Capital One 2Q15 Earnings Call Notes

Seeing aggressive pricing in sub prime auto lending

“In our auto business used vehicle values have softened, although they remain near historically high levels. A decline in used car prices would put pressure on our results. We’ve discussed increased competition in pricing and underwriting for some time. In the second quarter we observed increasingly aggressive underwriting practices by some of our competitors, particularly in subprime. We are losing some contracts to competitors who are making more aggressive underwriting choices. As a result, subprime originations declined modestly compared to the prior year.”

NPL rate rose 50bps driven by oil and gas and taxi medallion loans

“We built allowance over the last three quarters in anticipation of increasing risk in oil and gas and taxi medallion loans. In the second quarter criticized non-performing loans were up $282 million from the prior year to $463 million and the NPL rate increased about 50 basis points to 0.90%. These trends were driven by downgrades of oil and gas loans and to a lesser extent downgrades of taxi medallion loans. Second quarter credit results include the final results of the Shared National Credit’s exam.”

Investing heavily in digital

“We remain compelled by the opportunity, need and urgency of digital transformation. We are entering a mobile, on-demand, real-time world. Digital has already disrupted many businesses and has created entirely new industries. The pace of disruption is sweeping, breathtaking and accelerating. Banking is inherently a digital business and is ripe for transformation.

To win in the digital world, we can’t simply bolt digital onto the side of our existing business or port analog banking services to digital channels. Technology and information will fundamentally change how banking works and unlock new capabilities and the ability to deliver entirely new experiences. To fully capture these benefits, we’re deeply embedding digital into our businesses. We’re becoming a destination for great digital talent; product managers, designers, engineers and data scientists. We’re simplifying and modernizing our infrastructure to drive agility across the company. We’re building foundational capabilities around software development, design and information and we’re transforming the way we work to unleash the power of modern technology and great talent to drive innovation.

We are making significant investments in our digital future. We don’t build technology for technologies sake. We are working backwards from a future where the vast majority of interactions with our customers will be digital. We are already seeing the payoff. Our digital investments are creating a compelling customer experience, delivering data-driven insights and are a key enabler of the strong growth we are delivering.”

Continue to see strong growth opportunities in card

“We continue to see strong growth opportunities across our Domestic Card business. We believe that the right choice to drive long-term value is to spend marketing and operating expense to capitalize on this window of opportunity. ”

Allowance is being pushed up by growth

we’ve talked about this for a while, we’re in a growth period for Card. So that growth, all else equal, is going to be pushing up the allowance.”

New origination have slightly higher loss content

“The losses of new originations are higher than our highly-seasoned back book just because that back book was profoundly seasoned by anybody who survived the great recession and the very extended period of low originations for us and in many ways for the industry. So off of an unusually low loss back book, we are seeing very good origination opportunities and it’s really more of the same that you’ve seen from us for a long period of time.”

We’re intrigued by all the startups in the financial services space

“we’re intrigued with frankly all of the startups in the financial services space, one category of which is the online lending and peer-to-peer lending and so on…even though we may not see much of an effect, we certainly have a real interest in watching what goes on in that space.

Digital development going to be a drag on efficiency for some time and that’s ok

“We are not primarily motivated by cost saving with digital because I think that’s about fourth on the list of things that the power that digital provides. Right now, it is still a net negative and probably for an extended period of time measured purely by cost, digital will probably be a net negative. But even then on the cost side, we’re seeing benefits already in statement and payment processing, telephone servicing costs, workforce restructuring that you saw, branch efficiency, data storage, a lot of things. But the bigger benefits are things beyond that that show up in terms of better credit risk management, faster product development, and ultimately, the kind of growth that you’re seeing.”

Our digital investments aren’t just science experiments

“we’re not just investing in science experiments or seeing what’s new and shiny object. When we talk about digital investment, it starts with talent. We’re talking about bringing in top engineers, product managers, designers, data scientists often from tech companies and startups outside of financial services. And this is a very important thing and obviously it costs money to do that, but that’s a foundational thing. We’re talking about providing the digital workspaces and the most modern tools for these folks that’s essential in terms of recruiting them and essential in terms of leveraging them.”