Capital One Financial Corporation (COF)

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Capital One Financial (COF)

Q1 2011 Earnings Call

April 21, 2011 8:30 am ET


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

Jeff Norris - Managing Vice President of Investor Relations

Gary Perlin - Chief Financial Officer


Richard Shane - JP Morgan Chase & Co

Craig Maurer - Credit Agricole Securities (USA) Inc.

Brian Foran - Nomura Securities Co. Ltd.

Moshe Orenbuch - Crédit Suisse AG

Bruce Harting - Barclays Capital

Donald Fandetti - Citigroup Inc

John Stilmar - SunTrust Robinson Humphrey, Inc.

Christopher Brendler - Stifel, Nicolaus & Co., Inc.



Welcome to the Capital One First Quarter 2011 Earnings Conference Call. [Operator Instructions] Thank you. I would now like to turn the conference over to Mr. Jeff Norris, Managing Vice President of Investor Relations. Sir, you may begin.

Jeff Norris

Thank you very much, Allen. Good morning, everyone, and welcome to Capital One's First Quarter 2011 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 first quarter 2011 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 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. And 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 that are accessible at Capital One website and filed with the SEC.

Now I'll turn it over to Mr. Perlin. Gary?

Gary Perlin

Thanks, Jeff, and good morning to everyone listening to the call. I'll begin on Slide 3. In the first quarter of 2011, Capital One earned $1.02 billion, or $2.21 per share, up from $697 million, or $1.52 per share, from the prior quarter. The biggest quarterly driver of the 46% improvement in income came from a $305 million decline in our provision expense, largely accounted for by a $249 million decline in charge-offs.

Total company charge-offs fell 78 basis points from the prior quarter to 3.66%, the lowest level since 2007. Even factoring in the $105 million allowance build associated with the Hudson Bay (sic) [Hudson's Bay] portfolio, better credit performance across all of our businesses drove a $561 million release in the allowance, and our total coverage ratio now stands at 4.08%.

Non-interest expenses were up 3% in the quarter. The seasonal decline in marketing spend was more than offset by a $103 million increase in operating expenses, driven mostly by $60 million of legal expenses in our Card business and the cost associated with the addition of the Hudson Bay (sic) [Hudson's Bay] portfolio. Looking ahead, it is reasonable to assume that non-interest expenses will rise modestly in line with marketing opportunities.

Revenue in the quarter was up 3% even as average loans were virtually flat. I'll discuss the drivers of this margin improvement as we turn to Slide 4.

The 29 basis point expansion of net interest margin in the quarter was primarily due to higher asset yields in our Card and Auto Finance businesses and a 9 basis point decrease in our cost of funds. The higher asset yields in Card were a result of the continuation favorable credit trends, the mix of balances and a modest increase in fee revenues.

Strong credit trends drove first quarter suppression down to $105 million from $144 million in the prior quarter as reversals declined by $25 million and recoveries rose modestly. Consistent with the prior quarter, we released $49 million from the finance charging fee reserve, which now stands at $163 million. The credit-related benefits to revenue have proven to be more persistent than we had expected, but we believe that credit impacts on revenue will stabilize once we reach more normalized charge-off in delinquency rates.

In addition to the favorable credit impacts, first quarter margin in the Card business also benefited from continuing run-off of lower margin installment loans and a continued low level of new balances on promotional rates.

Looking ahead, total company margins will continue to be impacted by credit trends, competitive dynamics in pricing and the timing and pace of loan growth. All else being equal, the addition of the Kohl's partnership assets will lower margins in the Domestic Card segment beginning in the second quarter. However, we expect that the impact from Kohl's on total company margins will be offset by a reduction in cash.

I'll now discuss capital as we turn to Slide 5. Our Tier 1 common ratio remains strong at 8.4% under Basel I, or 8.7% using known Basel III definitions. The nearly $1 billion increase in retained earnings caused our tangible capital ratio to rise 45 basis points this quarter. However, anticipated impacts to the numerator and denominator of our regulatory capital ratios caused a dip in those ratios this quarter. Let's start with the Tier 1 denominator.

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