Capital One 4Q16 Earnings Call Notes

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Capital One Financial Corporations’ (COF) CEO Richard Fairbank on Q4 2016 Results

The credit window is open but it wont be open forever

“I think that it will contribute to a – I think this window is still open but as I’ve been saying kind of every consecutive quarter you know this thing won’t stay open forever so I’ll leave you with two points. One, we’re still all-in in pursuing the window but I think that but let me comment for a bit just about the kind of natural physics that go along with the what’s happening on the supply side.”

Credit is now growing at a faster rate than the economy and its broad based growth

First of all just to comment on the supply side. You know after a number of years post the great recession where the growth of revolving debt was near zero or even negative, it is crept up in the last couple of years and now it is running at a 7% year-over-year rate and obviously that’s a faster growth rate than the economy is doing. And if you look at this growth it is broad-based although subprime growth has picked up and is now growing faster than prime. So currently if you exclude Capital One’s impact on the metric about 34% of the industry’s growth is in subprime and subprime card loans are growing 13% year-over-year versus prime which is growing about 6% year-over-year. Now I really want to stress this is off – and particularly in the subprime side off of a – much lower base following the great recession, so let’s just ground that a little bit.”

It is growing off of a lower base but its growing

“We went back and looked at the data here, prime loans decreased 12% from prerecession levels and they began growing again in 2011. Subprime loans decreased 43% from prerecession levels and didn’t start growing until 2014. So subprime industry outstandings right now are at 74% of prerecession levels and prime industry outstanding are basically right at prerecession levels. So clearly the subprime growth is – happened later and its off of the lower bank but the growth has physics and that’s what I know – I’m always focused on because when you have – consumers taking on debt and competitors you know supplying more debt that can affect both the volume and the selection quality of new origination, as well as of course you know impacting existing customers who along the way can take on more debt.”

We are in the intense part of the cycle

“So what we do when we see that is we just – we try to manage Sanjay in anticipation of this because we view it as the physic and we are very – we’ve always said we can’t predict the economic cycle but we really can watch and react to the credit cycle which isn’t the same thing as the economic cycle. So we are very focused on resilient, we try to anticipate how supply changes end up making their way into the credit performance of who we might originate and if I pull way up on all of that, we can continue to make very conservative assumptions in our underwriting, we managed to a belief that we are now in the intense part of the cycle but even with all that considered we still see a important growth opportunity available for us, is the window of opportunity and we will continue to pursue it obviously with our eyes very wide open.”

The amazingly low losses have to end at some point

“So our primary point has been – look in the end this is physics. The year after year just amazingly low losses it is – as we’ve said some quarters ago this has to be the bottom, things are going up from here all of that said you know I think that – I mean we are still – we are pursuing growth opportunities and continue to be optimistic about the originations that we can generate.,”

This is a very competitive market, especially at the moment

“So we have said all along this – this market, I can’t remember the last time I said that this market is not that competitive. I think it is very, very competitive and it is particularly competitive at this moment. Now when we look at this we – and you made a comment about our role in this whole thing, I mean as there are a few players who I think have gone very heavy into the spender business and we are one of them and all of us are contributing to that competitive intensity.”