Capital One Financial Corporation (COF)

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Capital One Financial Corp. (COF)

Q4 2009 Earnings Call Transcript

January 21, 2009 4:30 pm ET


Jeff Norris – VP, IR

Gary Perlin – CFO and Principal Accounting Officer

Richard Fairbank – Founder, Chairman and CEO


Bruce Harting – Barclays Capital

Brian Foran – Goldman Sachs

Andrew Wessel – J.P. Morgan

Rick Shane – Jefferies & Company

Chris Brendler – Stifel

Sanjay Sakhrani – KBW

David Hochstim – Buckingham Research

Brad Ball – Ladenburg Thalmann

Kenneth Bruce – Banc of America/Merrill Lynch

Joe Mack – Meredith Whitney Advisory Group

John Stilmar – SunTrust



Welcome to the Capital One fourth quarter 2009 earnings conference call. (Operator instructions) Thank you. I would now like to turn the call over to Mr. Jeff Norris, Managing Vice President of Investor Relations. Please go ahead, sir.

Jeff Norris

Thanks very much. Welcome, everyone to Capital One's fourth quarter 2009 earnings call. Thanks also for joining us a little bit earlier than usual today. 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 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 the presentation. To access a copy of the presentation and the press release, please go to Capital One's web site, click on Investors and 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 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 factor section in our annual and quarterly reports accessible at the Capital One website and filed with the SEC.

Now, I'll turn the call over to Gary.

Gary Perlin

Thanks, Jeff, and good afternoon to everyone listening to the call. I'll begin on slide three of the earnings presentation. In the fourth quarter Capital One earned $376 million or $0.83 per share, a slight decline from the prior quarter.

Earnings for a full year 2009 were $884 million or $0.75 per share after including the $1.31 dividend and repayment expense of the government's preferred share investment that we repaid in full in the second quarter. Revenues in the fourth quarter were down $216 million from the prior quarter with the largest factor being $113 million fewer gains from the sales of securities than we recognized in the third quarter. A continued decline in average assets also contributed to the dip in revenue, despite stable net interest margin. These declines were somewhat offset by a modest improvement in the value of our retained interests as well as less suppression of card revenue.

Non-interest expenses were up 8% from the linked quarter as marketing began to recover from historically low levels and operating expenses saw expected fourth quarter increases. While preprovision earnings fell by $362 million, provision expense improved by $354 million. As the $386 million release in our allowance more than offset the modestly higher charge-offs. More on credit performance and the allowance in a moment.

The $28 million after-tax loss in discontinued operations includes GreenPoint rep and warranty expense. All told, despite some larger swings in individual line items in the quarter, earnings per share were relatively flat. For the full year a challenging economy helped drive a 3% decrease in average loans. However, historically wide spreads on low risk investment securities particularly in the first half of 2009 led us to grow the investment portfolio by 26%, so our overall earning assets were up modestly in the year. This strategy helped produce stable margins and flat year-over-year revenue.

Looking ahead to 2010, we expect the trend of declining loans to continue with the runoff of certain portfolios and high levels of charge-offs, but unlike 2009, we do not expect this average loan decline to be offset by further growth in our securities portfolio as risk adjusted returns are likely to be less attractive than in 2009.

While margins may moderate slightly from fourth quarter levels, we expect that annual margins will largely be similar year-over-year. All told, stable margins on a smaller portfolio will likely lead to lower revenue in 2010. In response to lower loan demand and economic uncertainty, we pulled back on marketing spend in 2009. This decrease was offset by the addition of Chevy Chase Bank operating expenses.

We expect non-interest expenses to increase in 2010. Media and other marketing costs are likely to rise from depressed levels to levels that are more in line with our historical marketing spend depending on our evolving view of market opportunities. Operating expenses will remain stable as ongoing efficiency improvements are offset by investments in our banking and mortgage infrastructure.

Full year 2009 provision expense was essentially flat versus the 2008 level. Its higher charge-offs in 2009 were offset by $2 billion positive swing in allowance from a $1.6 billion build in 2008 to a $400 million release in 2009. This $400 million release was more than accounted for by a smaller reported loan book.

The potential for a reduction in our 2010 allowance due to declining balances and a moderating credit outlook could result in a significantly lower provision expense. Of course the economic picture continues to evolve rapidly and the results of various line items may play out differently than the projections I just described. In any event, our balance sheet affords us a great deal of flexibility to manage in a changing environment. This flexibility was clearly on display as we navigated a tough environment to produce strong results in 2009 and will continue to stay flexible as we manage through 2010.

As we turn to slide four, I'll describe the impact of our loan trends and economic outlook on our allowance. Our overall allowance declined by $386 million in the quarter as builds in both commercial and other consumer banking were more than offset by releases in both auto and credit card.

In commercial banking it is worth noting that the supplemental table show a spike in the GreenPoint small ticket CRE charge-offs which was driven by a movement of $277 million of those loans to be held for sale, causing us to charge the loans down to market value. Excluding this impact non-performing loans continued to rise while the total size of the portfolio remained largely flat causing us to build our allowance by $115 million in the quarter. Rich will discuss credit friends in the commercial banking segment in greater detail in a few moments.

In the auto business, $1.1 billion of loan shrinkage in the quarter and continued improvement in credit stemming from our portfolio shift to higher quality originations from 2008 and 2009, led to a $96 million release in our allowance for that business.

In domestic card about three quarters of the $416 million allowance release is driven by changes in the size and structure of our loan portfolio. About $220 million of that impact relates directly to the reduced level of reported balances.

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