Capital One 1Q17 Earnings Call Notes

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Richard D. Fairbank – Capital One Financial Corp.

Domestic card charge off rate higher than expected

“Based on portfolio dynamics and industry conditions we observed in the first quarter, we now expect that the full-year Domestic Card charge-off rate will be in the high 4%s to around 5%, with quarterly variability. That is up from our prior expectation of the mid 4%s. With the benefit of more data, we have refined the expected shape and timing of credit losses on our front book programs booked over the last few years.”

Increasing competitive intensity in the industry

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

A lot of supply out there

“Yeah, Don. So you probably heard us for, I would guess, four – this is like the fifth quarter now that we have been talking pretty vocally about supply out there in the marketplace. And the last few quarters we have pointed out the pretty striking growth rate of subprime itself. I don’t have the number right in front of me, but I believe it’s 14% year-over-year subprime growth for an industry that’s growing at half that overall. Now, again, Don, that’s off of – and I really want to stress this – it’s off a much lower base that retracted significantly after the Great Recession. But still, that certainly has our attention, that subprime growth.”

Card delinquencies are more telling than auto delinquencies

“Yeah, well, the first thing I want to say is that card delinquencies are a lot more telling than auto delinquencies. And so that’s point number one. So whenever you – I always just take as one part of a lot of pieces of information when you’re looking at auto what’s happening to delinquencies because the way that people pay, and, frankly, really what happens is they wait. A lot of people wait until the moment before a car would be repossessed. And then the key thing is the payment rate at that point. And that’s a lot more telling than the delinquency patterns that precede that. So that’s just more of a general observation. Whereas in the card business, delinquencies tend to just march on their way to charge-offs in fairly predictable ways.”