Capital One Financial Corporation (COF) Q1 2016 Earnings Report, Transcript and Summary

Welcome to the Capital One First Quarter 2016 Earnings Conference Call. All lines have been placed on mute to prevent any background noise. After the speakers' remarks, there will be a question-and-answer period. [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.

Thanks very much, Tom, and welcome everyone to Capital One's first quarter 2016 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 the financials, we've included a presentation summarizing our first quarter 2016 results. With me these evenings are Mr. Richard Fairbank, Capital One's Chairman and Chief Executive Officer; and Mr. Steve Crawford, Capital One's Chief Financial Officer. Rich and Steve 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 and for more information on these factors, please see the section entitled forward-looking information in the earnings release presentation and the risk factors section in our annual and quarterly reports which are accessible at the Capital One website and filed with the SEC. And with that, I'll turn the call over to Mr. Crawford. Steve?

Thanks Jeff, I’ll begin tonight with slide 3. Capital One earned $1 billion or $1.84 per share in the first quarter. Pre-provision earnings increased 10% from the fourth quarter to $3 billion as we had higher revenues and lower marketing and operating expenses. Provision for credit losses increased linked quarter driven by higher charge-offs and a $286 million allowance build including $73 million of allowance build in our oil and gas portfolio. As you can see on slide 4 reported NIM decreased 4 basis points from the fourth quarter to 6.75%, driven by one last day of recognized income and a full quarter of lower yielding GE commercial assets, partially offset by higher interest rates. NIM increased 18 basis point year-over-year fuelled by strong growth in our domestic card business. Turning to slide 5, our common equity Tier 1 capital ratio on a Basel III standardized basis was 11.1%, which reflects current phase-ins. On a standardized fully phased-in basis, it was 10.9%. We reduced our net share count by 12.8 million shares in the quarter. As we completed our previously announced incremental 300 million in repurchases in the first quarter. We are on track to complete our remaining C card authorization by the end of the second quarter of 2016. As we continue our parallel run for Basel III advanced to purchase, we estimate that our common equity Tier 1 Capital ratio was above our target of 8%. Let me now turn the call over to Rich.

Thanks Steve, I’ll begin on slide 7 with our domestic card business. Strong growth continued in the quarter. Compared to the first quarter of last year, our ending loans and average loans were both up 14%. We continued to like the earnings profile and the resilience of the business we’re booking. First-quarter revenue increased 12% from the prior-year quarter, slightly lagging average loan growth as revenue margin declined modestly. Revenue margin for the quarter was 16.6%. As a reminder, payment protection revenue contributed about 25 basis points to full-year 2015 revenue margin. Because we completed the exit of our back book of payment protection products at the end of the first quarter, we expect this contribution to go to zero in the second quarter revenue margin. Purchase volume in the first quarter increased about 20% from the prior year. Net interchange revenue for the total company also increased 20%. Although the two growth rates were the same this quarter, we’ve consistently emphasized the need to look at longer term trends to understand that interchange growth without the quarterly volatility. For the past several years, on an annual basis net interchange growth has been well below domestic card purchase volume growth. We’d expect this divergence to continue as we continue to expand and strengthen our rewards franchise by originating new rewards customers and extending rewards to existing customers. Also a few of the largest merchants have negotiated custom deals with the card networks that will make their way into interchange revenue overtime. First quarter non-interest expenses increased compared to the prior-year quarter, with higher marketing and growth-related operating expenses as well as continuing digital investments. As we've discussed for several quarters, two factors are driving our current credit trends and expectations. The first is growth math, which is the upward pressure on delinquencies and charge-offs as new loan balances season and become a larger proportion of our overall portfolio. The second is seasonality. All else equal, the first quarter is the seasonal peak for charge-off rate. Our guidance for domestic card charge-off rate remains unchanged. We expect the upward pressure from growth math will continue through 2016 and begin to moderate in 2017. We still expect the full year 2016 charge-off rate to be around 4% with quarterly seasonal variability. Based on what we see today and assuming relative stability and consumer behavior the domestic economy and competitive conditions, we still expect full year 2017 charge-off rate in the low 4s with quarterly seasonal variability. Loan growth coupled with our expectations for rise in charge-off rate drove an allowance build in the quarter. We expect allowance additions going forward primarily driven by growth. Slide 8 summarizes first-quarter results for our consumer banking business. Ending loans were down a little less than $1 billion compared to the prior year. Growth in auto loans was offset by planned mortgage run-off. Ending deposits were up about $5.3 billion and versus the prior year. Auto originations in the first quarter were $5.8 billion, about 13% higher compared to the first quarter of last year. In the fourth quarter of 2015, originations shrink particularly in subprime. This quarter, originations growth was stronger including in subprime. We had good success with our originations programs and it appears that competitive intensity may have softened a bit in the quarter. But we wouldn’t take much from any one quarter of results. We still feel the same way about this business as we have for several quarters. We remain very vigilant about competitor practices, in our underwriting we assume used card prices declined further. We continue to focus on resilient originations and we continue to expect gradual or normalization of margin and credit. Consumer banking revenue for the quarter increased modestly from the first quarter of last year. Higher revenue from growth in auto loans and higher deposit volumes was offset by margin compression in auto and declining mortgage balances. First quarter revenues were also aided by rewards liability release associated with discontinuing certain checking products. Non-interest expense increased compared to the prior year quarter driven by growth in auto loans and an increase in retail deposit marketing. First quarter provision for credit losses was up from the prior year, mostly as a result of growth in auto loans and a modestly higher auto charge-off rate. We also added to the consumer banking allowance for loan losses in the quarter. As we previously discussed, we expect auto charge-offs to increase gradually and in the first quarter we observed a decline in used vehicle values. These two factors drove the allowance addition. In our retail deposit businesses, customer needs and preferences are changing driving changes to the function, format and number of our branches. Like all banks we’ve been optimizing both the format and number of branches to better meet the evolving needs of our customers as banking goes digital. In 2015 branch optimization costs were about $50 million. We are planning to accelerate these efforts and we expect branch optimization cost to be elevated in 2016. We are still formulating specific plans and timings, but based on what we see today we expect to recognize branch optimization expenses of about $160 million in 2016. In the first quarter, actual charges were $11 million. This category rather than the consumer bank P&L. We expect several factors to put pressure on our consumer banking financial results in 2016. In the home loans business planned mortgage run off continues. In auto finance, margins are compressing and charge-offs are rising modestly. And our deposit businesses continue to face a prolonged period of low interest rates. We expect these factors will negatively affect consumer banking revenue, efficiency ratio and net income in 2016 even as we continue to tightly manage cost. Moving to slide 9, I’ll discuss our commercial banking business. Ending loan balances in the quarter increased 27% year-over-year, and average loans increased 24% including the acquisition of GE Healthcare Finance business. Excluding the $8.3 billion of loans acquired from GE ending loans grew about 10% year-over-year. While competition is pressuring loan terms and pricing in both CRE and CNI, we continue to see good growth opportunities in select specialty industry verticals. Revenue in the first quarter increased 14% compared to the first quarter of 2015. Revenue growth was below average loan growth because of continuing spread compression. Credit pressures continue to be focused in the oil and gas and taxi medallion portfolios. Provision for credit losses increased $168 million from the prior-year quarter to $228 million, as we continued to build reserves. We’ve been building reserves over the last six quarters in anticipation of increasing risk in oil and gas and taxi medallion loans. Downgrades of oil and gas loans drove first quarter increases in criticized and non-performing loans. The commercial bank criticized loan rate was 5.6% in the first quarter comprised of the criticized performing loan rate of 4% and the criticized non-performing loan rate of 1.6%. We continue to focus on managing credit risk and working with our oil and gas customers. As you can see on slide 10, our total oil and gas loans ended the first quarter at $3.2 billion or about 1.5% of total company loans as some exploration and production customers drew on their lines in the quarter. Unfunded exposure decrease to $2.7 billion, total exposure including both loans and unfunded exposure decline to $5.9 billion, we expect that oil and gas loans will continue to present challenges and we've been building reserves to reflect that concern. At quarter end approximately $262 million of our total commercial allowance for loan losses was specifically allocated to our oil and gas portfolio. This allowance is about 8% of total oil and gas loans. Including unfunded reserves plus allowance we hold $359 million in total reserves allocated to the oil and gas portfolio. While our current reserves fully reflect all the information we have today as the turmoil and the energy industry continues future developments could lead to further reserve builds and possibly increasing charge-offs. I'll close tonight with some thoughts on first quarter results and our outlook for 2016. We posted another strong quarter of growth in domestic card loan balances and purchase volumes driving strong year-over-year growth in revenue, as well as related increases in operating expense, marketing and allowance for loan losses. Non-interest expense decreased 6% from the linked quarter driven by seasonal declines in marketing and operating expense. First quarter non-interest expense does not represent a run rate for the remaining quarters of 2016 for several reasons. The first quarter is typically a low point for non-interest expense. Our businesses continue to grow. We expect about $100 million in elevated branch optimization cost to impact the remainder of 2016, and we expect the net impact of FDIC surcharges and premium changes to add about $20 million to quarterly operating expense beginning in the third quarter of 2016. Provision for credit losses increased in the quarter. We added to the allowance for loan losses, primarily because of domestic card loan growth and the expectation of higher domestic card charge-off rates because of growth math. We expect these factors to drive further allowance builds in 2016. We also build commercial banking reserves in the quarter to reflect increasing risk in energy loan. Our efficiency ratio guidance is not changing. Compared to 2015, we still expect some improvement in our full year 2016 efficiency ratio with continuing improvement in 2017 excluding adjusting item. To be clear there were no adjusting items in the first quarter. We planned to deliver efficiency improvement despite the additional pressure from elevated branch optimization cost, higher FDIC expense and deterioration in marketing expectations for interest rate. We expect our card growth will create positive operating leverage over time, and we continue to tightly managed cost across our business. Pulling up, we continue to be in a strong position to deliver attractive shareholder returns driven by growth and sustainable returns at the higher end of banks, as well as significant capital distribution subject to regulatory approval. Now Steve and I will be happy to answer your questions.

Thank you, Rich. We'll now start Q&A session. As currently the other investors and analysts who may wish to ask a question please limit yourself to one question plus a single follow-up. If you have any questions after the Q&A session, Investor Relations team will be available after the call. Sam, please start the Q&A session.

Thank you, sir. [Operator Instructions] And we'll take our first question from Moshe Orenbuch with Credit Suisse.

Rich, I heard you say don't look just in each quarter in terms of like growth rate of interchange income, but you had a couple of quarters where it's kind of match or been close to matching the level of the growth rate in spending volumes. Could you just talk a little bit about what will cause it, I mean, if you're saying that it will diverge and go lower, like what is the cause in the future. Have you got specific plans for growth and can maybe just relate that to how you see the competitive environment for rewards right now?

Okay, Moshe. So the most important point is to just reflect on the volatility of this number and particularly as we turn in the second consecutive quarter of where this – the number meaning the net interchange growth number where it is as high as it is, we go out of our way to remind folks that there's a lot that goes in to this particular calculation and these contribute to its volatility. So, let me start Moshe with just the volatility side of this thing. The net interest interchange metric includes partnership, contractual payments and international card and consumer bank net interchange and also we update our rewards liability every quarter based on points earned and redeemed the redemption mix and redemption rates. And so, any one quarter we probably spend more calories explaining that volatility than we do just reporting it just to make sure that folks focus on the longer term trends. If you look at the full year 2015 compared to 2014, our net interchange grew 11% compared to purchase volume growth of 21%. So, if we get pass the quarterly noise part of the conversation. Let's talk about why net interchange growth has generally lag domestic card purchase volume growth and why we also expect that to continue. Our rewards programs have been and continue to be very successful with -- yes of course strong growth in flagship products like Quicksilver and Venture and our Spark card, but we're also building a long term franchise very consciously and consistently by upgrading rewards products for our existing rewards customers and extending rewards products to some existing customers who don't have rewards. And as you can imagine this entails some near term cannibalization when we do this. But it's all part of building stronger, deeper customer franchise. And those trends – I mean we're well on our way with respect to those trends, but they will continue. And also -- and this is something that will be a newer effect in the numbers that's not in our prior numbers, a few of the larger merchants have negotiated customer interchange deals with the network and those economics on negotiations that have now happened will make their way into the interchange metrics for card players. So, you ask the question about rewards competition. This is a very competitive space, I think the competition has intensified a bit over the past years, over the past year really issuers are continuing to introduce new offers, upfront bonuses have been gradually increasing over time. I still look at this, as the player its generally rational, intensely competitive and our strategy is design to go right into a marketplace like that. So, we'll keep an eye obviously on interchange risk, I mean, that's a different orthogonal factor, but I think that we still feel pretty optimistic about that. That variable overall in the marketplace and all-in-all as we post another quarter of pretty strong performance we – it’s really more of the same story that we've seen in the past and despite intense competitive we still see a window of opportunity to grow and beyond sort of the notion of window here I think this is just part of the same strategy of Capital One to invest in and going at the top end of the marketplace and I think we're very pleased with our success.

Thanks very much.

Next question please.

We'll go next to Rich Shane with JPMorgan.

Thank you for taking my questions. Really there is sort of related, Rich, you've been very clear about your decision to be little bit more cautious in auto. Over the last several quarters you're actually going back probably four, five quarters, you've been pretty bullish on the opportunity in the card space. Do you see that opportunity still being there? And in light of the growth that you're experience now, I understand the growth math impacting losses into 2016, why are you so confident that they're going to start to flatten out into 2017 as you continue to grow?

Okay. Rick, several questions there. First of all you mentioned auto and card, so let me do a little cross calibration relative to those two. We see growth opportunities in both businesses, in fact you saw an auto actually growth stepped up a little, although we went out of our way to say, don't get carried away with that. I think our message is really the same as before, frankly, in both businesses our message is really the same as we had last quarter. On a cross calibration, I think the auto business is a little bit further along in the sort of the natural evolution of a market and the competitive dynamic associated with that and I think we see less growth opportunity there even though at the margin we're both vigilant and very much working to capture the opportunities that are consistent with our underwriting. On the card side, I think that the marketplace is despite very competitive is still, I'd say it's very rational. The competitors have staked our different positions in the marketplace with different strategies and several are succeeding all at the same time. Where we are finding growth is an opportunities that are through the result of investments for years and strategic focus and testing and a lot of things that give rise to a more sustainable growth opportunity. Again, I still would flag nothing last forever and we'll take this one quarter at a time. But we feel the same way about the card business as we do a quarter – did a quarter ago. I think there are still lags on the growth opportunity here. And again, it will all be down within abandons of caution and knowing that window is always open and close, but I think we still are quite bullish about this opportunity. Now, then you said, so what about growth math? The growth math, because we have the – the key thing about growth math that is – that's so central to our explanation about credit at the moment is not just that we're doing a lot of growth right now. And as you know Rick, growth entails sort of peak losses on a vantage in the first couple of years before a thing settled out. So you have that component, but the fact that it is on top of almost we never quite seen before the extend of such a season resilient back book that the juxtaposition of high growth on top of a highly season back book creates particularly more dramatic growth math effects. All of that said, it's also the case that if you overlaying a bunch of vintages that have the same credit growth dynamics, there is just a natural seasoning effect that occurs. Frankly whether growth continues or whether growth slows down that becomes a pretty strong effect in causing the credit effects of growth math to settle out in the latter part of the time horizon that we have provided guidance for.

Next question please.

And we'll go next to Betsy Graseck with Morgan Stanley.

Hi. Good afternoon. The couple of questions, one was just on Richard mentioned, the custom deals that the larger networks has struck with some of the larger merchants. I just wanted to get a sense from you as to the pace of impact on your fee rates that you're anticipating from this. Is it something that is a few basis points over a year time or it just tens of basis points over a couple of quarters? Maybe give sense of magnitude and timing and then whether or not you feel that as it plays out to other merchants, this is just something we should put in our model for the next year or two?

So, I think there are some – there are really kind of a couple of one-off things that have happened, that have been negotiated and those will become enduring effects relative to those merchants. So those effects will make their way over the course of the next number of quarters into a change in the run rate of interchange from those couple of merchants. And I don't think this is just like a see [ph] change in how the industry works, but we just wanted to flag that these I think well known things that have gone on in the marketplace, have a natural impact as they flow into any of the major card players.

So, is it changing your go-to-market strategy with rewards as you indicated with this, this is just kind of noise in the background as oppose to we have to change, how we are thinking about rewards with this custom deals happening?

The reality is the merchant marketplace even though it’s a lot more consolidated than it was years ago, it still when you really stand back and look at it a strikingly fragmented marketplace and this does not have any impact on our overall strategy.

Next question please.

We'll go next to Sanjay Sakhrani with KBW.

Thank you. Rich, you talked about possibly more provisions in the oil and gas portfolio, could you just talk about the sensitivity going forward?

So, I think that, look, I don't think we want to be in the sensitivity business. I think we did scenario last time that went through sort of the mathematical impact of a one unique set of assumptions about prices and all that happened is our own provision was different, but the external scenario was different and our own allowance build reserve and everything else ended up being unique. So, I think what I would say is this. It maybe useful just to pull back and just talk about the provision in the quarter for a minute and then I come back and comment on your question, but if we look at our -- we had a $157 million of the $228 million commercial provision expense was related to energy and $18 million was due to charge-offs mainly in the oil and field services segment. We build reserves by $139 million, and of that our unfunded build was $54 million. As we used higher utilization assumptions for some borrowers given the somewhat defensive behavior that we saw during the quarter, and then lower oil and gas prices run off on hedges and declining collateral values also impacted our borrowers and contributed to the reserve build. And then there were some odds and end to round out the build in provision. So, I think that what we have done in terms of allowance and unfunded reserve builds reflects what we see with our customers and in the marketplace at this time, but I think it is also the nature of markets that sometimes feed on each other that I think that they still needs the deleveraging of the oil and gas industry, still needs to happen. I think we've reserve for that which we see and I think it's our expectation that it will take a while and have continuing credit impacts as this thing fully plays out.

Okay. And just a follow-up, just that revenue margins disclosure going forward in terms of protection products, how much of the 25 basis points was in the first quarter, that's going to go to zero on the second quarter? And then when I look at the U.S. card – sorry the domestic card revenue margin, that came down quite significantly year-over-year. Could you just maybe talk, speak to the trajectory going forward maybe? Thanks.

Okay. First of all, to your cross-sell question. As we mentioned we fully exited cross-sell at the end of the first quarter and we'll have no cross-sell revenue in the second quarter. But yes, some of that affect happened in the first quarter, the first quarter was I don't have the exact number in front of me, but something in the neighborhood of half of the -- is around 10 basis points and being the amount of revenue that we got and that was around 10 basis points. So that would be your answer on that. The domestic card revenue margin, it's interesting how stable that has been over the years. That has been – there's been a lot of factors that have worked in opposite directions on that margin. There is certainly been a macro effect that we've been flagging over time in terms of things that we call franchise enhancements where we continue to make choices in the customers favor and that have a bit of impact on revenue. The most dramatic of these in recent years has been this cross-sell effect and it is now fully playing out. I think the biggest impacts on revenue margin going forward will not be so much of the franchise – further franchise enhancement, although here and there those always go on. I think it’s the – whatever happens in the competitive marketplace which is every intense, and we will continue to monitor that, but I think we're going to stay out of forecasting business with respect to revenue margins.

Next question please.

We'll go next to David Ho with Deutsche Bank.

Hi. Thanks for taking my question. I just want to talk about some of the asset sensitivity and I know it's been coming down the last three or four quarters. I know that the outlook on rates obviously continuous to evolve but certainly little lower here versus your expectations. Can you talk about just your balancing strategy and how do you think about positioning this year?

Yes. It's not our policy and try to end up with a large asset sensitive position that's kind of naturally what we end up with as a result of the balance sheet that we have. So we find ourselves in an asset sensitive position but I think we probably if we could do it in an efficient way work to not have as much sensitivity. I should mention we do have some work underway that suggest deposit pricing may not lag as much as we've originally estimated. There's no final decisions estimate on that point and we probably won't had a more fully formed analysis of that until the second quarter in terms of how it might change our disclosed impacts. But we're taking all of the actions that we can at our accounting friendly to manage the interest rate risk. And really what we're trying to do is balance kind of near term net interest income sensitivity which longer term changes in economic value.

Next question please.

We'll go next to Ryan Nash with Goldman Sachs

Hi, good evening guys. Steve, maybe you could follow-up a little bit on that last comment you made about that deposit pricing likely won't lag as much you expected, what is it given that betas have been extremely low across the industry? What is that you're seeing that leads you to the conclusion that it might not be as low.

I think we are all struggling with and as you look across the industry at management comments, with the extraordinary change in the actual balance sheets of different depositories and then the extraordinary influence of central banks and the market place and a real uncertainty is to how regulation impacts, deposit flow is going forward and the nature of completion, we're not a period where history provides much comfort to try and figure out where we're headed. So, I think it’s just not surprising that we will continue to be to look at our assumptions on interest rate, sensitivity and risk management and frankly trying to be creative about how this environment which is so different and unlike an unprecedented to how that's going to unfold and what that should mean for how we manage interest rate risk. Now if in fact things due change and our model suggest we are less sensitive, I think that will be a good thing and we'll have avoided for instance, putting on more hedges than we would have otherwise done. So, but I think this is something that everybody in the industry expresses a lot of uncertainly about and its continuing to look at what the implications of that our for rate risk and rate risk management.

See if you let, let me interrupt, almost 10% expenses are up 6%. I take the fact that there some headwinds over the next couple of quarters from the branch optimization from the FDIC, but if we continue to see loan growth at these various strong levels, can you help us understand just the magnitude of efficiency improvement, do you think you can continue to drive similar like levels to what we've seen year-over-year, would you expect to see somewhat of a deceleration. And what is a future benefit of the branch optimization that you're doing this year? Thanks.

Yes. We really spend a lot of time on the guidance that we gave last quarter and Rich talked about some of the challenges that have emerged over the last three months to that guidance which were absorbing and keeping where it is. And I think with all the puts and takes that's about as far as we prepared to go. Obviously the branch optimization in and of itself on a narrow basis creates savings, but we're also investing in that business in other places and really what we want to do is talk about this on consolidated level. Rich, I don't know whether you have anything to add.

Nothing.

Okay.

Next question please.

We'll take our next question from Chris Brendler with Stifel.

Hey, thanks for taking my question. I just wonder to see if you any additional color you provide on the strong purchase volume growth in the U.S. card business, 20% is very strong and it seems like most of your competitors are trying to piggy back on Quicksilver and other successes in the cash back space. Any thoughts on the competitive environment with that 20% growth, can you sustain that level? And I'd also like you to address the private label businesses, is that contributing to that strong growth or is that actually dragging on that. It seems to me you haven't really invested or done a whole lot of private label since you bought that HSBC business? Thanks

Okay. Chris, the purchase volume continues to be strong, let's talk about where we're seeing it. We're seeing it across various segments in our business that are growing nicely and obviously the spender and rewards business is growing in our revolver business where we focus on revolvers rather high balance revolvers, we see it in small business. But the growth results from success of our rewards programs, it results from new account origination but also credit line increases. And there is an element of this as you're familiar with the fact that we over the last couple of years increased credit line quite significantly making up for kind of a brown-out that preceded that period of time. Now we're in equilibrium with respect to credit line increases. But as people utilize extra line as you have new originations just the utilization of the card, all of these thing help grow purchase volume. So, the purchase volume numbers are the results of direct success in spend oriented programs as well as it’s a byproduct of all the growth that's going on at Capital One. Can we sustain this? I think that we're in a good competitive position, but obviously a lot of other competitors are investing heavily and have a lot of very successful things that they're doing, so we will continue to take this opportunity as far as it will take us but we're cognizant of the intense competition there. Private label with respect to growth rate is in a different place because that's relatively modest growth rate, because we have not been adding lot of big partnerships. Some of our existing partnerships are having nice growth but that business is in an intense competitive period around auction prices and we've gone to a bunch of auctions. We've tended to come up empty handed lately because of – we're not been willing to go to some of the extreme levels that we have seen where the market clearing price goes. All that said, we like the partnership business and I think it has continued opportunity, but in that business that is so auction driven, I think we have to be very respectful about the nature of the auction pricing cycle within that business and make sure that we don't do unnatural things for the seek of growth.

Next question please.

We'll take our next question from Don Fandetti with Citi.

Yes. Rich, if you look around at the major card issuers, it looks like consumer credit very strong. But if you look on the edges for example, the marketplace lenders, they're starting to have problems, and I was just curious if you thought that could be canary in the coal mine or if you think that just a more of a reflection of aggressive growth and maybe not having good credit underwriting in their DNA?

First of all, I want to start with your opening point, consumer credit and especially card credit have been exceptionally strong for some years now. And for Capital One if you peel away the effects of growth math that's still very much the case. And when we look at our back book for example credit is strikingly stable with some pockets have even continuing improvement. And this very strong credit environment has been the result of for ourselves and the industry highly -- highly seasoned back book is made up largely of customers who weathered the great recession, a more disciplined consumer who is less likely to be over stretched or over indebted and a economy that has slow though it has been sort of on a long sustained kind of recovery here. But from where we sit today, my biggest worry and it kind of gets to your question is the potential impact of growing a competition and actually the growth itself that we see of credit around us. We’ve seen a growth of revolving debt creep up to about 6% recently. That’s pretty high relative to the low and sometimes negative levels since the recession. And both consumers and creditors have been very cautious. Beyond card growth, we’ve seen growth in other non-mortgage debt. We’ve seen it institute [ph] in lending, auto lending and installment lending and we are watching that closely as well and installment lending which I think the banks have gradually returned to has been the primary asset class for the alternative lenders and you may remember we had an installment lending book that into the great recession was probably our worst performing portfolio. So we -- my point is primarily a installment lending point but the broader point is all of this -- the math of the amount of growth that we see in the credit market place is not lost on us. Now it is in the context of a particularly on the card side growth being flattish for a long period of time so we are not overly alarmed by just a surge of growth but we’ll certainly have to keep an eye on this. And we know that in the end the growth, the things that we see in the market place with respect to growth not only affect our growth opportunity they can affect credit with the selection quality of new originations and can impact existing customers who take on more debt from other players. So, all of that is stuff that we look at, at this point Don we have not seen these effects in our performance. We’ve reaffirmed our guidance but it’s just a reminder why we focus so much on resilience. We don't set growth targets in company. We focus on capturing highly resilient opportunities when we have them and in the end always that we're in the risk management business, but right now net-net we still feel very good about our opportunity here and we feel very good about the credit outlook.

Next question please.

And we'll go next to Ken Bruce with Bank of America Merrill.

Thanks. Good evening. I would like to piggyback off of the questions around credit. I guess you've talked about the general performance. Can you address the subprime portfolio, subprime credit card portfolio that's obvious grown a whole lot. And then just interested if it's in performing in line with your original expectations and if you could dimensionalize how you expect the economics of that portfolio to perform over the next year, 1.5 years? Thank you.

Ken, it is performing consistent with our expectations, and we've been that business for a long period of time and what we see is consistent with what we've learned over the year about that business and we like its profitable business. We like its resilience and we're continuing to grow in that of one of many segments that we're growing in at the moment.

Next question please.

We'll go next to Eric Wassterstrom with Guggenheim Securities.

Thanks very much. Maybe just a follow-up on that last point. Could you give us a sense of -- in the new accounts that are being booked, how they compare from a FICO stratification standpoint, or some other underwriting metric to the historical growth?

Yes. We're growing in segments in which we have a lot of history and a strong track record even through the great recession. We're in our branded card business. It’s probably not exaggeration to say when we look at the major places we're investing, we're growing in all of them with the exception of one – we are growing in all of those and there is one place we're not growing, we're actively working to continue to dial that down and to shrink it and that's the high balance revolvers. The combination of these factors has driven our portfolio mix of 650 and below assets, a little higher over the past year. Generally though our portfolio mix has been about one-third plus or minus, I think recently it’s been a little bit more on plus side.

Next question please.

We'll go next to Arren Cyganovich with D.A. Davidson.

Thanks. Excuse me, there is -- one of your competitors in the online banking business had acquired a brokerage and wealth management company. I was wondering what you see as the opportunities? I know you have some of that business that you've built organically. And are you pursuing that strategy? Is there an opportunity to grow that or acquire other businesses related?

We're not – we're certainly in that business. We're not a big player in brokerage and wealth management space. I think that it is not – it’s an area on an organic basis we continue to work to growth opportunities. We're kind of a small player. I don't think that the big wirehouses are shaking in their boots about Capital One. But especially for our existing customers we've got some really nice, very refreshing high value products for our customers, but it still off of a very small base at this point.

Next question please.

We'll go next to Matt Burnell with Wells Fargo.

Good evening. Thanks for taking my question. Rich, I wanted to follow up on a couple of earlier questions in terms of you've mentioned for several quarters the opportunity, particularly for growth, particularly in cards. I am curious what you see as a potential yellow flag or warning signal that might signal to you that maybe that growth opportunity is coming to an end? Is it economic factors or is it some of the competitive factors that you mentioned earlier?

So, I think – look, the economy is always a wildcard there, but I don't think that is where that – as our growth I think is going to be more driven unless there's a dramatic kind of change in the economy. I think it’s going to be much more driven by the competitive environment and the related impacts of that competitive environment on the credit environment. And we just learned long ago one of the things that makes this business what it is in terms of the opportunity to make money and get growth opportunities, but on the same its always something that we have to remind ourselves is the relationship between competitive practices that both how intensive the marketing is, the underwriting practices, the pricing and those things, how much they impact not only growth but ultimately make their way into the credit side of the business as well. And this is one business where our own customers and a lot of credit business this customers have a lending product from one bank. In this case people can have credit cards with a lot of players and then of course they hold the lending products from others as well. So as I have said and I still actually would describe the credit card market place this way, on a cross calibration with the rest of the industries that we are in, I think this is the most rational of the market places. But certainly the thing that we are watching the most is the level of supply out there and I think the underwriting competition has been very rational which is a good thing, but we will continue to watch that competition and then look for impacts that can come with that, that would signal to us that it would be appropriate to slow down or whatever. But again, you always know us, we are always in the go out and look out and [Indiscernible] at things to worry about, but I think that we continue to like the opportunity in the current space.

Next question please.

And our final question today comes from Chris Donat with Sandler O'Neill.

Hey good afternoon, thanks for squeezing me in, me in here. Was just curious to follow up on the last question, as we look at the disclosures in your 10-Q we see that your subprime credit card balances have been growing in the high teens or even 20% in the fourth quarter. In terms of the competitive landscape are you really facing much competition or do you have a lot of running room compared to what other issuers are doing?

So one of the things that has been striking to us is the amount of -- there’s a lot of consumer credit is in that space. There is a number of major competitors are actually growing in that space and also what impacts that business a lot is the what spills downstream from the prime business as consumers migrate. And so, when you -- and you can look at the overall disclosures on how much the various banks have of 660 and below. And you can see that there is a pretty sizeable amount of business that each of the players have. I think they have different strategies with respect to them. Capital One’s case we explicitly actually target certain pockets within that business, other players it’s more of a byproduct of more generalized marketing that they do and some of the retail bank players I think they are going to this space with your own customers that they know well. So I think that it’s a more competitive space then I think sometimes urban legend will have it, but that Capital One I think just has a more unique approach to the business and one of the striking things I’ll mention again about the card business is the major card players have staked out unique strategies for how they play in this business and relative to most businesses that we are in I am struck by the differences in those strategies and frankly look around and see a lot of successful players doing smart things given where they are and the bone structure of assets that they have and it leads to the simultaneous success I think of a number of players.

Well thank you everyone for joining us on the conference call today and thank you for your continuing interest in Capital One. As I mentioned before the Investor Relations team will be here this evening to answer any further questions you may have. Thanks again. Have a great evening.

Ladies and gentlemen this does conclude today’s conference. We appreciate your participation.