Capital One Financial Corp (COF) 2011 Q3 法說會逐字稿

Welcome to the Capital One third quarter 2011 earnings conference call. All lines have been placed on mute to prevent any background noise. After the speaker's 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, Global Finance. Sir, you may begin.

Thanks very much, [Rica] and welcome, everyone to Capital One's third quarter 2011 earnings conference call. As usual, we are webcasting live over the Internet. To access the call on the internet, please log onto Capital One's website at capitalone.com and follow the links from there. In addition to the press release and the financials, we've included a presentation summarizing our third quarter 2011 results. With me today are Mr. Richard Fairbank, Capital One's Chairman and Chief Executive Officer and Mr. Gary Perlin, Capital One's Chief Financial Officer. Rich and Gary will walk you through this presentation. To access a copy of this presentation and the press release, please go to Capital One's website, click on investors, and then click on quarterly earnings release.

Please note this presentation may contain forward-looking statements such as information regarding Capital One's financial performance. Any forward-looking statements contained in today's discussion and the materials speak only as of the particular date or dates indicated in the materials. Capital One does not undertake any obligation to update or revise any of this information, whether as a result of new information, future events or otherwise. Numerous factors could cause our actual results to differ materially from those described in forward-looking statements. And for more information on these factors, please see the section titled Forward Looking Statements in the earnings release presentation, and the risk factors set forth in our filings with the SEC, which are accessible at Capital One's website. With that I'll turn the call over to Mr. Perlin. Gary?

Thanks, Jeff, and good afternoon to everyone listening to the call. Let me provide a few highlights from the quarter on Slide 3. Capital One delivered earnings per share of $1.77, or $813 million, in the third quarter, compared to $1.97, or $911 million in the second quarter of 2011. The linked quarter decrease in earnings was caused by an increase in provision expense, which was only partially offset by higher pre-provision earnings. Loan balances grew in the quarter by almost $1 billion to $130 billion, driven by growth in our auto finance and commercial businesses. While our revolving domestic card balances also grew, the reported domestic card segment posted moderately lower balances due to continued runoff in our installment loan portfolio.

Net interest margin remained strong in the quarter. It expanded 19 basis points to 7.39%. The combination of loan growth and margin expansion drove higher revenue in the quarter. Since non-interest expenses were only up modestly, pre-provision earnings were also up in the quarter. As overall credit trends are stabilizing after almost 2 years of rapidly declining charge-offs, our quarterly credit metrics are increasingly driven by seasonal patterns. Charge-offs continue to fall in the quarter, but a significantly smaller allowance release, associated with stabilizing credit trends, caused our provision expense to rise. The charge-off rate improved 39 basis points to 2.52%, while our coverage ratio of allowance to loans came down only 19 basis points to 3.29%.

Finally, our capital generation capacity remained strong. Our tier 1 common ratio was up over 60 basis points in the second quarter, and now stands at 10%. Turning to slide 4, I'll briefly discuss net interest margin. Net interest margin grew as our average asset yield rose while our cost of funds declined. Loan yield was driven up by a variety of items, including an $85 million release from our finance charge and fee reserve, which I will discuss in a moment. The positive impact of loan yields on the margin was partially offset by the increased investments in cash equivalence, representing proceeds from the completion of acquisition related bond financing and security sales. The cost of funds declined modestly in the quarter as deposit rates fell, and the proportion of wholesale funding was reduced.

Turning to slide 5, let's take a closer look at the income statement. Capital One earnings in the third quarter were driven by loan growth and expanding margins, offset by higher provision and non-interest expenses. Total revenue increased 4% on a linked quarter basis. About half of the revenue growth resulted from a decline in the level of revenue suppression in our card business. This lower level of suppression was driven by an improvement in the estimated collectibility of build finance charges and fees on existing card balances. The improvement in the estimated collectibility was, in turn, driven by a change in the way we calculate expected recoveries of non-principal balances, to reflect our evolving experience in a period of highly elevated inventories of charged off debt in relation to the more recent level of finance charges and fee balances.

The finance charge and fee reserve has now reached its historical low, and we expect it to remain reasonably stable for the foreseeable future. We would expect overall revenue suppression levels going forward to be more or less in line where they've been in the last several quarters prior to this one, but without the benefit of further reserve releases, such as the one we had in the third quarter.. We experienced growth in both net and non-interest income. Net interest income grew as margins expanded and balances grew. Non-interest income increased slightly in the quarter, driven by the absence of the contra revenue impact from the UK payment protection settlement that we recognized in the second quarter.

In addition, there were 2 significant, but largely offsetting items, related to our balance sheet repositioning ahead of the pending acquisition of ING Direct. We recognized approximately $240 million of gains from the sale of $6.4 billion of mostly agency mortgaged backed securities. These sales, which benefited from lower rates, are intended to manage our balance sheet risk in advance of acquiring a substantial quantity of mortgage assets from ING Direct. You will also recall that in early August, we entered into a pay fixed swap position as a partial hedge against the impact of changing interest rates on the value of the net assets we will record upon the close of the pending acquisition with ING Direct.

At the end of the quarter we recorded a $266 million mark-to-market loss on the swap. That position will continue to be marked until it is closed. As we stand today, the impact of rate movements on the value of the acquired net assets at closing, net of the swap impact, should benefit capital compared to our estimates at the time of the ING Direct deal was announced in June. Much of this movement occurred by the time we announced the HSBC US card business acquisition in August, so we have no reason at this time to change the estimated incremental capital for that acquisition of $1.25 billion. Non-interest expense increased slightly in the quarter, due to higher staffing costs, as well as accruals against an earned out agreement related to a previous acquisition.

Looking ahead, we would expect operating expenses in the fourth quarter to be similar to Q3 levels, as run rate and year end expenses are likely to make up for the assumed absence of the unique items in the third quarter. Marketing expense in the third quarter declined modestly, mostly driven by the timing of several large marketing programs whose expenses were recognized in the second quarter. In line with usual historical patterns, marketing expenses should rise in the fourth quarter. The higher loss in discontinued operations is largely attributable to a rep in warranty expense in the quarter of $72 million, compared to $37 million in the second quarter of this year. This increase is partially the result of claims paid in the quarter, and a $23 million increase to the rep and warranty reserve, which now stands at $892 million, representing what we believe to be probable and estimable losses.

As a result of some generally increased activity by investors in the non-GSC and non-insured securitization categories, we would further estimate that the upper end of a reasonably possible range of future losses from rep and warranty claims beyond current accrual levels, has risen from $1.1 billion to $1.5 billion.

Now turning to slide 6, let's take a quick look at our capital position. Strong business performance, as well as the continued decline of disallowed DTA, drove our tier 1 common ratio up 60 basis points in the quarter to 10%, using Basel I definitions. Using known Basel III definitions, our tier 1 common ratio would be approximately 10 basis points higher than that. We continue to be comfortable with our strong capital levels and our underlying trajectory.

With that, I'll turn the call over to Rich. Rich?

Okay. Thank you, Gary, and welcome to everyone this afternoon.

I'll begin on slide 7 with a look at loan volumes. As Gary mentioned, ending loan balances grew by just under $1 billion in the quarter, despite continuing runoff of home loans in our consumer banking segment and installment loans in our domestic card segment. Domestic card loan balances declined modestly in the quarter; but excluding the installment loan runoff, revolving credit card loans grew by just under $300 million in the quarter, up about 0.5% sequentially, and up about 4.5% compared with the third quarter of 2010. We expect seasonal growth in domestic card loan balances in the fourth quarter.

Beyond loan growth, there are continuing signs of traction in our domestic card business. New account originations continue to grow, and new accounts booked in the third quarter of 2011 were more than double the new accounts booked in the third quarter a year ago. Growth in purchase volume continues to outpace the industry. Our purchase volume grew 17% from the third quarter of 2010, excluding the impact of the Kohl's portfolio.

In consumer banking, loan balances were up modestly as strong growth in auto loans was partially offset by an expected runoff of the mortgage portfolio. Auto finance originations were $3.4 billion, up 17% from the second quarter, and 40% from the third quarter of 2010. We expect that auto originations will remain strong and drive continuing growth in auto loans.

Our commercial banking business delivered another quarter of steady loan growth. Ending loans were up 3% from the prior quarter, and up 9% from the third quarter of 2010. Growth in loan commitments, an early indicator of future loan growth, was even stronger. Our CNI and CRE businesses experienced the strongest growth in both loans and loan commitments. Loan demand is expanding beyond refinancing to include demand for new credit to finance growth for our commercial customers. Looking at the whole company, we believe the period of shrinking loans through the great recession has come to an end, and we've returned to modest growth. We expect modest year-over-year growth in ending loan balances in 2011. Given the lower starting point for loan balances, we expect that average loans for 2011 will be comparable to average loans for 2010, even as period end balances grow.

Much of the growth we're delivering today is focused on franchise building, customer relationships, and accounts. These include rewards customers and new partnerships in our domestic card business, commercial banking customers, and deposit customers, and auto dealer relationships in our consumer banking business. While loan balances and revenues from these customers ramp up gradually over time, we expect the growth of these franchise building customer relationship to drive strong and sustained bottom line earnings and capital generation through sustainably lower charge-off levels, low attrition, and long annuity-like revenue streams that build gradually but stick around for years.

Slide 8 shows that credit results across our consumer businesses are stabilizing at relatively strong levels and exhibiting expected seasonal patterns. Domestic card charge-off rate improved in the quarter. About half of the improvement resulted from expected seasonal patterns, with the remaining improvement driven by strong underlying credit performance. We continue to see declining loss severity, strong credit performance in our newer vintages, and portfolio seasoning as older vintages mature. The delinquency rate as of September 30th increased from the prior quarter. The increase resulted from expected seasonal patterns and a change in the way we estimate recoveries related to our finance charge and fee reserve that Gary discussed a few moments ago. We expect that domestic card credit metrics will continue to follow normal seasonal patterns in the fourth quarter.

In our consumer banking business, charge-off rate improved in the home loan's portfolio, while the delinquency rate increased modestly. In the fourth quarter, we're planning to move a portion of our mortgage loans from third party servicers onto our own servicing platform. This move may create some noise in the fourth quarter credit metrics, but shouldn't impact the underlying trends.

In the auto finance business, charge-off rate and delinquency rate increased in the quarter, consistent with expected seasonal patterns. As you can see in the year over year improvements in both charge-offs and delinquencies, auto finance credit performance remained strong, with the most recent originations continuing to perform better than originations from 2007 and 2008. In fact, auto finance credit metrics are near their all-time lows, driven by the actions we took to retrench and reposition the business, tight underwriting and loss mitigation actions through the recession and continued strength in used car auction prices. We believe we've reached a cyclical low point for auto finance charge-offs.

Credit improvements in our card and auto finance businesses have out paced the modest and fragile economic recovery. Recent economic headlines have been full of bad news with zero job growth in August, the debt ceiling crisis, and downgrade of the US credit rating, continuing worries about the European debt crisis, and increasing stock market volatility.

We continue to monitor our own portfolio credit performance for signs that the negative economic news is driving deterioration in credit results. We have yet to see any evidence of this. The choices we made in underwriting and managing our business through the great recession continue to drive strong credit performance. We made tough choices to tighten underwriting, focus on only the most resilient businesses, and aggressively manage and mitigate credit losses. As a result, our internal portfolio credit metrics remain strong, with normal seasonality re-emerging after a long period of cyclical improvement.

Slide 9 shows credit results for our commercial banking businesses. Nonperforming asset rates improved across our commercial lending businesses, as we continue to see slower flow rate into nonperforming loans. Nonperforming asset rate for the commercial banking segment improved in the quarter, despite an uptick in the NPA rate in our runoff, small ticket commercial real estate portfolio.

Charge-off rates improved in the quarter for all of our commercial businesses, with the exception of the middle-market CNI business. The increased charge-off rate in CNI was driven by 1 sizable credit. Charge-offs for commercial banking are at their lowest levels since the third quarter of 2008. Slower flow rate into NPL and stable property values are driving lower charge-offs. Commercial banking credit metrics have stabilize and improved modestly over the last 5 quarters, and we believe that the worst of the commercial credit cycle is behind us.

As I just discussed for our consuming lending businesses, we don't yet see any evidence of recent economic headlines impacting our commercial credit results. We continue to expect some quarterly uncertainty and choppiness in our commercial charge-offs and non-performers.

I'll close this evening on slide 10. Strong third quarter results across our businesses demonstrate that we continue to emerge from the great recession in a strong position to win in the marketplace and continue to deliver shareholder value. Our domestic card business delivered another quarter of strong returns. The headwinds of installment loan runoff and elevated charge-offs continued to subside. The new account originations and purchase volumes are growing, and our new products, new partnerships, and great customer service are winning in the marketplace.

In consumer banking, our auto finance business continued to deliver loan growth with strong credit and strong returns in the third quarter, and we continue to grow deposits and retail banking customer relationships. With the worst of the commercial credit cycle behind us, our commercial banking business delivered its third consecutive quarter of strong and steady profitability and continued loan growth, and commercial deposits and commercial customer relationships continue to grow. We remain on track to complete the ING Direct acquisition late in 2011 or early in 2012, and to complete the acquisition of the HSBC US card business in the second of 2012. We expect that these acquisitions will deliver attractive financial results in the near term and enhance our ability to deliver sustained value over the long term to our customers, our communities, and our shareholders.

With a combination of Capital One, ING Direct, and the HSBC US card business, we're building a banking franchise that includes advantaged access to both sides of the balance sheet. Unlike other local and regional banks, we are not constrained by geography. Our strong national scale positions in credit cards and auto lending provide us with advantaged access to resilient loans with strong returns. HSBC's card business will expand and enhance our already advantageous position in credit cards, and establish Capital One as a leader in card partnerships as well. Our brand has achieved national scale and near universal awareness. A brand is a promise, and brand strength comes from keeping that promise year after year with great products, great value, and great service.

We continue to see and experience the power of advantaged local scale positions in attractive markets. Local branch scale is still, pound for pound, the most effective way to reach a broad base of commercial small business and consumer customers to build deep banking relationships with them. With ING Direct, we will add to our local banking capabilities to become the leading direct bank customer franchise, with national reach and advantaged digital distribution capabilities in our deposit business.

Our relevant scale provides us with sustainable economic advantages. For example, in our card business, national information scale and our proven rigorous approach to credit risk underwriting have enabled us to deliver industry leading profitability with middle of the pack credit losses through good times and bad, and we expect with the direct distribution and digital capabilities of ING Direct, we will be able to deliver sustainable economic advantages in our banking and deposit businesses as well.

Capital One is already one of a handful of banks that's building a very large and loyal customer base. ING Direct has 7 million loyal, early digital adopters with attractive demographics, and HSBC has 27 million active US credit card accounts. So the acquisitions will strengthen and expand our customer base. Over time these customer relationships are a tremendous source of value, as we can expand and deepen customer relationships with new products and services. The market trends that have shaped banking and driven Capital One's strategy for the last 2 decades continue to play out, with banking going national 1 product at a time. The explosive growth in digital channels, capabilities and access continues to fuel these trends.

With the combination of Capital One, ING Direct and HSBC's US card business we are positioned at the forefront of where banking is going. For our shareholders, we're in an even stronger position to deliver long-term value through growth potential, strong returns, and strong capital generation.

While expected runoff of several of our legacy and acquired businesses will somewhat mute loan growth rates in the near term, we can deliver solid, long-term growth because of our advantaged access to both sides of the balance sheet. And our combinations of businesses and the unique and valuable banking franchise we've built put is in a position to continue to deliver strong returns and capital generation. We expect that strong earnings and deep access to deposits will maintain the strength of our capital and our liquidity. Coupled with our rigorous approach to risk management, we expect our balance sheet strength will sustain our proven financial resilience and our ability to deliver shareholder value through economic cycles.

With that, Gary and I will be happy to take your questions. Jeff?

Thank you, Rich. We'll now start the Q&A session.

As a courtesy to other investors and analysts who may wish to ask a question, please limit yourself to 1 question plus a single follow-up question. If you have any follow-up questions after the Q&A session, the investor relations staff and I will be available after the call. Rica, please start the Q&A.

Thank you, sir. [ Operator instructions ] Brian Foran with Nomura.

Hi. You referenced normal seasonality a lot. It's been 4 years or so since we've had to deal with normal seasonality, so can you just walk us through the sign posts we should look for, when delinquencies stop going up in the fall, how much charge-offs are expected to go up in 4Q due to normal seasonality, stuff like that, and, I guess, in particular, it would seem to me like the proof that the delinquency runoff has been normal seasonality would be early delinquencies should fall in November. Is that the right sign post to look for?

Okay, Brian. First, let me just talk generally about seasonality. In the Card business, which you're really asking about, the second quarter's the seasonal low point for delinquent payments, probably because that's when income tax refunds are paid. The third quarter becomes the seasonal low point for losses as the low delinquency from the second lead to charge-offs in the third quarter, and just as a side bar, by the way, auto has slightly different seasonal swings. We generally see the low point in delinquencies in the first quarter and losses in the second, quarter and auto, of course, has more pronounced seasonality than the Credit Card business does. I think it may be a bit of artificial science to be getting down to the month.

We've studied delinquencies. I've been doing this for 23 years, of course, and we've studied seasonality, and just when we think we finally can exactly describe precisely its effects, it tends to -- there's a fair amount of variation it in. But I think the important thing to understand is, this seasonality is real in the Card business, and as we signaled last time, we expect the normal seasonality to return, and what we saw in our Card business, in both the charge-offs sort of low point here and the uptick in delinquency, is consistent with our own seasonal trends. We also, 1 thing I've been a little struck by is that our seasonality at Capital One is a little bit more pronounced than some card players are with respect to the seasonality of delinquencies.

So this time, for example, with our delinquency increase, if we went back and when we normalize our own delinquency performance relative to the peers, who have just announced, in fact, the delta between them is just about exactly on the average of our delta versus them, with respect to what you see in the third quarter. So if I pull way up, what we see at Capital One is seasonality that is exactly consistent with this huge improvement in credit basically running its course, and that now, while I don't want to declare a long period of stability, essentially that's essentially where we are and what we see as we look out. That's essentially the word I would use. We see stability. We don't see indications of worsening, even though we read it in the paper every day, but I think our investors would be well served also to assume that the big credit improvements that have pretty much defied the performance of the economy, most of that has run its course at this point.

That makes sense. I mean, I guess, for what it's worth our data suggests your seasonality is 2X the industry almost, and consistently happens 1 month earlier, and I'm not sure everyone gets that when they look at the data. I mean, I guess my follow-up, a lot of people are concerned you're stuck in a rut of negative operating leverage, usually citing the expense numbers, but I guess there's also some concern, even though you have great payment volume growth, your interchange is actually coming down a little bit, suggesting some pretty big rewards numbers as well. How do we frame the push/pull between the expense numbers being higher than people would like versus the credit is great, you have extra earnings, now is the time to invest or produce future growth. And again, what benchmark should we look to, to get comfort that expenses are not kind of off the rails here?

Hey, Brian. It's Gary. Happy to take that question from you. Just I would note there that your description of operating leverage, of course, we have seen our revenue moving up, even without some of the 1-time effects, and you did describe some of the situation with respect to revenues in card, but you really have to take a look at the overall company when you take a look at our operating expenses. A lot of the investments that we have been making are obviously supporting not just the Card business.

So a lot of new products, new product capabilities, and so forth, but also the continued build-out of our banking infrastructure. We're going to be a very significant bank, and need to build the infrastructure that goes with it. Rich talked about some of the growth that you've seen in our auto finance and commercial businesses, and some of the investments we've been making there, geographic expansion in auto, building out greater product capabilities for our commercial clients. We're investing across the board to find different growth opportunities and make sure that we stay very much at the forefront of where banking is going in terms of digital capacity, customer experience, and so forth. And when you look at the overall revenue margin you may not see positive operating leverage in every single quarter, but we're convinced that the investments that we're making are going to pay off, and you'll see that in terms of good returns over time.

Next question, please.

Mike Taiano with Sandler O'Neill.

Okay, thanks. Just sticking with the delinquency question, was just curious, does the Kohl's portfolio also have an impact there in terms of goal rates, given you do have a loss sharing agreement there? If I understand it correctly, I think your delinquencies will be on the entire portfolio, but the ultimate loss will be shared. Is that right?

That is correct, Mike, and it's unlikely to have a really a significant amount of impact. And of course, you're now a couple of quarters into that business, so quarter-over-quarter change, unlikely to be driven by that.

Okay. Thanks. And then just had a question on capital. Gary, I don't know I heard you right in terms of the $1.25 billion, if you continue to expect you'll have to raise that before the HSBC deal closes. And on that topic, it's been a while, since you guys talk about capital return, and obviously you have 2 big deals that are pending, so maybe not the right time, but just curious as to whether your views on that have changed at all, given these 2 big deals that you're doing.

Well, I think you got it right, Mike, that now is not the time for us to be looking past the deals. We're very focused on doing what we need to get them closed and integrated, and obviously there is some capital that we may have raised and may well need to raise here for these acquisitions, but we believe that in due course, they will be highly capital generative, and will be putting us in a position longer term to be able to generate capital and find ways to make sure that gets deployed in the best interest of our shareholders, which would likely over time include greater return to shareholders as well.

If I could, Mike, I would just take the opportunity to indicate that we've got a lot of time here. We're a couple of quarters away from settling on HSBC, as again Rich described. We expect to settle on the ING Direct transaction late this year or early next. We'll be in the second quarter of next year for the HSBC US Card business, and so it's very early for us to change our estimate about what the additional capital might be to support that transaction because there are a lot of moving parts and pieces, and we know what some of them are, but we don't know what others are going to be. We still have another 6 months to go. So just to tick off the 3 big movers. So, first you've got our underlying capital generation trajectory for Capital One. As I've said, that's strong and intact. You've seen it again this quarter.

Next there's going to be the impact of ING Direct on our capital. We already know what capital issuance there will be there. We've already done the forward sale, the $2 billion of equity, and of course we have an issuance of equity pre-agreed with ING Group. Some of the elements that are in motion on the ING Direct impact is going to be purchase accounting, net of the hedge position that I described earlier. That hedge was placed around the same time as we announced our estimated capital requirement for HSBC. So you can assume that we were already counting on some of the purchase accounting benefits of lower rates, and by the time we closed those could be higher, those could be lower. And so, too, we could see a bit of change in the non-interest rate purchase accounting effects, as well as the impact of any of the other balance sheet repositioning we may undertake.

I talked about some of the security sales. Even after we close ING Direct, there will be some timing and other factors that will affect the capitalization of HSBC. Obviously we'll have updated internal capital generation estimates. We'll also update our stress scenarios to see what impact that has on our capital target and position, and of course there will be some purchase accounting impact related to HSBC. So it will be a bit of uncertainty here over the next couple of quarters as to exactly where we land. What I would focus on with HSBC is that we believe that acquisition will be highly attractive across a wide range of outcomes with respect to the upfront capital. Once we're past that, we'll get onto the generating capital going forward of all of these combined businesses.

Next question, please.

Of course. We'll take our next question from Ryan Nash with Goldman Sachs.

Thanks. So just on the US revenue margin, even after the accounting change, it looks like the revenue margin was almost 17%. I guess, can you just maybe help us understand what's driving this? It seems like what we're all reading out there in the news is that competition is increasing, yet you're metrics are improving. So is it something like a mix shift that's driving this? Or is the competition really not as bad as we're reading? Thanks,

Ryan, yes. So first of all, as we've stressed, but just to stress it again. The revenue margin is, of course, getting a non-sustainable boost from the impacts on the decline in the fee and finance charge reserve, and I know you know that. But even when you sort of strip out those effects and those effects, we always assume those effects kind of are about coming to an end, and then they've continued to have some legs to them. Even sort of beyond that effect, the performance of revenue and the revenue margin specifically in the Card business, I think has, frankly, a little bit exceeded our own expectations, and it's not coming from a mix shift.

Our mix is very stable in the business, because as we said, Ryan, while I think a lot of people sort of changed what they did as a result of the great recession and the Card Act, we're pretty much doing what we did before, and on what I feel is a more level playing field, and a substantially more rational competitor set. So I have many comments I can make about the Card business, and specific characteristics of what's going on specifically, and maybe I'll save it for another question if people want to ask that. But generally, I think we're seeing, frankly, just a pretty strong performance of our customer base, very low attrition and revenue strength pretty much across the board in the face of strong competition.

Thank you.

The next question, please.

Next we'll hear from Chris Kotowski with Oppenheimer.

Yes I mean, there's been a lot of attention about the regulatory pathway for the ING acquisition, and I know you're probably limited in that, but can you discuss if it's significantly different for the HSBC acquisition, or is that just a purchase of assets, and that faces lower standards.

Yes. Chris, it's Gary. With respect to HSBC, that will require a regulatory application, in this case to the OCC and the initial application has already been filed, and we expect we'll go through the normal process there.

Okay, but it's not as rigorous and public a process as a full bank acquisition, right?

You know, it's being treated as if we were acquiring a bank. The only difference is we're not acquiring a bank holding company, and hence the OCC application, rather than the Fed. I'd rather not speculate on how that process will go.

Fair enough. Thank you.

Next question, please?

Thank you, sir. Next we'll hear from Chris Brender with Stifel Nicolaus.

Hi. Thanks. Good afternoon. I guess first on Durbin and the hoopla we've seen recently on charging for debit cards. I know it's not a big revenue stream for you, but have you evaluated or had any thoughts of changing your debit card pricing, and do you see this as an opportunity for Capital One to gain market share in banking?

Yes, Chris. How are you?

Good.

Yes. I mean, just because that part of our business is a smaller part of overall Capital One, the Durbin Amendment is not as needle moving for us. It will, though, just on a gross basis, reduce our revenue by about $70 million to $90 million. So it's not small potatoes. And what we are doing is we are doing some changes in our branch bank. We have removed no-strings free checking, I guess you can call it, from our product set. But what we've done is we're going out with low monthly fees and some very reasonable hurdles to avoid them. So I think overall, it's a relatively benign sort of change that we've done at Capital One, and I think early indications are, I think, positive customer reaction, I think, on a relative basis.

I think partly to your other point, though, is I think there are many trends in the marketplace that I think argue for an acceleration of sort of the move to direct banking in some of these things. So a company like ING that always represents sort of the trade-off between better deals, but yet, gosh, the switching costs associated with all the convenience of local banking. I think that in addition the sort of devastating macro trend of digital revolution, the mobile revolution, some of the payment revolutions going on. I would add to that, though, kind of, too, where I think your point is going, that the big noise about just how expensive banking is becoming for folks probably does play into the hand of the sort of low-cost players.

Okay, and a follow-up. If you could talk about deposit growth you're seeing on the commercial bank side. Consumer bank deposit growth has been good as well, but you're really starting to pick up some steam in deposit growth, and I just wondered if you could give us color on some of the drivers there, and whether or not you think it's sustainable, just given how, I think, a lot of it is macro based, but maybe it's also Capital winning some market share.

Yes. I think sort of the things beyond the strong macro effects is -- I think it's the result of a real focus at Capital One on primary banking relationships and building. So what we've done, first of all, is we are, and so much of the growth that you see comes from really focusing on the identified areas where there are sustainable, competitive advantages to be had, and through the power of deep customer relationships. Now, I know in some ways that's kind of a truism for what people pursue in banking, but we are very, very focused on this.

So there's a lot of emphasis in, and investment in, deeper treasury management relationships, a lot of emphasis on certain commercial businesses that tend to be deposit rich, and those have gone very well, as well as some of our investment in specialty banking segments. So what you see, though, is not an anomaly. What you see is, I think, just about everything you see in Commercial. In fact, we kind of look at it. I think some of the growth metrics, about two-thirds of the growth metrics that you see in Commercial, if you normalize for some of the 1-time effects that happened a year ago, kind of two-thirds of the growth metrics that you see are really sustainable across a number of metrics, and it really reflects a Commercial business that is not doing anything flashy. It's really just doing a lot of things well.

Next question, please.

Of course. We'll take our next question from Sanjay Sakhrani with KBW.

Thank you. I'll ask my 2 questions upfront. I just want to make sure I understood the change in the recovery expectations for non-principal balances. I guess just how did an improvement in recovery expectations actually take the delinquency rate up? And just how does that tie into charge-offs in the future? And just so I understand how that affects suppression on a go forward basis, suppression will move up with credit eroding, I would assume. So the revenue yield, all is equal, should not feel the impact of suppression unless you see an associated degradation in credit quality. Am I thinking about it correctly? And then just secondarily, could you talk about the [rep and] warranty increase on liability and kind of what was driving that? Thank you.

Okay, Sanjay. I think you've asked the questions on a lot of people's minds. So I'll try and give them a pretty fulsome answer but not go into all the gory details as much as I would love to on the suppression. So let's take the first question, which is how can we be giving the good news of more collectible fees and finance charges and yet see an increase in the delinquency rate? So the first thing I'd say is what's been happening with the recoveries. Well, as you know, recoveries of charged-off finance charge and fee balances, as with the recoveries of principal balances that were charged off, have been high for quite a while, and we expect that they'll remain that way for 3 reasons.

First, we've got a high inventory of charged-off, in this case, non-principal balances, and it's unusually high because we're in the aftermath of the great recession. So as things have improved very dramatically, the inventory of charge-offs is pretty high on which we can recover. Secondly the cyclical credit improvement is raising the expected collectibility of charges and fees. And finally, and this is more of a structural change, we now have a structurally lower level of finance charges and fees.

So if recoveries had remained pretty strong and high, what made things change this quarter? What's really changed is our assessment that almost all of these relatively high level of recoveries are coming from previously charged-off non-principal balances, and that's what causes a release in our finance charge and fee reserve. It's based on existing non-principal balances and we called it out because the proportional impact at this point was pretty high, since we had already gotten to a pretty low finance charge and fee reserve balance. So an $85 million release is a little more than half of what the finance charge and fee reserve balance was. Okay.

So why would this cause an uptick in the delinquency rate? It's pretty mechanical. The short answer is that while we now expect we will collect more, the increase in what we expect to collect is being added to today's delinquent balances. So what it effectively means is that we're going to be increasing the numerator in the delinquency ratio, and we're going to be increasing the denominator; but because the numerator is much smaller, the addition of what we now expect to collect, which is in the delinquency buckets, goes up.

So you have this 1-time significant effect on the delinquency rate. It's always in the delinquency rate. This is why it's having a particularly big impact at this point. Now going forward, what you've said, Sanjay, is very much the case. We're down to a relatively low level of finance charge and fee reserve, somewhere in the $60 million to $70 million range. We think that will be pretty stable. So suppression on a quarterly basis is probably going to reflect what's happening to the level of reversals. It will be a lot lower than it has been historically, because we're charging fewer finance charges and fees, but it should be pretty stable. If that is the case, then going forward what we would expect is the suppression levels we've been seeing for the last year or so, up until this quarter, is probably what we'll see over the next several quarters, assuming that credit is more or less in line with what we expect. And to answer your question about whether this has any mechanical impact on the charge-off rate, the answer there is no. It only affected the delinquency rate. Hopefully I made it clear why.

Gary what about the reps and warranties.

Rep and warranty. Thank you. So the increase in the reserve Sanjay, which is the probable and estimable -- it's driven, again, largely by the level of activity that we're seeing. We did have 1 claim paid, which affected the expense. Relatively two-thirds of the expense this quarter came from the payment of a claim, rather than the increase in the reserve, and the small increase in the reserve is effectively just a reflection as we kind of fill out all the cells in the spreadsheet. If we see increased activity among some uninsured investors, particularly in the non-GSE, non-insured securitization, or what we call our everything else segment. Even small changes in activity, you know, we'll try to pick them up and reflect them in the reserve.

If you take a look at what's going on in the environment around us as well, heightened governmental and regulatory scrutiny and so forth, that's why you'll see a proportionally larger increase in what we consider to be the reasonably possible range, which doesn't meet, of course, the high standard of probable and estimable in the reserves. So I think it's a reflection of both what we have seen and what we're seeing more broadly, and what that could mean over the long run, and just trying to be prudent around that.

Thanks, Gary. Next question, please.

Next we'll hear from Betsy Graseck with Morgan Stanley.

Hi. How are you? Can you hear me?

Yes.

I just wanted to make sure I understood the impact on the yield as you go into the next quarter, based on the 1 timer you did this quarter with the $85 million release. That should come out of our numbers; is that correct?

That's correct, Betsy, and if you go back to the conversation that Rich was having with Chris a little while ago, the impact of the finance charge and fee reserve released this quarter -- think of it as something, 50 to 60 basis points of margin in the Card business, and that should be a 1 timer, yes.

Okay, and then separately, I just wanted to get a sense as to what your strategic plans are for the consumer mortgage business. I've noted some fairly unique go-to-market strategies, and wanted to understand what your share gain appetite is there.

So Betsy, in the mortgage business, our primary focus has been, really, absolutely, dealing with some of the troubled mortgages that came through our acquisitions, and so, as you can imagine, there's a big investment of infrastructure and all of the things that go into that, and we're making great progress on that, and, very pleased with that progress. Along the way, and of course, we've been thinking about the mortgage business for 23 years, and it's notable in its absence from our national strategy as we built national capabilities in some other businesses, but not been there. I think, on a national basis, the mortgage business, with 1 exception, which I'll tell you about in a second, I think still has a number of structural issues that make it not so attractive for us.

The 2 places that we feel are advantaged mortgage origination business opportunities are, 1 on a national basis and 1 local. The national opportunity really relates to what ING Direct, in fact, has been doing with their, I think, very well run national direct mortgage business, and we are impressed with what we see, and we plan to continue investing in that business. The other is that we continue to believe, like almost everybody in banking does, that regular old, good old-fashioned in footprint mortgage origination, if not done in unnatural ways can be a good source of moderate growth in the business. So all that adds up to a moderate mortgage origination business over time. It's not going to scare the big players, but it has a role in our future, but it's going to be relatively more modest versus some of the really huge businesses that we have, Betsy.

Next question, please.

Next we'll hear from Craig Maurer with CLSA.

Yes, good evening. I wanted to ask you a couple questions on the Card business. 1, actual account growth was very strong, as you alluded to, and we've seen that from a couple other players. Has there been a dramatic increase in demand for accounts? Is this something that the Durbin Amendment is driving as debit becomes more expensive to use? I'm just curious what's going on there. And secondly, has there been any change to the run rates in October? Thanks. In terms of purchase line.

Okay. Craig, so, first of all, with respect to the Durbin effect. I think if there were a significant effect, we probably wouldn't see it yet. If we should be seeing it yet, I don't think we can with the naked eye. We'll continue to analyze for these effects, but my expectation is the Durbin effect on causing a switch between debit and credit cards -- I'm still going to probably take the under on how big that effect is going to be. I've always been struck at how consumers use different parts of their brain for how they think about what they use debit cards for and what they use credit cards for. Furthermore, there are many, many banks out there that are not charging directly for debit use. So maybe we'll find some upside surprise in that, but we're not counting on it.

Demand, I think consumer demand -- I'm glad you asked that point, because while if you look at revolving debt growth, on a year-over-year basis, it's still negative, but it's trying to get toward 0, but the thing is, I think that if you look at the last couple of quarters, effectively on a seasonally adjusted basis, I think we're finally to the point where consumer revolving debt in the nation is basically flat. And that's a big achievement relative to where it was, and so I think the consumer is kind of coming back slowly, but surely here. The most important thing, by far, with respect to new account origination for us has really been not the environment, but frankly the traction that we are getting on our own programs.

All during the great recession, while we were dialing back on our originations, we were not dialing it back at all on our testing, and dislocation creates, the flip side of that is opportunity, and so with all of the seeds that we have planted here over the last couple of years, we found some very promising growth opportunities that every month are getting a little more traction than they had the month before. So if you followed my comments to the marketplace for most of this year, I've been talking with quite a bit of passion about the feel that I have.

Just meeting and spending all the time I do in the Card business, the feeling I have about the growing traction in the Card business; and as I've said a number of times, I think that traction is greater than you're seeing in the metrics, because if you want to originate cards with big metric movements, do big balance transfer plays. That's instant gratification, instant volumes immediately. 1 minus that is pretty much what we're doing. So we're doing all the stuff that builds slowly and builds franchises over time. I'm pretty excited about the traction that we're getting in the Card business. As I often say it, Craig, I think in terms of market share growth, and I really like our chances for market share growth, and if the consumer cooperates a little bit here, I kind of like our chances for some real growth.

And Craig, before we go to the next question, it's not our practice to comment on sort of mid-month metrics like purchase volume trends. So we'll take the next question.

Of course. Moving forward, we'll hear from Bob Napoli with William Blair.

The auto finance business, Rich, you've seen the auto finance cycles many times, and there are cycles in auto finance that can be pretty pronounced. You're growing that business pretty quickly. There seems to be more competition moving in. What are your thoughts on how big you want that business to be? What is the mix, are you sub-prime versus prime? How comfortable are you with that asset class, which has been pretty volatile, becoming a bigger part of your balance sheet?

Well, Bob, 1 thing that I really want, to not invest in is businesses that most of the time do pretty well, and if you just try to be smart about timing and avoid just getting whack, you can kind of do okay. I think that's a fools errand in the banking business, and frankly, a lot of banks and a lot of bankers over many years have been on that errand. So our pursuit of the auto business is not driven by a belief that most of the time you can make money and just hang on in the rest of the time and try to be smart about timing. We really like the structural characteristics of this business for us. So where is the leverage in this business? First of all, this is one of the businesses on little cat feet that has been a macro trend that I don't think people have focused on, but we entered it, this business in 1998 for this reason, and that is that this would be a fragmented business that would become national.

It is on its course to doing that, Bob, but it still has quite a journey to have. So a business that's a fairly low growth business has a lot of opportunity for very successful national players, because that's a macro trend in itself. Secondly, the leverage, especially in any area other than the absolute highest part of super prime, there is tremendous leverage in credit and rigorous information-based strategies, and the scale that comes with that, which we've spent, now, 13 years building, and I think that's really paying off. Another aspect to this business I think is profoundly important, and something that we have certainly come to appreciate over the years of building this business, it is deeply about customer relationships. In this case, the relationships with the dealers, and I know there's kind of a perception out there of dealers just holding auctions and all this stuff, but dealers care about the value-added services and whether you're there in the downturns as well.

So basically we've had great traction, and it's showing up on J.D. Power metrics, in terms of really improving dealer relationships. So what's happened is, when the great recession came along, and you may remember we had some pretty challenging credit metrics right as the great recession began. Auto is kind of like, in some sense, the canary in the coal mine, I think, in terms of early harbinger of credit. Additionally, we made a few mistakes the last time around, I think, in some of the expansions that we did. What we're doing now is a lot of the growth that's coming, is doing the same thing we've been doing in some geographies and extending it to others. This is a business that I think can be, over time, quite a bit bigger than it is now. Almost all of the net growth will be in the upper part of the market, because we already have a pretty sizable position in the sub-prime space. So I'm pretty bullish about it, and It's many years in the making, and it's here to stay.

And a follow-up on the Commercial finance business. Are you adjusting a strategy? I think you've hired a team from the senior executives that used to be with Capital Source? So your middle-market strategy, are you adjusting that and looking at accelerating the growth of that business with the people you're bringing in?

Yes, we are. I don't think, relative to the size of Capital One, that it's going to be massively sort of moving the metrics, but I do want to say, I want to pull up and talk about the Commercial business. And that is there is a lot of vanilla commercial business out there that has a rough time through to cycles with all the oversupply that exists in banking, and I don't think next downturn is going to be different from that. Where we are focusing more and more is on the differentiated part of commercial banking, and I think that comes from very deep primary banking relationships driven by treasury management relationships and things like that, and by very expertise-driven specialty businesses.

And if you think about expertise-based credit management, in a sense that's what we've been building at Capital One, yes mostly on the consumer side, but what we're doing, still at a relatively small scale, but building out a sort of 1 executive at a time, focusing very, very much on great talent and very rigorous credit management. Specialized commercial business, that I think is really much more differentiated from the vanilla thing that gets so whacked in the credit cycle.

Next question, please.

Of course. We'll move onto Ken Bruce with Bank of America, Merrill Lynch.

Thanks. Good evening. Rich, I share your optimism around the consumer, at least as it relates to the credit card product. I would like you to maybe elaborate a little bit on some points you made earlier. You saw pretty impressive growth on card accounts. I think you mentioned 2 times the 2010 third-quarter pace. I'm wondering if you could give us a sense as to where the growth is coming from, if it's in the more transactor based products, or in the more revolver based products, and how you're thinking about splitting the 2.

And then, I guess any observations you could offer around private label as an area for growth. Citibank had mentioned that they have seen a significant change in consumer behavior around the private label product, and how you're thinking about that, please. I have a follow-up as well.

Okay. Thank you, Ken. Yes, first of all, given that we are sort of avoiding the really heavy balance transfer type of business, almost definitionally we're going to be seeing a lot more progress on account origination than we're going to be on balance origination in that sense. And while we and no other player really gives out sort of account origination detail on an apples-and-apples base and all, just suffice it to say that, that's exactly the case. We're getting quite a more traction in account origination, and this is the beginning of the other good metrics that flow from originating these franchise-based accounts. From a mix point of view, the mix is so strikingly similar to what it has been.

We're investing a lot, you can see on TV, we're investing a lot in the right at the top of the market, right against the leading transactor players, and getting good traction with respect to account growth there, and we're also doing our normal strategy we've done for 23 years of cherry-pick within the revolver market, where the best opportunities are with respect to revenue and risk, and that continues to have account growth in a very comparable mix. With respect to the private label business. The private label business, I think for a long time, people sort of thought the private label business was going to get supplemented by the co-brand business, and I think its demise has been greatly exaggerated. In fact, to the contrary, there's really more a macro trend back in the other direction, and I think retailers are finding that a well-run private label business is something that has a lot of great value, and the ability to deepen customer loyalty.

I'm not sure what Citi is referring to, the significant change in consumer behavior. I haven't seen any step changes in any of the metrics. The credit risk in this business has improved, pretty much in lock step with all the improvements that we've seen in other card businesses. What we're going to focus on in the private label business, and yes, it does represents a significant growth opportunity for us, is still to be selective, though, and go after the partners who -- 1, have a very good sound business model in their own right; 2, are very focused on that they have an objective function, and this is a really important point, objective function that the credit card program is not about how much money can you make, how many this or that can you do. The credit card program is about building deep customer loyalty and when they have that objective, we want to be there as their partner; and third, we're going to be sensitive to the sort of auction price nature of how some of these portfolios move, and we're going to stay disciplined.

Next question, please.

Thank you, sir. We'll hear from John Stilmar with Sun Trust.

Thank you. Good evening. Gary and Rich, I don't know if this a question is for you, but through the accounting, you've spoken about the stability of recoveries on previously charged-off accounts. I think we reached the peak in charge-offs in 2010. When should we reach the peak in recoveries, and should the slope of recoveries follow some sort of time pattern with what those charge-offs did?

John, are we particularly focused on recoveries of finance charges and fees?

No, sir. We're focusing on just recoveries in general. Recoveries of principal charge-offs, I thought corresponded to the same trend, and if I'm incorrect there, maybe you can articulate why it wouldn't be. I assume it's the same trend as recovering fees and finance charges, because your recoveries are so strong now.

Yes, It is. It's strong for some of the reasons I described, which again, the speed of the improvement in credit has meant that there's a large quantum of charged-off debt from the charge-offs over the last couple of years, and when we recover against that, we obviously have a lower quantum today. It is exaggerated in the fee and finance charge area because relatively speaking, you've seen that we've moved. Our revenue model has gone more towards net interest margin, away from some of the non-interest margins. So there's an exaggerated impact. Heavy recoveries against a low amount of kind of forward-looking finance charges and fees.

Again, exactly when that settles out, we've seen pretty steady recoveries now for a while, but I think it's hard to know exactly when that's going to change. I think that may reflect more of the macro credit trends and statistics we see. So it's kind of hard to call that particular [top] until we see how everything else plays out.

To your point, John, even through the last quarter, recovery liquidation rates were still improving, and so look. I mean, again, we kind are of the view that in general, the great improvement that follow the great recession, the great improvement here probably means that recoveries pretty much would be stabilizing out. I'm not sure we've actually quite seen that effect yet, but we would expect it.

Okay, great. Then my follow-up question. I was wondering if you could share with us deeper expectations for both business performance. And I guess with all the concern over credit is we're seeing return to seasonality, what we should be thinking about with regards to the HSBC portfolio. I know you've made some comments about double digit discretion relative to consensus estimates, but any sort of details around that assumption for how we should be thinking about credit costs and potentially margins for HSBC would be greatly appreciated. Thank you, gentlemen.

Yes. I think, it's funny thing. The HSBC portfolio is pretty darn similar to our portfolio, even though much that's in it is different, but let me say what I'm saying. First of all, its sort of mix along the credit spectrum is similar in the sense that it has so much of, people sometimes think about the sub-prime branded stuff that HSBC does. It has massive prime and top of the market business and some of its partnership stuff. So bringing it on would have similar mix to ours. They have had credit policies that are fairly similar to ours. They have had a conservatism about credit lines in pricing that's very similar to ours, which by the way, is 1 of the reasons we did the deal, because when someone has had appropriate conservatism on pricing and lines, you can deal with it. When horses are out of the barn it's hard to really get them back, which is why we've walked away from a number of other portfolios in the past.

Revenue margins at HSBC are strong, and they're strong for Capital One. So I think things would look good there. The 1 thing I do want to flag is that even at the same time that we're creating quite a bit of value through the synergies and the things that we talked about when we announced the deal -- I do want to say there's some part of the HSBC business that are, for them, already runoff portfolios, and when we get inside, there might even be some other parts that we would add to that, in terms of what's a runoff. And so we will be initiating sort of this annoying runoff portfolio kind of headwind, even at the same time, I think that value creation and the growth of value creation will continue in a really sizeable way with respect to this deal.

Next question please.

Of course. We'll hear next from David Hochstim with Buckingham Research.

Thanks. Wondered if you could just expand on what you were talking about with the auto business in terms of the growth and how much is attributable to the geographic expansion, and has there been some change in types of loans? You're making more used car loans in the last year, long terms, rates change? I guess it's also a question about competitive dynamics.

Okay. So David, the growth is essentially coming in 2 ways. 1 is more up-market, if you will, and more geographical expansion, of exactly what we do, and much of the geographical expansion is, in fact, more up market expansion, and in a lot of cases with dealers where we were already there on the sub-prime side. So where I feel very confident about growth plays is when you have something that has already been validated and tested, and you're rolling that out. Now, classically, for Capital One, that means test sells, and of course that's what we do. We test everything and roll it out. In this particular case, what we're rolling out geographically, and with respect to doing more of in the up-market space, is things we've been doing for an extended period of time with a very proven business, and very relationship-focused model. So that's why I speak with quite a bit of confidence about both the ability to continue to generate some pretty substantial origination numbers, but also very confident with respect to the performance of these.

In terms of what's happening in the industry, competition is definitely increasing in the auto business. There is some pressure to extend terms, in terms of length of the loans. A little bit on that. Not much at all yet on the loan-to-value, but the thing that we have found is, holding very firm to what we believe are the right credit standards. We've found there is a lot of continuing opportunity. But in terms of how much growth we get in the future, it is going to be the intersection of a very proven expansion play that we have, and the absolutely inevitable increase in pressure competitively in the auto industry, and inevitably some moves by some players to worsen credit. Net-net, it's still a pretty good environment to compete, but we're going to watch very carefully.

Could you give us some idea how much the numbers of dealers you're working with has increased over the last 12 months, and has the mix of indirect and direct changed much?

No. First of all, while we are, by our tally, the leading direct player in the nation, our direct business is swamped by the indirect business, because buying a car a dealership is really a kind of category killer, a good way to get financing. So, as you know, David, we've done everything we can to build a direct business there, and it's a nice, relatively small business. So we will both grow the direct business and the indirect business, but if I were to predict, you're not signing going to see massive, devastating macro trend of direct taking over indirect any time soon. You asked about used versus new. This is same kind of mix here that we've had in the past, and because, again, we're mostly doing the same thing that we did before. It's just that there's more growth opportunity at the top end of the credit spectrum where our share has been less, and we're growing it.

Next question, please.

We'll take our next question from Scott Valentin with FBR.

Good evening. Thanks for taking my question. Just wanted to revisit the purchase transaction volume. Historically I know you guys have focused on driving transactors for a while, but this is the first time I think it's really outperformed relative to other Visa and MasterCard issuing peers. And just wondering, is it more the recent vintages that are performing better, or is it just people are pulling their cards out and Cap One has gotten top of wallet through marketing?

Sorry, what was the first of your condition?

Just that which vintages have performed? Is it more recent vintages that are now transacting more versus historical, or is more across the entire spectrum, but through marketing you guys have moved top of wallet?

Yes. So first of all, I think for the industry there has been pretty good purchase volume growth, as you know, but it is the case that for the third quarter in a row, Capital One has had the highest purchase volume growth. Although for some players who have huge purchase volume numbers, we are coming off of a bit of a lower base, so I think we have a bit of an easier job to do in a sense. The success is coming, Scott, from 2 things. 1 is we're investing very heavily, as, frankly, are Chase and AmEx in particular, in the real top of the market heavy spender, and these are very expensive accounts to get. As everybody knows, when you get them, they tend to have great performance, and very heavy spending patterns, and they're long annuities. You're seeing the results of a lot of hard investment by Capital One.

Secondly, though, this metric is actually something I would point at is, in this thing where I keep saying, look, I see a lot of traction to Capital One. Trust me, you'll see it in the metrics some day. This booking of accounts that are not balance transfer based, but really that build their balances over time, this is a manifestation of them starting to build their balances over time. So you do have some of that effect going on as well. But still, the biggest thing for all of us in the industry is not really anything we're doing individually here, it's the return of spending that is going on by consumers, but credit cards are getting more than their share. We are actually gaining share in purchase volume faster than retail sales are gaining, because credit cards tend to be more -- the non-discretionary items tend to be purchased with a (technical difficulty) massive reduction in non-discretionary items, and spend a bit more than that. You're seeing the share gains there.

Okay. That's helpful, and as a quick follow-up, in the commercial banking segment, the loan growth was very strong this quarter. You called out, I think, C&I in commercial real estate. Is there any regional areas? Is it Metro New York that's driving? That's the biggest part of the franchise, but in terms of growth, are you seeing any regional differences?

Yes. 1 of the best ways to over-stereotype what we do, and once I tell you that, I'll say that's way too stereotype, why would you oversimplify like that. But in a sense, most of the CRE is in the north and most of the C&I is in the south. Okay, and so when you think about growth there, New York, so let's talk C&I. In many ways it's really a story about New York. I mean, New York has certainly weathered the great recession quite well, and is seeing steady signs of recovery, and on most financial metrics from a commercial point of view, New York has been, not a great performer, but a better performer than a lot of the other markets out there. For quite a number of months we've seen vacancy rates dropping and rental rates, we're getting some traction, and property values strengthening, and more activity by sponsors and so on. I just do want to caution, though, that the New York economy, certainly I think it's a plausible argument, that it is going to have some challenges here with respect to all the financial institutions and the announced layoffs and stuff like that, but we're still cautious about that.

The other thing I want to say is with respect to CRE, a lot of our stuff is with respect to the multi-family part, which is a bit of a specialty business and 1 that's done quite well in the recession. With respect to C&I, you're talking more in the south. For us, this is headlined by the growth in our energy business, which of course is kind of booming at this point, but that's an oversimplification, but it will work for now.

Next question, please.

Thank you, sir, and we'll take our last question from Don Fandetti with Citi.

Rich, you talked about long growth in Cards. So I just wanted to follow up. I mean, as I look out to 2012, do you really think that there's going to be in the industry any meaningful, if any, real card loan growth? It just seems like consumer sentiment's still pretty soft. GDP numbers are not great, and you have what appears to be sort of spending growth rates peaking. I was just curious if you think it's just going to be kind of like the main players fighting over market share, or there's actual real growth in this business in '12?

The hard work of consumer demand in the Card business, measured by revolving debt to even get back to zero. I think it feels exhausted, just trying to get back to zero. So I'm in your camp. If I had to guess, I think this business is a GDP-type of business, or maybe even a little less than in the near term. I think I see little to suggest that this thing would break away from the pack very much. I think the consumer de-levering has been absolutely real, and by the way, it's been a very good thing. We should all be very careful what we wish for from a bank, in the sense of the de-levering has had a lot of benefits with respect to credit quality, but there are parts of the market that are not returning. The credit card market as a whole is smaller as a result of the regulations that are there. That's something that still has to run its course with respect to the outstandings.

The consumer, while maybe they're deleveraging, is reaching a stable point. I certainly don't seen any evidence that it's returning. So I subscribe to your view. We should view this as a low-growth business from an outstandings point of view. Where is there opportunity? There's opportunity to gain share, there's opportunity, and there's a lot of opportunity to create real value though and real growth in value through the fact that at times like this, if you originate well, you can get, sometimes, spectacular credit performance. You can get chance to build these annuities that last a long, long time.

And so I would characterize the card market right now, competitively while you look at mail volume. Mail volume is returning dangerously close to sort of where it used to be, and by the way, that doesn't even show that a lot of the marketing has moved to the Internet. So in a way it understates the return of marketing. I do think, while our competitors are being very tough, at least they're being rational, and I think there's a lot of value, a lot of opportunity, to create real value. And my last thing I would leave with you is, here's the acid test that I look at. The total net present value that we feel that we estimate that we're originating -- we look at that every year, the kind of annual tranche of originations is how much total NPV is being created. The origination vintage of this year, I think is going to give a run for its money to some of our best years that we've had in the last decade. It's just going to show up a little bit different in terms of its timing, and what and where in the P&L you see that benefit.

Thank you.

Thank you, Don.

I'm sorry, sir. That is all the questions we have. I'd like to turn the conference back over to Mr. Norris.

Well, thank you, Rika, and thanks everybody for joining us on the conference call tonight. Thank you for your continuing interested in Capital One, and as always, the Investor Relations team will be here this evening to answer any further questions you might have. Have a great evening.

That does conclude today's conference. We thank you for your participation. You may now disconnect.