Capital One Financial Corp (COF) 2013 Q1 法說會逐字稿

Welcome to the Capital One first-quarter 2013 earnings conference call. This call is being recorded. All lines have been placed on mute to prevent any background noise. After the speakers' remarks, there will be a question-and-answer period.

(Operator Instructions)

I would now like to turn the conference over to Mr. Jeff Norris, Senior Vice President of Investor Relations. Sir, you may begin.

Thanks very much, Matt, and welcome, everyone, to Capital One's first-quarter 2013 earnings conference call. As usual, we are webcasting live over the Internet. To access the call on the Internet, please log on to Capital One's website at www.capitalone.com and follow the links from there. In addition to the press release and financials, we have included a presentation summarizing our first-quarter 2013 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 the presentation and the press release, please go to Capital One's website, click on investors, then click on quarterly earnings release.

Please note that this presentation may contain forward looking statements. Information regarding Capital One's financial performance and any forward looking statements contained in today's discussion and the materials speak only as of the particular date or dates indicated in the materials. Capital One does not undertake any 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 factors section in our annual and quarterly reports which are accessible at the Capital One website and filed with the SEC.

And now I'll turn the call over to Mr. Fairbank. Rich?

Thanks, Jeff. Before we get started this evening, I wanted to take a moment and say a few words about my friend and our CFO, Gary Perlin. As we announced a few months ago, Gary has decided to retire and will be transitioning out of the Company over the course of this year. After a decade of great work at our Company, this is Gary's last earnings call. Now at Capital One, as you know, we always search the world to find the very best talent, and that's how we found Gary. I tried to get Gary to join us in 1994. He chose other options, but we didn't give up and he finally saw the light in 2003. And since then, Gary has made a huge impact at Capital One on every step of our journey to build a great Company and reward our investors. He's been a strong leader and a wise and trusted advisor. And as you know, he's smart and he's rigorous and he has the highest of integrity. I know you will join me in saying thanks to Gary and wishing hip the best as he immerses himself in his many interests beyond Capital One. I'm grateful for everything he's done to put our Company in a strong position.

As we wish Gary well, we're also welcoming Steve Crawford to our Company as our new CFO. Steve will officially take over the CFO role on May 24 and you'll be hearing from him during our second-quarter earnings call. Steve brings more than two decades of big time financial services experience to the table, including having been the CFO of Morgan Stanley, and he knows our Company well. Steve has already hit the ground running since joining us in February and he's fully engaged in having an important impact on how we continue to win in the marketplace, how we manage our business, and get our investors paid. Gary and Steve have been exemplary in working together to insure a smooth transition and I'm looking forward to working with Steve for many years to come.

And now with my deep appreciation for all he's done over the last decade, and for one last time, I'll turn the call over to Gary.

Thanks, Rich, for those very generous comments. It's been a personal and professional privilege to work with you and the entire Capital One team for 10 very exciting years. I also count as a highlight the opportunity to meet and interact regularly with so many analysts and shareholders. You all have both challenged and supported me and I hope that I've returned the favor in a spirit of friendship and mutual respect.

Now, as always, let's get down to business. We'll turn to slide 3. Capital One earned just over $1 billion or $1.79 per share in the first quarter, including $2.5 billion of pre-provision earnings, which after adjusting for the benefit of moving our Best Buy partnership portfolio to held for sale, is about in line with the quarterly run rate we anticipated for 2013. In addition, earnings in the quarter benefited from lower provision expense, which was driven by a $261 million allowance release. Lastly, we recognized a $97 million charge for rep and warranty expense in the quarter which was driven by a $107 million charge in discontinued operations, offset by a slight benefit in continuing operations.

There were also a few notable events in the quarter. First, we redeemed $3.6 billion of high coupon trust preferred securities on January 2, which had a benefit to net revenue this quarter of $9 million. This includes a $75 million benefit to interest expense, largely offset by a one-time non-interest income reduction of $65 million attributable to the accelerated amortization of issuance costs. Second, we announced our agreement to sell the Best Buy partnership portfolio and moved about $7 billion of loans to held for sale as of February 1. This movement to held for sale resulted in a $40 million benefit to revenue in the quarter and a $41 million reduction in provision expense. The provision benefit results from the fact that expected charge-offs are absorbed by the carrying value of the held for sale loans after reclassifying some $289 million in loan loss allowance. Revenues similarly benefits as reversals of fee and finance charges are also taken against the carrying value of the loans. All told, the movement of loans to held for sale resulted in an $87 million benefit to income before tax in the quarter.

We expect earnings will be positively impacted for the first three quarters of this year until the partnership portfolio sale closes. This positive impact on 2013 earnings will be partially offset by the reduction in earnings once the sale closes late in the third quarter. We have included an appendix slide in this presentation detailing expected quarterly financial statement impacts by line item. These estimates are limited to 2013 and do not necessarily reflect opportunity costs in 2014 and beyond. That's because we expect to capture incremental cost savings going forward and because revenues would likely have fallen as a result of our choices around card practices such as exiting payment protection.

Turning to slide 4, I'll briefly discuss highlights of our first-quarter income statement. Pre-provision earnings were up 7% in the quarter or 5% net of the benefit from moving the Best Buy partnership to held for sale. This improvement was driven by a decrease in non-interest expense, partially offset by the expected seasonal decline in revenue. Revenue was down from the fourth quarter as seasonally lower balances and purchase volume in our domestic card business were partially offset by higher margins, which I'll discuss shortly. Non-interest expense decreased 7% from the fourth quarter when operating and marketing expense levels tend to be seasonally high. The quarterly impact on operating expense from the amortization of purchased intangibles and integration costs are detailed on this slide and expected annual impacts which really haven't changed in our estimate are shown on slide 12 in the appendix. At this point, non-interest expense is currently tracking a bit below our projected run rate for 2013 which I shared with you on last quarter's call. Rich will have more to say on expenses in a few moments.

Putting these items together, please recall that our January estimates for revenue and expenses for 2013 were approximately $22.5 billion and $12.5 billion respectively, resulting in pre-provision earnings of about $10 billion. Three months into the year, those estimates for the full year remain within any reasonable margin of error. We saw a 23% decline in provision expense in the quarter primarily driven by a $261 million allowance release, partially offset by $67 million in other provision expense. The other expense was driven by a reserve build for unfunded commercial commitments reflecting a one-time change in estimate and by foreign currency adjustments. The largest component of the allowance release was in domestic card, due to better than anticipated credit performance in the quarter including delinquencies and an improvement in drivers for our future outlook. Still, the coverage ratio of allowance to delinquencies in domestic card rose above the level in recent quarters.

Finally, we recorded a $97 million charge in rep and warranty in the quarter, of which $107 million was recorded in discontinued operations offset by a $10 million release in continuing operations. This expense reflects our assessment of probable and estimable losses in light of the current environment largely in relation to non-agency mortgage developments.

Turning now to slide 5, I'll touch briefly on loan balances and margins. Average interest earning assets fell in the quarter as a result of both lower cash balances and a seasonal reduction in loan balances. The decrease in loan balances was offset by net interest margin expansion. Reported NIM increased in the first quarter to 6.71% from 6.52% in the fourth quarter. Two factors drove the quarterly increase in NIM, offsetting the reduction resulting from the simple math of the first quarter having two fewer days worth of recognized income. The first positive impact was from the redemption of trust preferred securities early in the quarter. This resulted in 11 basis point benefit to interest expense as well as an 8 basis point benefit from reducing the cash balances that had been built up in anticipation of the call of those securities. There was also a 7 basis point improvement from the $40 million revenue benefit from the announced sale of the partnership portfolio. Although those loans are now accounted for as held for sale, the balances remain as interest earning assets.

Looking forward, we continue to expect about $12 billion in loan run-off in 2013, about $10 billion in mortgage run-off, and about $2 billion in domestic card. Planned run-off will continue in 2014 which we estimate at about $8.5 billion of which $7.5 billion is in mortgage and $1 billion in card. As for NIM, we continue to expect that we'll experience some cross currents. Like the rest of the industry, low interest rates, a relatively flat yield curve, and weak loan demand represent headwinds. However, we expect to see the continued beneficial effect of lower rates on deposits and other borrowings and a rotation from lower yielding mortgages to a broader mix of consumer and commercial loans.

Turning to slide 6, our Tier 1 common ratio on a Basel I basis rose about 80 basis points in the quarter to end at 11.8%. We expect that we will continue to generate substantial amounts of capital in coming quarters inclusive of our previously announced intention to increase the quarterly dividend to $0.30 per share beginning this quarter, subject to final approval of our Board of Directors at its scheduled meeting in May. As noted on our last call, we have formally begun our journey to adopt Basel II, also referred to as advanced approaches, which for Capital One will take effect on or after January 1, 2016. Using our revolving estimates of this impact to Capital One's Tier 1 common ratio under currently proposed rules for implementing Basel III over coming years, would be about 8.5%. This estimate incorporates the amortization of PCCR and the scheduled pay down of capital punitive investment securities. Let me remind you that this ratio is now above our assumed target when Basel III is fully phased in over the next several years. Rich will address in his comments our intentions for capital management in light of our strong balance sheet position and expected generation of substantial amounts of additional capital going forward.

With that let me hand the call back to Rich.

Thanks, Gary. I'll begin on slide 7 which provides an overview of solid business results in the first quarter. Our domestic card business posted strong profitability in the quarter. As Gary already discussed, first quarter results reflect the impacts of the planned Best Buy portfolio sale and held for sale accounting. Excluding held for sale accounting impacts, ending loan volumes declined 7.4% in the quarter, which compares to quarterly declines of about 6% in the first quarters of 2012 and 2011. Expected seasonal patterns and planned run-off of some of the acquired HSBC branded loans drove the first quarter decline. Purchase volume, excluding HSBC, increased about 5.5% compared to the first quarter of 2012. First quarter last year had two more processing days than the first quarter this year. Adjusting for the difference in day count, the year-over-year growth in purchase volume would have been about 8%.

Domestic card revenue margin, excluding held for sale accounting impacts, was about 16.3% in line with normal seasonal patterns. Charge-off rates increased 8 basis points in the quarter to 4.4%. Delinquency rate improved 24 basis points to 3.4%. Charge-off and delinquency trends were both modestly better than expected seasonal patterns. As we've discussed for several quarters, we believe that cautious consumer behavior is one of the key drivers of persistently weak consumer demand and the resultant pressure on loan growth. However, the flip side of relatively weak loan volumes is relatively strong credit performance which we've observed over the last couple of years.

The consumer banking business delivered another quarter of solid results. Ending loans declined about $1.5 billion in line with our expectations. About $800 million of continuing growth in auto loans was more than offset by about $2.2 billion of expected mortgage run-off. Auto loan originations were down $500 million compared to the first quarter of last year, a decline of about 11%. The year-over-year decline in originations reflects increased competition and our choice not to chase growth that might compromise the sustained returns or resilience of the business. Consumer banking revenue was stable compared to the fourth quarter. Loan yields were stable and deposit interest expense improved modestly. Provision expense was relatively stable. The auto finance charge-off rate showed modest seasonal improvement and the overall consumer banking charge-off rate remains below 1%.

Our commercial banking business delivered another quarter of solid growth and profitability. Loans grew 1% in the quarter and 12% year-over-year. Revenues were up about 4% compared to the first quarter of last year driven by growth in loans and deposit balances. Revenues grew despite increased competition and pressure on margins. Our loan yield was down 56 basis points from the first quarter in 2012, which is largely due to the continuing impact of the low rate environment, movement of our portfolio to more floating rate loans with better credit, and the absence of a favorable one-time impact we had in the first quarter of 2012. Non-interest expense improved about 12% in the quarter driven by the absence of several non-recurring items from the fourth quarter of 2012. Quarterly operating expense was down about 1% compared to the first quarter of last year. Our charge-off rate in the quarter was 7 basis points. We continue to see improvements in non-performing loans and criticized loans, so we expect the strong credit performance of our commercial banking business to continue.

Turning to slide 8, let me pull up and talk about how our businesses are positioned. Our commercial banking business is in a strong position to continue to deliver steady growth and profitability. While increasing competition, particularly in middle market lending, may continue to impact pricing of new loan originations, we have a diverse set of businesses in attractive markets. For example, our focus on strong local market, commercial real estate, and our deep industry verticals in C&I lending continue to drive solid growth and profitability. Across our commercial banking businesses, loan growth, credit, and profitability trends remain healthy.

In consumer banking, both our direct bank and branch based deposit franchises remain very well positioned. We continue to see the benefits of local scale and attractive markets, and we've made great strides in operational and customer improvements in our branch franchise. On February 1, we rebranded ING Direct to our new direct banking brand, Capital One 360. Rebranding efforts and customer communications are going well. Capital One 360 is now the leading digital bank positioned at the forefront of where banking is going.

Our home loans credit trends remain strong and meaningfully better than the assumptions we incorporated into credit marks on the acquired home loans portfolios, and our servicing operations are solid. In our auto finance business, our focus on building deep relationships with our most valued auto dealers continues to pay off. We're delivering sure footed growth by expanding the relationship approach to new geographies. We still see solid overall profitability and above hurdle returns in new originations, but we expect that increased competition will drive returns from current levels closer towards cycle average. We expect that our auto finance business will continue to deliver solid growth and returns.

Our domestic card business is very healthy and delivering attractive results. Margins and returns are strong, even as we invest in franchise enhancements. Charge-offs and delinquencies are normalizing at strong levels with expected seasonal patterns. And it's important to note that reported results in our domestic card business are inclusive of our partnerships business which has lower margins, average charge-off rates, and lower returns compared to our branded card business. The key issue is loan growth which reflects both some weak demand and, just as importantly, the strategic choices we're making. We are choosing to let the least resilient loans we acquired from HSBC run off. We're also continuing to emphasize resilience in our new originations as we remain largely on the sidelines of the high balance revolver space in the domestic card market. This choice to avoid high balance revolvers swamps the other factors that impact loan growth because this part of the market presents the greatest opportunity to grow loan balances through the use of balance transfer teasers and through balance stimulation offers to existing customers.

For years, we've talked about the resilience issues with high balance revolvers and we consistently have chosen to avoid this part of the market. By definition the value and benefit of resilience is harder to see during the good times, but our choice to largely stay out of this part of the market was one of the key drivers of our relatively strong performance through the great recession. We continue to actively pursue revolver customers that have lower balances and indebtedness levels as well as transactor customers where we are gaining share. While the transactor business does not deliver near-term loan growth, it does deliver attractive and sustained economic value through high spending and interchange revenue, low attrition, low credit losses, and franchise enhancing customer relationships. Our choices are evident in selected domestic card metrics.

Loan volumes reflect both significant planned run-off and our choice to stay out of the high balance revolver space. The fact that only 6% of our domestic card loan balances are on promotional rates is another result of avoiding high balance revolvers. Purchase volume growth reflects the continuing growth of transactor customer relationships. And over time we expect the run-off will subside and that the gains we are seeing in the customer segments we're focused on will more clearly drive loan growth. Our domestic card business is delivering significant shareholder value today in the form of strong and sustainable returns and capital generation.

I'll conclude my remarks this evening on slide 8. Our businesses continued to deliver solid results in the quarter. We have great businesses with attractive and resilient risk adjusted returns lead by strong and sustainable profitability of our domestic card business. Our auto finance and commercial banking businesses are delivering solid growth. Our balance sheet is strong and we continue to generate significant capital. In the near-term, we continue to navigate the challenges of the prolonged low interest rate environment, weak consumer demand and significant planned run-off of certain acquired mortgage and card loans. We are not content to simply watch these market challenges and run-off trends play out. We are fully mobilized to protect the profitability and returns of our business by managing costs and to deliver shareholder value by returning capital.

I'll discuss cost management first. Our outlook for non-interest expense in 2013 remains $12.5 billion, comprised of $11 billion in operating expense and $1.5 billion in marketing expense. In 2014, we expect operating expense to improve to about $10.4 billion. We expect acquisition related intangible amortization to decline by about $100 million compared to 2013. While this is a non-cash item that amortizes away, we intend to manage our businesses to insure that these savings hit the bottom line. We'll also manage down our integration costs by about $160 million versus 2013 and intend to manage so that these cash savings hit the bottom line as well. We expect to realize the remaining operating expense improvements through our continuing efforts to manage expenses tightly and operate more efficiently across our businesses. Our operating expense outlook does not include the potential impact of either positive or negative non-recurring items which we do not forecast. As always, we will make decisions about how and when to spend marketing dollars based on our current and expected view of opportunities in the marketplace.

Moving now to capital. As Gary discussed, we're in a strong capital position today and we continue to generate capital on a strong trajectory. With the successful completion of the 2013 CCAR process in March, we're planning to increase our quarterly dividend to $0.30 per share beginning in May subject to approval by our board. As we've discussed, we see this as a first step. Based on our current forecast and subject to regulatory approval, we would expect to request share repurchases that would drive 2014 total payout ratio to a level well above current bank industry norms driven by several factors. We expect that our business will continue to generate attractive returns, adding to our existing capital strength. We expect significant planned run-off to continue through 2014, and we believe purchasing our own stock is a particularly compelling alternative at the current time.

We've started discussions with our regulators to seek approval to begin share repurchases in 2013. While we had not yet reached agreement for the sale of the Best Buy portfolio at the time of our CCAR submission in early January, our CCAR plan indicated that in the event we reached an agreement to sell the assets, we would seek approval to distribute capital freed up by such a sale. Any such share repurchases would be subject to approval by our regulators, and if approved, would not be executed until the time the portfolio sale actually closes.

Pulling up, our outlook for the next couple years implies that diligent expense management and significant capital return will be key levers to create shareholder value and we are highly focused on delivering that value as quickly and effectively as possible.

Now Gary and I will be happy to take your questions. Jeff?

Thank you, Rich. We will 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 one question plus a single follow-up question. If you have any follow-ups after the Q&A session, the investor relations team will be available after the call. Matt, please start the Q&A.

(Operator Instructions) Ryan Nash, Goldman Sachs.

Rich, thank you for all of the clarity on costs and capital. Just to follow-up on the comments on CCAR. You talked about that the plan contemplated you being able to go back and repurchase some stock that was freed up. Can you give us a sense of what that incorporates? Is it you're allowed to repurchase stock of the capital that was actually freed up from the transaction, or is there a different amount? And second, just when you say total payout way above bank industry norms, can you try to quantify that or at least put it in a range for us?

Yes, Ryan. First of all, there's not an official CCAR process that we are reentering here. So, our intent is consistency with what was in our original CCAR process or application, if you will, and that was very explicit about this Best Buy component. So what we are trying to free up is the capital associated with the Best Buy sale.

But again, what actually happens along the way in these conversations is something that there's not an official process and we'll have to see what happens in the Fed conversation. With respect to what do we mean by a payout above industry norms, bank industry norms? Well as we look out there, I think the bank industry norms are running around 50% in terms of total payout ratio and our intent for 2014 is to distribute well above that.

Next question please.

Craig Maurer, CLSA.

So quickly, if the buyback -- if you were to get new approval for the buyback, the earliest we could hope for is basically fourth quarter as you expect the sale to close in the third, correct? And secondly, you discussed loan growth being still the big challenge out there. Can you discuss what you're seeing from competitors, especially in the card industry, that could be limiting that availability? Thanks.

Craig, it's Gary. I'll take your first question, and again, as Rich said, there's not a formal process, but just following our own capital plan, we would wait until after the sale closes and the capital is freed up to begin any repurchases that are approved by the regulators. So that would be probably end of the third quarter, early fourth, yes.

Craig, in terms of the competition, I assume we're talking about in the Card business. I think competition in the Card business is at a -- I mean it's always intense, but it's at a fairly stable and reasonably rational level. The biggest issue I think we start with is just sort of demand itself, industry -- revolving debt is generally going sideways. It's been going sideways for an extended period of time. Certainly purchase volume in the industry is -- the card industry since its bottom of the downturn, the card industry has seen their own purchase volume grow faster than retail sales in the same way that the reverse effect happened on the way down.

So that's been a pretty good thing. And I think that the industry has settled out to a place where supply is down from where it went to in 2011. I think what happened is, as competitors saw the sun just start to peek out a little bit with respect to the Great Recession, they stepped on the gas with respect to direct mail volumes and marketing in 2011, and I think found that there wasn't nearly the response that they had hoped for. So what has happened is direct mail volumes are now kind of like 30% down from there, generally stable. Pricing out there in the marketplace is generally stable, I think going up just a little bit.

And so, I don't think our opportunities are really being driven by competitor actions. I think they're really being driven by the choice that we make in the -- it's sort of again, if we denominate our conversation by loan growth, then really the choice is about the high balance revolvers and the balance transfer; it is teaser rate game, that is the thing that most dominates the metrics with respect to loan growth.

But if I look beyond that, yes, demand is weak. We are gaining share in all the segments that we are investing in. I think we very much like the economics of what we're booking and we don't want to push anything in an unnatural way, but the key thing is we're saying we want to make sure that we can maintain the exceptionally high returns we have in the Card business and we've got to do that through managing our expenses carefully. Redoubling that imperative of course is having Best Buy move out of the equation. So, there's tremendous energy on the expense side in the Card business and then across the Company on both expenses and in terms of capital return.

Next question please.

Sanjay Sakhrani, KBW.

First off, congratulations and good luck to Gary. Also, I appreciate the added disclosure. I had one question specifically to Best Buy and then one for Rich. Just on Best Buy, I was looking at that table that you guys had in the slide deck towards the end of it, and I was wondering, is the fourth quarter the number to kind of look at and annualize? And when I do annualize that number it approximates about $0.38 in EPS after tax. I was just wondering whether in that fourth quarter number there's some seasonality?

And then you talk about getting some operating leverage into 2014, so does that mitigate that impact? And then secondly for Rich, perhaps you could just talk about marketing, because that was one point you made into 2014. I was just wondering how much of that number is discretionary and how much of it is allocated to cards? And to the extent that you're not seeing the growth, how much of that can you pare back? Thank you.

Okay, Sanjay, it's Gary. Let me address your question, looking now at slide 11 of the presentation in the appendix. We've given you the quarterly estimates for this year of the impact of Best Buy because you're going to see those playing through from one quarter to the next. If we close late in the third quarter, we wanted to show you what you might expect in terms of impact in the fourth quarter.

But as I said earlier, it would be wrong to simply take the fourth quarter and annualize it in terms of the opportunity costs, both because of the additional non-interest expense that we expect that we can take out of our base, some of it related to the moving out of that particular partnership. But also because the revenue stream associated with that book of business, we would have assumed would have started to decline because of the choices we've made around some of the card practices. I mentioned payment protection being one of those.

And in terms of the bottom line EPS impact, remember as well, that there's not only the opportunity loss of the earnings, but to the extent it frees up the capital to the extent we're able to use that freed up capital to repurchase our shares, we think we can mitigate a significant majority of any opportunity loss in terms of EPS. Rich?

Yes, Sanjay, on your question with respect to marketing, we have the whole information based apparatus of Capital One geared toward very rigorous measurement about what we're marketing and what we're getting for that. We don't measure success of marketing by a loan growth metric. It's really measured by the creation of value, and before we originate, after we originate, and after programs have aged for many years, we of course estimate and then reestimate and go back and assess and see what we have learned.

In this environment of certainly not a lot of torrid loan growth, there still is good opportunity to create real value and we are very comfortable with what we see and we have a lot of evidence for, I think, the positive choices that we're making. And that's why, as we're managing expenses so tightly, we're separating out our commitment, if you will, that this is where we think operating costs are going to go. And then the marketing call will continue to be more of a line of scrimmage call really based on what we see the market has to give us.

Next question please.

Bill Carcache, Nomura.

I was hoping you guys could help me reconcile some of the commentary. Just trying to make sure that I understand how you guys are thinking about the capital return from a value creation perspective. You've described the value creation aspects of capital that can be freed up and returned as a result of Best Buy. But my understanding was that you guys had paid an 8.25% premium or thereabouts to acquire the Best Buy portfolio. And you essentially got back par for it and now you're returning that capital. So can you help me understand the economic value creation element of that? And then I have one follow-up.

Sure, Bill, it's Gary. The premium that we paid for the HSBC business of just over 8% was across the entire business. We obviously ascribe different parts of that premium based on the value that we thought existed in various parts of that portfolio. We ascribed very little value and therefore very little of the premium to the Best Buy portfolio. And so, that's how it looks to us in terms of being able to get back to a point where we're really creating value by returning that capital and improving performance.

Okay, thanks. And the follow-up is there has been evidence that post the payroll tax cuts, that some lower income customers have faced greater level of financial stress. Have you seen any signs among your certainly if not on an overall aggregate basis maybe just within some of your lower income customers of any kind of weakness from that sub group?

No, Bill, we have looked specifically actually for that effect. There's several things going on sort of in the broader political marketplace, and we tried to look for any evidence of actually any of those effects in the actual performance metrics of our customers overall or within a particular segment, and we have not seen that.

Next question please?

Kevin St. Pierre, Sanford Bernstein.

Gary, all the best and good luck. On the capital commentary, Rich, I know there are a lot of investors who are going to be happy to hear what you offered. Maybe I could ask you to just take one more step and think about capital deployment opportunities that could arise between here and the time when Best Buy closes and whether you would or would not look at portfolio acquisitions or any other types of acquisitions.

Well Kevin, first of all, overall as a general comment, we believe we have plenty of capacity to return capital to our shareholders and add attractive partnership relationships. In 2013, I think in particular, any deal would need to be an extraordinary opportunity with identifiable near-term returns to forego an opportunity to return capital to you in 2013. I think we're really kind of saying we're going right down this path.

It's a very near-term path and we want to make sure that -- its been an important event here to have the Best Buy portfolio even though we valued it at par, it's a big event when this comes out of the portfolio. And we've got a lot of capital in a sense sort of trapped in the Company here. And we want to make sure that we get this out as fast as we can. But I don't think that will take away from our opportunity over time, Kevin, to get the kind of attractive partnerships that are out there and that we're well positioned to take advantage of.

Great, that's clear. And just a quick follow-up. Just to clarify, your outlook for operating expense in 2014, that would be inclusive of any savings related to Best Buy?

Yes, that's correct, Kevin.

Next question please?

Chris Brendler, Stifel Nicolaus.

I had two questions. The first one being relative to the Domestic Card business. Can you give, either Rich or Gary, any sort of metrics or sense that the strategy that you're embarking on -- and it's obviously a difficult macro environment to grow that business, but you seem to be spending a lot of money on marketing. The spending growth, the purchase volume growth has been fading a little bit. That could be macro. You're still doing better than most of your peers, but the lending growth has been challenging. Now do you feel like you're getting a good ROI on your investment these days and all the money you're spending on your marketing and all the television advertising?

And Rich, you referenced the fact that these transactors, they don't tend to create balances right away. But is there potential that there's some of this growth you've been putting on, some of these high spending transactors could spool up and start to add more meaningfully in later years? Any signs of success would be helpful? And I have a follow-up, as well.

Yes, Chris. So metrics for the strategy that we're embarking on, I think the -- probably the most significant metric I would point to is in a sense the risk adjusted margin that in our Business, we are so focused on doing the equivalent of a mini stress test on every origination that we do. We have over our long track record been very, very focused on what is the credit risk and what is the revenue that we have to protect that and how does that revenue behave under stress.

So of course the Great Recession was kind of exhibit A of that, but I would point right now while we spend a lot of time talking about growth metrics to the very, very strong returns that we have in the Business. And in our branded book, those returns are higher because those are blended with partnerships that are an auction-based business and it's inherently -- it's an above hurdle but lower return business than certainly the business that we spent all these years building here. So that, the revenue, and the credit is really the heart of that thing and therefore really the ability of this business to really generate returns.

Now, there's another very important thing that's going on that probably slows down our growth in what is a little bit of a seam, but I don't want to over-emphasize that. But that is just this emphasis on creating value through long-term franchises. So, the classic long-term franchise is this, the heavy spender marketplace, and these cost a lot of money to acquire. They have the lowest attrition rates of anything that I've ever seen in the Card business, and that's a great thing too. But these things build over time and yes, the more traction we have with that and the more other things settle out that will continue to build success, but it will happen even more so, I think, on the revenue side than on the -- just in terms of balances.

Another metric related to that though, is something that we don't -- we have to sometimes give you a little color on is what's the relationship between purchase volume growth and interchange growth. And there's also been a transition as we've gone out with more of an emphasis on getting these new transactor relationships and more of our mix comes from the new high value reward cards instead of just the building of balances by the rest of our portfolio. The interchange growth has lagged the purchase volume growth overall. And you also have to normalize for the partnership side of that which has a whole different kind of economic. But anyway, long story short, the interchange growth has now also caught up to the growth of purchase volume in our branded book.

These are all things, some of it kind of beneath the surface that you can't see, but showing the vertical things catching up with the tremendous horizontal economics that we have. But slowly but surely also, we are continuing to build revolver customers. We just tend to shy away from the big balance ones, but on a broad basis we're continuing to build that business and they're generating very good returns with high resilience. So we feel good about this.

The key thing is we just -- to us is we've got to make sure that we respond to the opportunity we see in the market. Right now, the best opportunity is to really make sure that we maintain our margin and get capital to shareholders, even as we continue to build a long-term franchise and look forward to also the run-off subsiding, which will also really get the metrics going.

That's helpful, and I'm sure macro and higher consumer confidence would also help. A related second question is HSBC and I know you guys are fanatics about testing and measuring and evaluating your own performance, and is this a transaction that you would still do again? We're struggling at this point to see the financial benefit. Are there strategic benefits? The Private Label business, I think, has the potential to be something special in a mobile world. Is this part of the strategy that Private Label could potentially be a growth engine for Capital One over the next several years?

Chris, I think that because there have been so many moving pieces, it's hard to really kind of see the absolutely separable effect of HSBC, but I want to show it through -- I want to talk about it a little bit as we have seen it. We initially set out to buy $30 billion of this, and we talked about that and arranged a capital raise associated with a bit of a larger number. As you know by the final thing that we bought and paid for was around $27 billion-something.

But since then, everything about the HSBC deal has come in consistent with our own expectations, even paradoxically our hunch that the Best Buy portfolio was something that in fact we might be able to move out early. We valued it at par. We didn't know what the timing would be and so on, but our initial hunch was this wasn't going to be the right probably fit with us strategically. It might be great with somebody else. And so, that has even moved along in a sense consistent with expectations.

So we're still very happy with this deal. I think that the bigger kind of story there in the face of the challenges in the marketplace and the weakness of demand and all the building pressures on expenses and the regulatory environment and everything else, to really make sure that -- our job is to drive the real return and shareholder value that can come from the position that we have put ourselves in, and now with this deal coming on, these two deals coming on. And that's what we are very, very focused on. So yes, we still very much like this deal.

Next question please?

Moshe Orenbuch, Credit Suisse.

Rich, could you actually talk about the credit card run-off over '13 and '14? Is that going to include the underlying loan growth that you're talking about that's already net of that, and what are the characteristics of those loans that you're running off?

The credit card run-off is the size of it, it is $2 billion. And I'm looking for an itemization of this. I don't want to just do it off the top of my -- you've got it Gary.

Just getting back to Moshe's point, it's $2 billion in '13, about $1 billion in '14, and to your question, that's a gross run-off, Moshe. That is not a forecast of what our actual balances are going to do. That's the amount that we're going to have to build in order to stay even. Obviously, as Rich has said, we're looking to build, and we expect to offset some of that run-off. But it's just the run-off amount, it's not an assumption about where overall balances are going.

And what distinguishes those loans from the rest of the HSBC portfolio?

And again, as far as the HSBC loans go, Moshe, as Rich described, it is the mostly the less resilient of those loans that, as they pay down, we'll see them start to run-off. Also included in that number is the run-off of the very tail end of the closed end loans that have been accounted for as part of our domestic card segment for many years.

In fact, Moshe, if you forgive me for possibly being only directionally accurate, as I do recall, of the $2 billion we're talking about in '13, $500 million is the installment loan portfolio. That number goes to about $200 million in 2014. So what we have in this run-off portfolio is mostly the HSBC run-off.

And essentially just to give a little more color on that, Moshe, it is some of the highest loss in our opinion, least resilient part of the branded book that we got from HSBC. So you have some of the really kind of lowest margin stuff with installment loans and some of the kind of highest loss stuff. Things like the old metrics book.

Right. On the payment products, could you just remind us what you're doing going forward and what the impact is going to be as those run down?

The payment protection, Moshe?

Yes, the payment protection.

Yes, so Moshe, as we announced, it was actually I believe early a year ago, that early in the year we shut down the origination of payment protection products in our Credit Card business, and so we announced there would be a -- the economics of all of that is on our existing book, we would continue the payment protection products, but it would just be a case of the math of run-off from there forward. And by the way, also on Best Buy there was kind of a similar effect that was part of the declining economics of Best Buy that Gary talked to you about. Gary, do you happen to have the -- talk to Jeff to maybe get the component of that run-off. We did give some information that from which you could determine the annual effect of this tail, Moshe. We're not in possession of it right at this moment.

Moshe, it's Jeff. I can get you that. I don't have it in front of me right now. The story though is that it hasn't changed. Our estimates and the run rates we're observing haven't changed, and what we're seeing is consistent with what we laid out a couple quarters ago. Next question, please.

David Hochstim, Buckingham Research.

I'd just like to congratulate you, Gary, and I wish you all the best. And I was wondering if you guys could speak a little bit more about the operating expenses and marketing expenses, and if you were to do a little bit better than your target, where do you think there could be some additional savings? For example, in marketing as you do more and more customer acquisitions online, shouldn't that be less expensive than direct mail? And where else could you save some money on expenses do you think?

Let me start with operating expenses. Operating expenses is -- this is not a program per se. This is what we're talking about here is a central basic way of life of running this business and there are a number of factors that are significant macro trends that given opportunity for continued expense opportunities beyond the kind of forecast window we're talking about and even in the forecast window, we're taking advantage of some of these.

But you've got the whole trend toward digital, so it happens on the -- that's not only in the marketing side. But the more and more customers that we can get into digital servicing, there's a key thing there on the retail banking side, the more and more customers that we can get to really become digital bank customers instead of such heavy uses of the branches, even the role of things like smart ATMs that we've put all over our network. These are important trends, but they don't happen automatically, David. They have to be actively managed to get the customer behavior changes, and then to make sure that the money drops to the bottom line.

We are also working to drive significant improvements in technology delivery and really the way that we do IT projects. These are very complex projects and we've done a lot of process redesign of that and there's significant opportunity there. One of the big, big themes around banking is complexity. Banks have inherent complexity, but certainly with all the things that have become part of what running a bank is these days, there's a lot of leverage to complexity reduction and we're all over this.

But I do want to say also again, we just bought ING Direct. That is the leader in the way banking is going to be in the future. Now in a few ways they were maybe too far ahead of their time, and this is not a change that everyone is ready to sign up for right now, but I think there are big opportunities there. There are big opportunities in procurement. Big institutions like our own have very big third party expense budgets, and to really, really drive best-in-class kind of procurement capabilities. This is incredibly important, as well.

So our entire -- we are just laser focused because as the guy who came out of the strategy business, I want to say what I think -- what we've always said, what is strategy? Strategy isn't about bubble charts and just about market position. Strategy is about finding where the leverage is and driving great outcomes. The things we're talking about here have tremendous leverage over a long period of time and we are sizing them, driving them, and we want to make sure that that's going to be a key way from customers to economics to the customer experience that we stay ahead in this marketplace.

And the same things that happen in marketing you think and leverage?

Sorry, and just in terms of marketing, one thing I want to say is that mail has a role. Mail is certainly declining over time, but mail has a role that is a different role than digital originations have, and that is that mail allows you to proactively target in ways that actually are not possible on the Internet and so on. So we -- look, we are a big player in digital originations, but our choice is on the direct mail side. The nice thing is we have an absolute expense. We have a response rate, and we have the economics that allow us to very efficiently measure how and how fast to drive down that cost as the world changes.

Next question please.

Brian Foran, Autonomous Research.

On capital return, when you think about payout ratios, should we be thinking about it against GAAP earnings or some kind of cash earnings concept that's closer to the actual annual capital generation?

Brian, I think you'd really want to mostly be thinking in terms of GAAP, obviously. Most of the non-GAAP impacts on revenue will be completed in 2013. So, all that's really left next year will be the significant but predictable and slowly declining impacts on operating expense. But in general terms, Rich is talking largely GAAP, but with wide enough range would probably cover both.

And then just on the expenses, I mean the comments you've given are definitely very helpful and show where you want to go long-term. If I just think about the Card business and expense to loans, I know it's not a perfect metric, but it's one metric. You're at 9% this quarter, 8% and change last quarter, expense loans and domestic card. And historically, you used to be like 5% to 6% and some of your peers are still around 5%. Can you help us dimension how much is temporary versus how much is mix changes or regulatory changes that have happened just as we think about where that could go long-term?

Yes, Brian. Look, we very energetically benchmark ourselves by expenses relative to just about every denominator that we can find out there. And I want to say a few things. First of all, there's certain things that create near-term pressure on expenses that -- and ratios like Best Buy coming out and certain things like integration costs and other things that are a little bit more in the temporary thing.

One thing I do want to say is that I think our expense ratio to loans is inherently higher than other players because of our strategy of pursuing -- of kind of avoiding the higher balance accounts. And so expenses, loans don't actually drive expenses. They drive charge-offs, but what drives expenses is really accounts. And on a per account basis, our metrics are much closer to some of the other norms.

But all that said, where we absolutely need to go from here is to continue to drive more and more efficiency and there are a lot of different levers to do it. And that is strategy with a capital S, that's where the opportunity really is. And that will help us preserve what has been something we've treasured for a long time is to have returns at the top of the industry, in the Card business and then helping us to have returns for our overall corporation that are at the higher end of banks. And so again, always look at ROA again as one of the key metrics there.

Next question please.

Daniel Furtado, Jefferies and Company.

This is Martin Kemnec in for Dan Furtado. Thanks for taking my question. Question for Gary relating to the Domestic Card business. Can you help me disaggregate how much of the $5.3 billion decline in card balances was seasonal and what was related to the run-off portfolios?

Martin, it's hard to pinpoint the run-off portfolios. The two things that would have been driving the decline in loans first would have been for card -- would have been the move of Best Buy loans to held for sale. So, you're going to see a reduction in the held for investment loans. And then the balance is largely going to be seasonal. So, actual run-off would be hard to measure and is almost certainly a very small portion of that. It's the seasonal effect of going from fourth quarter to first quarter, plus the impact of moving the Best Buy portfolio to held for sale, remember that was done on February 1.

Next question please.

Bob Napoli, William Blair.

Two questions, one first on strategy with what you have today and then on growth. On International Card, that business really hasn't grown in a long time. I guess card industry hasn't grown, but does it strategically fit, Rich? Do you have an international strategy beyond the markets that you're currently in, a growth strategy to move into new markets, or does it make sense to sell those portfolios and redouble your efforts in the US?

So Bob, we are in Canada and in the UK in credit cards only. And we chose those two markets -- one didn't have to hire McKinsey to figure that one out. In a sense they are the markets that are most similar to the way the marketplace works, the availability of data, and a lot of things. It was kind of a natural to go there, and it helped that they spoke our language.

But beyond -- all jokes aside, we are not at this point -- we're very focused on the agenda that we talk about here. Those two businesses I think the Canadian business has been a good earner for a long period of time. The UK had a couple of challenges along the way, certainly the amazing whack the whole industry has taken on some of the payment protection thing has lead to some charges and so on. But we think we're well positioned in both markets. And while geographically they look far away, synergistically it's just like another part of our Card business.

We transfer talent across, we use them as training grounds for talent, new insights come out of those two marketplaces that we adopt here. It is synergistic. It makes money. And I think it's an appropriate thing to continue in our portfolio even as we're not pushing out farther in the geographical expansion.

Okay, thank you. And then, the payments industry is more dynamic today than ever. And it seems like maybe Capital One who has always had a really good credit card business might be at a little bit of a competitive disadvantage versus some of the dynamics going on in the industry. Many of your big competitors are either closed loop or own merchant acquirers which with the JPMorgan Chase payment tech with Visa strategy. Does -- with the capital that you have, are there any thoughts of investing further in, say, buying a merchant acquirer or other investing more heavily in other areas of the Payments business that could be synergistic with your US Card business such as prepaid?

Bob, we -- Chase of course just announced this little opportunity they're working with with Visa, that I think pretty much all the card players in the industry jump to attention on that thing and -- look, I don't think we know much about that. I think that it's a divergence from Visa's more normal, more level playing field treatment of the industry here. But we're all over paying attention to that.

It would be -- the answer is no, we're not out looking to go deeply into the merchant acquiring business. Probably like any bank, there's some areas that we have disadvantages, but look, I really like the positioning we have. We are not looking to significantly change the bone structure we have. What I really want to do is capitalize on the opportunities to create value with the bone structure that we have worked for years to get, and I think we're particularly well positioned.

Next question please.

Ken Bruce, Bank of America Merrill Lynch.

Thanks, good evening, and let me add a fond farewell to Gary. Thank you for all the help over the years. My first question relates specifically to revenue margin, probably my favorite topic for Capital One. And I'm hoping you might be able to provide a little bit of context around the 123 basis point lift that you're getting from the Best Buy part of the portfolio coming out. And when you look at that it's 1,633 net of the 123 basis points. It's curiously similar to the first quarter 2012, and I just want to understand how you think that's going to migrate over the next few quarters once the Best Buy portfolio is completely out of the numbers?

Thanks, Ken. I'll start. It's Gary. I don't know if Rich may want to add a few things. First of all, let me just remind you that in addition to the impact that Rich described of the Best Buy in Q1, it will have an incrementally higher impact on Q2 because we'll have three months rather than just two months in the quarter when any of the reversals of finance and fee charges will not be going through revenue but they'll be going against the mark on the loans. By and large, most of what we've seen otherwise has been normal seasonal impacts. But again, you will see some pretty big impact over the course of the year.

The Card business, in particular, when we're looking at revenue margins, because the revenue from the Best Buy portfolio will show up in the numerator of that calculation, but the denominator is just loans held for investment, so excludes that. That's going to be the biggest single driver along with kind of normal seasonal trends, at least for the next couple of quarters.

And as a follow-up, just of the $40 million revenue lift that you pointed out from the fee reversals, is that you had $265 million of revenue suppression, so without that it would have been $305 million? Am I understanding how that is running through the numbers correctly?

More or less, yes.

Thank you very much, and again good luck with your next endeavor.

Thanks, Ken.

Next question please.

Betsy Graseck, Morgan Stanley.

Couple of questions. One was I just wanted to follow-up on the expense side. I want to make sure I understood what you were saying regarding where you anticipated expenses to go from 2013 around $11 billion net of the marketing expense to $10.4 billion, is that accurate?

Yes, that is Betsy.

Okay, so excluding the integration and the acquisition related costs, that essentially means a 3% decline which seems imminently doable there on those non-marketing expenses. On the marketing expense side though, I guess the question is, if you're looking to replace the run-off portfolio to the degree possible, does that imply either an increase in marketing expense to try to incent either usage or track new card accounts?

And if you could also give us some color on how progress is going on implementation of the CARD Act changes that went into place last fall on extending line utilizations? Is there -- or balances per card? Is there any progress there you can talk to us about and help us understand how to get the balances up?

Okay, yes. So on the expense side, Betsy, you've got it right with respect to $10.4 billion. And again, from the $11 billion going down to the $10.4 billion, that's $100 million of acquisition-related intangible amortization, a decline in that; $160 million of integration costs that we have to manage to come out, but we're dropping that to the bottom line; and then all the rest is just other operating cost savings.

I want to give you a window into how we think of marketing. We're really not out on a quest to replace the run-off portfolio. To me the run-off portfolio is just a thing that is running its course. And in many ways, it is irrelevant to -- and not in many ways, it's just flat out irrelevant to our marketing decisions and our growth choices net of that.

It's very relevant when it comes to things like capital distribution. It's very relevant that we make sure that we manage our economics working backwards from what comes with the territory with these portfolios running off. But underneath it all, it's the same way we make choices all the time, and we look at opportunities and we model them under stress. And we pursue all of the opportunities that really look good in that context. And the marketing is really -- the marketing choices are dependent on that. And I think that however you've seen our marketing over the many years, this is really the same whole methodology there.

I'm glad you asked about the CARD Act thing because one other factor, and we have mentioned it in other conversations but we did not today. One other moderate factor that has held back our loan growth has been the adapting to the regulatory requirements with respect to the credit line increases. And let me just talk a little bit about this.

Coming out of the CARD Act and downturn, the regulators understandably have heightened expectations regarding credit line increase programs and they put in place new requirements regarding the use of modeled income to demonstrate a customer's ability to pay. And so they essentially increase the requirement in terms of validating an assumed income before one could give a line increase.

And of course as you can imagine, we had built very significant models associated with line increases and we have a very dynamic and ongoing and important line increase strategy with respect to our customers. So, starting really in 2012, we work to retool to create a line increase program that met these various conditions, and we're going to be pretty much back pretty close to our run rate later this year. So, that will give an extra boost, but it's not game changing, but it's something that it's important that we get back to.

Next question please.

Chris Kotowski, Oppenheimer and Company.

First of all, after the Best Buy news hit, I went back to your April or your mid 2011 filings and looked at the Kohl's portfolio, and that was $3.7 billion portfolio and it looked like your purchase credit card receivable intangible only went up by $13 million, which is something like 35 basis points. So it lead me to think, here we have two cases of these partner cards and you seem to never ascribe any value to them. And so why is it a good business if we never seem to ascribe value to these? Do you give up just too much of the economics with the partners?

Let me just answer your accounting question, Chris. So we're typically going to see more value, more PCCR type value. Whatever premium is paid has to be attributed to the various sources of value. And the credit card relationships, because they are direct between us and the borrower in general purpose credit cards because those accounts will often remain over many, many years. You'll just see more of whatever is paid associated with PCCR in branded books. So that's what you're going to see there.

And if you go back to the Kohl's portfolio, remember the nature of that business. It's very particular. It's a wonderful partnership. It's high performing and they are a great partner. But also remember that there's a very heavy cost and revenue sharing aspect to that business, which is also going to affect the economics there. So, that's what would pretty much account for what you've seen in those two particular portfolios when it comes to PCCR. And remember value can be ascribed to businesses that's going to be showing up in places other than in PCCR.

Is that kind of typical for a partner card, that it's that low?

For partner cards again, there is no single representative situation, Chris. You've got to take a look at the partner, their history, the nature of the contract, and what is being paid. But it's going to be different for each one. It's not surprising that we saw what was in there.

Also remember that with these partnership transactions, there is typically an expiration date on the contract. There is no expiration date on our account relationship in the general purpose business. So with Best Buy for example, because the contract was coming due in 2014, as we said earlier this year all we did was to kind of end that a little bit earlier. That's going to have a huge impact on what's there. So just because there is a fixed-term to partnerships, that's going to affect the accounting, as well. But I wouldn't read too much into the accounting as a measure of long-term value creation potential as Rich has said. We're looking for good partnerships that will deliver that over the long-term.

Chris, let me just talk strategically about partnerships. We have had an interest in partnerships for many years because it's an alternative way to get access to customers, and in some ways actually advantaged access to customers because there are people who do certain things and they choose to do it with the retailer and that can be a good thing. And plus you have retailers who subsidize the activity, and so that can be an economically good thing.

Now it's also been very attractive to us because as a huge player in the Card business this not only represents a significant additional source of volume, but the skills required are right down the plate in terms of how we operate the business and headlining it is credit skills. And also in some of these partnerships the ability to do credit across a variety of different customer profiles is also a very important thing to retailers, and we have a pretty big skill experience at that. So, credit and information based strategies, very important part of that.

Now, also very important is expenses. And if you look at the Best Buy economics, it will show you something that you probably already knew about the business and we know which is that this is a scale driven business. So the marginal economics of a partnership whether it's in unloading Best Buy or whether it's in getting another one are particularly attractive because there's a lot of fixed cost in the business.

This is a scale driven business and if you look at the private label business, you'll find this is not an all comers kind of thing. Capital One is third in a business with three big -- frankly, with three big players because it is a scale-driven business. So we have seen some companies get themselves into trouble in this business, and I believe what happened is in the quest for scale, there might have been some indiscriminates with respect to what customers are being booked or what's happening at auction.

So the other thing I want to say about this business is and why it is inherently less profitable than the regular old branded Car business is it is auction based. It does have periodic auctions. And that is something that makes it hard to generalize, this is why things are so situation specific. So while scale matters, what we have said is we want to selectively grow this business going after great retailers with strong brands. Retailers that view the credit card program as a strategic opportunity to build a franchise rather than just a way to make more money; and a contract, and this is an incredibly important point, a contract that aligns the parties interest and has the right market clearing price to it.

For that reason, we stayed out for a bunch of years about the business. We also stayed out because we didn't have the scale to really get in all that effectively. Now we have the scale, we're in a great position. I think there are relationship benefits to the incumbent that can help you in auction time if they like how you're servicing them.

But bottom line, this is never going to scare the Branded Card business in terms of its returns. But relative to the opportunities that we see in banking and across Capital One's portfolio, I think it offers well above hurdle rate returns, but it has to be managed selectively. And that selectivity is both in choosing new partners and also being willing to sometimes move on from some of the ones we have.

Okay, thanks everybody for joining us on the conference call today. And thanks for your interest in Capital One. As I said before, the investor relations team will be here this evening to answer any further questions you may have. Have a great evening.

Thank you, sir. Again, that does conclude the Capital One first quarter 2013 earnings conference call. Thank you again for your participation. Have a good night.