Capital One Financial Corporation (COF)

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Capital One Financial (COF)

Q4 2012 Earnings Call

January 17, 2013 5:00 pm ET


Jeff Norris

Gary L. Perlin - Chief Financial Officer

Richard D. Fairbank - Founder, Executive Chairman, Chief Executive Officer and President


Sanjay Sakhrani - Keefe, Bruyette, & Woods, Inc., Research Division

Scott Valentin - FBR Capital Markets & Co., Research Division

Moshe Orenbuch - Crédit Suisse AG, Research Division

Brian Foran

Christopher C. Brendler - Stifel, Nicolaus & Co., Inc., Research Division

Donald Fandetti - Citigroup Inc, Research Division

David S. Hochstim - The Buckingham Research Group Incorporated

Kenneth Bruce - BofA Merrill Lynch, Research Division

Daniel Furtado - Jefferies & Company, Inc., Research Division

Robert P. Napoli - William Blair & Company L.L.C., Research Division

Sameer Gokhale - Janney Montgomery Scott LLC, Research Division

Bill Carcache - Nomura Securities Co. Ltd., Research Division

Michael P. Taiano - Telsey Advisory Group LLC



Good day, ladies and gentlemen. Welcome to the Capital One Fourth Quarter 2012 Earnings Conference. [Operator Instructions]

I would now like to turn the conference over to Mr. Jeff Norris, Senior Vice President, Investor Relations. Sir, you may begin.

Jeff Norris

Thank you very much, Lisa, and welcome, everyone, to Capital One's Fourth Quarter 2012 Earnings Conference Call.

As usual, we are webcasting live over the Internet. To access the call on the Internet, please log on to Capital One's website at and follow the links from there. In addition to the press release and financials, we have included a presentation summarizing our fourth quarter 2012 results.

With me today are Mr. Richard Fairbank, Capital One's Chairman and Chief Executive Officer; and Mr. Gary Perlin, Capital One's Chief Financial Officer. Rich and Gary will walk you through this presentation. To access a copy of the presentation and press release, please go to Capital One's website, click on Investors, then click on Quarterly Earnings Release.

Please note that this presentation may contain forward-looking statements. Information regarding Capital One's financial performance and any forward-looking statements contained in today's discussion and the materials speak only as of the particular date or dates indicated in the materials. Capital 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. Numerous factors could cause our actual results to differ materially from those described in forward-looking statements.

For more information on these factors, please see the section titled Forward-Looking Information in the earnings release presentation and the Risk Factors section in our annual and quarterly reports, accessible at the Capital One website and filed with the SEC.

And now I'll turn the call over to Mr. Perlin. Gary?

Gary L. Perlin

Thanks, Jeff, and good afternoon to everyone listening on the call. I'm going to begin on Slide 3, which provides a few highlights from the year and quarter just ended, as well as our outlook. While I will not speak to all of the items on the slide, I'd like to give a few high-level comments.

2012 was an exciting year for Capital One. We completed the acquisitions of ING Direct and HSBC's U.S. Card business, 2 businesses that will deliver attractive financial and strategic returns for years to come. 2012 full year results also reflect solid underlying performance across all our businesses, as Rich will describe in a moment. Our balance sheet also grew significantly stronger, with ending Tier 1 common capital at 11% on a Basel I basis, positioning us well to meet our fully phased-in assumed Basel III target in early 2013.

While acquisition-related accounting created some pressure on GAAP earnings and substantial quarterly variations in our income statement during 2012, the variability abated considerably in the last couple of quarters. While purchase accounting explains a portion of the lower revenue and higher provision in our Domestic Card business in the fourth quarter, the linked-quarter reduction in corporate earnings is largely attributable to expected seasonal impacts on margins and noninterest expenses. We also issued a notice to call $3.6 billion in trust-preferred securities during the fourth quarter, which was completed earlier this month.

The buildup of cash in the fourth quarter ahead of the actual redemption created some temporary pressure on net interest margin although future interest expense will be reduced. Our views of 2013 have not changed since we discussed emerging quarterly trends in October. Much of the expected impact of merger-related credit accounting has now about run its course and a majority of expected synergies are being realized. Revenue will continue to be impacted by about $200 million in remaining premium amortization in 2013, and noninterest expense will continue to be affected by the amortization of PCCR and other intangibles for several more years, albeit at modestly declining levels. Much of the remaining integration of restructuring expense will also be incurred through the balance of 2013.

With a few exceptions, fourth quarter 2012 results give us a pretty good picture of what to expect in terms of pre-provision pretax earnings in 2013, assuming little change in the external environment.

As we said in October, overall noninterest expense in 2013 is expected to total about $12.5 billion or just over $3.1 billion on average per quarter. This reflects a decline in average quarterly expenses relative to seasonally elevated operating and marketing costs in the quarter just ended. It also assumes that we incur about $600 million of intangible amortization and about $220 million of the $350 million of remaining merger-related expenses all in 2013.

Average quarterly revenue levels in 2013 are expected to be in the same ballpark as in the fourth quarter of 2012. While average earning assets will fall modestly, net interest margin could be a bit higher, with steady yield on average earning assets and an expected reduction in interest expense.

As indicated last quarter, we expect a modest reduction in loan balances in 2013 as runoff of some $12 billion in ending loan balances of acquired mortgage and credit card loans is only partially offset by organic loan growth. At the same time, cash balances are declining with the call of TruPS in early January.

As for both ING Direct and HSBC, we continue to believe that they are both financially and strategically compelling. We are as excited about the acquisitions as we were the day we announced them. This is true even though the acquisition impacts will play through our 2013 financials differently than expected at announcement back in 2011. The deals created some $2.5 billion less in goodwill than originally anticipated due in large part to the impact of declining interest rates on fair value marks. As a result, we will achieve or exceed in 2013 our expected post-deal capital position, but we will do so earlier and with less reported earnings because we're amortizing fair value premium rather than accreting fair value discount.

Because we expect to generate capital in 2013 in excess of what is required for our balance sheet and that which is necessary to meet Basel III requirements, capital allocation will be a key lever to create and deliver shareholder value. We expect to begin our journey of returning increased capital to shareholders through the 2013 CCAR process already underway, which Rich will address and you'll hear more about in March.

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