Capital One Financial Corporation (COF)

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Capital One Financial (COF)

Q4 2011 Earnings Call

January 19, 2012 5:00 pm ET


Jeff Norris -

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

Gary L. Perlin - Chief Financial Officer


Christoph M. Kotowski - Oppenheimer & Co. Inc., Research Division

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

Joel Houck - Wells Fargo Securities, LLC, Research Division

Moshe Orenbuch - Crédit Suisse AG, Research Division

Donald Fandetti - Citigroup Inc, Research Division

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

John W. Stilmar - SunTrust Robinson Humphrey, Inc., Research Division

David S. Hochstim - Buckingham Research Group, Inc.

Betsy Graseck - Morgan Stanley, Research Division

Brian Foran - Nomura Securities Co. Ltd., Research Division

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



Welcome to the Capital One Fourth Quarter 2011 Earnings Conference Call. [Operator Instructions] Thank you. I would now like to turn the call over to Mr. Jeff Norris, Senior Vice President of Global Finance. Please go ahead, sir.

Jeff Norris

Thanks very much, Dana, and welcome, everybody, to Capital One's Fourth 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 and follow the links from there. In addition to the press release and financials, we have included a presentation summarizing our fourth 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 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 obligations 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.

With that, I'll turn the call over to Mr. Perlin. Gary?

Gary L. Perlin

Thanks, Jeff, and good afternoon to everyone listening to the call. Let me provide a few highlights from the quarter and full year on Slide 3. Capital One earned $407 million or $0.88 per share in the fourth quarter of 2011. We saw strength in loan growth and stable revenue. Earnings declined, however, due to increases in non-interest and provision expense, the latter reflecting stabilizing credit trends. There were an unusual number of unique items impacting revenue and operating expense, which I'll review in a moment.

While full year 2011 results also had some noise, they provide a somewhat clearer picture of where we stand as we approach the integration of ING Direct and U.S. Credit Card business of HSBC in the first part of 2012.

After falling in 2010, Capital One loan balances grew by some-8% over the course of 2011, resulting in a constant level of average loans.

Interest expense fell by about 30 basis points and margins remained stable. As credit improved, a substantial reduction in provision expense more than offset a significantly increased level of investment in marketing and operations to restart our loan growth engine.

We also accelerated our buildout of top bank infrastructure especially in the second half of 2011 to ensure our readiness to execute on very attractive acquisition opportunities.

Although we expect considerable noise in our 2012 financials from the purchase accounting effects, integration expenses and partial year impacts of these acquisitions, the economics of the deals are compelling and we remain excited about the sustained value creation they will enable. When the deals close, I will be able to provide you with a detailed view of how they are likely to affect our financials this year and beyond.

Now let's turn to Slide 4, and I'll focus on the fourth quarter. Capital One earnings per share were $0.88 or $407 million in the fourth quarter compared to $1.77 or $813 million in the third quarter of 2011. The decline in linked quarter earnings was driven by lower pre-provision earnings and increasing provision expense.

Revenue in the quarter was down about $100 million or 2%, owing to a few unique items. Linked quarter revenue was negatively impacted as we recorded a very modest increase in our finance charge and fee reserve after an unusually large $83 million release in the FCFR in Q3 of 2011.

Q4 revenue was also hit by a further build in reserves to cover higher expected expenses related to past sales of payment protection insurance, or PPI, in our U.K. business. This resulted in a contra-revenue of approximately $81 million.

In addition, non-interest income in Q4 was negatively impacted by a representation of warranty expense of $38 million.

Stripping out these impacts, revenue increased over the third quarter by about 2.5%, in line with average loan growth.

Moving to non-interest expenses. They were up quarter-over-quarter due to a seasonal ramp in marketing spend and an increase in operating expenses. The $213 million increase in operating expense recorded in Q4 included $92 million in litigation expenses, 2/3 of which relates to our U.S. Card business. We also had approximately $40 million in asset write-downs and other costs as we rationalize some facilities and equipment, principally related to acquired banking businesses.

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