Capital One Financial Corp (COF) 2009 Q4 法說會逐字稿

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

Welcome, everyone, to Capital One's fourth quarter 2009 earnings call. Thanks also for joining us a little bit earlier than usual today. As usual we are webcasting live over the Internet. To access the call on the Internet. To access the call on the Internet please log on to Capital One's website at Capitalone.com and follow the links from there. In addition to the press release and financials we have included a presentation summarizing our fourth quarter 2009 results.

With me today are Mr. Richard Fairbank, Capital One's Chairman and Chief Executive Officer and Mr. Gary Perlin, Capital One's Chief Financial Officer and Principal Accounting Officer. Rich and Gary will run you through the presentation. To access a copy of the presentation in the press release please go to Capital One's website, click on investors and then click on quarterly earnings release. Please note that this presentation may contain forward-looking statements. Information regarding Capital One's financial performance and any forward-looking statements contained in today's discussion and materials speak only as of the particular date or dates indicated in the materials. Capital One does not undertake any obligation to update or revise any of this information whether as a result of new information, future events or otherwise.

Numerous factors could cause our actual results to differ materially from those described in forward-looking statements. For more information on these factors please see the section titled forward-looking information in the earnings release presentation and the risk factor section in our annual and quarterly reports accessible at the Capital One website and filed with the SEC. Now, I'll turn the call over to Gary.

Thanks, Jeff, and good afternoon to everyone listening to the call. I'll begin on slide three of the earnings presentation. In the fourth quarter Capital One earned $376 million or $0.83 per share a slight decline from the prior quarter. Earnings for a full year 2009 were $884 million or $0.75 per share after including the $1.31 dividend and repayment expense of the government's preferred share investment that we repaid in full in the second quarter. Revenues in the fourth quarter were down $216 million from the prior quarter with the largest factor being $113 million fewer gains from the sales of securities than we recognized in the third quarter. A continued decline in average assets also contributed to the dip in revenue, despite stable net interest margin. These declines were somewhat offset by a modest improvement in the value of our retained interests as well as less suppression of card revenue.

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

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

Looking ahead to 2010, we expect the trend of declining loans to continue with the runoff of certain portfolios and high levels of chargeoffs but unlike 2009 we do not expect this average loan decline to be offset by further growth in our securities portfolio as risk adjusted returns are likely to be less attractive than in 2009. While margins may moderate slightly from fourth quarter levels we expect that annual margins will largely be similar year-over-year. All told, stable margins on a smaller portfolio will likely lead to lower revenue in 2010. In response to lower loan demand and economic uncertainty, we pulled back on marketing spend in 2009. This decrease was offset by the addition of Chevy Chase Bank operating expenses.

We expect noninterest expenses to increase in 2010. Media and other marketing costs are likely to rise from depressed levels to levels that are more in line with our historical marketing spend depending on our evolving view of market opportunities. Operating expenses will remain stable as ongoing efficiency improvements are offset by investments in our banking and mortgage infrastructure. Full year 2009 provision expense was essentially flat versus the 2008 level. Its higher chargeoffs in 2009 were offset by $2 billion positive swing in allowance from a $1.6 billion build in 2008 to a $400 million release in 2009. This $400 million release was more than accounted for by a smaller reported loan book.

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

As we turn to slide four I'll describe the impact of our loan trends and economic outlook on our allowance. Our overall allowance declined by $386 million in the quarter as builds in both commercial and other consumer banking were more than offset by releases in both auto and credit card. In commercial banking it is worth noting that the supplemental table show a spike in the GreenPoint small ticket CRE chargeoffs which was driven by a movement of $277 million of those loans to held for sale, causing us to charge the loans down to market value. Excluding this impact non-performing loans continued to rise while the total size of the portfolio remained largely flat causing us to build our allowance by $115 million in the quarter. Rich will discuss credit friends in the commercial banking segment in greater detail in a few moments.

In the auto business, $1.1 billion of loan shrinkage in the quarter and continued improvement in credit stemming from our portfolio shift to higher quality originations from 2008 and 2009, led to a $96 million release in our allowance for that business. In domestic card about three quarters of the $416 million allowance release is driven by changes in the size and structure of our loan portfolio. About $220 million of that impact relates directly to the reduced level of reported balances.

The remaining quarter of the card allowance release is driven by the regrounding of our models to reflect the fact that actual credit performance has been favorable to our internal expectations even though some macroeconomic variables have come in worse than we expected. As you will hear from Rich in a moment, we remain cautious in our economic outlook especially with respect to the labor and housing markets. Consistent with this view we are continuing to maintain high levels of allowance to both reported loans and delinquencies.

Turning to slide five I'll discuss movements in our balance sheet. Assets increased by $2.4 billion in the quarter as shrinkage in each of our lending businesses was more than offset by growth in our securities portfolio and cash position. Our managed domestic card portfolio was down $1.6 billion in the quarter driven primarily by a $1 billion dollars of runoff in our closed end loan portfolio. The closed end clone portfolio had $7 billion outstanding as of the end of the year and it will continue to pressure card growth as we expect approximately $3 billion to run off over the course of 2010. The slight shrinkage in our fourth quarter commercial banking portfolio was more than driven by the shift of the small ticket CRE portfolio to held for sale that I mentioned earlier. Our commercial lending business is expected to grow modestly in 2010.

On the consumer bank side the $1.9 billion decline in fourth quarter assets was primarily driven by $1.1 billion of lower outstandings in the auto business and a $700 million decline in the size of our mortgage portfolio. With respect to auto, recall we drastically pulled back on origination volume in early 2008 and we are now beginning to approach the point at which the runoff of prior originations will equal new originations. As a result of this slowing pace of run off we expect ending loans to be down approximately $1.5 billion over 2010 compared to a $3.3 billion decline in 2009. Our mortgage portfolio largely remains in runoff mode and expect to decline by approximately $2.5 billion in 2010. Our $39 billion securities portfolio remained fairly constant quarter-over-quarter both in terms of size as well as composition. The total net unrealized gain to the portfolio now stands at $291 million down some $49 million from the third quarter primarily as a result of higher interest rates across the medium and long-term parts of the yield curve

Finally, we had a nearly $5 billion increase in our cash position in the fourth quarter as we held late quarter deposit growth and the proceeds from our November trust preferred issuance in cash and cash equivalents. We expect a substantial amount of this position to roll off in the first quarter.

Between the runoff of our closed end loan portfolio in the card business and declining consumer loans in both auto and mortgage, we expect these businesses will together lose approximately $7 billion of loans in 2010. While our other lending businesses may see net growth this year despite elevated levels of charge-offs it is reasonable to assume that the total loan portfolio will decline by mid-single-digits in terms of percentage this year. Taking into account the rapid shrinkage already experienced in 2009 the averaging impact of a mid-single-digit percentage decline in ending loan balances this year will equate to a high single-digit percentage decline in average loan balances. On the liability side we continue to leverage the flexibility of both our branch and national direct bank platforms to drive down funding costs. In the fourth quarter we swapped out of higher priced time deposits into money market and savings accounts and increased the amount of non-interest bearing deposits. You'll see the benefit of these moves on funding costs on slide six.

While asset yield declined by 14 basis points in the quarter, we were able to offset most of the decline through lower funding costs resulting in a stable net interest margin. As I indicated on the last call some of the non-interest income revenue realized in the third quarter was not sustainable in the fourth quarter and revenue margin fell slightly but remained high. While both net interest margin and revenue margin may moderate slightly from fourth quarter levels we expect the full-year rates for 2010 to be similar to those in 2009. With revenue down and non-interest expenses up in the quarter, the efficiency ratio climbed 5% from the abnormally low third quarter to 43.9%.

Looking ahead, the expectation for a smaller loan portfolio will put downward pressure on revenues in 2010, coupling that with our expected increase in marketing and largely stable operating expenses it is prudent to assume that our efficiency ratio will rise year-over-year. I will now discuss capital on slide seven.

Our ratio of tangible common equity to tangible managed assets rose 10 basis points in the quarter to 6.3% as earnings more than offset a modest increase in tangible assets. In addition to the increase in common equity we see in the TCE ratio the Tier 1 ratio benefited from three additional factors. First, the reported balance sheet got smaller. Second, some of the asset growth was in cash which carries a zero risk weight on our regulatory ratios and finally Tier 1 includes the proceeds of our $1 billion trust preferred issue in November. In aggregate these factors resulted in an overall 190 basis-point improvement in the Tier 1 ratio. While these capital ratios are at their highest point since the third quarter of 2008, the composition of reported capital and reserves will, of course, change considerably with the first quarter implementation of FAS 166 and 167 as well as the corresponding implementation of the regulatory capital rules over the next five quarters.

Turning to slide eight, I'll describe these impacts in greater detail for you. For Capital One, consolidation under FAS 166, 167, takes effect on January 1, 2010. While you will see the actual impact of book value consolidation when we report first quarter earnings, we thought it would be useful to describe the key impacts of consolidation by providing on this slide an estimated balance sheet for the start of the quarter. Under FAS 166 and 167, we are bringing back all $46 billion of securitized credit card and installment loan assets and approximately $1.5 billion of securitized mortgage assets. These $47.8 billion of assets can be seen in the adjustment to loans held for investment on the slide. It's worth noting that about $6 billion of securitized mortgage assets will remain off balance sheet. Even though we don't retain all of the risks associated with securitized assets, we will build an allowance at a comparable coverage ratio to existing on balance sheet assets upon consolidation.

The implementation of FAS 166 and 167 will therefore reduce retained earnings primarily due to the after-tax effect of the $4.3 billion allowance build, and the allowance would stand at $8.4 billion. The change in accounting also eliminates the line item for accounts receivable from securitizations. This account included several different items most materially the securitizations retained by Capital One as well as the cash and collection accounts related to our securitization transactions. About $5 billion of retained interest in our own securitizations will now be classified as loans and the amounts in the securitization related cash accounts will now be classified as cash. The change in other assets is primarily due to the deferred tax asset created upon implementation. And, finally, we will increase our securitization liability to account for the debt associated with those assets.

Now that I've shared the geography movements of the balance sheet, I'll provide pro forma capital estimates for this impact on slide nine. Since we've always captured securitized card assets in the denominator of our TCE ratio the only impact of consolidation to the denominator of the TCE ratio comes from the addition of $1.5 billion of securitized mortgage assets. This asset increase coupled with the reduction in the numerator caused by the $4.3 billion allowance build, would have decreased the TCE ratio by about 150 basis points to 4.8% as of the end of the year. Since the allowance build is tax affected you'll note on the right hand graph that the allowance grows more than our TCE declines.

Going forward, given the natural runoff of high fourth quarter cash balances, the impact of our runoff portfolios and likely seasonal declines in revolving credit utilization we continue to expect that our TCE ratio will be above 5% at the end of the first quarter and will likely grow thereafter. Our Tier 1 and other risk based capital ratios will be impacted by more significant moves in both the numerator and the denominator. But unlike the full and immediate impact of consolidation to the TCE ratio the timing of the impact will be realized more gradually in line with the phase-in framework established by national bank regulators. The phase in period extends through 2010 with the full impact of consolidation of off balance sheet securitizations for regulatory capital purposes included as of the first quarter of 2011.

We are providing pro forma estimates of regulatory capital ratios using the rules which will be in place as of March 31, 2010. In order to facilitate sequential comparisons when we report at the end of the first quarter of 2010. Pro forma Tier 1 ratios as of 12/31/09 are impacted by a decline in the numerator as we account for the allowance driven reduction in retained earnings. The numerator is further reduced by our need to disallow for regulatory capital purposes some or all of the deferred tax asset which results from the consolidation driven increase in allowance. The net result of the reduced numerator will cause pro forma Tier 1 ratios to decline from actual 12/31/09 ratios by some 400 basis points.

Beginning in the third quarter of 2010 what remains then of current off balance sheet assets will begin to flow in part into the denominator of the Tier 1 ratio. Of course the numerator may also change between now and then depending on changes in the allowance over the next few quarters. Total risk based capital rules dictate not only a phase in period for including securitized loans in the denominator of risk weighted assets but also for the numerator impact for any allowance build associated with off balance sheet assets. As a result there is only a de minimus impact in the pro forma estimate of total risk based capital on 12/31/09 compared to the actual ratio prior to consolidation.

Aside from the balance sheet impact of this transition it is important to note that our income statement will also be impacted in future quarters by consolidation. Since allowance will now be required for all of our managed assets the movement in our allowance for our card business, for example, will be approximately three times as large as it would otherwise have been had the two thirds of our card loans that are securitized stayed off balance sheet. Given our expectation for continued loan shrinkage in 2010, allowance releases associated with declining loan volume will now be amplified compared to what it would have been without the FAS 166 and 167 implementation. In addition to the allowance our IO strip and other retained interest valuation will change also as a result of consolidation.

Prior to FAS 166 and 167, we recognized small gains upon securitization and changes to our valuation flowed from non-interest income. Post-consolidation no gains will be recognized and allowance will be established upon loan origination and changes to expected losses will flow through the provision at a level higher than previously recorded through the IO strip. As we've been saying for a number of quarters, the implementation of FAS 166 and 167 simply creates a migration of accounting entries across the balance sheet and does not change our Company's risk profile or capacity to absorb that risk. Our balance sheet remains extremely strong and flexible and those characteristics give us confidence to produce strong results despite a challenging and uncertain environment. I'll pass the call over to Rich to talk about the performance of our businesses in greater details.

Thanks, Gary, I'll begin on slide ten. Our credit card business was the biggest contributor of profits in the quarter. With both the domestic and international card businesses posting a profit. I'll discuss the results of the card business in a moment.

In our commercial banking business, credit performance was the biggest driver of the net loss. Provision expense actually declined modestly from the third quarter but remains elevated. Looking beyond credit results commercial loan balances declined slightly while low-cost commercial deposits grew. Higher loan yields drove a modest increase in revenue. Non-interest expenses increased driven by rising costs associated with loan workouts and by continuing infrastructure investments.

The consumer banking business posted a modest net loss for the quarter. Seasonal credit trends reduced fourth quarter auto finance profits compared to the third quarter. Mortgage portfolio revenues and profits declined as a result of negative valuation adjustments to retained interest and securitized mortgage portfolios and MSR write-down and purchase accounting adjustments. We also continued to experience the expected runoff of mortgage balances.

Consumer banking provision expense increased with seasonal increases in auto finance and continued deterioration in mortgage and home equity credit trends. Operating expenses increased in the quarter as a result of several factors. Fourth quarter includes planned expenses related to the integration of Chevy Chase Bank, beyond integration we're investing to build a scalable banking infrastructure to ensure we're well positioned to take of advantage of opportunities to grow our banking businesses. Higher costs associated with auto finance collections, and mortgage loss mitigation operations contributed to higher operating expenses in the quarter. Consumer banking deposits grew even as deposit interest expense declined again in the fourth quarter.

Slide 11 shows credit results for our credit card business. Domestic card charge-off rate was relatively stable from the third quarter to the fourth quarter decreasing 5 basis points. There were a number of offsetting factors under the surface. The fourth quarter is a period of seasonal headwinds in domestic card. All else equal that would have increased fourth quarter charge off rate by about 80 basis points. Domestic card assets continue to do shrink in the fourth quarter. This denominator effect led to a 45 basis-point increase in the fourth quarter chargeoff rate. Fourth quarter chargeoff rate included a 60 basis points benefit relative to Q3 as we passed the peak of the OCC minimum payment impact in the third quarter. The OCC minimum payment impact fell from about 80 basis points in the third quarter to about 20 basis points in the fourth quarter. When you adjust for the effects of seasonality, OCC minimum payment impact and declining denominator, underlying credit quality in our domestic card portfolio improved in the fourth quarter.

Later stage delinquency flow rates declined slightly after rising rapidly over the previous year. Post-chargeoff recoveries liquidation rates showed signs of stabilization after prolonged periods of decline. Bankruptcies were slightly lower on a quarter-over-quarter basis. And while early-stage delinquency flow rates remained elevated in Q4, they declined slightly from the third quarter.

Domestic card delinquencies rose 40 basis points in the fourth quarter. Our delinquency rate increased more than some others. It appears that the adverse trends in flow rates and delinquency bucket inventories has abated although we do expected elevated delinquencies to lead to an increase in charge offs in the first quarter 2010. Overall we expect further increases in the domestic card charge off rate into 2010. We expect the chargeoff rate for the first quarter could cross 11% driven by declining loan balances and the effect of pricing actions flowing through to chargeoff.

We believe that we'll reach the quarterly peak of chargeoff dollars in the first quarter of 2010, although declining loan balances may cause chargeoff rates to remain elevated for a bit longer. Similar to our view of unemployment rate nearing a peak doesn't necessarily mean we're nearing the beginning of a robust recovery. But barring significant adverse changes to our long-term credit outlook or the regulatory environment, we expect that our domestic card business will remain profitable in 2010. Credit trends in the international business reflect continuing economic weakness in the UK and Canada. We have been retrenching the UK business for some time now and we have been cautious in Canada in anticipation of the credit worsening that began in the first half of 2009. Fourth quarter credit results as well as the outlook for reaching the peak of dollar charge-offs in the first quarter of 2010 resulted in a significant decline in provision expense for our credit card business. Declining provision expense was the key driver of profitability in the quarter.

Slide 12 shows loan balances for the domestic and the international card businesses. Ending loans in our domestic card business continued to decline in the quarter. The decline resulted from the continue continuing runoff of nationally originated installment loans and elevated charge-offs partially offset by seasonal balance build. In 2009 we continued to aggressively manage the Company through the downturn in part by retrenching and pulling back on originations. As a result marketing expense for 2009 was unusually low.

In 2010 we expect that domestic card marketing expenses will ramp back toward more normal levels depending on our assessment of the marketing -- market and the merging opportunities for profitable and resilient origination growth. However, we expect that increased marketing will not result in net loan growth in 2010. While increased marketing may result in revolving loan originations that more or less offset the effect of elevated charge-offs, we expect domestic card loans to decline in 2010 because continuing runoff of about $3 billion of installment loans. If normal seasonal patterns hold we would expect that most or all of the decline would come in the first quarter.

In subsequent quarters we'd expect loan balances for the domestic card segment to be relatively flat as originations roughly offset both elevated charge-off and installment loan runoff. To put this in perspective, domestic card loans shrank by about $11 billion in 2009 as a result of weak demand from credit worthy borrowers, elevated charge-off, unusually low marketing and originations and the runoff of installment loans.

Slide 13 shows annual domestic card revenue margins since 2004. While quarterly revenue margin can vary considerably annual revenue margins have been very steady for seven years. Revenue margin in the domestic card business improved modestly in the fourth quarter to just over 17%. Recall that last quarter we indicated the domestic card revenue margin would likely decline modestly in the fourth quarter but remain above 16%. Fourth quarter revenue margin exceeded our previous expectations largely as a result of better than expected credit results. The same credit results and outlook that contributed to the allowance release in the quarter had a parallel, albeit smaller, favorable impact on revenue. Actual credit results were favorable to our prior expectations driving a more favorable assessment of the collectability of finance charges and fees that were previously build but not recognized as revenue. This allowed us to recognize some of these previously billed fees as revenue in the fourth quarter and to recognize a larger portion of fourth quarter fee billings as well.

Looking forward our view of domestic card revenue margin for 2010 has not changed meaningfully, although the stronger than expected fourth quarter revenue margin changes the trajectory of how we expect to get there. We expect -- excuse me, we expect that quarterly domestic card revenue margin will be in the mid-15% range in 2010, although the revenue margin in the first quarter may come in a bit higher than that. Several factors may introduce more than usual uncertainty and quarterly variability in revenue margin. Continuing favorable credit impacts to revenue may push revenue margin a bit higher. Conversely, pending regulatory interpretations of aspects of the card loss such as defining reasonable fees and the need for issuers to consider, quote, unquote, unrepricing later in 2010, pose risk to the downside.

Before moving to our commercial and consumer banking businesses I'd like to pull up and discuss our long-term outlook for domestic card more holistically. Relative to the industry, we believe our domestic card business will be less exposed to most aspects of the card law because we've never relied on practices like aggressive penalty repricing, universal default or double-cycle billing. As a result we would expect that we will be able to essentially restart the marketing of similar products, to similar customer segments that we were doing before we pulled back before the recession. We do expect to see a redistribution of where credit card revenue comes from in our US card business. With declining revenues from over limit fees and increasing revenues from up front pricing. In aggregate we believe our model will remain largely intact over time, assuming an intact revenue model, bottom line returns will be largely determined by where credit losses normalize, we expect returns in our card business to diminish modestly from prerecession levels but to remain very attractive and well above hurdle rates over the longer term.

Our outlook for 2010 revenue margin is consistent with this longer term view. We're already seeing the redistribution in the 2009 trends of rising interest income and falling net -- and falling non-interest income in our domestic card business. Compared to 2008, domestic card net interest margin increased 86 basis points in 2009, while non-interest income as a percentage of loans, decreased 87 basis points. The redistribution drove domestic card revenue margin for the third and fourth quarters of 2009 to unusually high levels, while the 2009 decline in non-interest income is mostly the result of consumer behavior changes in the downturn, we expect the new card law will drive continuing redistribution in 2010 which will result in quarterly revenue margin returning to more normal levels.

As you can see on the graph, expected revenue margin in the mid-15% range is certainly consistent with our history over the last six years. We expect the 2010 domestic card results will reflect the continuing drag of declining loan balances resulting from installment loan runoff as well as increasing marketing expense. But the credit card business has always been characterized by significant near-term marketing investments followed by a long-term payoff with very attractive risk adjusted returns. Margins will likely return to well above hurdle over the cycle. We expected that returns will be more sustainable, long-term with competitive practices cleaned up by the card law. And as we said before we believe the domestic card market and the competitive environment following the implementation of the card law will play to our strengths.

Slide 14 shows commercial banking credit trends. Commercial banking charge-off rate increased sharply in the fourth quarter, while the non-performing asset percentage declined. The divergent trends were driven by the small ticket commercial real estate loan portfolio which continues to run off after we stopped originating these loans over two years ago. We charged off a portfolio of non-performing loans in the fourth quarter as we moved to sell them. This also drove the sharp increase in small ticket CRE charge-offs you can see in the press release tables.

In our core commercial lending businesses, which excludes the small ticket real estate portfolio, charge-off rate in the non-performing asset rate both increased driven by deterioration in the commercial and multi family real estate portfolio. Within this portfolio the deterioration remains concentrated in our relatively small construction portfolio and in loans related to New York City office buildings.

Credit performance in the middle market portfolio was relatively stable. We believe that the continuing recession will drive continuing declines in commercial real estate values and that non-performers and charge-offs will remain elevated across our commercial banking businesses in 2010. Compared to most large banks, commercial loans are much smaller percentage of our total Company managed loans and we also believe that our commercial banking loan portfolio is well positioned to weather the recession. We have a favorable loan mix with relatively small risk to construction lending. Our relatively small exposure to construction lending CRE charge off rate is lower than many other banks. We also have a relatively large exposure to New York City multi-family, which has been resilient to recession because of rent-controls and supply limitations. We have disciplined lending standards and we underwrite to replace cash flows and rents and we follow a relationship oriented approach, that focuses on borrowers we had long experience and deep relationships.

Slide 15 shows credit results for mortgage and auto, the two largest components of the consumer banking loan portfolio. Delinquencies and charge-offs for the mortgage portfolio continue to degrade along with the industry but remain in line with industry credit trends for similar high quality portfolios. Our mortgage portfolio includes the she have she have mortgage loans we acquired. Our credit metrics and the P&L are largely insulated from the credit risk of the Chevy Chase mortgage loans because of the substantial credit mark we took at the time of the acquisition. Credit trends through 2009 are in line with our expectations and remain comfortable with the mark. Our current priority for the mortgage portfolio is aggressively managing defaults. We're also building infrastructure and developing strategies in anticipation of opportunities to grow in footprint mortgage originations as the mortgage market shakes out and the economic cycle turns.

Auto finance, charge-offs and delinquency rates both increased in the fourth quarter. The increases resulted from expected seasonal patterns and impact from the decline in the denominator. These factors were partially offset by the continuing success of our investments in auto finance collection s and recoveries. Capital One auto finance delivered another strong quarter of profitability despite continuing economic headwinds. Our 2008 and 2009 origination vintages are delivering strong results. We have been able to originate loans with lower LTVs to customers with higher FICA scores. At the same time we have been able to improving pricing and margins in the current competitive environment. As a result we expect that the 2008 and 2009 originations will yield above hurdle risk adjusted returns and our performance to date is tracking at or above these expectations.

I'll conclude tonight on slide 16. Pulling up we have worked for years to position our Company to be resilient and we're demonstrating that resilience through the most challenging economic cycle that we've seen in generations. We've delivered solid preprovision, pretax earnings throughout the recession. We passed the government stress test and we were able to be among the earliest to repay TARP. We have delivered bottom line profitability for both the quarter and the year, and we've maintained the strength and flexibility of our balance sheet. As a result we're well positioned to deliver value as the cycle plays out. The mechanics of how we deliver value over the cycle will shape near-term trends. We expect that loans will continue to decline in 2010, driven largely by a continuing runoff of businesses we exited or repositioned earlier in the recession. As we near the peak of charge-offs in our consumer businesses, the combination of declining loan balances and moderating economic outlook create the potential for significant allowance releases. Potential allowance releases would coincide with investments we expect to make to drive future growth and returns.

In 2010 we expect marketing expense will begin to ramp toward more normal historical levels and that operating expenses will be similar to 2009 as ongoing efficiency improvements are offset by investments in infrastructure. While we expect loan growth and returns to lag investments, just as they always have, we remain confident that the returns will be attractive and sustainable over the long term. Our results for the fourth quarter of 2009 provide a sort of preview of many of the trends that we expect to continue in 2010. Declining loan balances and stable margins, lower revenues and preprovision earnings, and the offsetting effect of significant allowance relief that resulted from both declining loan balances and modest favorability in credit results and outlook.

As we enter 2010, we continue to make the tough decisions and take the actions that we believe will put our Company in the best possible position to manage the Company through the downturn for the benefit of shareholders. As a result of our actions we believe that we remained well positioned to weather the storm and to deliver shareholder value over the cycle. Now, Gary and I will be happy to answer your questions. Jeff?

Thanks, Rich, we'll now start the Q&A session. As a courtesy to other investors and analysts, limit yourself to one question and a single follow-up question. If you have any additional follow up questions after the Q&A session, the Investor Relations staff will be available after the call. Would you please start the Q&A session.

(Operator Instructions). We'll take our first question from Bruce Harting with Barclays.

So how should we think about the current run rate on charge-offs at about $2.2 billion and now the new reserve allowance level having doubled due to FAS 166, and how that works through the numbers over the next four quarters as you said charge-offs in dollar terms may peak in the first quarter and then drop from there? Thanks.

Hey, Bruce, it's Gary. Certainly now that we will be building an allowance against our entire book, the size of the allowance is going to be a lot closer to our view of the next 12 months of losses than it was before. I want to warn you, it is not exactly the same thing because there is not an exact one for one in all of our businesses. For example, some of our commercial assets carrying allowance that is different than 12 months' expected loss. And even in the card business, the allowance is only booked against expected losses and loans already on our balance sheet and it doesn't speak to any potential losses on balances that could be booked over the course of the year. So, directionally, take a look at the allowance and that will give you a view of where things are likely to go over the next 12 months based on our current view. But it's not exactly going to be one for one, just a lot closer than it was.

Thank you.

And we'll take our next question from Brian Foran with Goldman-Sachs.

Following up on the same issue, when we try to think of the core earnings run rate of the Company, the struggle is you've done $0.90 give or take each of the past two quarters, you're pointing to lower revenue on both price and volume but higher marketing expense but then against that coming back to the allowance issue if I understand the slide right, it is going to be 6.5% when historically you kind of ran with 4% in a normal credit environment. If this -- is 2010 the kind of transition year where credit getting better, the earnings are driven mostly by reserve releases and underlying that the core franchise isn't actually earning very much but it is more investing for the future?

Yes, sure, Brian, it is Gary. I think you're reading things quite correctly assuming that our view of the economy is in sync with yours, which is that charge-offs are stabilizing at relatively high levels. And we've got allowance coverage ratios that reflect that, as Rich can said, we're going to have to have to work hard to rebuild our balances. Many of them either running off because of the discontinued businesses or perhaps running off because of the high level of charge-offs so there is an investment to be done this year as Rich described on the marketing side, in order to generate growth to fill some of that reduced level of balances.

So I think all told, over the last couple of years, you've seen a great stability in each of the major line items of our income statement that is both revenue and expenses and provision with a lot of offsets within those areas. What you saw in this last quarter was a decline in revenue, largely coming from balances. You saw relatively stable margins. You saw a slight tick up in expenses. And a significant decline in provision expense and that seems to me a reasonable expectation as the economy begins to turn if that's in fact what it turns out to be doing.

One follow-up, if I could.

Yes, go ahead, Brian.

On the TCE ratio pro forma for FAS 166 previously you said greater than 5 and now it is 4.8. I realize there is a lot of moving parts but is there any one particular thing that drove the change?

As a quick reminder, Brian, what we said that when we fully implement at the end of the first quarter, we would be at 5%. We weren't actually guiding to where we thought we would be pro forma at the end of 12/31, since it wasn't in play there, as I described, what we've expected in the first quarter is a pretty significant decline in balances, both in cash balances, typically in the first quarter, we have a decline in revolving credit balances and we have continued runoff. So as I said earlier, I'm comfortable that what we said before which is that our TCE ratio at the end of the first quarter in which we implement FAS 166, 167 would be above 5% and it still feels like the right thing for us right now.

Next question.

We'll take our next question from Andrew Wessel with JPMorgan.

Good evening, thanks for taking my question. Just the one I had was about the opportunities to grow the banking business going forward and you talked about building on your infrastructure to have the potential to really scale up and be bigger. Is that any indication about the strategy of potentially looking at deals going forward in the -- at least in 2010, I think the past conversations have been a lot of the FDIC transactions didn't look all that attractive to you. Has anything changed there? Is there anything else you see on the acquisition front?

Yes, Andrew, this is Rich. Actually it's a -- the path to being what we kind of, the term we use and commonly use in the regulatory circles, top 10 banking infrastructure is something that is the same -- it is a shared path were we never to do any more banking deals or were we to do more banking deals because it really is basically the path to take three banking infrastructures, none of which was built anywhere near to top 10 banking scalability, and to build that capability. So we're not investing extra in order to be able to view bank acquisitions.

As I said before, we are well positioned with the transformation we have done as a Company, with the relevant scale in all of our businesses. I think we feel very well positioned. It is not lost on us that there will be a lot of banks in various situations of hurt, and we will look at those opportunities as they come along and FDIC deals, we have participated in some of the examination of those deals, but to us it's a very much about disciplined evaluation of the opportunities. There is no sense of we've got to get to a different place and therefore, Andrew, we are very much in the same place as we were last time we talked to you on that.

Thanks.

Next question, please.

We'll take our next question from Rick Shane with Jefferies & Company.

Hey, guys, thanks for taking my question. I'm going to focus on the other part, the margin side. Your guidance is effectively for flat year-over-year margins which I would take to be in the mid-15% range. The 2009 numbers had a really sort of dramatic contour to them in that they rose steadily throughout the year. If we look at where we're headed, the implication is that we're going to see a step down from Q4 which is what you guys have indicated. What I would like to understand is how that is going to play out throughout the year. Are we going to see a big step down in the next quarter and then is it going to level off or is it going to decay throughout the year and you are going to get to a mid-15-type number by 16% in the first half and 14.5% in the second half, and the real implication being what should we be looking for out in 2011? Where are we going to exit the year?

Rick, I want to stay out of the quarterly margin projection business. However, it's also that we are not projecting, in some sense a continual decline over the course of a year. One thing that creates uncertainty about the number that was on display in the fourth quarter is what happens with respect to how credit comes in relative to their expectations and therefore how that flows through the finance charge reserve impacts which go through revenue. But frankly, other than those effects, this is pretty much a move toward the 15% kind of range and it's not some big decline over the course of the year.

As we indicated the first quarter probably be a graduation on the way to that but I think this is more of a destination margin for us as opposed to something on the way to a different destination in the following year. I think our view about this thing is, and the reason we put that slide in, it was kind of striking even to sort of take a trip through memory lane and look at so many years with relatively stable revenue margin. Because fundamentally our business model isn't really all that much changed from where it's going to be, versus where it has been over the past years. It's logical that, and somewhat natural to us, that it would be -- the revenue margin would be in a similar kind of a place. So, frankly, the 15 -- the revenue margin in the 15s that we're talking about, is I think sort of the, as far out as we can see it, a kind of destination margin on the other side of the card act and the other changes. I think there would be a gradual impact over the years as credit losses come down probably you would see margins sort of naturally moderated -- moderate from there.

To steal some of Gary's words, a little bit of geographic change, but long-term, not a big change?

Exactly. But I really do want to push on the geographic change, because this is something that I think is on the way to a, while we want our investors to understand the geographic change, pulling up beyond Capital One sort to the credit car industry, the geographic change, yes, there is some geographic change from non-interest income going to net interest income but the much more important thing is the geographic change of how pricing happens with respect to customers and the marketing. And the geographic change is that pricing is going to go much more to up-front, very clear pricing and it's a return along with that to this business being about what it used to be so much about, which is up-front underwriting, and this is the business that we've been wanting for a long time. It is the business of the '90s and we look forward to that. We're pretty comfortable that for us along with that, will be a revenue margin generally consistent with the revenue margin we've had before.

Great. Thank you.

Next question ,

And our next question comes from Chris Brendler with Stifel.

Rich, another question on the card business, if I might. I think that when this card act was first announced we were thinking that you would see a pretty dramatic impact on the industry's loan balances and that you would cause issuers to pull back from not only subprime but also the prime segment as just the lack of repricing made those businesses, made those lending opportunities shrink, combined. We're already seeing shrinking industry with consumers leveraging. Your guidance appears to be a lot more aggressive for 2010 in terms of loan growth in the card business. I am just wondering what sort of macro or industry assumptions you have around your ability to grow the card portfolio this year. And if you share my recent thinking that a lot of the shrinkage in the card industries balances in 2009 was really more self-inflicted as everyone pulled back on marketing and pulled back on lines. You had the industry shrink a lot. And maybe as credit is turning we'll see better industry growth this year. Thanks.

Before we talk about kind of us and this year, let me talk about the industry and what's been happening, and I think what's headed to happen over time. By far the really big story with respect to outstandings in the card business is the math of 10% charge-off rates, and it's pretty breathtaking watching the whole industry lose balances and as we pointed out that is always first and foremost the thing that kind of drives ours and frankly the industry's declines. As we've talked about for ourselves, I can't speak for the industry, but for ourselves sort of 2010 is the year that things kind of stabilize with respect to that. As originations sort of move to offset that the -- the second big point that I'd like is that there is very big consumer phenomenon happening here. The lack of credit demand is a striking thing across all of our businesses but we certainly see it in the card business, and while I think that is particularly acute during this downturn, our expectation is on the other side of this downturn continued bias for the consumer to increase savings as opposed to borrowings, will be something that probably causes the card business to be -- not have much growth, and probably more likely to be something with respect to shrinking.

So that leads us to the part that we can more only speculate about, and that is what is the competitive environment, that in the end, kind of completes this equation? I think, we, in all of the businesses that we're in across all of banking, I think that the competition has generally pulled back and has some blend of licking their wounds and kind of rethinking their business model, but, I would expect in the card business there to be less competition than in the really intense days of the past but certainly more competition than the fairly absent competition, ourself included, over the past year.

But for us, I think the encouraging thing is that for us it is not really a matter of reinventing a business model, it is a matter of just kind of doing what we've done before in the context of a more level playing field and we really look forward to that opportunity. Don't confuse that with big rapid growth. But I think from everything we can see the opportunity to have very healthy, good quality growth with the kind of returns that we've enjoyed for many years is what we see, and as Gary and I have been pointing out, we just got to make sure our investors understand the mechanics of kind of going through the transition from big shrinking time to where we're restarting the engine and really getting growth going again.

Thanks. Quick follow-up, if I could. Just update us on how you're seeing the opt in on over limit fee, and your customers' response to those new rules?

This is something that is really kind of unfolding right before us at this point. I really can mostly just want to talk philosophically. I think opt in is a -- while it has obviously impact on the industry is something from a consumer point of view is very sensible and kind of, I think it is a good way to approach the business. We are undertaking to offer the over limit feature to our customers that want it and I think some will take it and some will not. But in any event, the net effect of the rules with respect to over limits will be a sizeable reduction for ourselves and the industry with respect to overall over limit fees.

Next question, please.

Our next question comes from the Sanjay Sakhrani with KBW.

Thank you, just to follow up on that loan growth question before. I mean, does that mean that we could actually see net portfolio growth in US card in 2010? And which segment is there a potential growth opportunity? Is it the prime revolver segment as you've suggested in the past. And I have one follow-up after that.

Well, first of all, the prime revolver segment was my highlight for the one that wasn't a growth opportunity for us for many years, but let me come back to that. Again, we start with the math. We start our race well behind the starting line because we have to take all the massive charge-offs and then our little -- our business of installment loans which is part of what we report to you, that sends us farther behind the starting line just with respect to growth. Our point is not so much bout big growth from here, it is more a point of not going backwards more this year. I think most of the backward move you'll see in the first quarter. The rest of the year is for the entire reported segment is probably something more about being in balance with respect to that, but whether we move forward or little, or somewhat forward or somewhat backwards relative to that is really more of a matter of what happens at the line of scrimmage.

Now, the -- what opportunities there are, I think that, we still really have to watch what happens with respect to competitive pricing in the business. The part of the business that is going to see -- that has to be the most sort of to reinvented for the industry, has been sort of right there square in the prime revolver space where the old business model was long 0% teaser rates and then heavy penalty repricing as a way to make the margins go around. With that basically gone, as we've always said, the key thing to look at is the go-to rates. Don't focus so much on teasers and their length and what they are. Interest rates are pretty low these days. But the go-to rates will be the key indicator. We have seen go-to rates in the last - from the fourth quarter of last year to the fourth quarter of this year go-to rates with respect to what's in the mail, they have gone up by about 250 basis points in absolute, and about 300 basis points when adjusted for the prime rate. So kind of on a net basis. So that is good progress including 100 basis points of progress just in the last quarter. So our appetite for the kind of -- the right smack in the middle of the prime revolver space is going to be driven, I think, by where pricing goes, but as well as consumer demand.

Okay.

My other point is, by the way, it's not yet at its best destination where it really needs to be in my opinion. Pricing -- remember that this industry now doesn't have the repricing abilities it had before. It's got forward repricing which works on a muted and very delayed basis. The industry has to have destination pricing in its go-to rates and that's what we're going to be looking for and it is not fully there yet.

Okay. Thank you. Gary, two quick data point questions. The regulatory capital ratios you illustrate in the slides that basically doesn't include the off balance sheet loans and the denominator, right, because those can be phased in, in the third quarter, right? The second question is, can you define what normal level of marketing expenses would be -- would it be something comparable to what we saw in the fourth quarter of 2010? Thank you.

With respect to the pro forma capital ratios again, because we followed the rules, that you'll see as of March 31, it means for the Tier 1, Tier 1 common and total risk based capital the off balance sheet assets are not in the denominator but the numerator has been reduced both for the allowance build and the hit to retained earnings as well as there's a deferred tax asset disallowance that's taken into account in these pro formas for the regulatory ratios, at least the Tier 1 and Tier 1 common, because that is going to -- going to affect us. The denominator will grow starting in the third quarter for those ratios. Based on the phase-in, based on what the balances are at time. So, yes, you've got that right. TCE, you see that the full and final effect is already there.

As far as the marketing expense, Sanjay, again, I think both Rich and I have indicated that we saw a little bit of recovery in the fourth quarter. We certainly expect that the artificially depressed or historically depressed level of 2009, are not a sustainable level of marketing spend. We're going to expect to see that grow, and exactly how quickly and where we end up is going to be based on the marketing opportunities we see. But I think the direction is pretty clear.

Great. Thank you.

Next question, please.

Our next question comes from David Hochstim with Buckingham Research.

Following up on Sanjay, I guess, if you thought about market recovering, could it go back to 2006, 2007 levels of $1.4 billion annually or something less than that because you're not going to be growing as aggressively you think the industry competition is any less? And then the second question or clarification is just if, Gary, if you could repeat what you were suggesting we might expect in terms of reserved draw-downs after you have the reserve build on January 1, with the portfolio shrinkage?

David, with respect to the marketing levels, I mean, you know, we're still in the middle of, in many ways, the great recession, and the industry is still on its way to getting its pricing footing back with their reinvented business model. So, I think what we're talking about here is versus the real, the huge reduction we had in '07 -- excuse me, in '08. Excuse me, in '09. I'll get my years right. This has been a long recession, I guess. But relative to that, I think you're going to see us move, ramp back toward, more normal levels, but, but, the industry is still got to get back into equilibrium.

'08 is more normal than '06 or '07, is that the way to think of it?

Yes, I probably just kind of leave it at this. We'll see. There's really a lot to unfold over the course of the year. We'll continue this conversation in the next few quarters.

Okay.

On your allowance question, David, look, we're not, in the business of giving a lot of forward views on the allowance. But certainly it is important at this time of consolidation to remember that the -- at least in the securitized credit card business, the heavily securitized credit card business, that any changes going forward in the allowance, up or down, are going to be amplified by a factor of close to 3 because everything is now on balance sheet as opposed to a third.

The other thing that we have said simply because the math is pretty obvious, is that we do expect our balances to be coming down and Rich and I both indicated in which businesses those are likely to come. A lot of the balance decline is really going to come outside of the revolving credit card space. So but with the balances coming down, that would tend to drive, allowance releases even if the outlook for credit were to remain absolutely stable. Any additional allowance release that comes from further confidence in the moderating outlook for charge-offs would obviously have the potential to drive more, but in terms of the actual amount, we're just going to have to wait and see how these things play through.

Next question, please.

We'll go now to Brad Ball with Ladenburg.

Just to follow up on Gary's response to the allowance question. Is the impact you're talking about on the GAAP allowance because the managed allowance wouldn't be -- managed provisions wouldn't be adjusted for the FAS 166, would they?

Well, Brad, first off, let's -- let us celebrate that starting at the end of the first quarter we will only have one balance sheet to report on, not two. There will be no distinction between managed and reported. Historically, we tend to talk about things like card balances, card losses, card loss rates, all on a managed basis. The allowance has only been applied to the reported balance sheet, and that's why what we have always given you in terms of coverage ratios, is what is the allowance coverage ratio in the reported balance sheet, where there is a full allowance build. Going forward, there's going to be one balance sheet and, again, if you go back to my slide nine, you'll see that all credit outlook changes or portfolio composition changes that drive the change in the allowance, are going to affect the entire balance sheet going forward.

Okay. Fair enough. And then just one follow-up, on the card act, any impact in the fourth quarter from early implementation, either on revenues or expenses, or can you also give us a sense as to how to frame the potential impact on revenues and expenses, once the provisions are fully implemented by February 22?

Yes, so, I -- there was -- I mean, we had just to code, hundreds of man -- it's an incredible number of man hours to to code all of the changes that are going on there, so there's -- there is a fair amount of expense associated with this, but it's not something that would really move the needle of the Company. The good news is that we think we're well on our way to get all of it done. It is a Herculean task to get it done by the February 22, deadline, but, with respect to what happens once, the switch is flipped, so to speak, to us it's what we really have been talked about in this call, for Capital One, you will see a continuation of the redistribution across line items with OLs going down and, therefore, non-interest income going down, and the -- a bunch of the redistribution has already happened with respect to the net interest income line so that while there's been an unusual high net interest income -- one thing moves earlier than the other. That's why we're saying the net effects by the time we're done is, we're kind of back to where we were before with the margin in the 15s. And the business pretty much same business we had before.

Okay. Thank you.

Next question, please.

Our next question will go to Ken Bruce with Banc of America/Merrill Lynch.

I'd like to drill down on this margin issue a little bit more. Clearly it is an important factor in your earnings model and the leverage around that is pretty significant. And if I understand what you said is that you expect that the margins could drift up as much as 17% in the first quarter which is based on maybe lower fee suppression, and then would ultimately end up in the mid-15s. Are you saying the credit card impact will basically reduce margins by 2%? I mean, can you decompose that for us? I know this is kicking a dead horse but it really is an important matter. And if you would also address how much of the steepness of the yield curve may be either benefiting that or baked into your forecast for the mid-15, please?

Yes, Ken, I'm not sure where you're getting this 17s in the first quarter. But all we said was that, like we said last quarter, we sort of set out this -- essentially this thing in the 15s as sort of a destination. What we've been saying is the , changes in our view of the credit outlook kind of create bumpiness on the weight of this thing. So but the mid-15s, it's not going to be the same every single quarter. That is kind of the destination we're talking about for the year. It's the destination I think we'll get to for most of the year, and, in -- you'll find to the extent credit gets better over the course of the year somewhat, I mean you will find there will be quarters where this thing gets goosed up by a change in the credit outlook at that time. But the first quarter is on the way to -- net of all those effects, the first quarter is on the way to that destination, not, a trip up here. So,

Just on the question, Ken, as to whether or not the yield curve has any impact there, just a quick reminder that, that when we report our financials by business segment, the funding costs associated with each segment, are matched. So, any mismatch coming from the yield curve is actually going to be managed at the top of the house. It's managed by treasury. And it will show up, either in the, Other category, or it will be credited to the bank in return for the deposit funding. So the net-net of all of that, is that the yield curve, whichever way it moves, does not have an effect on the reported revenue margin in the card segment.

Okay. And maybe a follow-up to that is, is your strategy to manage interest rate risk within the credit card business similar to the way you've managed it historically?

Well, two things there, Ken. I mean, first of all remember, not for interest rate reasons, but to reposition our business for the new world, the card law, most of our cards, accounts now, have been moved to floating rates simply because with the inability to reprice, you've got to do that. But in terms of the overall attitude and risk profile up towards interest rates, again, all interest rate risk is managed at the top of the house. We've always had a, what I would consider to be a relatively low risk appetite for interest rate risk on our balance sheet it remains that way and, quite frankly, we're having been somewhat liability-sensitive over much of the second half of 2009, we, like I suspect many others are quickly moving, if we're not already at kind of a neutral interest rate position.

Next question, please.

We'll go now to [Joe Mack] with Meredith Whitney Advisory Group.

Thanks for taking my question. In previous quarters you have given some guidance regarding your thought process in terms of unemployment and housing prices. I was just wondering if that had changed from last quarter or if you could just remind us what your views on those topics were?

Okay. We -- we ourselves are assuming that unemployment peaks in the high tens, and that home prices fall another 10 percentage points off their peak which is 14% from today's level. Those just happen to be the assumptions in our outlook. More importantly, just the way we feel about the business is that, it is kind of the good news-bad news, and the most important credit takeaway we want to say is the good news is in certainly -- in all consumer businesses probably with the exception of mortgage, that you can reach out and just about touch effectively the peak that is there. And we have been waiting for this for a long time and we have been declaring for some time now that there are indicators that this thing is coming and we feel absolutely consistent with respect to that point.

The bad news, in a sense, or the other point we want to make is, do not confuse that with a lot of evidence out there that there is a big turnaround coming from here. The -- certainly the economy, if anything, the metrics have disappointed us over time, and in many ways we keep revising upward our economic out -- worsening our economic outlook. Interestingly, probably, over the course of most of this year our own credit metrics have actually outperformed in a good way to sort of offset these effects and we sort of in fact if you looked back to a year ago we said losses would end up to be almost exactly what -- how they finally have.

So I think we see actually in this phase of the cycle a little bit of reduction in the impact on credit metrics of things like the unemployment, just a little bit, which in a sense has just -- has just served to allow this settling out to happen even though unemployment still is getting worse. We're probably seeing the early stages of what we've seen in past recessions I think back to the one in the early '90s as we lived through that that credit metrics tend to level out somewhat before the final stubborn economic metrics of which the ultimate probably stubborn one is that unemployment rate.

Great. That's very helpful. Have a great night.

Next question, please.

We'll go now to John Stilmar with SunTrust.

Good evening, thank you for taking my questions. To start off, Rich, you built a tremendously successful business throughout the years. In start on the prime business as positive selection was really the marketing advantage that led to pretty strong risk adjusted returns as well as in your sub prime business a well managed business that didn't take advantage of some of the things that are now prohibited in the card act. How do you look going forward? I think it's almost a little paradoxical, It seems Capital One has been early at least in terms of repricing its customers. Now, you see in a couple months most people have repriced on the prime side. How have you seen the competitive landscape and do the ingredients that made Capital One great, we talk about front end repricing but a lot of that was the discovery of positive selection. How does that then now set Capital One up for the next leg of this credit card market? Because it seems like those dynamics may not be playing out as they did earlier in the birth of Capital One?

So, John, there is a lot of things to say about that. I mean, when we look back to the good old days there were certainly a few great things about the '90s that we don't have anymore. The top of my list would be the tremendous growth of the industry, and we all had wind at our back as we were doing that. We were living through what would turn out to be the most protracted positive economic period, that was a great thing. And also the major players were a lot of the business net-net was coming away from regional banks. It was really the nationalization of the credit card business and therefore all of us players were taking share from the regional bank's and along the way some of the innovations led to positive selections. So a lot of those things are there for the history books but they're not really what kind of is what is in front of us.

But on the other hand the really tough chapter, which is the second chapter of the card industry, at least in my 20-some years of managing this, is this really tough chapter of the last decade, which has been characterized by aggressive industry practices that I think kind of undercut the business model of what a Company like Capital One had built, and created something that was very threatening to a franchise, and caused us to walk away from whole parts of the business. So I would characterize the next-generation of the card business or sort of the third chapter of the card industry, is going to be it's a very level playing field. It will be a return to up-front underwriting. And I don't think it's a matter of whether there is positive or negative selection. Every interaction with everyday in the marketplace has, you can always find positive and negative selections.

So I think the opportunities will be there. There will be way more premium on really rigorous information based decision making than there has been in the last 10 years, I think. And I think that that with the bad practices both from a customer point of view and from a credit point of view, having been purged from the system, this is going to be a level playing field where I think appropriately conservative issuers will have growth opportunities that won't remind you of the '90s, but that I think will make, for those that do it well make returns very consistent with some of the best periods that we've had pound per pound.

Great. Thank you. And then my follow-up question, in the auto business in the fourth quarter on the dollar business, it seemed like the dollar declined and your monthly data were a little bit more than they even were last time, this time last year. Can you talk about where you see the auto finance business that has always been a source of strength and then briefly also touch on some of the change we saw in international this quarter and how we should think about that kind of as in the quarters ahead.

Yes, so certainly the auto business from a credit point of view has certainly performed very well and over the course of the year better than expectation consistent with some of my earlier comments. One thing I do want to point out about the auto business is that it shouldn't necessarily surprise us that it starts performing better with respect to credit because the life of the assets is shorter. So in auto, because of the essentially two to two and a half year average life of an auto loan, now that we're a couple of years into this mess, most of our portfolio has been originated with our eyes wide open with respect to the mess than the economy is in and therefore it's very conservatively underwritten and so on and it is performing extremely well and a lot of that is the math of portfolio mix as well as I think just generally some of the unique dynamics of how consumers are paying their auto loans.

So, going forward, we -- we downsized that business so the tail doesn't wag the dog of Capital One, which it almost started to do at some point, but I think we see that as a really good opportunity for Capital One going forward. The international business, we're in the UK and Canada with respect to credit cards. Let me start with Canada. That's a bit of an easier story. Canada has been really quite a successful business and the Canadian economy hasn't suffered as much. So generally that business has gone well. We're just still hunkered down a bit weathering their smaller storm up there. In the UK it has been the hardest. It's been kind of a perfect storm combination of tough economic environment and some pretty severe regulatory and legislative kind of changes in that environment, and so we've gotten hit more badly there. We have hunkered down and you notice from the numbers although you can't see them by country, that business has gone from bleeding pretty substantially to actually really turning the corner, and while it's not ringing up some great returns it's really stabilized and we feel a lot better about it.

And I think we have time for one more.

We will go to Matt O'Neil with CLFA.

All of my questions have been answered.

Okay. Thanks, Matt, and thanks everybody for joining us on the conference call today. Thank you for your continuing interest in Capital One. As always, the Investor Relations team will be here this evening to answer any questions that you may have. Thanks and have a great night.

Ladies and gentlemen, this does conclude our conference. We appreciate your participation.