Capital One Financial Corp. (COF)
Q1 2009 Earnings Call
April 21, 2009, 5:00 pm ET
Jeff Norris - Managing VP, IR
Rich Fairbank - Chairman, President and CEO
Gary Perlin - CFO and Principal Accounting Officer
Brian Foran - Goldman Sachs
Craig Maurer - CLSA
David Hochstim - Buckingham Research
Andrew Wessel - JP Morgan
Don Fandetti - Citi
Bob Napoli - Piper Jaffray
Sanjay Sakhrani - KBW
Chris Brendler - Stifel Nicolaus
Bruce Harting - Barclays Capital
Moshe Orenbuch - Credit Suisse
Bill Carcache - Fox-Pitt
Scott Valentin - FBR Capital Markets
John Stilmar - SunTrust Robinson Humphrey
Richard Shane - Jefferies & Company
Ken Bruce - Banc of America/Merrill Lynch
Previous Statements by COF
» Capital One Financial Corporation Q3 2009 Earnings Call Transcript
» Capital One Financial Corporation Q2 2009 Earnings Call Transcript
» Capital One Financial Corp. Q4 2008 Earnings Call Transcript
I would now like to turn the call over to Mr. Jeff Norris, Managing Vice President of Investor Relations. Sir, you may begin.
Thank you very much, Jamie and welcome everyone to Capital One’s first quarter 2009 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 CapitalOne.com and follow the links from there. In addition to the press release and financials, we have included a presentation summarizing our fourth quarter 2009 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 and Principal Accounting Officer. Rich and Gary will walk you through this presentation. To access a copy of the presentation and the 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.
Now I will turn the call over to Mr. Fairbank. Rich?
Thank you, Jeff. And good evening everyone. I will begin on slide 3. Capital One posted a net loss from operations of $87 million or a negative $0.39 per share. Total company net loss for the quarter was $112 million or negative $0.45 per share. Continuing economic deterioration through the first quarter was the biggest driver of our quarterly result. While first quarter and near-term results remain under significant pressure at this point in the cycle. We continue to make tough decisions and take the actions that we believe will put our company in the best possible position to weather the storm and create shareholder value over the cycle.
The results we are reporting today reflect the decisions and actions we took in the first quarter. Charge-offs increased across our lending businesses with exception of our auto finance business. I will discuss credit performance in just a moment.
In the first quarter, we took several actions to further fortify the company and build future earnings power. For example, we continued to increase our capacity to absorb future credit losses by adding a $124 million to our allowance for loan losses increasing our coverage ratio to 4.8%. We made choices to ship the mix of the earnings assets and liabilities on our balance sheet. We made these choices to further strengthen our position to weather the storm and to create sources of long-term value, but these choices also impacted revenues, margins and balance sheet metrics in the quarter.
We added $14 billion in deposits with our acquisition of Chevy Chase Bank. With strong and growing access to local banking deposits; we were able to increase our funding from core deposits and allow higher cost wholesale deposits to run off as they matured in the quarter.
The combination of adding Chevy Chase deposits and optimizing across our deposit channels resulted in net deposit growth of about $12 billion to $121 billion at the end of the quarter. We saw unprecedented opportunities to generate revenues by purchasing investment securities at attractive levels. So we grew our portfolio of high quality investment securities to $36 billion. And we originated billions of dollars in new loans while maintaining disciplined underwriting standard. Loan originations were more than offset by falling purchase volumes and loan demand by the run-off of loans related to businesses we repositioned or exceeded several quarters ago, as well as by normal attrition and of course by rising charge-offs. Our loan-to-deposit ratio has improved from 1.7 to 1 a year ago to 1.2 to 1 at the end of the first quarter.
First quarter pre-provision, pre-tax earnings were relatively stable compared to the fourth quarter at 2008. Revenue declined due to a combination of factors related to the weakening economy and choices we made about the mix of our loans and earnings assets. Revenue declines were mostly offset by improvements in non-interest expense that resulted primarily from our actions to improve operating efficiency and because we saw limited opportunities for new marketing in the current environment.
Against the back drop of economic worsening and volatile markets, our strong and transparent balance sheet remains a source of strength in these turbulent times. Despite higher charge-offs, further additions to our allowance and the completion of our acquisition of Chevy Chase Bank, our tangible common equity to total managed assets or TCE ratio at the end of the first quarter was 4.8%, an improvement of 20 basis points from a pro-forma level of 4.6% at the end of last year, but the strength of our balance sheet is not just about weathering the storm, we also expect our balance sheet to generate shareholder value as we emerge from the storm. Our balance sheet can contribute to higher margins over the time as capital markets funding and wholesale deposits mature and we replace them with lower costs, local banking deposits. And when the cycle eventually turns and opportunities for profitable and resilient loan growth emerge, we will be able to grow loans without the need to raise additional capital by rotating our earning assets from investment securities back into new loan growth.
I will discuss credit performance and the profitability of our businesses on slide 4. Economic deterioration continued at a rapid pace during the first quarter driving increasing delinquency and charge-off rates across most of our lending businesses. US card charge-off rate increased to 8.4% for the first quarter above the 8.1% charge-off rate expectation we articulated a quarter ago. Expected seasonal increases in bankruptcies and declining loan balances resulted in higher charge-off rates compared to the fourth quarter of 2008. The increase in charge-off rates beyond our expectations resulted from several factors related to the pace of economic deterioration in the quarter. Bankruptcies were higher than expected increasing charge-offs directly without impacting delinquency rates.
Recoveries on already charged-off debt were lower than expected. We also observed an acceleration of later stage delinquency balances flowing to charge-off in the quarter. For context, recall that when we articulated our expectations last January, the unemployment rate was 7.2% and we assumed it would increase to about 8.7% by the end of 2009. The unemployment rate has already deteriorated to 8.5% and is expected to move beyond 8.7% well before year-end.
Even though our US card charge-off rate was higher than the expectation we had last quarter, delinquencies in charge-offs were a bit better than we would have expected given the actual economic worsening we have seen in the quarter.
Our US card business posted just over $2 million in profits in the first quarter. Profits of about $50 million in our revolving card businesses were mostly offset by a $48 million net loss in the installment loan businesses.
As we discussed last quarter, our US card business includes about $11 billion in installment loan. Installment loan performance has been significantly worse than that of our credit card businesses. We essentially stopped originating installments loans late last year, so the portfolio will continue to shrink as the outstanding loans amortize.
We expect the drag on US card profits to continue as the installment loans continue to run off. We expect further increases in US card charge-off rates through 2009 as the economy continues to weaken. It is likely that our US card charge-off rate will increase at a faster pace than the broader economy as a result of the denominator effect and our implementation of OCC minimum payment requirements.
While many credit card issuers will see declining loan balances in the current environment. We expect that our denominator will decline even more than the industry as a result of installment loans running off. While installment loans account for just 15% of US card loan balances, we expect that run off installment loan will drive about a third of the expected denominator effect.
We expect the total denominator effect to increase second quarter charge off rate by about 50 basis points. As we have discussed in prior quarters, we are the only major credit card issuer implementing OCC minimum payment policies now as we were not regulated by the OCC when the policies were put in place several years ago in a wholly different credit environment. We have been analyzing test cell data to estimate the expected impacts of implementing OCC minimum payment policies. Based on three months of additional data and test cell results, the size of expected OCC minimum payment impacts has not changed although the expected timing has shifted a bit.