Q1 2020 Earnings Call
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Welcome to the capital one first quarter 2020 earnings conference call.
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During the call over to Mr., Jeff Norris Senior Vice President of Global Finance, Sir you may begin.
Thanks, very much Matt welcome everyone to capital one's first quarter 2020 earnings conference call.
As usual, we are one what cost while I'm on the Internet.
Something that's not quite as usual.
We're talking about social distance and reach webcasting from our own home. So please be patient with its if there's an occasional.
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Access to call on the Internet. Please log on to company wants website capital one dot com, it's all over the next from there.
In addition to the press release in financials. We've included a presentation summarizing our first quarter 2020 results.
With me today are Mr., Richard Fairbank capital one's chairman and Chief Executive Officer.
Mr., Scott Blackley capital once Chief Financial Officer.
Switching Scott will walk you through this presentation to access a copy of the presentation in the press release. Please go to capital one's website click on investors think click on quarterly earnings release.
Please note that this presentation may contain forward looking statements information regarding capital one's financial performance and then any forward looking statements contained in today's discussion in the materials speak only as are the particular gate or gates educated doesn't materials.
Travel to one does not undertake any obligation to update or revise any of this information.
Well there was a result of new information future events or otherwise.
Numerous factors could cause our actual results to differ materially from those described in forward looking statements.
More information on these factors. Please see the section entitled forward looking information the earnings release presentation.
And the risk factor section in our annual and quarterly reports.
That's what the capital one website and filed with the FCC.
With that I'll turn the call over to Mr. Fairbanks.
Rich.
Thanks, Jeff.
And good good evening everyone.
Before we get into first.
Then overview of Kogut 19, and its impact.
In roughly the last two weeks it the first quarter.
The world changed abruptly as the spread of covert 19 accelerated.
Like all of you were watching with empathy and gratitude as people and communities take extraordinary action.
They are for the sick support first responders and slow the transmission of the virus.
That capital one we're focused on the well being of our associates, our customers and the communities we serve.
And we fully mobilized to do our part to make an immediate positive impact.
Enabled by our technology transformation.
About 80% of our associates and 98% of our non branch associates.
Smoothly transition to remote working arrangements and are now securely and productively working from home.
For our associates, who must be a capital one location, we've taken steps to improve social distancing.
The opted flexible attendance and leave policies and increased hourly pay.
For our customers, we're offering a range of forbearance options and taking steps to make it easier for banking customers to access their money, while social this I'd say.
Covert 19 has capitalized three unprecedented events that are sweeping the world with breathtaking speed.
A global pandemic.
A partial shutdown of the global economy.
That's cool intervention of a magnitude not seen since the great depression.
It is difficult to predict the magnitude and duration of the disruption.
Capital, one is well positioned to whether these challenges.
Throughout our history, we focused on resilience in all of our choices on liquidity and capital as a result, our balance sheet is strong.
We have deep liquidity reserves and a strong capital position.
We've also been obsessed with resilience in our choices of businesses and segment.
And then all of our underwriting decisions in good times and bad.
We've avoided or exited last resilient business.
Businesses and segments.
We built stress testing into our underwriting decisions years before the advent of industry wide annual stress test.
We model measure and analyze the resilience of our loan portfolios from origination throughout the life of the loans.
And as always we're focused on resilience and long term value creation in the choices were making today to manage through the pandemic and its impact.
Our businesses have demonstrated their track record of successfully weathering recession, including the great recession and emerging in a position of strength on the other side.
As who have been impacted by Kobin 19.
That help takes different forms depending on the business.
In card and auto Forbearances, primarily in the form of short term payment deferrals and fee waivers.
In the retail bank, we are waving selected fees for impacted customers.
In commercial we're working with our clients on a more customized basis.
As of April 17th.
Domestic card forbearance enrollments covered about 1% of active accounts or 2% of loan balances.
And then our auto business about 9% of our customers or about 11% of balances.
Our investments to transform our technology and how we work our powering our response to the pandemic I've already mentioned, our quick and essentially issue free transition to working from home.
Which was enabled by our moved to the cloud and our broad integration of mobile technology.
Digital and data capabilities are also powering rapid changes and enhancements in underwriting and modeling.
And expanding the scope that effectiveness of real time monitoring.
Turning now to guidance.
Because of the economic this disruption and uncertainty caused by cobot 19.
We are withdrawing our efficiency ratio guidance, including our guidance of annual operating efficiency ratio of 42% in 2021.
We're only a handful of weeks into the pandemic and its economic effect and there is a wide range of possible outcomes.
It is difficult to forecast specific efficiency targets or time frames, while the pandemic runs its course.
But we remain focused on delivering positive operating leverage over time.
It's one of the most important pay offs of our digital transformation.
And a key element of delivering long term shareholder value.
We're also withdrawing our guidance on 2020 marketing.
We continue to make marketing decisions at the line of scrimmage based on our dynamic assessment of market risks and opportunities.
Consistent with our longstanding focus on resilience, we're pulling back on marketing in the near term based on our current view of Kogut 19 risks.
Pulling up we're answering a time of significant challenges spawned by the global Corona virus pandemic and the near shutdown of economic activity across our country and the world.
The largest government stimulus in decades and increased forbearance should help to mitigate some of these challenges.
But it's difficult to predict how it will all play out.
On top of that.
It's even more difficult to predict the course of the pandemic and the length of time that economic activity will remain shut down.
As we manage through what lies ahead I believe we will continue to be well served by our strong balance sheet. Our resilient business is our digital transformation and most importantly, our deep experience and learnings from managing through good times, and bad times or two and Uh huh.
Half decade.
We are ready to take on these challenges.
Now I'll turn the call over to Scott.
Thanks Rich.
The one last 1.3 billion worth $3.10 per share in the first quarter.
Net of adjusting items, our E. P. S loss in the quarter was $3.02 driven by 3.6 billion dollar allowance build.
Turning to slide four I'll cover the allowance in more detail.
The adoption of Cecil increased our allowance by 2.8 billion as of January 1st 2020 in line with previously communicated expectations.
Our first quarter allowance build up 3.6 billion consists of 2.2 billion in card.
Approximately 600 million in auto and approximately 700 million commercial.
We modeled it several economic scenarios and then we added some judgmental overlays in determining our allowance.
The most heavily weighted a beach economic scenarios included a sharp increase to at peak unemployment during Q2 2000, 29.5%.
Followed by an improvement into 2021.
I would encourage you not to get too focused on the headline unemployment rate because it would just one of the many variables impacting our allowance.
For example, after we complete their modeling we added qualitative overlays, reflecting risks and uncertainties due to the more severe economic forecast we saw round in after quarter end.
On slide five you can see that our coverage ratio in domestic card because more than doubled since December 31st since December 31st almost 9%.
Our U.S. branded card coverage ratio was 10.1%.
The difference between these ratios is driven by loss sharing agreements you know partnerships portfolio, where we only allow for our portion of the estimated losses.
Our auto coverage now stands at 3.4% over two times the coverage at your rent in commercial reserve coverage has also doubled to almost 2% driven primarily by oil and gas.
We have included in oil and gas slide in our appendix with details on that specific business.
Next I'd like to discuss our capital and liquidity positions as rich mentioned.
We focus on the resilience of our liquidity and capital positions in good times and in bad and Accordingly, we enter into the code at 19 situation with strong levels of capital and liquidity.
On slide six you can see our preliminary average liquidity coverage ratio during the first quarter was 145% up from 141% at year end and well above the 100% regulatory requirement.
Ended the quarter, we had total liquidity reserves from cash securities and Federal home loan bank capacity of 106 billion, including about 25 billion in cash.
Turning to slide seven I will cover capital.
Our common equity tier one capital ratio was 12.0% at the ended the first quarter.
Well above the regulatory minimum requirement of 4.5% and about $3 billion above our 11% long term capital target.
In the first quarter, we purchased approximately 312 million or 3.7 million common shares prior to <unk> spending.
Our share repurchase program on March 13.
In terms of the impacted new regulations in Q1, we adopted the federal reserve spinal tailoring rule and elected opt out.
I'll be including <unk> and regulatory capital measures. We also elected to adopt the five year Cecil transition regulatory capital.
These impacts.
The elections are included on slide seven.
Lastly, turning to slide eight you can see net interest margin was 6.78% in the quarter.
Eight basis points lower than the prior year corridor.
On a quarter over quarter basis, net interest margin decreased 17 basis points, largely driven by lower day count higher average cash balance that I mentioned previously and lower yields on our loan portfolio.
This was partially offset by lower interest expense paid on deposits.
Looking forward, our net interest margin will continue to be impacted by a variety of factors, including our asset mix deposit pricing cash positions and day count.
And as we've previously mentioned.
Well rate environment, as a headwind and a higher such positively sloped yield curve as a tailwind.
All else equal significant decrease in rates and our elevated levels of cash are likely to create the headwind to net interest margin in the near term.
With that I would turn the call back over to rich.
Rich.
Thanks Scott.
This quarter there is an obvious recurring theme.
In each of our businesses and for the company.
First quarter results reflect two distinct time period.
January Onest through mid March.
Before covert 19 impacts to a colder.
And the last two weeks of the corridor when cobot 19 drove sharp changes in many metrics and trends.
Pre covert 19 results generally shows solid momentum and strong performance on growth credit and efficiency.
To put capital one and a strong position.
Post covert 19 trends show a clear inflection.
But there's too much uncertainty to simply extrapolate recent trends.
With that context, I'll pick up on slide 10, which summarizes first quarter results for our credit card business.
Pre provision results were solid in the first quarter with continued year over year growth in loans and purchase volume.
Credit card segment results and trends are largely driven by the performance of our domestic card business.
Which is shown on slide 11.
Domestic card ending loan balances increased 8.4% year over year, driven by the addition of the acquired Walmart portfolio.
The emergence of covert 19 impacts late in the quarter caused a deceleration in the growth of ending loan balance.
First quarter average loans grew 11% year over year.
First quarter purchase volume was up 8% from the first quarter of 2019 with strong growth through most of the quarter, partially offset by sharp declines near the end of the quarter.
By the end of the first quarter weekly purchase volume was running at a year over year decline of about 30%.
Consistent with industry trends, our largest declines were in travel and entertainment restaurants and discretionary retail. These category decreases were partially offset by an increase in spending it supermarkets and discount stores.
Through April 17.
Weekly purchase volume continues to be down about 30% year over year.
Revenue increased 2% year over year growth in average loans was offset by lower revenue margin.
The revenue margin declined 129 basis points compared to the first quarter of 2019.
A majority of the decline was driven by the expected impacted the revenue sharing agreement on the acquired Wal Mart portfolio, you expected massive comparing to the first quarter of 2019, which benefited from a rewards liability release.
And lower net interchange revenue, resulting from the late quarter drop in purchase volumes.
Non interest expense was up 2% from the prior year quarter in line with the trend in revenue.
The charge off rate for the quarter was 4.68%.
36 basis point improvement year over year, driven by the addition of the acquired Walmart portfolio.
Because of the delinquency rate is not affected by the loss sharing agreement. The addition of the Walmart portfolio put upward pressure on the first quarter 30, plus delinquency rate.
Despite this upward pressure the delinquency rate improved by three basis point year over year to 3.69%.
There were no significant cobot 19 impacts on domestic card delinquency and charge off metrics in the first quarter.
However, we had a significant allowance build in the quarter reflected reflecting the expected credit impacts.
The shutdown of economic activity.
Pulling up in the first quarter, our domestic card business delivered solid results and quickly mobilized to respond to covert 19 impacts.
Slide 12 summarizes first quarter results for our consumer banking business.
The auto business posted 9% year over year growth and ending loans and 8% growth in average loans.
But by the ended the quarter, leading indicators of growth started to show Cobot 19 impacts weekly dealer applications were down an average of about 35% year over year and the second half of March.
And down about 25% year over year and the first half of April.
Weekly dealer originations were down an average of about 25% year over year, and the second half of markets and down about 45% year over year and the first half of April.
Ending deposits in the consumer bank were up 6% year over year.
Average deposit interest rate for the quarter declined 12 basis points compared to the prior year quarter at 14 basis points from the sequential quarter driven by the market interest rate environment.
Our average deposit rate paid going forward will depend upon several factors, including the market interest rate environment.
Our deposit mix, our funding needs and competitive dynamics.
Consumer banking revenue.
Decreased from 3% from the first quarter of last year.
Underlying revenue growth from higher auto loans and retail deposits was more than offset by two factors.
Differences in the timing of federal reserve rate cuts versus our deposit pricing moves pressured revenue in the quarter.
And our deposit mix continued to shift toward higher rate products.
Non interest expense was essentially flat year over year.
First quarter provision for credit losses increased $625 million year over year, primarily as a result to vote and allowance build in the auto business, driven <unk> driven by Kogan 19 and Cecil.
The auto charge off rate increased five basis points compared to the prior year quarter to 1.54%.
Moving to slide 13, I'll discuss our commercial banking business.
Ending loan balances were up 14% year over year about half of this growth resulted from customers drawing down lines late in the quarter.
After peaking in March line draws have subsided, thus far in April 4th quarter average loans were up 7% compared to the first quarter a year ago average deposits also increased about 5%.
First quarter revenue was up 8% from the prior year quarter.
Driven by growth in average loan balances and strong non interest income on.
Non interest expense was essentially flat compared to the prior year quarter.
Provision for credit losses increased $787 million compared to the first quarter of 2019, driven by a significant allowance build.
A little more than half of the allowance build is related to pressure in the oil and gas portfolio caused by the sharp drop in commodity prices in the wake of the shutdown and economic activity.
The remainder of the build is related to covert 19 impact across the portfolio.
We've provided a breakout of oil and gas portfolio composition and reserves on slide 16.
The commercial banking charge off rate for the quarter.
Was 0.57%.
The criticized performing loan rate for the first quarter was 3.6%.
And the criticized nonperforming loan rate was 0.6%.
[noise] pulling way up.
In the first quarter capital one rapidly mobilized to respond to covert 19.
And the disruption it is causing.
With a focus on our associates, our customers and our communities.
We are in a position of strength to weather the pandemic.
And we're closely monitoring conditions and manage managing our businesses.
More resilience and long term value creation.
Hi, I'm struck by how fast how unpredictably and how much the world can change in just two weeks.
Rapid change can lead company scrambling to make choices in the heat of the moment in a swirl of uncertainty and anxiety.
But so much of the leverage is in the choices one makes before coming to say.
Before coming face to face with sudden challenges.
I've, often said that the choices you make during the good times that have the most impact on how you whether the bad times.
And that's a core tenet of how we Matt managed capital one every day.
From our founding days, we have hard wired resilience into every choice, we make on credit capital and liquidity.
Our balance sheet is strong we built resilient businesses and a resilient loan portfolio, we have invested to transform our technology and how we work.
And we're taking decisive actions to aggressively manage credit risk and further strengthen resilience leveraging what we've learned to over two and a half decades.
There are certainly challenges ahead for the economy.
Our customers and for capital one at this point, it's very hard to predict how the great how great the challenges maybe or how long they may last.
We're well positioned to navigate and manage through these uncertain times and do emerge with the strengths to find attractive opportunities on the other side.
Now, we'll be happy to answer your questions.
Jeff.
Thank you rich.
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First question will come from Betsy Gracing with Morgan Stanley.
Good evening, thanks for taking the calling out there it is safe there.
Rich I guess I just wanted to understand how you're thinking about FY <unk>.
<unk> card business as we go through the next couple of years in particular, how to integrate the new Walmart portfolio in relationship into the business that you've got and what it means for growth in that portfolio with that customer sat.
So Betsy a good evening.
B B.
Wal Mart or integration has really happened and so.
We have a wonderful working a partnership with Walmart really exceptional and.
They they I've been struck by how much they appreciate the importance of.
You know the card in their their business and in their future.
Digital.
Business opportunities and so are you know we've been optimistic for what this partnership can be at the moment financially that the partnership is dominated by the economics of the.
Backbone portfolio that that we acquired and that's fully integrated and you know that's that's a farming and.
Back to.
And we have been working very hard with Wal Mart to put in place the elements and the channels.
And the opportunities for originations.
You know Covisint 19, coming along as is a bit of.
You know a challenge in the middle of this and so probably you know that that business will.
Like all of our business is probably be subject to.
Some of the.
Demand impacts and you know.
Changes that I mentioned relative to what typically happens in a downturn, but Scott we're still very focused on a moving forward with them and I'm what I'm struck by also is that.
The B, we take the very same perspectives on how to manage credit in this environment, how to where to find the opportunities and.
So we'll be continuing to move forward.
Okay. Thanks, and then as a follow up just wanted to turn to.
The outlook for the reserve you went through very detailed segment by segment should terms appreciated wanted to understand how you think about that reserve as we you had the next couple of quarters unfold I realize you know the nine after centric unemployment is 22 20.
With that you put the qualitative overlays on so you.
How much more unemployment do you feel like Youve baked into the current reserve level. Just so we can get a sense. That's when we see the numbers come out how we should be flexing future reserve build if any.
Hey, Betsy Thanks for the question, but you know I think that the I would start off by saying.
The reserve when we topped up the reserves at the end of the corridor.
We actually Didnt go and do a another model run we just did an overlay so I can't get too precise insane like hey, Here's a specific number that I would tie to our reserve in terms of unemployment level and it just didn't general in terms of how to think about that reserve going forward I would just say that.
You know that may not be quite as simple as just taking that headline unemployment and try not to the size of the allowance I. Just you know was talking about the fact that we did do this.
Late add to the reserve based on some of the worsening economic forecast, we had and then the second thing I'd just say is that.
You know where we've got.
I think we're just going to see a lot more data in the next 90 days you know is before we have to close the books again, and you know thinking about kind of the path of the country's response and the virus. How the consumer is going to you know react to all the stimulus and you know well actually also house and some credit data.
By the time, because the books next quarter, which of course, we're gonna I'll use all those things to refine our allowance estimate. So at this point you know I'd really like to see that data before I speculate on what are the last night I got it.
Next question please.
Next question will come from Don Fandetti with Wells Fargo.
Thank you so Scott thanks for the color I'm the reserve building and if I look at your allowance.
My personal view is that you guys took them more conservative.
Approach. So we appreciate the other thing so that the card issuers.
Bigger reserve build next quarter, but rich I was wondering if you could talk a little bit <unk> loan growth. What your plans are in cards I know if I go back to the credit quarter. Since your loan growth declined significantly and can you just provide some thoughts on stimulus a in terms of what the offset by the how to think about that.
Yeah. Thanks.
Don.
So.
The first thing that I think is.
Striking.
Well from my experience across several downturns and then.
You know thinking about how to interpret this downturn of course, we haven't seen anything as a precipitous.
As this particular one but.
A couple of things tend to naturally happen in car.
The lower purchase volume, obviously very striking particularly in this downturn at this point.
But you know lower demand for credit.
Lower requests for credit line increases and I want to pause on that because I think there's a kind of intuitive logic people would think we'll wait a minute.
No when when customers feel the strain of the downturn.
Surely a lot of them have to be beating a path to try to get more credit.
And what I've seen in the past and what we're already seeing here.
He is.
No that that.
Similar behavior tends to be.
You know in general one of you know battening down the hatches a bit being more conservative you know.
Increasing their their savings that they have an opportunity to do that sometimes paying down debt now obviously, there there's a huge gradient across customers but.
I just wanted to say that that our expectation and what we're seeing in a matter of weeks is something that is left on the demand side and you know I think I would guess that during the period when consumers feel a lot of uncertainty I think that.
But at least for that period of time that demand will be less I know, it's also really quite plausible that you know as things settle out on the other side.
Simmers will still carry that cautiousness with them, we saw some of that after the great recession that that there was there were some behavioral changes you know it in that particular case.
I don't want to overlay you know on top of that what we're doing that capital one.
We're making.
Here very very early and into that sort of a free fall period of the economy, we're making choices.
That you.
You know our you know right out of our playbook and in downturns and certainly I think makes a lot of sense in this downturn.
Tightening our extension of new credit to avoid the heightened risk of adverse selection.
And then we're also pulling back on near term marketing.
In response to that decreased opportunity at this very moment for quality growth and of course, the decrease marketing has a bit of Ah you know that that a you know world well itself flow into you know little bit on the growth side. So.
The combination of these natural trends.
And our actions.
Put downward pressure on loan balances.
Now I really want to stress that this is a moment in time and this is how the market's reacting you know that the consumer is reacting and the choices, we're making at this moment in time.
We have really structured our business.
And our Playbooks to be you know always you know testing and you know looking for inflection point, and ER and and to see where the opportunities can come and we will pounce on them. When they do one of the thing I want to say is it's not like there's going to be a single inflection point.
Right and then and then suddenly sort of the saw the Sun is going to come out the way opportunities will emerge will will be probably really quite sloped bye.
Byproduct area.
We found across business lines, the sort of inflection point varied by many many months and our business and then it will vary by segment are probably by geography. So you know right and Oh, yeah. It's it's a time to be cautious at.
And but where we're very very.
Closely monitoring where opportunities at where and when opportunities present themselves.
You have a follow up till now.
Next question please.
Our next question will come from Sanjay Sakhrani with KBW.
Thanks, So I hope you guys are doing well Richard talked about pulling back on marketing and obviously that wasn't as evident in the first quarter, but when we think about.
The magnitude and you could pull back on marketing and even other expenses could you just walk us through how you're thinking about it over the course of the period that we're going to experience. This weakness as a result over 19.
Yeah, Let me talk about the.
Let me start with the marketing first.
So.
You know right now we're pulling back a in a number of areas too.
Avoid the heightened risk of adverse selection.
So you know these areas include some pullbacks in digital and online original rejuvenation channels direct mail.
On me on the advertising side certain product oriented national advertising.
You know at that at the same you know we continue we're continuing to originate.
You know through some channels.
We are.
But we're also continuing to invest a you know brand although the overall brand investment is down and we are at full levels of marketing on our national banking side.
You know that the whole.
You know you know most of the things that are going on the b incredible importance of digital banking experience to the.
You know just just about all the trends are are sort of consistent with an acceleration in the kind of things we've been looking for in consumer behavior relative to our national Bank. So.
We're we're a full greenlight.
On on that one.
So and again I'm talking moments in time and these things are line of Scrummage calls like I've always said. So this is this is not the you know these these are not predictions of a sustained.
Set of choices, we're we're making I'm just sharing with you the choices that we are making in this particular phase of this downturn.
So you know relative to.
Expenses overall, I mean, we had wonderful momentum in our company and that our businesses and then our tech transformation.
So you know the very immediate choices.
Our more around our choices of credit risk and the <unk> credit risk at the margin the marketing.
That we're doing we are tightening up on hiring.
And can and and tightly managing operating expenses as we continue to monitor the.
Trajectory.
And character of this downturn.
Okay.
And I appreciate slide 16, which goes through some of the commercial oil and gas portfolio exposure is but I don't know Scott. If you could just help us think through the sensitivities around this because you know we're hearing all sorts of stuff happening with the price of oil.
Maybe just help us think about how that sort of translates into this and also you know there were lots of news articles about hedging and derivative contracts and how it affects you made baby could just you know clearly there on that as well. Thank you.
Sure. Thanks, Sanjay so just starting off on eating piece.
On or excuse me the energy business. So you know that business you see in the slides is really predominantly a exploration and production business and when we did the allowance. We based you know a lot of the allowance on where the revenue stream that those producers.
<unk> are going to half, which is basically the forward coil prices and even with this in your you know the short term disruption that was all about spot prices and not so much about you know the longer term prices. So I'd I'd I wouldn't get too worried about kind of that short term just.
Corruption in the market overall I'm you know when I look at that that industry, and where we are and what a what is going on with.
Just the incredible reduction in the U.S soon.
Oil and gas I would just say best when we set this reserve up the significant portion of it we added.
Non specific reserves these aren't reserves associated with specific names that that are struggling we did a pretty healthy amount of qualitative reserves just based on the rest of the number of these names just continuing to struggle. So you know I feel pretty good about the the level that we.
Put in there in spite of everything that we've seen a in the last several weeks.
And then moving onto your other questions about.
Kind of what is going on.
With the commodities so you know.
Capital, one has a business, which does commodities trading on behalf of our customers and.
Our net exposure to commodity price risk is de Minimis, we did ask the CFTC for temporary relief from being designated as a major swap participant which is the lowest level in that regulatory hierarchy, and we did that mainly because you know there could be some the price volatility could move some of our position.
Turning to levels that they would trigger that registration and we really do appreciate the speed at the CFTC granted relief.
For us in a against not having to Ah to necessarily register.
However, because the request was really broadly misunderstood in the marketplace. We did notified the CFTC that we're not going to rely on that waiver and we're going to go ahead and register if derivative volumes reached out to the threshold that would require us to register.
Just have a couple other comments there so one our commercial bank does not engage and the speculative derivative trading no. Since 2015, we provided as I said commodity price hedges as a service to our oil and gas customers and then when we do these trades, we basically I'm back to back for age we enter into a trade with arc.
Customer and we entered into an offsetting trade with Wall Street and so we're really you know sitting here in a in a very low risk position and I would just say at the moment. There's no outstanding margin calls you know we've reduced our risk exposure to commodity is essentially the zero and you know you can look in our temptation to use unsi.
But this is normal hedging activities and you know if there's any updates down that yeah, we'll we'll point that out there but.
Hopefully that color theater definition.
Next question please.
Our next question will come from Eric Wasserstrom with U.P.S.
Hi, Thanks for taking my question can you give me okay.
Yep.
Good thing.
So.
Oh, sorry, that's accretive question.
Just about the reserve adequacy.
In the car segment.
[laughter] I noted that the you indicated that its oh, there's only reserving political portions of the covenant programs mature actions are the risk.
But is the is the long.
The loss content in in the program significantly. This thing has entered into a world portfolio such that it would like and you can skew that that that ratio in some way.
I think that.
The thing I would just said there so one the loss sharing in those arrangements, we only recognize in our allowance and in our charge offs are portion of the loss and you know some of these loss sharing arrangements. We talked about this the Walmart Washington range that includes significant loss sharing and so as a consequence.
A week it really does decreased the amount of coverage that is necessary required to cover our portion of those losses. So you know while the book itself may have losses that that or you know appropriately reflect reflective of the types of customers that are and there we end up having a much smaller.
Our portion of losses that we recognized in our coverage levels are appropriately lower given that relationship.
Okay, great. Thank you for that and just as a follow up.
Moving to come from some of their questions that have imposed.
One of the thing that nothing can be a struggling with is that something because of course to the close of the quarter, having positive economic conditions in expectations have continued to deteriorate.
So in that context, you know again like how should we think directionally about the adequacy of reserve across the different product. There is there a greater likelihood of amounting to two do another true up into the future position to forward looking.
You know a economic expectations as you feel like you had a lot.
Looking to April trends, such that the first quarter of provision really contemplate has a lot about already.
Well you know we did I had mentioned this we did make make some adjustments to our modeled reserved as we close the books in you know the first week of April.
I really wanted just emphasize that I, we've certainly seen some scenarios, particularly you know economic scenarios that are more severe than what we modeled but on the other hand, you know we've seen more stimulus that's been done brought to bear since then as well and.
And.
I said this earlier, but I really think that we it is very hard for us would predict where this ah you know they allowance might be headed there is such an important relationship.
Government stimulus and hardship programs that you know really are going to work to help offset.
Offset some of the economic challenges that the that that we're seeing right now and I just I just I don't have a good sense about you know as the allows gonna be bigger or smaller I really just want to see a little bit more data before we have a lean in either direction.
Next question please.
Our next question will come from Ryan Nash with Goldman Sachs.
[laughter].
Good morning.
Yes, we can rise.
Hey, good evening, everyone [laughter].
[laughter] so.
Maybe one question a follow up for me. So rich if you look you know the stock's trading at a $30 discount the tangible capital since this pandemic began on concerns that you know just could obviously end up getting into the capital base of the company you know when I look you're a 12% fee. If you want from us to high single mystery, even after building seem.
I forget reserves. So when you just think about I know, it's hard to predict at this time, you think about the different range of outcomes combined with the fact that your halting buybacks the balance sheet sounds like its can be shrinking how do you think about capital and capital progression and this kind of environment.
Well, Ryan I I think we.
Answered this downturn.
You know I I think about the choices that we have made over the years and you know coming from that sort of risk management philosophy that.
Deepen and the way this company is founded.
And.
And even a number of choices that were made over the last.
Few years and I think we enter this downturn in a really good.
Position.
And Ryan would it be useful possibly to of the aperture and your question and sort of compare.
Oh, Yeah, do a little bit of a calibration about you know going through the great recession, and and calibrate do how I feel about.
This time around not that we can predict this downturn, but in a in and in other words, though just thoughts about.
That experience and and comparing some of their resilience dynamics would would would that be a helpful and Oh well my question well my follow up question, but it's actually going to date and I think everybody's kinda alluding to the some of this call. The fact that you know as we see unemployment reach certain levels there's an.
Underlying assumption that losses are going to rise to similar amounts. So I actually think it'd be helpful. For you to compare and contrast, this to the financial crisis. What's different then why did the factors whether it's the card act or anything else that's changed across the industry that you think we'll make those relationships no longer hold.
Ah yes so.
Knowing of course that you know this particular downturn. It's so early you know nobody knows how how prolong this will be how severe it will be what the recovery will look back look like or.
How much government support and forbearance or you know there will be and how it mitigates the economic effect. So you know with those caveat.
Let me talk a little bit about.
You know the marketplace as we entered the downturn.
Some of the things on both sides of the ledger at at you know in terms of resilience levers and opportunities and then.
So let me start.
With the marketplace somebody start with the consumer I think the U.S. consumer.
Is in much better shape than at the outset as a great recession.
You know consumer debt levels are lower on a per capita basis payment obligations are lower still supported by low interest rates.
The savings rate over the past few years is double what it was before the great recession.
And we're not dealing with a structural problem in the economy like the housing sector pre great recession that had to work itself out over multiple years before we could see a sustained recovery.
In corporate market.
As we mentioned in.
Earnings calls over the last few years. The there are some mounting kind of competitive challenges, including higher debt levels lower a you know lower interest coverage weaker covenants.
All of which you know feel weaker than before the great recession.
You know on the other hand, the banks of bad or a smaller part of this trend and increasing leverage with capital markets and Nonbanks taking.
And increasing share of this growth.
And capital one.
We weathered the great recession, a very well and demonstrated the resilience of our business model.
Today, we have a stronger capital position and a stronger liquidity position than we had going into the last Craig.
Len and let me comment briefly about each of our major lending business.
There are some offsetting factors that impact the resilience of our card business.
Relative to the last downturn.
The card act as leveled the playing field, but it is negatively impacted resilience bye.
Banning the repricing of existing balances.
And changes to accounting rules now dramatically amplify the volatility of allowance.
Oh this although this doesn't change the underlying resilience of our lending portfolios and of course, there were talking about both says 166 167 and see so.
And our returns while still very strong.
Our.
So somewhat lower than they were prior to the great recession.
But we have change the mix of our portfolio.
Reducing our exposure to high balance revolvers.
And significantly growing our spend or business at the top of the market.
And building a stronger customer franchise across the portfolio.
And we've built loss sharing in the most of our partnership deals which improves our resilience.
In the auto business.
We have lower charge offs higher returns.
A a strong franchise build or you know one deep dealer relationship at a time.
And a more resilient strategy.
Our commercial business.
Did exceptionally well and the great recession.
But was aided by a business mix and a geography that did not get severely impacted during the downturn.
You know our commercial portfolio you know was still in the developing stage you know eight it looks pretty.
Pretty different today.
Yeah, we've exited or reduced exposure to several less the resilience segments like small ticket commercial mortgages.
And equipment finance.
We've invested in building specialty businesses to generate better risk adjusted returns.
And Weve increased noncredit revenues significantly.
But we think the overall commercial sector.
Is in worse shape as companies and taken on more debt and increased leverage.
And the creditor protections have gotten weaker.
And borrowers have use more aggressive add backs to inflator now again, that's not mostly a description of what's happened the bank lending, but really to lending in the broader marketplace, which of course impacts banks as well.
Of course, no took no two downturns are the same and we get to look at the great recession in hindsight and you know that.
Thats of course 2020.
At this point, we know very little about how the covert 19 pandemic and its economic impacts.
I will play out.
We know of course that the onset was more abrupt.
And that the initial work worsening is likely to be steeper faster and deeper.
We also know that the downturn is being met with a more rapid and.
Much bigger fiscal.
Particularly Cisco.
And monetary intervention the largest.
Let's go a intervention we'd seen since the great depression.
We know that forbearances available to customers on a much greater scale than it was a last time around.
So our strategy in the face of the current challenges and uncertainties is too aggressively manage credit and resilience.
You know from a decision making point of view.
Because downside risks can be you know non linear.
We take a very cautious approach at this very moment, while the economy is you know descending.
Also though while very proactively positioning for opportunities that may emerge.
On the other side of this.
And that's why we've said we're tightening our extension of the new credit.
With a real I toured the probably hi, adverse selection that that that would be for his prevailing out there.
And pulling back on near term marketing tightly managing expenses.
And being you know really ready to be responses as this downturn evolves and knowing that we need to evaluate that on a segment by segment basis across our business.
So you know polling way up Ryan we feel really good about the choices we made over the years, we feel very good across liquidity capital and credit resilience choices as we entered the downturn.
With the tech transformation, we've been able to have a company that can that can move very quickly.
And Oh, you know I I feel very good about where we are.
It's hard to predict exactly what will happen here.
But you know I think the choices you know it.
I I wouldn't change just about any I really wouldn't change any of the choices.
Knowing where we are now I would not change the choices, we made leading up to this and I really like our chances.
Next question please.
Our next question will come from Moshe Orenbuch with credit Suisse.
Great. Thanks, maybe <unk> richer Scott could you give us just a little bit of they a little more detail about.
Specific forbearance programs that you have encouraged of auto particular, how long they might last and what the take up it's been in terms of.
As it peaked can you talk a little bit about that little more detail.
Oh, Yeah Moshe so.
Oh for card customers, who enroll.
We are allowing them to skip one payment.
ER with no late fee.
On a month to month basis.
Interest continues to accrue.
ER and.
As of April 17th as we said you know 1% of active accounts have received assist assistance representing 2% of balances.
For auto customers can skip one to two payments.
With initial interest continuing to accrue and payments added to the end of the alone.
And and I want to comment there when I say things your monthly or every two months. This is not like that they're only chance, but we wanted to get give.
Get ourselves more flexibility to evaluate the situation knowing how fast things are changing.
But you know, it's certainly likely that customers who are on a monthly program will.
You know be extended.
Or if the opportunity.
Calls for that.
And as we said before as of April 79% of customers have received the system representing 11%.
Balances.
You know it's it's.
It's striking.
As we look between auto and a card.
How much higher the.
The requests are on the auto side.
And I think.
That.
Well its striking I don't think it's necessarily surprising.
You know we have found in fact a cross.
Our businesses, if you know a.
You can see very visually that the size of the payment amount is a key driver of the a number of requests that we get and of course auto payments are typically much higher than credit card minimum payments.
And.
The the other reason of course is that an auto the stakes are higher for the customer.
They're very motivated to make sure that they can keep.
Their car.
[noise] culture.
And as a follow up maybe could you just talk a little bit about.
Yeah, you're talking about the things you're doing could tighten the card business and any changes that you would either.
Think about making would see which in the industry with respect to competitors and should be awards and the kind of product you might change we you know.
You know the next several quarters since we are you know kind of when when hopes.
Sure promotions.
Well I think we.
You know the <unk> that the rewards marketplace was very competitive in terms of the authors and early spend bonus and things like that but it did kind of settled out into an equilibrium.
With with purchase volumes down and and you know probably for most a card issuers.
Some tightening up in this very moment.
You know I don't I don't think we would I think that I would expect their competitiveness to be a in terms of products and product offers to be probably stable.
The intensity of the of the competition, it's probably going to lighten up just probably because people are going to cut back on marketing and and you know certain of the products. When you think about it for the reward industry and for capital one.
Are you know oriented towards the thing that that people aren't able to do right now.
You know travel and entertainment dining and add a lot of things like that so.
I.
I I think that.
This will be a period, where I think.
Issuers will be focused on meeting the needs of their customers and the planning for opportunities when things change and you know opportunities can emerge.
Much sooner than the entire economy recovery again as I said this is a segment by segment and situation by situation or kind of thing. So we're already working too.
You know figure out where opportunities.
Individual opportunities can be there.
Possibly even that data become bigger opportunities because of the the.
You know situation the world is that.
Next question please.
Your next question will come from dual card catchy anymore.
Good evening, we've seen other banks this quarter generally shut their reserves at level sufficient to cover.
50% on average a cumulative losses contemplated in there should be we had for scenarios under the fast your shirt any thoughts on why you guys might differ on this metric.
Yeah, Bill Thanks to the question so.
Obviously, there are different scenarios, that's that's a starting point and I won't go into all of the you know the differences there, but just to kind of a few points as you think about if your calibrating us against others on the first is that when you think about our allowance versus the way to said models de fast.
One of the issues that impacts that comparisons that said usage industry outbreaks recovery rates and as I mentioned last quarter. Our practice is to work recoveries, which results in a longer tail and that's really important under Cecil because you can see so you take the undiscounted recoveries as an allowance offset.
So our c. So recoveries I believe are gonna be quite a bit higher versus the said and their industry average recovery rates. The second point I would make is that when these partnerships that we talked about that have loss sharing arrangements that meaningfully reduces the losses that are attributable to capital one.
And we only have to allow for our portion of those losses in our our allowance and in our provision and so.
You know that's that is how we do our resilience in modeling processes, while we don't have visibility into the fed modeling approach is I don't think that the fed necessarily gives us right. It in d. fast for that offset because they've historically not collected all the data necessary to make those adjustments. So just a couple of factors that you should consider.
In terms of how we sit relative to others.
[noise] next question please.
Your next question will come from John Hecht with Jefferies.
Afternoon they'd be for taking my questions.
First one is I'm, just I'm trying to think through.
Now stimulus Mike might be different this time and then if you think about it there were some information put out in the Wall Street Journal today is that.
For a lower income worker stimulus to the extent they have unemployment.
This is a pay increase for beauty time for them worse for prime consumer undergoing unemployment in the season benefits of the Kodak, It's still substantial decrease.
In your compensation for Awhile, and how do you guys who through that in terms of relative performance in your Nonprime book versus your Prime book. This go around.
John.
The.
I think the.
But striking about the.
School stimulus here are there many things probably striking to all of us about it but when we've gone back and and.
Specifically calibrated to the great recession.
I don't have the numbers right in front of me, but I was.
Struck by the fact that.
The benefits for those who get like unemployment benefits the unemployment benefits are higher it's a across the you know.
Across a range of relevant incomes the entire line is higher.
And.
The eligibility.
Yes.
Significantly higher so those two things you know.
Our it's hard to quantify you know how much of an impact that will be because no. One can quantify you know how much of it impacted was the last time, but intuitively.
I mean, I think you know that effect can have quite a bit of impact in a in a good way on peoples.
The ability to a weather there.
You know individual storms and make it a.
To the other side.
With respect to subprime versus crime. The first thing I always say it I.
I think if if if I showed you the.
You know.
You know by income.
It's like it is.
Prime or it you said it takes it to prime Prime and subprime you know you've got at the top of the market. There's there tends to be some very high income folks, but I think you would be a surprise that there's not as much slope as one might think.
Yeah, you know relative to things like income on a you know across our business.
As you move along the credit spectrum.
There is some slow, but not but not at that not all that much.
All of that said, though the fact that I think the the the government is working hard to create a safety net for people.
Who you know don't necessarily have all of the.
You know buffers, some people might have in life and and the fact that that that that net is extending wider.
And.
And and broader and deeper I think that.
Ah you know that will you know should have a pretty positive benefit for consumer consumers and their ability to among other things pay there.
You know pay there they're building their credit card bills.
And I do want to say that that Wow. It's only a you know a small number of days of data we couldn't see in our payment rates.
Some you know a spike up around that time, the those individual checks were coming in so you know that could be a short term thing, but you know that would be confirmatory of the intuition or that are that we would have.
Okay, that's very helpful color.
And then a separate question.
Type thing.
Situation that we're offering.
Yeah.
It's actually behavioral or shouldn't get the night and have a pretty well in digital banking.
Hey, John I'm sorry.
Oh, I'm, sorry to interrupt you were having you're breaking up.
So we cannot milking the question can you.
[noise] got carried out.
That's better.
Okay.
Correct.
As we've been <unk>.
I just don't hear him. It for why have you seen anything real change with respect to action with a your consumer.
Thank you.
Pretty heavily in that opportunity.
Well John I'm, So sorry, let's try one more time and then we might have to move on but.
Well John were you, saying given that we've invested heavily on our consumer bank in terms of the digital side of the business.
Or are we.
You know are we seeing.
You know anything particular, there would that be close to the question that you added.
Yeah, good, particularly given that were Ah stay at home situation and you know you're going to have a greater opportunity to interact with the digital over to digital channel.
Well you know an interesting thing is we are probably in the best position a you know in America to have a calibration.
About because we not only have a a digital bank. We also have you know a branch based.
Bank in some of our geography is as well and so are we certainly you can see the calibration there is.
The first thing I would say is there certainly are a core customers who still.
You know.
Need and want.
Oh, well they they very much want to use the bank and we've been able to keep most of our branches opened by.
Like 75% of them, Oh by having drive throughs, and some a glass windows, where some social separation. So weve certainly seen a continued volume there, but if I pull up I think that.
This moment is you know some people say you know they predict Josh people will have very different behaviors on the other side of this moment.
I'll make a different prediction I think that is going to be an accelerant to that behaviors that we were all as a society heading for anyway and.
The.
The advantage I think that that the banks, who have you know really driven their customers to digital and build the built the capabilities that can help on customer pretty much do everything.
Digitally <unk> it was always where the world's going but I think it just you know and an acceleration of you know the bell curve shifted in terms of I think that number of folks. This is me talking more empiric intuitively then empirically, but this is why I said earlier.
And I talked about we're going to keep our but on the gas with respect to the are you know the marketing and the investment in our national banking strategy because of course.
What that is.
You know as I've, often called that we're trying to build the bank of the future.
And.
I I think that.
You know years in the evolution of America, and consumer behavior or possibly just got.
Compressed here.
Next question please.
Our next question will come from Rick Shane with JP Morgan.
Hey, guys. Thanks for taking my questions.
Two questions first in the past you talked about at 25 basis point benefit from the loss sharing the Walmart agreement throughout 2020, I'm wondering if there's any tap on that or how much. We could expect expect that lacks a is charge offs rise a related to covert 19.
Hey, Rick how are you.
As you think about Walmart, we did talk about a 25 basis point impact to delinquencies.
And you know on an ongoing basis, you know about that same level going forward and.
I think that there's the yes, we could absolutely see variability in the impact of that to the totaled just given you know movements and in the loss rates of either part of that calculation I would anticipate them to be relatively small because so the loss sharing.
In some significant with Walmart that it gets.
It could move up a bit and still not really impact our overall loss rate all that much.
But there's not a and if there's not a cap there's not a cap or in the contracted by chance you were asking that.
So that this loss share is on a percentage basis and in.
It it will stay that way.
Okay, Great and then rich for you look you're you're.
A serious student of human behavior.
And I'm curious what you have seen in terms of consumer behaviour. So far that has surprised you the most.
Yeah.
[noise].
You know I.
I I I'm not sure anything has.
Been surprising I'm certainly struck by.
The here's the thing it's interesting about this particular downturn almost all other downturns.
You know most other downturns have the following characteristic.
They kind of happened on little Cat feet, and then you know as things start picking up but it's a slow kind of descent into that.
And the.
The other thing is.
So often there are structural problems and this is an economy appointments structural problems in markets.
That that sort of lead to that and then the resolution of it needs to fix those structural problems on her way to fixing all the other problems that come from.
So I think what so extraordinary about this.
Is the just swiftness.
This thing and the fact that it's really the entire world going through this and that sort of vertical descent [laughter] from an economy point of view that happened so quickly.
So things that things that I'm I'm struck by on the consumer behavior side.
I have been really struck at.
The.
The early behaviors that I see better conns consistent with a model that we have blade.
Back but.
Let me back up for a second it say.
There's a there's the saying that I used to.
That I've said for years is that.
You know consumers are a lot more rational.
Then the institutions, who serve that including the financial institutions, who serve them you know off over the years.
I have always been struck over the years.
Despite all the things that are written and speculated about consumers just how rational they are.
And so you know I was struck during the great recession that their rationality there was some irrationality before that the great recession.
This time around.
The consumer was in a solid.
Very balanced shape going into this downturn.
And the little things that I've seen.
Behaviors on the on that on the savings side, you know not on our bank side.
Behaviors on the payment side, the purchase volume side.
Even on the delinquency you know side of things.
And at what I see.
Is a.
Rational consumer and I think what we all should think about as we calibrate the any other recession.
This is a downturn that came to the whole world right. It wants.
And it's a downturn without a bad guy.
That's the other part of this thing.
So what's the implications of the downturn without a bad guy.
Is it's a lot easier politically to mobilize Ah solutions for consumers that bad debts that that's a political and economic point that I think that.
It's going to be a good guy in this downturn and its resilience.
The other thing the other final thing I'll say about.
Human behavior or the behavior that we certainly saying I'm amazed I'll talk about our company really a point about consumers find about people.
Hi, I'm amazed.
How.
Productive.
People are and.
You know, we just did an associate to all associate survey and and and engagement and morale is.
His is still at very high levels people are all in their engaged and the productivity is extraordinary when people working for from home. It doesn't mean that everybody you know when the world opens up everybody's going to just stay home.
But I think that.
You know back to my earlier point I think there's.
Hey compression in years in the learnings and the behaviors associated with digital and I think every company is going to walk away some of that's experience.
Struck by the extraordinary productivity that I or certainly most companies.
It really certainly ones that are digitally or you know what a good position.
Bye bye.
What just happened on the productivity side and.
You know that there's some learnings for.
For all of Us there.
Next question please.
And our final question will come from Brian Frameless autonomy.
Oh, Hi, <unk> I know the calls come on but I'm just on the hop back.
You know clearly understand pulling a target given how much flux there is but on the core after moving to the cloud [laughter] retiring the data centers.
Because any part of that core expense.
All right or I've heard and timing changed or is it more just mechanism twox, maybe some call center bombings and stuff like that you know because the data center strategy change at all I guess, it's the crux of the question.
No not not a single bit I mean, you know we we are incredibly well served by our movie moved to the cloud.
<unk> ability to scale up for some extraordinary things that have happened at somebody thinks it but some of the cloud strategy that.
The technology transformation everything about it we we felt this experience is validated with respect to the datacenter exit.
Itself, we are on the very same timing of later this year I mean, we're we're already.
Fully in the cloud.
So what.
What but the data centers are still open because there is you know you'd think once you get out well then you just you're done but there is there's a there's a period of of much of a year to actually do all that a wind down a activities associated with the datacenter so were 100.
Present in the cloud and be a wind down is going right on schedule and we're talking later this year.
And the associated economic benefit of of Ah of those moves.
Okay, well I think that wraps it up to this evening. Thank you for staying with US. Thank you for joining us on the conference call today.
Thank you for your interest in capital one the Investor Relations team will be available later this evening to answer any further questions relieved.
Ladies and gentlemen, this does conclude or call for today. Thank you for your participation you may now disconnect.
No.
Mm.
[noise].