allowance regime, because we tend to see a longer tail of recoveries on our charge offs. So net of all of that.
I think you're going to see a 1.42 multiple on our allowances our domestic card business at the point of transition 1.49, multiple for our auto business and I as I mentioned in my first answer I think those are relatively stable.
Your question about will highlight this look in peer just stability and in periods of growth. Let me just kind of answer that real quick in periods of stability. You know you're really just going to have take that multiple and apply it to whatever allowance build that you are thinking about and that includes model moderate growth and a stable economy.
There's a couple of things that could cause that implied cecil multiple to vary over time, and let me give you a couple of examples. So the first is that as you know and we've talked about Cecil pulls forward the allowance expense associated with new lending.
And.
So all else equal our implied Cecil multiple would probably go up in periods of higher growth and just to give you a bit of a sensitivity there during our growth surge in 2014 at 2015, the implied multiple during that period. If we had lived under Cecil would've been higher.
Perhaps in the 1.6 range. So just to give you a sense like there's a lot of things that could move around but if we just kinda took hindsight and applied you know kind of where we see things we can see the multiple going up into that range on the flip side of that in periods of high recoveries you could actually see the multiple go down so in periods immediately afterwards.
Downturn, where there's higher you know what we've got this big portfolio of recoveries those might actually start to be a bigger factor and and push the the ultimate multiple down. So I know that was a bit of a long answer, but hopefully that gives you a sense of kind of the moving pieces of hub.
How season is going to work day too.
All right. Thank you I have one follow up just on the Walmart portfolio I know it was known to have a lower tender share penetration I was wondering if that's a big growth opportunity in 2020 in a contributor card growth and then just a clarification on the marketing expense outlook for 2020 would this year's growth be.
Moderately higher sort of that was that a good comparison in terms of the growth rate. Thank you.
Could you repeat the second question sounds a.
Your clarification question.
Yeah on the marketing expense growth you mentioned moderately higher I was just wondering if not 29 teens growth rate would be you know commensurate with moderately higher there's like mid single digit growth.
Okay. So.
So the.
I think what we have this year as a continuation of the momentum that we had last year and I want to say also to my.
Response to a Ryan Nash is opening question.
That you know and you know one of the important drivers of 42 is it continuing traction.
In the business and marketing is a very important element of that and in fact.
You know so we.
As a way to think about it is is.
We start with a and opportunity in a sense a growing opportunity on the on the on the marketing side consistent with what we're seeing overlay that.
With Walmart, which is a new thing and you know those two things together is what.
It.
Is.
Driving our guidance of.
A moderate increase in marketing.
<unk>, which do you want to.
Talking about his question on.
Look opportunity from goes Ducs entity in the Walmart portfolio, Yeah, Let me say it it's certainly a and honor and an opportunity to.
Partner was alert, but not all the world's largest retailer actually the world's largest company a fortune one company.
And to launch a digital first card program.
So.
The.
For capital one this the opportunity at divides itself into a a back book where we.
Have converted the old synchrony back book and Weve, you know told you a lot about the size and the general parameters associated with that.
And then there will over time be a.
Growing front book that will be the originations that we do under this new partnership we're not gonna be specifically guiding to that front book because in many ways. This will.
You know have a lot of similarity to many of the front book.
Ah things that we do add capital one.
Certainly.
The size of Walmart and at this point, the you know relative to other partnerships the at the penetration levels.
Of of the credit card.
Relationships there is certainly.
Ah you know upside there and I think Walmart certainly believes that and so do we.
But oh, it's we're in the very early stages of this but I think we're very pleased with.
The way our two companies are partnering here.
Next question please.
And your next question will come from Moshe Orenbuch with credit Suisse.
Great. Thanks, you referred to a 5.7% growth in the branded cards that that I think was the same number that you referenced in the third quarter. So roughly the same level is gross could you just talk a little bit about what the you know kind of <unk>.
Outlook is I mean, because that does exclude walmarts talk a little bit about whether that branded growth was going to be accelerating or decelerating and the impact maybe.
On overall growth from Walmart.
I do have a follow up.
Yeah Moshe So first of all a you know the front book of since it starts at zero. The front book by definition will be a growing book I also want to point out the back book of Wal Mart or would that was a loss rate that it has a is a run off portfolio that that you know running off at a pretty.
You know sizable equip a relative to you know portfolios otherwise that we have so they're gonna be to force is going in opposite directions, there and Oh, Yeah, we'll have to see how that plays out but we're certainly a very happy to have that.
That partnership.
The outlook.
Look I think we continue to a you know feel good about the growth opportunities in the card business, but I think it's it's more a continuation of the.
Ah, but story that we've been talking about before in terms of where we're benefited by a number of years of strong.
A counter origination.
We have been overtime a increasing.
Credit line.
As we have validated a each successive vintage is coming in as good as it is and in fact, the if anything the recent vintages are outperforming in a good way, but you know bye.
By a bit some of the earlier vintage the all that is a good Baghdad gives us the confidence to you know to continue to drive the originations and also the continuing confidence on the.
On the credit line side no. This is all in the context of an economy. That's already you know the longest.
In in like a in in recorded.
History here between recessions, but so you know with it with a cautious I it at the environment. The things that we've been talking about for a number of quarters are continuing to find traction and that.
That a and and and then very important element of that is the success of the marketing. So that's why I'm you know we feel good about the growth opportunity.
Gotcha, and just as a follow up little bit a housekeeping noninterest income.
Outside of interchange revenue and service fees kind of underlying was up very nicely both from a third quarter and.
A year ago, we set primarily just changing that.
The absence of PPI charge are there other sectors as well.
Moshe can you, just which which specific line item are you looking up.
Which which you guys have called you know kind of other income.
It was up like <unk>.
55, 60% Q3, and 90% or so from a year ago right and leave guests with most had the PPI charges in them, but.
Yeah.
So a few things that impact that line item. So other noninterest income really is driven by oftentimes marks on on a variety of different.
The situation. So the first is.
We actually have some compensation related assets that we mark and we take the benefit of those marks runs through this line item in revenue and there's an offsetting expense that runs through an elevates STN b cell in that period with the run up in the market there was a pretty healthy amount of more.
Mark on compensation. The other thing that runs through there. We do you know occasionally have partner payments that are that are coming in under the contracts those can run through there and be a bit lumpy.
I think that the level that you're seeing in Q4 is a bit elevated to what I would expect on a on a run rate basis.
Next question please.
Your next question will come from Betsy Graseck with Morgan Stanley .
Hi, good evening.
Hey, Betsy.
Just switching gears, a little bit talking about NIM I know that NIM went up nicely in the corner and <unk>.
Actually I think your comment in your prepared remarks around how low rates are a little bit of a headwind. So just want to square those two things and understand how you're thinking about.
You know the outlook for many of the nice to claim in the deposit costs and he can speak to that a little bit.
That team you know as I mentioned last quarter, we have had been talking I'm for a number of quarters about headwinds from deposit mix and deposit pricing and we had started to see those debate a little bit.
Last quarter when I look at NIM. This quarter, you know I mentioned that there were two primary factors that drove him off on a linked quarter basis. One of those was asset mix, which was the larger of the two factors that I described the other was the other factor was seasonal loan growth. So you know we're seeing a bit of Ah you know that's that's.
Traction in in there.
The cost deposit pricing, that's embedded in that as well as as you know things like accelerated amortization accelerated amortization on the premiums that we have some of the securities all of that's embedded in there. So overall I think that when it comes to the impact of deposit pricing.
Our beta to have been relatively low since the.
Declining rate cycle started that may be an opportunity rich mentioned the types of factors that would drive where deposit pricing goes. So I think we'll have to see you know where that that moves to but at this point I don't really see any outsized impactors, whether positive or negative on our net interest margin.
Okay, and then you know some mix really driving the bus on that one.
Right I think about <unk> the c., so outlook here and I know, we already talked about they to quite a bit I just wanted to see if you could give us some color around the commercial banking increase in your day, one I ask just because some of the other folks and we look at had declines in commercial so I wanted to understand what was driving a little bit of different outcome for you.
You know it is so hard for me that judge what others are doing on their estimates you know it depends on the life.
In a variety of factors, so I can't even hazard a guess when it comes to commercial just because the portfolios are are pretty different yeah. So I, just I'd really honestly.
Don't have an answer to you on that one.
Next question please.
Your next question will come from Rick Shane with JP Morgan.
Hey, guys. Thanks for taking my question I think we'd all agree that 100 dollar loan balance on January 1st after the holidays would have a difference we payment behavior than 100 dollar loan balance on me first after tax refunds are distributed I realize some ses.
Perspective, you're supposed to take lifetime loss assumptions on both.
Trying to understand how does the tactical difference in terms of that near term kenyans behavior in capture lifetime losses are.
Slightly differently is 5% growth in December the scene is 5% growth in June .
Rick I would just say that.
Seasonal growth and Transactors, we looked at those we look at the likelihood of are evolving we use historical empirical data about you know how quickly those get paid down. They don't tend to have you know large lifetime allowances and in general I would say those aren't a you know really a factor.
Describing the multiples that we disclosed.
Got it so it's just a follow up to that.
Necessarily expect to see that same seasonality because you are able to factor.
In the short term than we tend to be years.
Yeah, I broadly speaking you know all else equal I think that's true.
Next question please.
Your next question will come from Don Fandetti with Wells Fargo.
Yes, a rich you know there's been a lot to talk in the thinking of payments industry with a b to b and kind of forms of top three small business card issuer can talk a little bit about the competitive dynamic there and.
What your thoughts are in terms of growth.
<unk> growing faster than your consumer business.
So.
The.
Our small business business, we don't break that out separately.
We are.
As we are in the consumer side, one of the top players in the league table in that particular space Amex is way north of the rest of the unlike the shorter distance between competitors on the consumer side.
But.
You know that business is.
Ah Hey.
A business that a simple extrapolate a simple transfer of of of a consumer approach.
Or a lift and shift of a commercial approach a ends up.
Being a sub optimal thing and the traction and success, we've gotten in the small business space comes from really working backwards from the customer and the customer needs over a very very long a period of time and.
The so.
A lot of the underlying dynamics of the same in that business in terms of this shift in payment the reduction in cash and checks and so on but what I would leave you with is like our some of the other investments we made a capital. One this is many years kind of into making and we're continuing to.
To a you know generate successful growth there.
The one thing I would say is that on both the consumer side and certainly the the.
Small business and the commercial side.
The change that is going on in payments.
His breathtaking I think it's really at the vortex.
Technology change in all of banking.
And.
That's partly because.
You know the Digitization of transactions is a you know a very natural place to go but it's also one of the places that is is not regulated or is very lightly regulated and Furthermore, it is the place where.
Many tech companies, who really don't want to be carrying around bank holding company or you know.
Badges and things like that.
Focus on how they can try to win on the front end of banking.
And and leave a lot of the backend of banking to the banks. So I'm I'm excited by the opportunity in the on the business side as well as the consumer side, but I'm certainly struck by the breathtaking a rate of change and I think for every player in the business.
There's a real imperative to you know come up with the strategy and work backwards from where the world is going is that a forward.
From where we are.
A follow up dog.
Nope almost up.
Next question please.
Next question will come from John Hecht with Jefferies.
After doing thanks very much for taking my questions just you're not looking for guidance, but just thinking conceptually long term.
It would be would seem logical that you could do more digital customer AG aggregation, what's a digital bank in place and with that is it fair to think that customer acquisition costs, you know to cost tied to physical mailings and so forth may be more efficient going forward.
Wait I want to make sure John could you explain a little bit more of your question again.
It's just you guys have invested a lot more to digital banking platform and it's clear to us that you know as a user of your website.
You can do more on the right and so the question is given that your consumers can do more online one of their cross selling opportunities are there other opportunities to reduce your customer acquisition costs for specific product.
Yeah. So.
So from that.
Interestingly, it's on the <unk> the.
Founding notion of this company one of the founding.
Notions was that marketing is gonna be reinvented by the technology.
And information Revolution, and so way back with you know old fashion direct mail.
We set out to build a business that we also didn't have.
Hey.
No. It was it was bought by being very small we didn't have much of a cross sell opportunity. So much of the heritage. If a company for long period of time was focused on the origination of business.
And one of the grade prizes that weighted us overtime was to have a scale franchise and there are two parts of that one is to really be large, but the other is to be a franchise and.
If you overlay the whole digital revolution on that I want to.
Redouble your point that I think the V.
The the opportunity that.
Oh wait.
The companies who have.
Who bring three things to the table is is extraordinary.
One is the table Stakes is you really need to be large and however important scale was in the past.
It is more important everyday and I believe it was very important in the past.
The second thing.
That one needs to bring to the table is.
Great digital capability and that's not just in terms of nice apps and that kind of thing, but also a V a information based capabilities, which increasingly.
Are are very benefited by.
Real time big data and the use of machine learning. So you know there's a great opportunity. There. That's the second leg of the stool. If you will but I've really really you know what we what we believed at the outset and what we certainly live everyday is there's a third leg of the stool.
And that is that you have to have a loyal customer franchise, just having eyeballs lying around just having a large customer base its nice, but the non linear things that happened when there is a deep and loyal franchise is a great thing if you look as.
At the essence of capital one strategy over all of these years.
We started with not saying it expand years and years and the quest for scale.
Secondly, we have you know starting with an information based strategy many years ago and really <unk>.
And that was again pre internet and all of that but but are you know where we've come overtime. The whole tech transformation driving toward a great digital capability and real time machine learning Big data a capability and then finally.
And maybe of all of them. This is the hardest one to build.
It is really building that loyal customer franchise, which is you know all about a great customer experience.
Products that people can rely on a.
Ah Hey.
Customer relationship that.
That to tell your friends about.
And ER and ultimately a brand that stands out and I. Appreciate your question because that has been a three legs of the strategy for many many years and I think the.
Growing traction that we're having on a lot of fronts, including on the financial side is a product of of that opportunity and I think the there's a lot more upside from here.
[noise] next question please.
Your next question will come from Brian Hogan with William Blair.
Good afternoon Ah. Thanks first questions on the competition and your views on the Apple card and the potential pressure could come from that and bush competitor in their growth has been pretty dramatic in the first two years. So.
Then a follow up on on that is actually a potential competition from like the of the challenger banks like could chime in there and 26 and others are using the a customer losses from those.
Right. So Brian you. Your your questions about competition are focused really more on the the sort of the tech side and the new innovation as opposed to just a the.
Well, let me let me start with just a question a comment about competition in general and then in the card business and then let me pivot.
To a some specific things.
It is you know the credit card business I think has.
You know I think back to the founding of capital one is that.
Right.
I always say that you know capital one's a very young company to most compared to most of our bank competitors. They they've been around for over 100 years a in capital one's case is not an accident that we started.
With credit cards.
Because we had a belief way back then that credit cards structurally head at a number of advantages that would allow them to you know have very good earnings power and also be absolutely at the the tip of the spear of where the whole Tech Revolution and information Revolution, we're taking in it.
As funny.
You know over 25 years into this journey.
I'm finding a lot of the same you know observations that we had before and I think the credit card as a as a business is kind of standing out in these times relative to the earnings power of a business like this as well as some of the growth opportunities that it has.
That said that insights not lost on our competitors and this is a very competitive business.
Because of this scale requirements in the business. It is it's a very consolidated business and I think most of the competition revolves around.
You know the top 10 players in the business and I think the competition is intense.
But I think it's it's fundamentally rational.
But the intent shows up and in marketing intensity rewards offers.
Pricing and various things, but if we pull way up and I cross calibrate to other parts of banking in which we play this feels like a the I'll be area with the highest opportunity and the most kind of rational marketplace at the moment, let me pivot to.
The the the tech marketplace.
No. So often were asked by investors about Fintechs and what about this started up and that startup and of course, we keep an eye on that.
I think the sort of elephant in the room is the gigantic tech companies.
And these sort of opportunities that they have and so we've always had a lot of respect for that and frankly.
Our tech transformation is motivated in many ways by trying to emulate and learn from some of the best practices of those companies.
It certainly has our attention when Apple launches the Apple card I think it was a really really well done a marketing campaign, which is universally what we've observed from Apple for many many years and Ah you know, we'll keep an eye on that but I I would say that.
That now adds to the list of.
Impressive competitors and impressive offerings that we are up against.
If we pivot to the challenger banks.
That are out there, so I'm going to switch more to the.
Deposit in banking side of the business. There's some really a striking numbers that have been posted by companies that are I'm trying to.
Establish themselves in banking.
We know from having spent a lot of years doing this and right now having a national you know a national banking strategy and you see us on television it is a really hard.
Thing to dislodge business from a the established banks with great scale and local presence.
And.
You know so that all of us are working very hard on that.
I have been struck by the numbers of account origination that are coming out of some of the challengers banks. The biggest question I haven't I don't know the answer over just a question I have is how much activity level and true sustaining traction do they have I'm not saying they don't I think it's something that is an important place to look.
But were inspired by some of the innovation our competitors are doing and it's a reminder to all of US that if we you know really lean into.
Hi Tech innovation, there's an opportunity to chip away at the extraordinary position that a few of the biggest banks in the U.S. have.
Next question please.
Your final question in the evening will come from Eric Wasserstrom with you'd be yes.
Okay. Thank you for for fitting in.
Rich in your in your commentary you alluded to to the fact that or competition in the auto space a intensified to some extent can you just to give us a little more incident on what you're referring to it and what ways that manifested and then I have a one one quick.
Unrelated follow up.
Yes, so the the.
[noise] auto business.
Has.
You know a relatively small number of very large players and.
<unk> I've, often said Eric that.
Competition in auto is even more impactful.
Then a in in in the short term than competition in card only because.
On the auto side, you have a dealer in the middle of an auction.
And when the dealers sees something from a particular lender like a looser credit policy or a different pricing.
You know the dealer can drive a significant amount of business in a way that just doesn't happen in the one to one marketing that happens on the card side. So it's why almost every conversation that we have about auto and every week every time we.
We we celebrate a particular growth that we have we always caution how big that factor is and how much that factor can create adverse selection.
If if people are loosening their credit policies. So what we do is we we Ah you know we invest heavily in in a technology in this business and we're absolutely every quarter, we're out there to get whatever opportunity, we can have consistent with our own stand.
Understood and with a very very watchful eye on the competition.
In the last you know over the last few years. There. There you know was a pullback of a have a couple of competitors that we took advantage of both of them have certainly returned and are pretty.
Aggressive players in the space and what we would describe to you is that the competition is increasing.
In the auto space. Its you know nothing too you know wave red flags about but as generally.
Increasing.
And the B, it's a little bit.
Unusual that at the same time, we're saying competition is increasing that were also saying.
We are our originations and even a you know our our book of business overall.
Actually increasing.
That is.
You know something that maybe a little bit anomalous. There is also something hard for us to tease out is the growing traction that we're getting by the very heavy investment we have in technology in the auto business. That's in terms of.
Of.
Ah underwriting real time big data driven underwriting.
The creation of.
Products for customers and dealers.
In this space that are that are very sophisticated peck driven.
Products that actually have real time mass scoring.
Of any car anywhere.
Across the nation.
And.
And the continued success that we've had in building a deep dealer relationships, so to particularly kind of good quarter for capital one, but I think the impression I wouldn't leave you with the competitive meter is rising and we'll have to keep an eye.
On that and the other very important thing that is probably the most important thing that we all should keep in mind in this business is that.
The auto business has been a credit performance in the end I'm speaking of the industry now has been benign for a long period of time.
And at the top of the list of why that is so is what has happened what is going on with used car prices, which have been you know stayed you know at a relatively high level for a long period of time. This is a collateral driven business I also think when when you have businesses, where the collateral value.
Who's had been high for a long period of time.
One asset we have to ask ourselves what collateral assumptions collateral value assumptions, our underwriters, making across the industry I'll tell you what we do and we assume they're going down I can't speak for the whole industry, but I just want to put a caution that.
We've had good times <unk> for a long time in that business and collateral values have.
Have been an unusually strong.
Ally.
And won't forever.
Thank you for that and my very quick follow up.
Scott, It's just on the the touch rated.
[noise] looked like it came in around 19 in this quarter percent or so.
How should did was there anything, especially in this period, some true ups or something and how should we think about the appropriate rate going forward.
Yeah.
Let me comment on more of the full year tax rate because that's what I would point you to the full year tax rate was about 19.5% I would say that's a reasonable baseline, it's gonna be plus or minus you know from their dependent on income levels.
You know evolutions in our credit the businesses that generate tax credits.
But nothing particularly large we did have some discrete and in the quarter, which drove down the quarterly rate, but a 19 a half a good starting point for a you know how do you should think about future.
Well, thanks, Scott and thanks, everyone for joining us on the conference call today. Thank you for your interest from capital one.
After relations team will be here. This evening answer some follow up questions that you might have upgrade evening everybody.
Once again that does conclude or call for today. Thank you for your participation you may now disconnect.
[noise] mm.