Capital One Financial Corp (COF) 2015 Q4 法說會逐字稿

Welcome to the Capital One fourth-quarter 2015 earnings conference call.

(Operator Instructions)

Also, today's conference is being recorded. Thank you. Now, I would like to turn the call over to Mr. Jeff Norris, Senior Vice President of Global Finance. Sir, you may begin.

Thanks very much, Justin. Welcome, everyone, to Capital One's fourth-quarter 2015 earnings conference call. As usual, we are web-casting live over the internet.

To access the call on the internet, please log on to Capital One's website, at capitalone.com and follow the links from there. In addition to the press release and the financials, we have included a presentation summarizing our fourth quarter 2015 results. With me this evening are Mr. Richard Fairbank, Capital One's Chairman and Chief Executive Officer, and Mr. Steve Crawford, Capital One's Chief Financial Officer.

Rich and Steve will walk you through this presentation. To access a copy of the presentation and press release, please go to Capital One's website, click on investors, then click on quarterly earnings release. Please note that this presentation may contain forward-looking statements.

Information regarding Capital One's financial performance and any forward-looking statements contained in today's discussion in the materials speak only as of the particular date or dates indicated in the materials. Capital One does not undertake any obligation to update or revise any of this information, whether as a result of new information, future events, or otherwise. Numerous factors could cause our actual results to differ materially from those described in forward-looking statements, and for more information on these factors, please see the section titled forward-looking information in the earnings release presentation, in the risk factor section in our annual and quarterly reports, which are accessible at the Capital One website and filed with the SEC.

With that, I'll turn the call over to Mr. Crawford. Steve?

Thanks, Jeff. I'll begin tonight with slide 3. Capital One earned $920 million, or $1.58 per share in the fourth quarter. Net of adjusting items, we earned $1.67 per share.

Pre-provision earnings were down from the third quarter, as higher revenues were more than offset by higher marketing and operating expenses, driven by seasonal and growth-related costs. Provision for credit losses increased as we recognized higher charge-offs and a larger allowance build. On December 1, we closed on the acquisition of the GE Healthcare business, including $8.3 billion of loans and $500 million of good will.

In addition to one month of operating earnings, there were two adjusting items related to the close of the deal. We had a $49 million allowance build related to past rated loans and $20 million of deal-related costs. As a reminder, for the acquired GE loans, we are required to account for term loans with credit deterioration under SOP 03-3 and current and revolving loans under our traditional loan accounting processes. Of the acquired loans, 835 million are accounted for as 03-3 loans.

Turning to full-year results, 2015 pre-provision earnings of $10.4 billion were up 3% year-over-year, as higher revenue was partially offset by higher non-interest expense. Net income for 2015 was down 11%, as higher pre-provision earnings were more than offset by additional provision from credit losses. Full-year efficiency ratio was 54.3%, excluding adjusting items.

As you can see on slide 4, reported net interest margin increased 6 basis points in the fourth quarter to 6.79%, in line with the prior year increase.

Turning to slide 5, as of the end of 2015, our common equity Tier 1 capital ratio on a Basel III Standardized Basis was 11.1%, which reflects current phase-ins. On a standard fully-phased-in basis, it was 10.7%.

We reduced our net share count by 7.6 million shares in the quarter. We expect to complete our previously announced buyback program in the second quarter of 2016.

As we continue our parallel run for Basel III Advanced Approaches, we estimate that our common equity Tier 1 capital ratio is above our target of 8%. We declared $158 million in preferred dividends in 2015, which increased $91 million over the prior year. Assuming no new issuance, we would expect to pay out approximately $205 million in preferred dividends in 2016. Specific quarterly payout schedules can be found in our regulatory filings.

With that, let me turn it over to Rich.

Thanks, Steve. I'll begin on slide 7 with our domestic card business.

Strong growth continued in the quarter. Compared to the fourth quarter of last year, ending loans and average loans were both up 13% and purchase volume was up about 18%. We continue to like the earnings profile and the resilience of the business we're booking.

Fourth quarter revenue increased 11% from the prior-year quarter, slightly lagging average loan growth, as revenue margin declined modestly. Revenue margin for the full year was 16.9%. As a reminder, we're on track to fully exit our back book of payment protection products in the first quarter. Payment protection revenue contributed about 25 basis points to full-year 2015 revenue margin, and we expect this contribution to go to zero by the second quarter of 2016.

Fourth quarter non-interest expenses increased 7% compared to the prior-year quarter, with higher marketing and growth-related operating expenses, as well as continuing digital investments. Credit continues to perform in line with our expectations in both our existing portfolio and our new originations.

As we've discussed for several quarters, two factors are driving our current credit trends and expectations. The first is growth math, which is the upward pressure on delinquencies and charge-offs as new loan balances season and become a larger proportion of our overall portfolio.

The second is seasonality. All else equal, seasonality results in an increasing charge-off rate in the fourth quarter, rising to peak charge-off rate in the first quarter. As we've said for the last three quarters, we expected growth math and seasonality would drive charge-off rate to the mid to high 3%s in the fourth quarter. The fourth quarter charge-off rate came in at 3.75%, in the middle of our expected range.

We expect the upward pressure from growth math will continue through 2016 and begin to moderate in 2017. We still expect the full-year 2016 charge-off rate to be around 4%, with quarterly seasonal variability. We don't normally discuss our charge-off outlook two years in advance, but given the sustained rapid growth rate, we want to give investors a sense of the growth math impact in 2017.

I want to note that our 2017 charge-off outlook is our best estimate today for things that are fairly far in the future, particularly given recent volatility in financial markets. All that said, based on what we see today and assuming relative stability in consumer behavior, the domestic economy, and competitive conditions, we expect full-year 2017 charge-off rate in the low 4%s, with quarterly seasonal variability. Loan growth, coupled with our expectations for rising charge-off rate, drove an allowance build in the quarter and we expect allowance additions going forward, primarily driven by growth.

Slide 8 summarizes third quarter results for our consumer banking business. Ending loans were down about $1 billion compared to the prior year. Growth in auto loans was offset by expected mortgage runoff. Consumer banking revenue for the fourth quarter was down 2% from the fourth quarter of last year.

Higher revenue from growth in auto loans was offset by margin compression in auto and declining mortgage balances. Fourth quarter non-interest expense was up 1% from the prior year quarter, driven by infrastructure and technology expenses in retail banking and growth in auto loans. Provision for credit losses was up from the linked quarter, primarily as a result of auto seasonality.

Fourth quarter auto originations declined about 8% compared to the fourth quarter of 2014. For the full year, auto originations were up 1% to $21.2 billion. Prime originations continued to grow.

Sub-prime originations have been essentially flat for several quarters before declining in the fourth quarter. We've discussed the effects of increased competition on pricing and underwriting, particularly in subprime. We will continue to pursue opportunities in auto lending that are consistent with our long-standing focus on resilience, including adding new relationships with well-qualified dealers and gaining greater share of prime originations with existing dealers.

Our consumer banking businesses face headwinds in 2016. Planned mortgage runoff continues, and auto margins are compressing from exceptional levels due to the mix shift toward prime and competitive pressure. We expect these trends will negatively affect revenues and efficiency ratio in 2016, even as we continue to manage costs tightly.

Moving to slide 9, I'll discuss our commercial banking business. Ending loan balances increased 24% year-over-year, including the acquisition of the GE Healthcare finance business. Fourth quarter ending loan balances also include about $900 million from a short-term agency warehousing transaction that is already paid down, which also will affect loan growth optics when we report first quarter results.

Excluding the GE loans and the agency warehousing transactions, loans grew about 6% year-over-year. As we've been signaling, our organic growth has slowed compared to prior years because of choices we're making in response to market conditions. While increasing competition is pressuring loan terms and pricing in both CRE and C&I, we continue to see good growth opportunities in select specialty industry verticals.

Full-year revenue increased 7%. Revenue growth was below average loan growth, driven by continuing spread compression. Credit performance remains strong for the majority of our commercial businesses, but credit pressures continue in the oil and gas and taxi medallion portfolios.

While the charge-off rate for the quarter remained very low at 3 basis points, provision for credit losses increased $86 million from the prior-year quarter to $118 million, driven by allowance builds. We've built allowance over the last five quarters in anticipation of increasing risk in oil and gas and taxi medallion loans and the addition of the GE Healthcare loans drove a $49 million allowance addition in the fourth quarter. Compared to the linked quarter, criticized performing loans were up $290 million to $2 billion, and nonperforming loans were up $97 million to $550 million, driven by downgrades of oil and gas loans.

The credit quality of the GE Healthcare portfolio is in line with our expectations. The GE Healthcare loans we acquired run at a higher criticized rate than our legacy commercial business, but that effect doesn't show up in the fourth quarter criticized loan metrics because of purchase accounting. We provided visibility into that impact by disclosing the managed criticized rate, which excludes the purchase accounting impact.

In the fourth quarter, the managed criticized rate was 5.4%, 130 basis points higher than the reported criticized rate of 4.1%. As we book new healthcare loans and the marked loans pay down, this will create upward pressure on our reported criticized loan metrics over time, all else equal. We like the GE Healthcare business and we're thrilled to welcome the new team to Capital One.

We remain highly focused on managing credit risk and working with our oil and gas customers. Of our approximately $3.1 billion portfolio of oil and gas loans, around half is in exploration and production, and around a third is in oil field services. We expect that energy loans will continue to present challenges and we've been building reserves to reflect that concern.

At year end, approximately $190 million of our $604 million in total commercial allowance for loan losses was specifically allocated to our oil and gas portfolio. This is about 6.1% of total energy loans. Given that oil prices have fallen since quarter end, unless they rebound, it is likely that energy loans will drive increasing criticized and nonperforming loans, further reserve builds, and possibly increasing charge-offs in 2016.

I'll close tonight with some thoughts on Capital One's full-year 2015 results and our outlook for 2016. Two factors shaped our 2015 results: growth and investments. Growth in domestic card loan balances and purchase volumes led the industry, driving strong year-over-year growth in revenue, as well as increases in operating expense, marketing, and allowance for loan losses.

The costs of growth are front loaded, but in our experience of more than two decades, revenue growth surpasses front-loaded costs over time and growth pays off on the bottom line. Provision for credit loss increased in 2015. Most of the increase came from higher allowance for loan losses, primarily driven by domestic card loan growth and the expectation of higher domestic card charge-off rates because of growth math.

Full-year efficiency ratio was 54.3% net of adjustments, better than our estimated range of around 55%. Three factors drove the favorability.

Revenues for the quarter were strong. We benefited from a handful of miscellaneous fourth-quarter expense items coming in favorable to expectations. And we're getting traction on efficiency efforts across the Company.

Even from the lower 2015 starting point of 54.3%, we still expect some improvement in our full-year 2016 efficiency ratio, with continuing improvement in 2017, excluding adjusting items. We are managing costs tightly across our businesses.

We expect our card growth will create positive operating leverage over time, and while not solely motivated by cost savings, our digital investments are already delivering tangible savings and productivity gains in servicing, core infrastructure, and our legacy operations, and we expect these benefits to grow over time.

Pulling up our 2015 results and the choices that drove them have put us in a strong position to deliver attractive shareholder returns, driven by growth and sustainable returns at the higher end of banks, as well as significant capital distribution subject to regulatory approval.

Now, Steve and I will be happy to answer your questions.

(Operator Instructions)

And our first question will come from Bill Carcache with Nomura.

Rich, can you talk a little bit more about the slowdown in auto loan originations and maybe if you could add a little bit more color on how that ties in with your outlook across the credit spectrum?

Yes, Bill. There's nothing really dramatic. There's really, the auto story, is the same story we've been saying for quite some time. So for at least a year now, we have been flagging that in the subprime marketplace.

We see practices that are inconsistent with where we want to go from an underwriting point of view. And we, you know, we raised the flag about that in our calls, and we have said, and continue to say today, that within the context of maintaining, doing credit the way we want to do it, we're going to still go for as much origination as we can do in the subprime auto space.

And, but the net effect of this going on for a number of quarters, as we have signaled, is just, this is the first quarter that actually subprime originations are down, and -- but it's, again, the same marketplace, but I think this is the effect that we have been signaling for some time. And so, you know, this is -- what I want to stress is we still very much like the business. We do it on our own terms.

And, you know, we have a great history and a real -- and I think great opportunities to create value in this space. But we, as always, number one, you know, put credit and our underwriting choices number one. And the net effect of that, at the moment, is some reduced opportunity in the subprime space relative to what would otherwise be there.

In the prime space, the opportunity continues. There are some competitive and marketplace and issues on a smaller scale going on there, but we still really like the auto business. I think this is a continuing manifestation of coming off what I have called the once-in-a-lifetime unique set of opportunities and confluence of marketplace conditions that existed in the wake of the recession. And so over time we're going to see a more normalized auto business.

And our next question will come from Moshe Orenbuch with Credit Suisse.

Great, thanks.

Maybe to turn to the card business, would you talk a little bit about how you see the competitive environment now? One of your competitors did announce a secured card program this week, so infringing on that perhaps lower demographic segment. Just maybe talk about the lay of the land as you see it from the card business.

So Moshe, the card industry is -- continues to be a very competitive, but fairly rational industry. Marketing levels are high, but stable. Pricing, teaser lengths, APRs, things like that, generally stable, and certainly in the places we play, we feel the pricing is resilient.

Rewards are very competitive. There have been some increases in early spend bonuses, but overall, it's pretty stable. And with respect to the subprime marketplace, there have been a lot of folks who have issued secured cards over time and I think now there's another player in that space, I think. So we'll continue to monitor the competitive environment there.

But we continue to pursue the same strategy pretty much we've been doing for many, many years. An area also, when you talk about competition, we tend to -- I tend to focus the conversation just on our own direct competitors. Of course a very relevant thing in the competitive environment is interchange, as well. And so we also, as we talked about, want to keep an eye on interchange risk.

A few of the larger merchants have negotiated lower interchange. That will have an effect that we keep an eye on. And also, we're watching the evolving digital marketplace for payment alternatives and any impact there on interchange or disintermediation or tolls or anything that happens along those lines. So, that's another dimension we should probably always add to our conversation about competition.

Finally, in partnerships, that's the place that I have most pointed to as the intensity of the auction-based marketplace there at times and in fact, very often recently, has led to market-clearing prices that have been pretty breathtaking. And as a result, we have not had as much growth as we might otherwise have had in that particular space.

The other thing about the card industry I think is worth pointing out is what's happening with industry growth. So industry revolving debt: for most of 2012 and 2013, it held steady at about 1% year-over-year growth. And then it maintained a little over a 3% growth since July of 2014, and in recent months, has been over 4%. So that's certainly getting a little bit more octane there. And bank card outstandings are up 4.6% year-over-year.

I think overall, if I pull way up about the credit card marketplace, I think it's a generally rational marketplace. I think we see opportunity for growth and very attractive returns. We monitor the marketplace obsessively and when we see windows of opportunity, which we do at the moment, we certainly go very hard to seize those opportunities.

Just given that it's about a year, any update you can give us on your success in Canada?

So are you referring generally to our Canadian business, Moshe?

Costco Canada.

You're talking about Costco Canada? In September of 2014, we launched a partnership with Costco and that deal did not come with a portfolio acquisition, so it was sort of at-the-margin, origination business. That business has had nice traction in terms of growth. It's not a big needle mover for Capital One overall, but it's certainly something that has had a fair amount of growth to it.

Next question, please.

Certainly. That question will come from Betsy Graseck with Morgan Stanley.

Hi. Couple questions. One was on just your comments around credit and I know you gave the outlook for 2017 in the low 4%s.

I think the guidance had been for around 4% for 2016. I'm just wondering, are you seeing a slower rate increase in 2016? Does a piece of what you're expecting as we move through 2016 into 2017 change at all versus prior commentary?

Betsy, explain the last part of your question one more time about, what did you say about 2016?

I think you had given guidance in the past around losses in 2016. I'm just wondering if your guidance around that had changed at all.

Not at all, Betsy. Guidance in 2016, exactly the same. So all we're doing is adding 2017 with some caution that's a lot further in the future and, again there, it's all about growth math.

Okay. All right. That's helpful.

Then just the follow-up is on your commentary around energy and if prices stay where they are today, you could see some criticized and classified increase as a result of reserve build. Could you give us a sense of the sensitivities there, if you have any that you could share? If prices stay flat where they are, what kind of reserve build we could see if prices go to 25? What kind of reserve build? Anything you're willing to share there is helpful.

Okay, Betsy.

We built reserves since the fourth quarter of 2014, and at year-end, as we said earlier, approximately $190 million of our $600 million allowance for loan loss is in commercial, is specifically allocated to the oil and gas portfolio. When we set our allowance each quarter, we assume a material degradation in future prices relative to the forward curve.

That said, oil spot -- basically spot and forward prices have declined about 20% since the end of the quarter. If they stay at that level, we estimate we'll have to build about $50 million in additional allowance, all other things being equal for the end of the quarter.

And Betsy, we're trying to give that to be helpful. And I know you've heard that in a lot of other places, but part of the reticence of estimates like this is you've got the price impact alone, but then you've got idiosyncratic things that can happen: in particular credits that can be just as important. So what Rich was talking about is really just a mathematical calculation of what would happen if the prices were closer to where they were currently.

Next question, please?

And that question comes from Sanjay Sakhrani with Keefe, Bruyette and Woods.

Thank you.

My first question is just how we should think about revenue growth out into 2016 and 2017. Should we assume it tracks loan growth and maybe if you could just discuss how the funding of that growth might play into that? Secondly, I was wondering if you could help me with how we should think about the profitability of the GE portfolio that you acquired?

Thanks.

I think you're right. The best way to think about revenues is that the primary factor there is going to be loan growth. The things that we've been observing about margin, net interest margin, haven't really changed.

You've got probably a mix benefit on the card side, a mix benefit from the lower mortgage loans. You've got a little bit of a negative against that in terms of the auto loans, and then the big uncertainty factor is what happens to rates. And your second question was on?

GE. Profitability of that portfolio.

I mean, we're really, we're really happy about the GE portfolio, but at less than 3% of interest earning assets, it's definitely accretive to our commercial business and to the Company. But not really material overall.

Next question, please.

And that question will come from David Ho with Deutsche Bank.

Hi, good evening. Just had a question on gas prices and if those continue to stay at these levels, at what point do your loss expectations start to tick down as you think about your outlook comments for 2016 and 2017?

You're talking about its impact on the consumer side?

Correct.

So David, there's really two sides to this. The first is the potential of sustained low energy prices to cause economic stress in geographies that are heavily dependent on that industry. And keep in mind on that, that our consumer lending business are mostly national businesses, so we don't really have any outsized concentrations in those geographies.

We have about 5% of our card portfolio is in parts of the country with high energy employment concentration. That said, when we look at these geographies, places like Houston, parts of North Dakota, Alberta Province and Canada, we do see slight upticks in card delinquencies. And where appropriate, we've taken steps to surgically tighten our underwriting in these geographies, although we want to be careful not to over react to these very modest effects.

But of course the flip side of falling energy prices is the direct benefit to consumers. And while the benefits are hard to disentangle from other economic effects, it's clear that falling gas prices translate into the equivalent of a pretty sizable wage increase for most households. So it's tough to gauge the net effect of these two factors. My hunch is that it's a net positive on consumer credit.

I think the thing that's been surprising to date is it hadn't shown up in consumer spending to the way that people would have expected. But obviously where it's going instead is to paying off debt. And given that we're in the credit business, that's not a bad thing either.

Thanks. And then separately, can you talk about some of the aspects of competition in the online deposit arena and any changes to your anticipated deposit beta, just given the current rate environment and some of what your competitors may be doing.

I don't know that we would talk much about the changes in deposit beta. We've often observed, and when asked about it, that the direct business does have higher beta than some of the more traditional forms of gathering deposits. But I think what you as investors are most interested in the total cost of those liabilities.

It's not just about beta. It's also about mix. And one of the most profound things that's happened on the liability side is the shift in mix, with much of it going into non-interest bearing. You haven't seen nearly as much of that at Capital One.

So we would in general expect to have higher betas than the peers, just as a result of the higher contribution of our direct and online business. But I think the mix is something on the other side.

I don't think you'll ever see us venture out too far. There have been so many fundamental changes in the marketplace, regulatory, technology changes that I'm not sure past is going to be prologue, but we like our funding position and the fact that it's diversified across traditional and direct channels.

Next question, please?

And that question will come from Eric Wasserstrom with Guggenheim Securities.

Thanks very much. Just two questions, please. One is, I may have missed this, Rich, but could you just clarify what aided the interchange revenues in the quarter.

And then my broader question is, as I think about all of the guidance, I just want to make sure I'm understanding everything correctly. It sounds as if the -- there's clearly going to be PPNR growth, given the very spectacular asset growth that's occurring. But how should we think about the net income line on a year-over-year basis?

So on the net income side, look, I think we've told you that on the top line, it's primarily going to be a function of loans. Rich has given you a directional guide on where we expect to go from an efficiency standpoint. Actually, I know you listen to our calls, so now with two years of charge-offs, you can actually get a pretty reasonable view on not only what net charge-offs might be, but also what the allowance needs might be in the coming year.

Obviously, there's a little bit of a new factor in commercial with respect to losses that make that less a function of card losses. And then the last piece is we've had an increase in preferred dividends. So we've given you some of the important building blocks there, which I would encourage you to fill in.

Eric, on the interchange number, fourth quarter net interchange grew 18% from a year ago and 11% on a linked quarter basis, which happens to be pretty much in line with our purchase volume growth of 19% from a year ago, and 8% from last quarter. I would not get overly focused on any one quarter.

I mean, when our interchange growth number was very low, I said this, when it's at this level, I say it again. There's a lot of factors that affect that quarterly number. If you look at full year 2015 compared to 2014, our net interchange grew 11% compared to purchase volume growth of 21%. Removing the quarterly noise, net interchange growth has generally lagged general purpose credit card interchange growth. And we expect this trend will continue.

Our rewards programs have been, and continue to be, very successful with strong growth of our flagship products. We're also building a long-term franchise by upgrading rewards products for our existing rewards customers and, consistent with the industry, extending rewards products to some existing customers who don't have rewards.

And as you can imagine, there is -- that entails some near-term cannibalization. But it's all part of building a stronger, deeper customer franchise and we're committed to doing that. And also, as I mentioned earlier, with a few merchants out there driving interchange through their individualized negotiations and things like that, that's also another factor that we have to keep an eye on.

So I wouldn't get carried away with any one quarter, but we very much like the growth we're having in our spender business and it's part of a long-term franchise strategy.

Next question, please?

Certainly. That question will come from Don Fandetti with Citi.

Rich, you had sort of talked a little bit about loan growth in cards and wanted to just get your sense. Would you be surprised to see sort of an industry pickup?

And where do you see better relative demand for credit? Is it on the subprime, prime side, or is it across the board?

You know, I -- my intuition is it is this effect of revolving credit picking up is an across-the-board thing. And by the way, when you look at revolving credit numbers, when card purchase volume numbers pick up, that also goes into that number. So I think that after several years of, frankly, really being in the doldrums, the card industry across the board is getting a little bit more octane.

That's obviously the industry overall. Our growth rates were pretty strong.

Got it.

Right. I think you were talking about an industry point, Don.

Yes, just generally across the board. Clearly you have been above the group.

Right.

Okay, thanks.

Next question, please?

And that question will come from Brian Foran with Autonomous Research.

Good evening. For investors, recession has become part of the conversation. It's probably not the base case for many, but it's a risk. People are worried about, where six months ago, it was viewed as a zero chance.

Clearly tonight, your base case, you've given us very clear charge-off guidance and commentary on growth math, but you've got endless data you can look at. Is there anything you're seeing in the data that would make you at all nervous about 2016 being the year the US dips into a recession, or is it all-clear from a consumer perspective based on what you're seeing?

Well, I don't want to get too far on either sides of your little continuum that you portray there. But let me say this about the health of the consumer. First of all, there's obviously been turmoil in the markets recently, including concerns about the global economy, especially China, and closer to home, concerns about the potentially disruptive consequences of falling oil prices.

Having said that, most indicators of the, quote-unquote real economy, at least in the US, continue to look pretty strong. We've seen sustained improvement in labor markets in recent months and steady home price growth. Consumer confidence remains solid.

And as we talked about earlier, falling energy prices, while they will stress certain sectors and certain geographies, they will also directly benefit consumers and if anything, I feel it would probably be a net positive for the overall health of the consumer. Of course our most reliable view, Brian, of consumers comes from our own portfolio, from direct indicators of consumer behavior, like payment rates and purchase volume, and from leading edge credit indicators like delinquency flow rates.

These indicators all look consistent with our views of seasonality and growth math and they are not giving us cause for concern. Obviously, the economy is something of a wild card and if the turmoil we're seeing in financial markets spills over into the real economy, we would expect that to show up in our credit metrics eventually, but we are not seeing any indications of that now.

I appreciate that. A smaller follow-up: the revenue suppression or the estimated uncollectible amount of billed finance charges and fees, it's been a while since we've had to think about that. Can you just remind us, is the best thing just to grow it proportionally with the charge-off guidance or is -- does it behave differently somehow as growth math --

Your instinct is pretty good. I mean, there's some other factors. If you went back in the history, you would see it depends a little bit on where you are in the cycle.

But the biggest driver of it is going to be credit. There's a little bit more seasonality to it because it's a six- to seven-month calculation, as opposed to charge-offs, which are 12 months. So there is a little bit of seasonality into it.

But with most of our figures, we try and point people to annual numbers and it should follow more what's going on, on the credit front.

Next question, please?

And this question comes from Chris Brendler with Stifel.

Hi, thanks. Good afternoon.

Just wanted to ask a follow-up question on the US card business. The interchange growth, coming back this quarter, the strong purchase volume growth, typically you've seen your marketing campaigns have a limited shelf life. It seems like Quicksilver and the cash back rewards are still extending your lead in the US card business. Have you seen any degradation of the effectiveness of this program?

And on the interchange growth discussion earlier, I just want to make sure that there is a -- there's a negative impact here that's causing the disconnect between purchase volume and interchange growth that may have been smaller this quarter, or is there actually something that's going to add to interchange income in any given quarter like this one?

Thanks.

So Chris, the purchase volume growth is really coming from success in traction that we're having across our business. Not coming from any one product, any one part of the business. It's coming from success of our rewards program. It's coming from new account origination. And it's coming from credit line increases. And as we do credit line increases, of course people are spending money as they use the card even more.

So there's a lot of things that are lining up right now to lead to a pretty strong purchase volume growth, one of which is the success of some of our flagship programs. On the interchange question --.

The only thing, as an example, the reason we try and point to longer-term trends is the rewards liability can obscure the underlying trends on any particular quarter, which is why you're better off looking at it on a longer basis.

Next question, please.

And that question will come from Rick Shane with JPMorgan.

Thanks for taking my questions this afternoon. First, I would like to talk a little bit about what's going on with rewards and perhaps how this plays out. When we think about the intensity of the rewards space right now, it almost feels like issuers are giving away transactions. It's maybe not a loss leader, but it's certainly not much more than breakeven. And that works really well in an environment where lending is so profitable because credit expenses are so low. Would we expect that as credit begins to normalize, do you think that we'll start to see some of this competition abate?

Wow, that's -- Rick, I don't know how to speculate about that particular thing. I think, I feel like the rewards business -- look, you're absolutely right that the rewards business is intensely competitive. And one thing I've said about the rewards business, it's really hard to be a casual player in the business, really ramping it up this quarter, putting it on TV this quarter, pulling back the next quarter.

This is about very sustained investment, building a brand, and being willing to do what it takes on a, on the timing of costs versus payback and things that make it difficult for companies to sustain their investment in this particular space. As you know, we've invested for years and I think we're in a good position there to get a bunch of traction and enjoy the financial benefits of that.

It is also the case, and you are correct that the rewards business has now extended farther across the credit spectrum, deeper into the revolver business, and a number of things. And a higher proportion of Americans are ending up with rewards cards, including a bunch who are regular old revolvers. Now, on the face of it, it's not that big a deal economically in the sense if someone is a revolver, they -- once they start revolving on the card, the reward economics aren't that relevant anymore.

So I -- your thesis is an interesting one. My own belief is this will continue to be, as far out as we can see, a pretty intensely competitive business. I do not describe it as a business where you just give everything away and make your money on the rest of the business.

We work very hard to have our spender business be a economically strong business in its own right. But this is certainly intensely competitive and I think some players will invest heavily to compete there and others will be a little bit more, you know, not as intensely investing in that space.

Rich, thank you. In appreciation of you taking a theoretical question and spending so much time, I'll pass on my second question. Thank you, guys.

Next question, please.

Certainly. That question will come from Bob Napoli with William Blair.

Thank you. Good afternoon.

Just on -- I know you talked about returns and growth at the higher end of the bank range. But if you look at the returns you're generating today, that Capital One is generating, you're generating return on GAAP equity in high single digits, return on tangible equity in the low teens.

Is that -- so that's -- are you, are you comfortable with those levels? Or do you think you're under earning what you should be? Just some thoughts around the returns you're generating today versus what you would target longer term.

So, look, I think our -- most of the industry is looked at on a return on tangible common equity. And there were, I think, a little over closer to 13% this quarter. And what we have said, what Rich has consistently said, was that he believes we should be at the higher end of banks with respect to growth and returns.

We haven't seen the final league tables. My guess is this year we'll probably not be as the higher end. That's not a commitment we make every year. Obviously, you've heard an enormous amount of our discussion over the past two years about this being a window of opportunity for us to grow and that growth in both the card business and digital is obviously something that costs money.

Rich, I don't know if you want --.

Well -- Yes, look, it's a very -- our investors and how they get paid over time is an incredibly central and important question always. Since our founding days, we've been very focused on building a company that can generate superior, sustainable financial performance.

And to do this, we need three things: core earnings power that has the octane to deliver attractive current returns and fund investment in the future. There are a bunch of businesses in banking that, in our opinion, don't have enough earnings power to do that. That's one reason we've tried to focus on the places that do.

Secondly, we need a strategic positioning in the marketplace that allows us to capitalize on opportunities. And third, we need the credit discipline to be able to respond to the windows that open and close in the marketplace. And we focused on these three things throughout our two decades as a public company.

Right now is a critical time in the marketplace. We're generating above hurdle returns, but are also investing to capitalize on two very significant opportunities. A card growth window, which is itself the reward of years of investment, and a sweeping digital transformation of our industry. Both investments are going incredibly well at Capital One. And we expect the benefits will increasingly show over time in our financial performance through growth, operating leverage, bottom line return, and capital return.

Next question, please?

And we have a question from Matt Burnell with Wells Fargo Securities.

Thanks for taking my question.

Rich, a question for you. Given what's happened in the market over the last three weeks or so, I'm curious how you're thinking about buybacks in the first quarter and the second quarter, given that your shares are now closer to tangible book value than they have been at some point.

I noticed that your buybacks in the fourth quarter were pretty consistent with the prior couple of quarters. Should we assume that, that buyback pace remains, or is there any way that you can potentially accelerate that in the first part of 2016?

Look, we're not going to get, speculate too much about what's going to happen going forward. I do think it's worthwhile pointing out, remember that we have a CCAR plan that's been approved through the second quarter of 2016.

So there's not really a tremendous amount of flexibility outside of what's already been approved. Some, but not a lot.

Okay. Thanks, Steve.

Then just one follow-up, if I can. There was slightly above average growth in your commercial real estate and multifamily portfolio.

I realize it's not a huge portfolio for you, but a number of other banks had suggested that, that's an area where they are getting a little bit more cautious market by market. I'm curious what drove that and if there was any part of that portfolio that was increased by the GE purchase.

Multifamily?

Yes.

I don't think there is anything. Rich, I'm not aware of anything in particular to point out in multifamily. And I don't think there was any addition from GE.

Okay. Thanks very much.

Next question, please.

And our last question tonight will come from Matthew Howlett with UBS.

Thanks for taking my question. Just to clarify on the efficiency ratio guidance, the guidance is still for a modest improvement in 2016 over 2015 with that really being driven by the backhand of 2016. Could you just sort of comment on the head count reduction and is that part of the improvement?

So we don't give guidance with respect to the timing. Our guidance are full-year numbers.

Head count, some of the recent announcements you've seen on head count impacts at Capital One are, of course, part of the continuing dynamic management of this Company, as we continue to adapt in the marketplace and continue to obsessively drive toward superior and sustainable returns and positioning this company to win in a rapidly changing environment.

I just want to add, the specific quote on efficiency was, we expect some improvement in 2016 and more in 2017, just to go back to the actual language.

Got you. Thanks for that.

And then Rich, just moving to the last questions on the charge-off guidance that you're looking at in 2017, is that the new normal of a low 4%? Is that we could look at as being a new normal, where you want to be in terms of a midpoint of a cycle? Is that what we're targeting long-term, or is this something we could look at as a long-term benchmark for where US card charge-offs will run?

No. It's a great question. We discuss all the time what's the, you know, what's the normal. I've been for 20 years wondering exactly what's the normal in the card business. And there's so many factors, I'm not sure that -- I think it sort of eludes a full generalization.

The key things that we are saying is this. Off of a base, an extraordinarily low charge-off level of these highly seasoned portfolios, like ours, and really the competitors have a similar kind of situation, but unusual factor number one, a highly seasoned back book that has survived the Great Recession.

On top of that, some dramatic growth numbers that, in our more than two-decade history of being, building a growth company, we have a lot of experience with how growth math works and that's why we very much want to get out in front of these numbers and explain, all other things being equal, how growth math works. And so that -- and we've even done the unusual of going all the way out into 2017 to describe that effect because we want our shareholders to understand the mechanics of how growth math works, other things being equal.

So that's not the same thing as declaring what's a normal for the card business, but what it is doing is giving you a sense of how a dramatic surge of growth on a very seasoned base, how the math of that works and the settling effect that starts happening over time.

Well, that concludes our call this evening. Thank you very much for joining us on the call this evening. And thank you for your continuing interest in Capital One.

Remember, the Investor Relations team will be here this evening to answer any questions you may have. Have a good night.

Thank you. That does conclude today's conference call. We do thank you for your participation today.