Capital One Financial Corporation (COF) Q4 2018 Earnings Report, Transcript and Summary

Welcome to the Capital One Fourth Quarter 2018 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 Finance. Sir, you may begin.

Thanks very much, Leanne, and welcome, everybody to Capital One's fourth quarter 2018 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've included a presentation summarizing our fourth quarter 2018 results. With me this evening are Mr. Richard Fairbank, Capital One's Chairman and Chief Executive Officer; and Mr. Scott Blackley, Capital One's Chief Financial Officer. Rich and Scott 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 and 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 in 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 Factors section in our Annual and Quarterly Reports accessible at the Capital One website and filed with the SEC. And now I'll turn the call over to Mr. Blackley. Scott?

Thanks, Jeff. I'll begin tonight with Slide 3. Capital One earned $1.3 billion or $2.48 per share in the fourth quarter. We had three adjusting items in the quarter, which are outlined on page 13 of tonight's slide deck. We had $284 million or $0.60 per share income tax benefit as a result of the resolution of the tax item, this was recorded in our other category. We had a $74 million or $0.12 per share net gains on the sale of exited business, this was also recorded in our other category and finally we had a build of $50 million or $0.11 per share related to the UK PPI Reserve. This was recorded in our Credit Card segment. Net of these adjusting items earnings were at $1.87 per share in the fourth quarter. Let me take a moment to walk you through this quarter's results. Linked quarter pre-provision earnings on a GAAP basis decreased 10% to $2.9 billion with revenues up 1% and non-interest expenses up 10%. The increase in non-interest expense was primarily driven by higher marketing. Operating expenses were up 1% linked quarter as the absence of $170 million legal reserve we booked in the third quarter was more than offset by normal seasonal spending and $110 million of expenses related to a contract renegotiation and UK PPI. The provision for credit losses was up 29% on a linked quarter basis primarily driven by seasonally higher charge offs and the impact of smaller allowance build after an allowance release last quarter. Across all of our business growth drove modest allowance builds in the quarter. Allowance movements across our businesses are detailed in Table 8 of our earnings supplement. Turning to Slide 4, you can see that reported net interest margin decreased five basis points on a linked quarter basis and seven basis points year-over-year primarily driven by higher rates on interest bearing liabilities and balance sheet mix changes. As we've talked about for some time, we continue to believe that increasing deposit cost will be a headwind to our net interest margin going forward. Turning to Slide 5, our Common Equity Tier 1 capital ratio on a Basel III Standardized basis was 11.2%. In the fourth quarter, we purchased 6.9 million common shares for $630 million which completes our 2018 CCAR authorization of $1.2 billion. We continue to view our capital need to be around 11% CET 1 based on current regulations. We believe we have sufficient capital on earnings power to support growth, our Walmart portfolio acquisition the phased in impact of adopting [indiscernible] on January 2020 as well as the potential for a meaningful capital distribution in the 2019 CCAR window. With that, I'll turn the call over to Rich.

Thanks, Scott. Before turning to fourth quarter results I'll share a brief update on our Walmart partnership. Walmart is America's largest retailer and we have a shared vision of how a card partnership can be a central part of a winning retail and ecommerce strategy. Last quarter, we announced our agreement to be the exclusive issuer of Walmart co-branded and private label credit cards. Tonight we're announcing that we've entered into a definitive agreement to acquire the existing portfolio of Walmart co-branded and private label credit card receivables at an attractive price and terms. At closing we expect the portfolio will consist of approximately $9 billion of receivables. And we expect to launch the new originations program and onboard the acquired portfolio late in the third quarter or early in the fourth quarter of 2019. Since we first announced the new relationship with Walmart, we've consistently said, we'd be happy to acquire the existing portfolio but only at the right price and terms. The portfolio has high credit losses, but we expect that the purchase price and customized revenue and loss sharing agreements will achieve resilient and attractive economics that make this a compelling acquisitions. For the acquired portfolio our share of credit losses is fixed at a low percentage throughout the partnership. In contrast, our share of revenue steps up after one year, after the step up our share of revenue is about three times our share of credit losses. In our financial results, we will recognize only our net share of the revenues and credit losses. We expect the impact of on boarding the portfolio will be a modest benefit to the charge off rate of our domestic card business. The new originations program also has revenue and loss sharing terms. The revenue and loss sharing percentages on the new origination program are different than the percentages on the acquired portfolio reflecting the fact that we will drive the underwriting that generates the new originations. In 2019, we expect to incur about $225 million in one-time expenses to launch the new originations programs and integrate the acquired portfolio. These expenses include technology investments and one-time costs associated with hiring and training operational staff and managing the surge of activities related to the conversion and launch. We expect these costs to ramp up over the course of 2019 will break them out as they're incurred throughout the year. When we onboard the portfolio we expect to build allowance only for our net share of the expected credit losses under the terms of our agreement with Walmart. We currently estimate a day one allowance build of approximately $120 million. The actual allowance build will depend upon the loan balances, credit performance and outlook as of the closing date. Pulling up, we're eager to work with Walmart to leverage payments innovation, digital capabilities and data and analytics to deepen relationships, drive digital adoption and create exceptional customer experience. We expect that the overall Walmart partnership including the acquired portfolio and the new originations programs and inclusive of the launch and integration cost. We'll have returns and resilience in line with our domestic credit card business. Slide 8 summarizes fourth quarter results for our credit card business. Fourth quarter pre-tax income was down modestly from the prior year as higher non-interest expense was partially offset by revenue growth and lower provision for credit losses. Looking at the full year we posted strong growth in pre-tax income driven by revenue growth and significant improvement in provision for credit losses. Credit card segment results and trends are largely driven by the performance of domestic card business which is shown on Slide 9. In the fourth quarter domestic card ending loan balances were up $2.1 billion or about 2% compared to the fourth quarter of last year. Average loans also grew about 2%, fourth quarter purchase volume increased 11% from the prior year quarter. Revenue increased 2% from the prior year quarter in line with average loans, revenue margin continues to be relatively stable at 16.0%. Non-interest expense was up about 18% compared to the prior year quarter driven by higher marketing. Our marketing investments are driving strong growth in new accounts and purchase volume. Loan growth is well below new account growth as we remain cautious on credit lines at this point in the cycle. We expect our strength and originations to give us optionality for future loan growth. Credit trends continue to be a driver of domestic card results in the fourth quarter. The charge off rate for the quarter was 4.64% down 44 basis points year-over-year. The 30 plus delinquency rate at quarter end was 4.04% up three basis points from the prior year. Credit performance is pretty benign but we should always keep in mind that we're fairly deep in the cycle. Pulling up the competitive market place remains intense but generally rational. Supply of credit card continues to settle out a bit. Against that backdrop our domestic card business continues to gain momentum, we're booking double-digit purchase volume growth, we're seeing traction in digital and product innovation and our investments in marketing are driving strong growth in new accounts. Slide 10 summarizes fourth quarter results for our consumer banking business which delivered 17% year-over-year increase in pre-tax income in the fourth quarter. Both ending loans and average loans decrease about 21% compared to the prior year quarter driven by the home loans portfolio sale earlier in the year. Ending loans in our auto business were up 4% year-over-year. Auto originations declined and loan growth decelerated as competitive intensity in auto increased. Ending deposits in the consumer bank were up 7% versus the prior year with a 41 basis points increase in average deposit interest rate compared to the fourth quarter of 2017. Our strongest deposit growth is in Capital One 360 Money Market accounts powered by our national banking growth strategy. Rising interest rates, increasing competition and changing product mix have put upward pressure on deposit rates. Looking ahead, we expect further increases in average deposit interest rate as product mix shift continues. We expect increasing competition for deposits will also put upward pressure on deposit rates. Consumer banking revenue increased about 2% from the fourth quarter of last year. Growth in auto loans and retail deposits was partially offset by the revenue reduction from the home loans portfolio sale. Non-interest expense was flat compared to the prior year quarter. Provision for credit losses was down from the fourth quarter of 2017 primarily as a result of strong credit performance in our auto business. The auto charge offs rate improved compared to the prior year quarter and we had a modest allowance build that was smaller than the build in the fourth quarter of 2017. Better than expected auction values continue to support strong auto credit. Over the longer term, we continue to expect that the auto charge off rate will increase gradually as the cycle plays out. Moving to Slide 11, I'll discuss our Commercial Banking business. In the fourth quarter pre-tax income was up 12% year-over-year. Fourth quarter ending loan balances were up 9% year-over-year that overstates the underlying growth rate as the timing of pay downs impacted the growth in ending loans. Recalled it last year, we experienced an unusually high level of pay downs just before the year end. The absence of this effect at the end of 2018 moves to the year-over-year growth rate calculation. Average loans are a better indicator of commercial bank growth trajectory. Growth in average loans was 4% year-over-year. Linked quarter growth was more modest with both ending loans and average loans up about 2%. Commercial bank ending deposits were down 13% from the prior year. Commercial deposit customers continue to rotate out of deposits and into higher yielding investments in the rising interest rate environment. Fourth quarter revenue was down 9% year-over-year primarily driven by the effect of the lower tax rate on tax equivalent yield. Non-interest expense was essentially flat compared to the prior year quarter. Provision for credit losses was significantly lower compared to the fourth quarter of 2017 driven by lower charge offs. The charge off rate for the quarter was 0.1%. The Commercial bank criticized performing loan rate for the quarter was 2.6%. The criticized nonperforming loan rate was 0.4%. While the credit performance of our commercial banking business remains strong increasing competition from non-banks continues to drive less favorable lending terms in the marketplace. We're keeping a watchful eye on market conditions and staying disciplined in our underwriting and origination choices. In the fourth quarter Capital One posted solid results as we invest to grow and drive our digital transformation. For full year 2018, we delivered 41% growth in earnings per share net of adjustments. Our domestic card business continues to gain momentum. Growth in new account originations and purchase volumes is very strong. Profitability for the full year is at record levels and we reach an agreement to acquire the Walmart co-branded and private label card portfolio at an attractive price and terms. Our national banking strategy continues to gain traction. And our commercial business continues to deliver solid results. We continue to drive for operating efficiency as we transform our technology infrastructure and change the way we work. Full year operating efficiency ratio net of adjustments was 45.2% for 2018. From here we expect full year operating efficiency ratio net of adjustments to improve modestly in 2019 excluding the one-time Walmart launch and integration expenses. While efficiency ratio can vary in any given year, over the long-term we believe we will be able to achieve continued gradual efficiency improvement driven by growth and digital productivity gains. Pulling up, we continue to build an enduringly great franchise with the scale, brand capabilities and infrastructure to succeed as the digital revolution transforms our industry and our society. Our digital and technology transformation is accelerating and it's powering our ability to grow new customer relationships and deepen engagement with new and existing customers. We are well positioned to succeed in a rapidly changing marketplace and create long-term shareholder value. And now Scott and I would be happy to answer your questions.

[Operator Instructions] and our first question tonight comes from Don Fandetti with Wells Fargo.

Couple questions on Walmart. I was wondering Scott if you could talk about the impact to the Rev margin I heard your comments on the allowance and then, can you help us better understand $100 million allowance build on $9 billion of loans. Did you buy the loans below par and is there a mark that's unusually high percent? I understand there's also a sharing and that all makes sense. Just trying to drill down a little bit more on that.

Yes, thanks Don. Let me just kind of walk through a couple of those questions. So first of all in terms of the allowance build I'll start there. The allowance build is really reflective of the loss share. I'm not going to give you any specifics about the price that we paid in those terms other than to tell you that, we would expect that in the portfolio acquisition accounting that we have to do, that we'll have a minimal amount of intangibles or premiums or discounts and that's going to translate to, no impact on future earnings there. When shifting to your other questions on revenue margin. You're right that because of the revenue sharing that we have and the fact that we're only going to record the portfolio of the revenue that is attributable to Capital One that will have an impact on revenue margin as we get closer to that transaction we'll give you more details about the impacts of both margin and on our loss rate.

Okay and then just to follow-up Scott. It sounds like you're going to make some strategic hires around those portfolio. This is a pretty large transaction I mean do you have critical mass, like is there execution risk for such a large transaction and are you comfortable with that risk.

Yes, Don we've been planning for that. We are a card company. This is right in the sweet spot of what we do, so this is really bringing on people into the organization to make sure that we're ready to both integrate the acquired portfolio and also launch the new partnership, so we'll work on that. It's a business that we know well, so while this is a significant undertaking for us to ramp up and get ready. I'm confident that we'll be able to manage that risk.

Next question please.

Our next question comes from Eric Wasserstrom with UBS.

Just a couple of questions. The first is, some of the non-interest income lines looked a little bit different than maybe the consensus was expecting. Not so much interchanged but some of the fee lines, was there anything unusual in this quarter's that occurred in with respect to fee income?

Yes just a couple of things. So in fee income one, part of the UK PPI is actually a reversal of income that runs through that service charge line item and so that was a component of the quarter-over-quarter decrease. The other components of that are really just a bunch of small individual puts and takes that all kind of went one direction and so I don't think, really are things that you should be concerned about impacting the run rate.

Great. Thank you. And then just on the auto credit performance and obviously Rich, I just heard your commentary about that. But with respect to the sequential change which showed a bit of deterioration in delinquencies and such, is there anything occurring there beyond the typical seasonal trend that we should be aware of?

No, we don't see anything that would be outside of the norm. I do want to point out, if you look back. You'll see that changes in delinquency rates in the auto business have not been that strongly correlated to changes in credit performance and delinquencies can change for a number of reasons not directly tied to a customer's ability to pay. Such as late fees, call intensities, other servicing strategies just a bunch of things that go on. I will point out though, that the - as we look at the auto industry the ratio of delinquency rates to charge offs has kind of risen overtime and it's just something that we should all keep an eye on and I don't think there is any unusual effect at Capital One, but as we - it's just something that we should all I think keep an eye on, along with things like auction prices which is probably at the top of our list of the factor that has been such a good guy for such a long period of time but of course at some point could go the other way.

Next question please.

And we'll take our next question from Ken Bruce with Bank of America Merrill Lynch.

My first question, I'll start with marketing. You called out that you're going to increase spending significantly in the fourth quarter and you did. I guess when we look at the significant year-over-year investment could you maybe elaborate as to what you're expecting to get for that increase in marketing, is this purely accounts or would you expect the transaction volume to increase from where it is currently?

So in marketing, first of all let me just kind of pull way up, marketing rose a lot $327 million quarter-over-quarter which is higher than typical seasonal increases as we continue to see strong opportunities for card originations, we launched a new card product and we rolled out our National Bank marketing. So one thing let me just, let me turn to the bank because I know your question is a card one, but part of the marketing number is on the bank side, so let me just start there. Every bank needs to figure out how to fund their company as they grow many kind of if you pull way back to it via acquisitions, as you know ours is an organic strategy that capitalizes on our strength and we've heard for years kind of been taking our two banks that we have one direct bank and one local bank and basically building one integrated bank which is integration across technology, product, the customer experience. There is a lot that goes into that and we've sort of spent years doing it. So what's noteworthy about this year and a milestone for us is, that we reached the stage of sort of integration of these businesses that we're able to launch national marketing of our very digitally leaning bank and so that's and that's a strategy that we will continue at Capital One. It just happened to be launched in the latter part of this year. Now a significant part of the increase in marketing was on the card side and we on the card side, if you - think a little bit about spenders and revolvers, on the spender side and of course quite a bit of our marketing is directly oriented at heavy spenders. We have for years been building a heavy spend business that it's all about good products, the customer experience and brand and we have seen increasing traction in that business and the ability to originate very compelling accounts that have wonderful enduring, long-term low risk annuities. And so we see a lot of traction there and we capitalize on this window that we see with respect to that business and you can see the purchase volume growth, the interchanged growth and noteworthy. This is achieved at stable margin and in that part of that business all at the same time, we're having rising returns. So that is very much happening just as we speak. The sort of delayed gratification part of the conversation is more on the revolver side, where again how the economics of that business works it's really driven by balances. Balances are driven by the choice on credit line. We see a very good opportunity and great traction in terms of originating accounts, but we continue to be cautious at this part of the cycle with respect to the extension of credit line and so in that sense it is little bit more about building option value. But the thing I want to stress, the way to build long-term growth in a business like this is, you got to do with accounts one can't just endlessly give credit line increases to one's own customers and so this phase for us is very much on the revolver side about building accounts and we're storing up some value, some option value relative to loan growth as the opportunity presents itself. But the key thing is, the accounts don't wait for us, so we want to capitalize on that when we can, while it's not. I don't want to overstate the point, that in a sense the credit opportunity is something where we can more chose the timing and so pulling way up, as I kind I've been indicating in the last couple of quarters we see a very nice opportunity in the card business and we wanted to step in and capitalize on that.

Okay well understand. Thanks for the detail on that. Just a clarifying point, in terms of the $9 billion that you're acquiring from Walmart and congratulations on getting that signed. Is that going to be the entire existing portfolio or is that - just run off somewhere where I think it was close to $10 billion last [indiscernible] reported on it, so are there current carve outs or is that the whole thing and you're just going to deal with the pricing and the loan loss sharing just in terms of dealing with the poor performers.

Yes, Ken that represents our estimate of the accounts that are still going to be in place when we get to the purchase date out at the end of Q3, early Q4 of next year and I would expect as we do a normal acquisitions that we would acquire current accounts as well as then delinquent accounts.

Next question please.

And we'll take our next question from Betsy Graseck with Morgan Stanley.

Can you hear me?

Yes.

Couple of questions. Just one on the Walmart portfolio how do you think about managing that book from here and is there anything you can share with us with regard to expectations for growth or credit quality or cross sell if you could give us a sense as to what your plans are for that going forward? Thank you.

Betsy, I don't think we have any unique things to say about how we would grow that book. The key thing about a partnership like this is to have a successful program we're going to need attractive products that both organization work hard to market effectively, a great customer experience and really great underwriting and we have a spent a lot of time with Walmart sort of thinking about how we can leverage their amazing size, and scale, and leadership and access to customers along with our position as a technology leader within the financial services marketplace and our underwriting and some of the combined marketing skills that we both have. So but right now that's kind of more on the drawing board and we're excited about the opportunity but a lot of it will boil down to execution.

Okay and then just to follow up, it has to do with. Just expenses in run rate business. I'm wondering if you could comment a little bit around professional fees. It looked like that might have been up a little bit in the quarter and maybe you could give us some census to whether or not that's something that's likely to persist here or was there some unique activity in 4Q that drove that off.

Yes, Betsy. Let me walk through that so, if you look at total non-interest expense that was up, as I talked about my talking points on a year-over-year basis principally driven by marketing. If I exclude marketing and just get to operating expenses there we saw a pretty modest increase of about 1% year-over-year, on a linked quarter basis. The thing to remember is that, last quarter in Q3 we had $170 million legal build so if I backed that out of Q3 I had about $200 million increase in operating expenses. Now let me break out kind of how that happened. About $110 million as I mentioned in my talking points where one-time expenses that were related either to a contract renegotiation or UK PPI and then the remainder is normal seasonal ramp that we see this time of year as we do things like engage professional service providers to help us prepare for CCAR real personal example, but also to do other things in the business. That's kind of a normal season's pattern for us. So once you take out those one-time things, I think that gets you to what you would normally expect to see in Q4.

Next question please.

And our next question comes from Sanjay Sakhrani with KBW.

Just want to follow-up on the Walmart questions. I guess when we think about EPS growth next year, how should we think about one, obviously investments you have to make with Walmart, do we exclude those for the purposes of thinking of EPS growth and then secondly, is the marketing expense run rate given you guys had a pretty elevated run rate today and then, maybe also just on capital return. Scott you mentioned you guys can return a decent amount of capital I just want to understand the capital required for the portfolio acquisition. Thanks.

Yes, why don't I start in terms of the capital and then I'll turn it back over to Rich. So on the capital the acquisition of the acquired portfolio is going to cost us roughly 30 basis points of capital and because we've already completed our CCAR authorization for 2018 over the next several quarters we're already 11.2% [ph] finishing 2018. For the next two quarters we don't have an opportunity to do any capital distributions beyond our normal dividend. So we're likely to accrete capital that puts us in an excellent position to fund that the acquisition of portfolio what the existing capital and then, be ready to adopt CECL at the end of the year, so that's a little bit of the capital trajectory and as I think about the opportunity for capital distribution as I mentioned we're starting at 11.2% [ph] we're going to be accreting. I think we've got their earnings capacity to absorb the organic growth that we see fund the Walmart transaction, get ready for CECL and still have the potential for a meaningful capital distribution.

And then on the EPS growth.

Rich, do you want to jump into the other questions?

Well, sorry so on marketing, was that a Walmart marketing question or overall?

Overall. How we used to think about EPS growth, you guys obviously had a great year this year, but how should we think about forward.

So on the marketing side, we will - I think most importantly the levels of future marketing are going to be based on the opportunities that we see in the marketplace. The bank marketing I referred to that's going to be less opportunistic one quarter to the next, that's just more of the way that we're going to build our really fund the company and build our national banking business. But so we're going to continue to invest in marketing and brand but it will still be a call to see the opportunity in the marketplace when we get there. So I think we continue to be very bullish about the opportunity at Capital One in creating value this year was a very strong year of earnings growth, we're not giving specific EPS guidance next year, but I think we continue to be very bullish about the business and the opportunity that is growing and the - as we look down the road, the opportunity to overtime get the benefits to the Walmart portfolio where you can see that it's really in the third year from now, where we really get up to the full run rate of that, the benefits as we get there of getting to some very key milestones on the tech transformation side, so these are all things that you know align our future. And for well both of those specifically there are certain investments that are going on right now in pursuit of that, but I think the opportunity that we see down the road is very attractive particularly.

And Sanjay just to come back to your questions on the one-time cost that we talked about Walmart. I certainly believe that those were costs that aren't indicative of the run rate of the business and the company's ability to deliver efficiency that's the reason that we've called those out and that will continue to isolate those for you next year.

Next question please. And we'll take our next question from Moshe Orenbuch with Credit Suisse.

Can you give us any sense as to the assumption for revenue growth and the target for an efficiency ratio that is kind of shows modest improvement I guess given the very, very significant amounts that you had in this second half of 2018 and how that would be reflective, if you had somewhat worse revenue performance and I do have a follow-up.

Moshe, we don't have a specific disclosure about revenue growth. I've kind of I think laid out some of the elements that are creating an opportunity particularly for revenue growth overtime obviously the stored value with respect to for to the very strong account originations right now and the stepwise good guy that's going to come from Walmart those are particularly two revenue pieces that are been in the delayed gratification category.

So it would generally be I guess it will be nice to see a little more matching of that, a little more matching of that spending with that, with the returns from that. But I guess to maybe from a philosophical standpoint when you think about the Walmart portfolio are their objectives and yours primarily to provide credit to those customers, is it a transaction vehicle for online spending? Is it a co-brand type of arrangement? Like how do you think about the way you're going to be executing on that program in terms of the front book and the new accounts you're soliciting.

Moshe that's a very good question. Right now the Walmart portfolio is one that is pretty revolver oriented. It's got high credit losses and I think that we and Walmart have aspiration to build a pretty different business. In the first word, I would put out there is the word digital. So to have this partnership be right at the vortex of the growth opportunity that Walmart is putting at the top of their entire strategic priority transforming themselves not only technologically but particularly to be a really big player, in the online retailing space and the partnership is certainly, we have that at the top of the list on this. So technology is going to be incredibly important driving digital activation and activity and there's I think quite a bit of market aspiration and if you look actually at Walmart's customer base there is a lot of that market - people there and a lot of opportunity. Now the key is to turn that opportunity into real digital buying power and that's what Walmart is focused on and I think we're going to be there to help on that, along in the way credit is also a very important thing obviously and I think that our experience from the very top pretty much across the credit spectrum I think is one thing that was in appeal on the Walmart side for having us as a partner, but that will be very critical part of that as well, but it is certainly our hope to pivot the sort of center of gravity of this partnership and expand the opportunity and move it more up market.

Next question please.

And we'll take our next question from Chris Brendler with Buckingham Research Group.

Another question in the card business, but not about Walmart. I understand there's a lot of good signs and then results of this evening with the strong purchase volume growth and making sense your optimism about the account growth, but I thought we're going to see a little better loan growth as we head into fourth quarter and [indiscernible] stuck at 2% doesn't feel like a Capital One type number because given although you're reporting to marketing what feels to be a good spot competitively, it can be outside perspective. So how do you feel about loan growth and maybe just your conservatism online granting at this point, as you're holding that back and also does the fact the CARD Act made it difficult to change rates on the fly sort of limiting your ability to extend balance growth at the point. Thanks.

Chris, sorry. What was your CARD Act question one more time?

Just the fact that you can't change rates, [indiscernible] delinquents the protection we had last recession where you could raise rates across the board and maybe that's sort of limiting your ability to get a little more aggressive online granting just given we're around the cycle.

Let me go back to start with Moshe's very hard felt [indiscernible]. It would be nice to see more matching of spending and return way. Isn't that the, that would be my wish for this business and in fact over the years the matching has become even more not align as with FAS 166/167 the mass of allowance builds, growth mass a lot of things in this business get pretty disaligned now a lot of it is inherent in the actual mechanics of how accounting and the business works. This particular alignment we're talking about here is, now some of it is inherent in the sense that whenever one spends a lot of money on marketing to generate accounts, accounts don't make any money. So the only things that bring instant revenue are going to create that alignment and things like big balance transfers. It's really basically things that bring a lot of balances in, that's what creates that alignment. One of things we've done overtime it's funny I haven't dusted off this phrase for a couple of years now, but you will remember Chris for years we were saying, we were running down high balance revolvers and we've continued to, now we're more in equilibrium with respect to that, but there are a lot of things that in the good times make a lot of money and I put high balance revolvers at the top, number one on that list. The issue is the resilience of that particular segment. So we just ask because of who we are at Capital One we've focused tremendously on resilience and we over the years have really driven down the proportion of our book that's high balance revolvers, now the - and to the specific issue today it's a pretty much $0.01 answer as to why the account growth and the loan growth are not connected and that is our choice on credit line. And while the CARD Act makes probably the stakes, not probably the CARD Act makes the stakes even higher to make sure that one's underwriting decisions are right the first time. We believe, we spend a lot of our energy looking at the competitive marketplace, looking at the credit cycle and then trying to make our choices accordingly and a lot of times we zig, while others zag and it's not an accident, it's actually a causal relationship because a lot of where opportunity lies and where risk exists is the flipside of what competitors are doing. So on this particular case and I really want to stress, we're capitalizing on the opportunities the marketplace presents and the success that we're seeing in our individual programs in the card business, to lean into that and capitalize on the growth opportunity. While our credit numbers are great and you can see the same numbers that we see, we're deep into the credit cycle and nobody knows when this thing is going to turn, but we believe that the prudent thing to do is have our foot on the gas of account originations and our foot a little bit on the break with respect to credit line extension. But it just turns out that method of driving if you will creates a really asymmetrical timing in numbers and cause a bunch of people to scratch their heads and wonder what we're doing, all I can say is that's probably a manifestation of the way we think and way we have thought over all these years. This particular disconnect of break and accelerator is among the highest examples of that, that I can remember in our history.

Next question please.

And we'll take our next question from Rich Shane with JP Morgan.

I just want to circle back on marketing. It was running for the first three quarters of the year up 11% or 12%. Fourth quarter it was up 80% year-over-year. I'm just curios if you can help us with some sort of guidance and what the cadence should be through 2019 and just as my follow-up, how quickly do you dial this up and dial this back?

So there's three different things that were going on that all came together in this particular quarter. There are really four things that came together in this kind of record quarter of marketing, one is seasonality that is seasonally very high anyway and we should always keep that in mind. We've talked about the national banking that's more of - that's not going to be an episodic line of scrimmage thing that's more of just, what we're going to do to build the business. On the card side, we also had in the fourth quarter the launch of one of our products. [Technical difficulty].

Is the call still active?

Yes, you're still live.

So we need the next question please.

And we'll move to our next question comes from Bill Carcache with Nomura.

I had a two part one. First do you guys have a sense for Walmart's commitment to promoting the new Walmart Capital One store card both on its website and in its stores and then secondly, do you think Walmart's commitment to promoting the new credit card is necessary to prevent the pool of applicants from skewing to a higher risk level. The reason I asked is because we've heard that Walmart's philosophy going back to towning has been not to promote credit to its customers and the result over the years was that, those who applied for credit with Walmart tended to be riskier credit seeking customers and I just want to hear your thoughts on those two questions?

Bill, I think you're going to mostly have to find that answer and let me Walmart speak for themselves on that. Let me say though I want to absolutely echo one of the comments that you made. Their commitment is absolutely necessary for this deal to be successful and it was an important consideration for us, as we entertained doing this partnership. So I think we've been impressed with Walmart's intent relative to this thing. This is going to be all about execution and I think third parties are committed to making this thing be very successful.

Appreciate that. Thanks for the comments Rich.

Next question please.

Our next question comes from John Hecht with Jefferies.

Just looking Q3 to Q4 the yield on the loan book was pretty flat, it had various components of liabilities also modest increase in cost. Number one, is there anything seasonal to think about there. And number two, given those trends and your comments on kind of pressures on deposit costs, what do we think about NIM over the near term next one, two, three quarters.

Thanks for the question, John. On net interest margin let me just kind of walk through some things that I think you might want to think about, so one just to remind you that NIM does tend to very seasonally and you'll see that quarter-to-quarter factors like seasonality and day count can make NIM up and down across each of those quarters. Looking forward we do think that, we've talked about deposits cost is being one aspect that could up, pressure on NIM and be a headwind. There's always puts and takes though in net interest margin, balance sheet mix is always a factor depending on the pace of growth of the different asset classes that can actually be a tailwind for NIM. And I would say just in terms of rates as we've told folks for a while now we are fairly neutral to implied forwards. So I don't expect that there is much risk that would benefit for us in terms of where rates can go from here and then finally I would just say like most banks a steeper yield curve would be favorable for the net interest margin, that fit gives you a little bit of the sense of where I could see that going.

Next question please. I'm sorry John, did you had a follow-up?

I was going to ask, is there anything specific to call out in Q4? You did mention some seasonal factors but was there anything in Q4 specifically?

No.

Got it. Thanks very much.

Next question please.

And our next question comes from John Pancari with Evercore.

Regarding the loss share on new originations. I know you mentioned different terms than the loss share that you agreed upon on the back book. How should we think about the assumed loss experience on new originations and how that should impact your what shows up on your, hits your P&L? Could that loss ratio come in above 4.5% level where you're operating at legacy Capital One or and could it near the 10% back book for legacy Walmart? Thanks.

So, well first of all we we're hopeful of being able to generate a book overall with credit losses that are in a different place than where the current book is. But because of the loss share whatever that loss number is, our loss number that we will experience will be fair amount lower than that because of the loss share so I think the overall front book and back book the overall Walmart portfolio is going to be very likely to be a positive contributor. I mean to the charge off of the company.

Okay and then separately the loss share and revenue share terms, does that, does that last for the life of the acquired loans and as well as the duration of new originations.

Yes these loss sharing percentages are for the life of this deal. We have one set of percentages for the back book and the only little wrinkle there is, the revenue share goes up to its destination in the second year and remains there for the life of the agreement, the loss share is throughout the same, is where it is for the whole partnership. On the front book, right out of the blocks we'll have a specific loss share and a specific revenue share that remained for the entirety of the partnership.