Capital One Financial Corp (COF) 2016 Q1 法說會逐字稿

Welcome to the Capital One first-quarter 2016 earnings conference call.

(Operator instructions)

Thank you. I would now like to turn the call over to Mr. Jeff Norris, Senior Vice President of Global Finance. Please go ahead, sir.

Thanks very much Tom, and welcome everyone to Capital One's first-quarter 2016 earnings conference call. As usual, we are webcasting live over the Internet. To access the call on the Internet, please log onto Capital One's website at CapitalOne.com and follow the links from there. In addition to the press financial and financials we've included a presentation summarizing our first-quarter 2016 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 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. And for more information on these factors, please see the section titled forward-looking statements 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 will turn the call over to Mr. Crawford. Steve?

Thanks, Jeff. I will begin tonight with slide 3. Capital One earned $1 billion, or $1.84 per share in the first quarter. Pre-provision earnings increased 10% from the fourth quarter to $3 billion, as we had higher revenues and lower marketing and operating expenses. Provision for credit losses increased linked quarter driven by higher charge-offs and a $286 million allowance build, including $73 million of allowance build in our oil and gas portfolio.

As you can see on slide 4, reported NIM increased 4 basis from the fourth quarter to 6.75% driven by one less day to recognize income and a full quarter of lower yielding commercial assets, partially offset by higher interest rates. NIM increased 18 basis points year over year fueled by strong growth in our domestic card business.

Turning to slide 5. Our common equity Tier 1 capital ratio on a Basal III standardized ratio was 11.1%, which reflects current phase-ins. On a standardized fully phased-in basis it was 10.9%. We reduced our net share count by 12.8 million shares in the quarter as we completed our previously announced incremental 300 million in repurchases in the first quarter. We are on track to complete our remaining CCAR authorization by the end of the second quarter of 2016. As we continue our parallel run for Basal III advance to purchase, we estimate that our common equity Tier 1 capital ratio is above our target of 8%. Let me now turn the call over to Rich.

Thanks, Steve. I will begin on slide 7 with our domestic card business. Strong growth continued in the quarter. Compared to the first quarter of last year, our ending loans and average loans were both up 14%. We continue to like the earnings profile and the resilience of the business we are booking.

First-quarter revenue increased 12% from prior-year quarter, slightly lagging average loan growth, as revenue margin declined modestly. Revenue margins for the quarter was 16.6%. As a reminder, payment protection revenue contributed about 25 basis points to full year 2015 revenue margin. Because we completed the exit of our back book of payment protection products at the end of the first quarter, we expect this contribution to go to 0 in the second quarter revenue margin.

Purchase volume in the first quarter increased about 20% from the prior year. Net interchange revenue for the total Company also increased 20%. Although the two growth rates were the same this quarter, we've consistently emphasized the need to look at longer-term trends to understand net interchange growth without the quarterly volatility. For the past several years on an annual basis, net interchange growth has been well below domestic card purchase volume growth. We'd expect this divergence to continue as we continue to expand and strengthen our rewards franchise by originating new rewards customers and extending rewards to existing customers. Also a few of the largest merchants have negotiated custom deals with the card networks that will make their way into interchange revenue over time.

First-quarter noninterest expenses increased compared to the prior-year quarter with higher marketing and growth-related operating expenses, as well as continuing digital investments. 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, the first quarter is the seasonal peak for charge-off rate. Our guidance for domestic card charge-off rate remains unchanged. 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. Based on what we see today, and assuming relative stability in consumer behavior, the domestic economy and competitive conditions, we still expect full-year 2017 charge-off rates 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. We expect allowance additions going forward, primarily driven by growth.

Slide 8 summarizes first quarter results for our consumer banking business. Ending loans were down a little less than $1 billion compared to the prior year. Growth in auto loans was offset by planned mortgage runoff. Ending deposits were up about $5.3 billion versus the prior year. Auto originations in the first quarter were $5.8 billion, about 13% higher compared to the first quarter of last year. In the fourth quarter of 2015 originations shrank, particularly in subprime. This quarter originations growth was stronger, including in subprime. We had good success with our originations programs. And it appears that competitive intensity may have softened a bit in the quarter.

We wouldn't take much from any one quarter of results. We still feel the same way about this business as we have for several quarters. We remain very vigilant about competitive practices. In our underwriting we assume used car prices decline further. We continue to focus on resilient originations. And we continue to expect gradual normalization of margins and credit.

Consumer banking revenue for the quarter increased modestly from the first quarter of last year. Higher revenue from auto -- from growth in auto loans and higher deposit volumes was offset by margin compression in auto and declining mortgage balances. First-quarter revenues were also aided by a rewards liability release associated with discontinuing certain checking products. Non-interest expense increased compared to the prior-year quarter, driven by growth in auto loans and an increase in retail deposit marketing.

First-quarter provision for credit losses was up from the prior year, mostly as a result of growth in auto loans and a modestly higher auto charge-off rate. We also added to the consumer banking allowance for loan losses in the quarter. As we previously discussed, we expect auto charge-offs to increase gradually. And in the first quarter we observed a decline in used vehicle values. These two factors drove the allowance addition.

In our retail deposit businesses, customer needs and preferences are changing, driving changes to the function, format and number of our branches. Like all banks we've been optimizing both the format and number of branches to better meet the evolving needs of our customers as banking goes digital. In 2015 branch optimization costs were about $50 million. We're planning to accelerate these efforts, and we expect branch optimization costs to be elevated in 2016. We are still formulating specific plans and timing. But based on what we see today we expect to recognize branch optimization expenses of about $160 million in 2016. In the first quarter actual charges were $11 million. These costs show up in the other category rather than the consumer bank P&L.

We expect several factors to put pressure on our consumer banking financial results in 2016. In the home loans business, planned mortgage runoff continues. In auto finance, margins are compressing and charge-offs are rising modestly. And our deposit businesses continue to face a prolonged period of low interest rates. We expect these factors will negatively affect consumer banking revenues, efficiency ratio and net income in 2016, even as we continue to tightly manage costs.

Moving to slide 9. I will discuss our commercial banking business. Ending loan balances in the quarter increased 27% year over year. And average loans increased 24%, including the acquisition of the GE healthcare finance business. Excluding the $8.3 billion of loans acquired from GE, ending loans grew about 10% year over year. While 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.

Revenue in the first quarter increased 14% compared to the first quarter of 2015. Revenue growth was below average loan growth because of continuing spread compression. Credit pressures continue to be focused in the oil and gas and taxi medallion portfolios. Provision for credit losses increased $168 million from the prior-year quarter to $228 million as we continued to build reserves. We've been building reserves over the last six quarters in anticipation of increasing risk in oil and gas and taxi medallion loans.

Downgrades of oil and gas loans drove first-quarter increases in criticized and nonperforming loans. The commercial bank criticized loan rate was 5.6% in the first quarter comprised of the criticized performing loan rate of 4% and the criticized nonperforming loan rate of 1.6%. We continue to focus on managing credit risk and working with our oil and gas customers.

As you can see on slide 10, our total oil and gas loans ended the first quarter at $3.2 billion, or about 1.5% of total Company loans, as some exploration and production customers drew on their lines in the quarter. Unfunded exposure decreased to $2.7 billion. Total exposure including both loans and unfunded exposure declined to $5.9 billion. We expect that oil and gas loans will continue to present challenges. And we've been building reserves to reflect that concern.

At quarter end approximately $262 million of our total commercial allowance for loan losses was specifically allocated to our oil and gas portfolio. This allowance is about 8% of total oil and gas loans. Including unfunded reserves plus allowance, we hold $359 million in total reserves allocated to the oil and gas portfolio. While our current reserves fully reflect all the information we have today, as the turmoil in the energy industry continues, future developments could lead to further reserve builds and possibly increasing charge-offs.

I will close tonight with some thoughts on the first-quarter results and our outlook for 2016. We posted another strong quarter of growth in domestic card loan balances and purchase volumes, driving strong year-over-year growth in revenue as well as related increases in operating expense, marketing and allowance for loan losses. Non-interest expense decreased 6% from the linked quarter driven by seasonal declines in marketing and operating expense.

First-quarter non-interest expense does not represent a run rate for the remaining quarters of 2016 for several reasons. The first quarter is typically a low point for non-interest expense. Our businesses continue to grow. We expect about $100 million in elevated branch optimization costs to impact the remainder of 2016. And we expect the net impact of FDIC surcharges and premium changes to add about $20 million to quarterly operating expense beginning in the third quarter of 2016.

Provision for credit losses increased in the quarter. We added to the allowance for loan losses, primarily because of domestic card loan growth and the expectation of higher domestic card charge-off rates because of growth math. We expect these factors to drive further allowance builds in 2016. We also built commercial banking reserves in the quarter to reflect increasing risk in energy loans.

Our efficiency ratio guidance is not changing. Compared to 2015 we still expect some improvement in our full-year 2016 efficiency ratio, with continuing improvements in 2017 excluding adjusting items. To be clear, there were no adjusting items in the first quarter. We plan to deliver efficiency improvement despite the additional pressure from elevated branch optimization costs, higher FDIC expenses, and a deterioration in market expectations for interest rates. We expect our card growth will create positive operating leverage over time. And we continue to tightly manage costs across our businesses.

(Inaudible) up, we continue to be in a 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.

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

(Caller Instructions)

If you have questions after the Q&A session, the investor relations team will be available after the call. Tom, please start the Q&A session.

(Operator instructions)

Moshe Orenbuch, Credit Suisse.

Rich, I heard you say don't look just at each quarter in terms of the growth rate of interchange income. But you have had a couple of quarters where it has matched or been close to matching the level of the growth rate in spending volumes. Could you just talk a little bit about what will cause it? If you are saying that it will diverge and go lower, what is the cause in the future? Have you got specific plans for growth? And again, maybe just relate that to how you see the competitive environment for rewards right now?

Okay. Moshe, the most important point is to just reflect on the volatility of this number, and particularly as we turn in the second consecutive quarter where the number, meaning the net interchange growth number, where it is as high as it is. We go out of our way to remind folks that there's a lot that goes into this particular calculation. And these contribute to its volatility. Let me start, Moshe, with the volatility side of this thing. The net interchange metric includes partnership contractual payments and international card and consumer bank net interchange. And also we update our rewards liability every quarter based on points earned and redeemed, and the redemption mix and redemption rate. So any one quarter we probably spend more calories explaining that volatility than we do reporting it, just to make sure that folks focus on the longer-term trends.

If you look at the full year 2015 compared to 2014, our net interchange grew 11% compared to purchase volume growth of 21%. So if we get past the quarterly noise part of the conversation, let's talk about why net interchange growth has generally lagged domestic card purchase volume growth, and why we also expect that to continue. Our rewards programs have been and continue to be very successful with, yes of course strong growth in flagship products like Quicksilver and Venture and our Spark card. But we are also building a long-term franchise very consciously and consistently by upgrading rewards products for our existing rewards customers and extending rewards products to some existing customers who don't have rewards. As you can imagine, this entails some near-term cannibalization when we do this. But it's all part of building a stronger, deeper customer franchise.

And those trends -- we are well on our way with respect to those trends. They will continue. And also, and this is something that will be a newer effect in the numbers that is not in our prior numbers, a few of the larger margins have negotiated custom interchange details with the networks. And those economics on negotiations that have now happened will make their way into the interchange metrics for card players.

So you asked a question about rewards competition. This is a very competitive space. I think the competition has intensified a bit over the past years -- over the past year, really. Issuers are continuing to introduce new offers. Upfront bonuses have been gradually increasing over time. I still look at this, at the players as generally rational, intensely competitive. And our strategy is designed to go right into a marketplace like that.

So we will keep an eye obviously on interchange risk. That is a different orthogonal factor. But I think we still feel pretty optimistic about that variable overall in the marketplace. And all in all as we post another quarter of pretty strong performance, it's really more of the same story that we've seen in the past, and despite intense competitive pressure we still see a window of opportunity to grow. And beyond sort of the notion of window here, I think this is part of a sustained strategy of Capital One, to invest in going at the top end of the marketplace. I think we're very pleased with our success.

Thanks very much.

Next question, please.

Rick Shane, JPMorgan.

Thank you for taking my questions. Really, they are sort of related. Rich, you've been very clear about your decision to be a little bit more cautious in auto. Over the last several quarters, or actually going back probably four or five quarters, you've been pretty bullish on the opportunity in the card space. Do you see that opportunity still being there? And in light of the growth that you're experiencing now, I understand the growth math impacting losses into 2016. Why are you so confident that they're going to flatten out into 2017 as you continue to grow?

So Rick, several questions there. First of all, you mentioned auto and card. So let me do a little cross-calibration relative to those two. We see growth opportunities in both businesses. In fact, you saw on audio actually growth stepped up a little bit, although we went out of our say to say, don't get carried away with that. I think our message is really the same as before. Frankly, in both businesses our message is really the same as we had last quarter.

On a cross-calibration, I think the auto business is a little bit farther along in the sort of the natural evolution of a market and the competitive dynamics associated with that. And I think we see less growth opportunity there, even though at the margin we're both vigilant and very much working to capture the opportunities that are consistent with our underwriting. On the card side I think that the marketplace is, despite very competitive, is still -- I say it's very rational. The competitors have staked out different positions in the marketplace with different strategies, and several are succeeding all at the same time. Where we are finding growth is in opportunities that are the result of investment for years and strategic focus and testing, and a lot of things that give rise to a more sustainable growth opportunity.

Again, I still would flag nothing lasts forever, and we will take this one quarter at a time. But we feel the same way about the card business as we do -- did a quarter ago. I think there are still legs on the growth opportunity here. And again, it will all be done with an abundance of caution and knowing that windows always open and close. But we still are quite bullish about this opportunity.

Then you said, so what about growth math? Because we have -- the key thing about growth math that is so central to our explanation about credit at the moment is not just that we are doing a lot of growth right now. And as you know, Rick, growth entails peak losses on a vintage in the first couple of years before things settle out. So you have that component. But the fact that it is on top of a almost -- we've never quite seen before the extent of such a seasoned, resilient back book, that the juxtaposition of high growth on top of a highly seasoned back book creates particularly more dramatic growth math effects. All of that said, it's also the case that if you -- overlaying a bunch of vintages that have the same credit growth dynamics, there's just a natural seasoning effect that occurs, frankly whether growth continues or whether growth slows down that becomes a pretty strong effect in causing the credit effects of growth math to settle out in the latter part of the time horizon that we have provided guidance for.

Next question, please.

Betsy Graseck, Morgan Stanley.

Hi, good afternoon. A couple of questions. One was just on Richard mentioned the custom deals that the larger networks have struck with some of the larger merchants. I just wanted to get a sense from you as to the pace of impact on your fee rate that you are anticipating from this. Is this something that is a few basis points over a year's time? Or this tens of basis points over a couple of quarters? Maybe give us a sense of magnitude and timing. And then whether or not you feel that as this plays out to other merchants, that this is just something we should put in our models for the next year or two?

I think there's some -- they're really kind of a couple of one-off things that have happened that have been negotiated. Those will become enduring effects relative to those merchants. Those effects will make their way over the course of the next number of quarters into a change in the run rate of interchange from those couple of merchants. I don't think this is just like a sea change in how the industry works. But we wanted to flag that these well-known things that have gone on in the marketplace have a natural impact as they flow into any of the major card players.

Don't anticipate changing your go-to-market strategy with rewards, as you indicated with it? This is just noise in the background as opposed to, we have to change how we are thinking about rewards with this custom deals happening?

The reality is the merchant marketplace, even though it's more consolidated than it was years ago, is still, when you really stand back and look at it, a strikingly fragmented marketplace. And this does not have any impact on our overall strategy.

Next question, please.

Sanjay Sakhrani, KBW.

Thank you. Rick, you talked about possibly more provisions in the oil and gas portfolio. Could you talk about the sensitivity going forward?

So, I think that -- look, I don't think we want to be in the sensitivity business. I think we did a scenario last time that went through sort of the mathematical impact of a one unique set of assumptions about prices. And all that happened is our own provision was different. Both the external scenario was different and our own allowance build, reserve and everything else ended up being unique. So I think what I would say is, it may be useful just to pull back and talk about the provision in the quarter for a minute, and then I come back and comment on your question.

But if we look at our -- we had $157 million of the $228 million commercial provision expense was related to energy. $18 million was due to charge-offs, mainly in the oil field services segment. We built reserves by $139 million. Of that, our unfunded build was $54 million as we used higher utilization assumptions for some borrowers, given the somewhat defensive behavior that we saw during the quarter. And then lower oil and gas prices, runoff on hedges and declining collateral values also impacted our borrowers and contributed to the reserve build. And then there were some odds and ends to round out the build in provision.

So I think that what we have done in terms of allowance and unfunded reserve build reflects what we see with our customers and in the marketplace at this time. But I think it is also the nature of markets that sometimes feed on each other that -- I think that this still needs to -- the deleveraging of the oil and gas industry still needs to happen. I think we have reserved for that which we see. And I think it's our expectation that it will take a while, and have continuing credit impacts as these thing fully play out.

Great. And just a follow-up. Just that revenue margin disclosure, going forward in terms of protection products. How much of the 25 basis points was in the first quarter that's going to go to 0 in the second quarter? And then when I look at the domestic card revenue margin, that came down quite significantly year over year. Could you just maybe talk -- speak to the trajectory going forward, maybe? Thanks.

First of all, to your cross-sell question, yes. So as we mentioned, we fully exited cross-sell at the end of the first quarter. And we will have no cross-sell revenue in the second quarter. Some of that affect happened in the first quarter. The first quarter was, I don't have the exact number in front of me, but something in the neighborhood of half of the --

it was around 10 basis points.

It was around 10 basis points. It being the amount of revenue that we got. That was around 10 basis points. That would be your answer on that.

The domestic card revenue margin, it's interesting how stable that has been over the years. That has been -- there have been a lot of factors that have worked in opposite directions on that margin. There has certainly been a macro effect that we have been flagging over time in terms of things that we call franchise enhancements where we continue to make choices in the customer's favor that have a bit of impact on revenue. The most dramatic of these in recent years has been this cross-sell effect, and it is now fully playing out.

I think the biggest impacts on revenue margin going forward will not be so much the franchise, further franchise enhancement, although here and there those always go on. I think it's whatever happens in the competitive marketplace, which is very intense. And we will continue to monitor that. But I think we're going to stay out of the forecasting business with respect to revenue margin.

Next question please.

David Ho, Deutsche Bank.

Thanks for taking my question. Just want to talk about some of the asset sensitivity. And I know it's been coming down the last three or four quarters. I know that the outlook on rates obviously continues to evolve, but certainly a little lower here versus your expectations. Can you talk about your balancing strategy and how you think about positioning this year?

Yes. So it's not our policy to try and end up with a large asset sensitive position. That is naturally what we end up with as a result of the balance sheet that we have. So we find ourselves in an asset-sensitive position. But I think we probably, if we could do it in an efficient way, would work to not have as much sensitivity. I should mention, we do have some work underway that suggest deposit pricing may not lag as much as we originally estimated. There's no final decisions that's been made on that point. And we probably won't have a more fully formed analysis of that until the second quarter in terms of how it might change our disclosed impacts. But we're taking all of the actions that we can that are accounting friendly to manage the rate risk. And really what we are trying to do is balance near-term net interest income sensitivity with longer-term changes in economic value.

Next question, please.

Ryan Nash, Goldman Sachs.

Good evening, guys. Steve, maybe you could follow up a little bit on that last comment you made about that deposit pricing likely won't lag as much as you are expecting. What is it, given that betas have been extremely low across the industry, what is it that are you seeing that leads you to the conclusion that it might not be as low?

I think we're all struggling with, and as you look across the industry at management comments, with the extraordinary change in the actual balance sheets of the different depositories and then the extraordinary influence of central banks in the marketplace. And a real uncertainty as to how regulation impacts deposit flows going forward and the nature of competition. We are not at a period where history provides much comfort to try and figure out where we are headed. I think it's just not surprising that we will continue to look at our assumptions on interest rate sensitivity and risk management.

And frankly try and be creative about how this environment, which is so different and unprecedented, how that's going to unfold and what that should mean for how we manage interest rate risk. Now, if in fact things do change and our model suggests we are less asset sensitive, I think that will be a good thing and we will have avoided, for instance, putting on more hedges than we would have otherwise done. But I think this is something that everybody in the industry expresses a lot of uncertainty about and is continuing to look at what the implications of that are for rate risk and rate risk management.

Let me interrupt. (Multiple speakers) almost 10%. Expenses are up 6%. I take the fact that there are some headwinds over the next couple of quarters from the branch optimization, from the FDIC. But if we continue to see loan growth at these very strong levels, can you help us understand the magnitude of efficiency improvement? Do you think you can continue to drive similar like levels to what we've seen year over year, or would you expect to see somewhat of a deceleration? What is the future benefit of the branch optimization that you are doing this year? Thanks.

So we really spent a lot of time on the guidance that we gave last quarter. And Rich talked about some of the challenges that have emerged over the last three months to that guidance which we are absorbing and keeping where it is. I think with all the puts and takes, that's about as far as we are prepared to go. Obviously the branch optimization in and of itself on a narrow basis creates savings. But you know we are also investing in that business and other places. And really what we want to do is talk about this on a consolidated level. Rich, I don't know whether you have anything to add.

Next question, please.

Chris Brendler, Stifel.

Thanks for taking my question. I just wanted to see if you had additional color you could provide on the strong purchase volume growth in the US card business. 20% is very strong, and it seems like most of your competitors are trying to piggyback on your Quicksilver and other successes in the cashback space. Any thoughts on the competitive environment as it relates to that 20% growth? Can you sustain that level? And then I would also like to try to address the private label business. Is that contributing to that strong growth, or is that actually dragging on that? Because it seems to me you haven't invested or done a whole lot with the private level since you bought that HSBC business. Thanks.

Okay Chris. The purchase volume continues to be strong. Let's talk about where we are seeing it. We are seeing it across various segments in our business that are growing nicely. Obviously the spender and rewards business, it's growing in our revolver business where we focus on revolvers other than high balance revolvers. We see it in small business.

But the growth results from success of our rewards programs. It results from new account origination, but also credit line increases. And there is an element of this, as you are familiar with the fact that we, over the last couple of years, increased credit lines quite significantly, making up for kind of a brown-out that preceded that period of time. Now we are in equilibrium with respect to credit line increases. But as people utilize extra line, as you have new originations, just the utilization of the card, all of these things help grow purchase volume. So the purchase volume numbers are the result of direct success in spend-oriented programs as well as it's a byproduct of all the growth that is going on at Capital One.

Can we sustain this? I think that we are in a good competitive position. But obviously a lot of other competitors are investing heavily and have a lot of very successful things that they are doing. So we will continue to take this opportunity as far as it will take us. But we are cognizant of the intense competition there.

Private label with respect to growth rate is in a different place, because that's a relatively modest growth rate because we have not been adding a lot of big partnerships. Some of our existing partnerships are having nice growth. But that business is in an intense competitive period around auction prices. We've gone to a bunch of auctions. We've tended to come up empty handed lately because of -- we have not been willing to go to some of the extreme levels that we have seen where the market clearing price goes. All that said, we like the partnership business and I think it has continued opportunity. But in that business that is so auction-driven, I think we have to be very respectful about the nature of the auction pricing cycle within that business and make sure that we don't do unnatural things for the sake of growth.

Next question, please.

Don Fandetti, Citi.

Rich, if you look around at the major card issuers, it looks like consumer credit is very strong. But if you look on the edges, for example some of the marketplace lenders, they are starting to have problems. And I was just curious if you thought that I could be a canary in the coal mine or if you think that that's just more of a reflection of aggressive growth and maybe not having good credit underwriting in their DNA?

First of all, I want to start with your opening point. Consumer credit, and especially card credit, have been exceptionally strong for some years now. For Capital One, if you peel away the effects of growth math, that's still very much the case. And when we look at our back book, for example, credit is strikingly stable with some pockets of even continuing improvement. This very strong credit environment has been the result of, for ourselves in the industry, highly, highly seasoned back book which is made up largely of customers who weathered the Great Recession, a more disciplined consumer who's less likely to be over-stretched or over-indebted, and an economy that has slow though it's been, has been on a long, sustained recovery here.

But from where we sit today, my biggest worry, and it kind of gets to your question, is the potential impact of growing competition, and actually the growth itself that we see of credit around us. We've seen a growth of revolving debt creep up to about 6% recently. That's pretty high relative to the low and sometimes negative levels since the Recession. And both consumers and creditors have been very cautious. Beyond card growth we've seen growth in other non-mortgage debt. We've seen it in student lending, auto lending and installment lending. And we are watching that closely as well. And installment lending, which I think the banks have gradually returned to, has been the primary asset class for the alternative lenders. You may remember we had an installment lending book that into the Great Recession was probably our worst-performing portfolio.

So my point is partly an installment lending point, but the broader point is, all of this -- the math of the amount of growth that we've seen in the credit marketplace is not lost on us. Now, it is in the context of a, particularly on the card side, growth being flattish for a long period of time. So we are not overly alarmed by just a surge of growth, but we will certainly have to keep an eye on this. And we know that in the end growth -- things that we see in the marketplace with respect to growth not only affect our growth opportunity. They can effect credit with the selection quality of new originations and can impact existing customers who take on more debt from other players. So all of that is stuff that we look at.

At this point, Don, we have not seen these effects in our performance. We have reaffirmed our guidance. But it's just a reminder why we focus so much on resilience. We don't set growth targets in the Company. We focus on capturing highly resilient opportunities when we have them. And in the end know always that we are in the risk management business. But right now net/net we still feel very good about our opportunity here and we feel very good about the credit outlook.

Next question, please.

Ken Bruce, Bank of America Merrill Lynch.

I would like to piggyback off of the questions around credit. I guess you've talked about the general performance. Can you address the subprime portfolio, subprime credit card portfolio? That's obvious grown a whole lot. And then just interested if it's in performing in line with your original expectations. And if you could dimensionalize how you expect the economics of that portfolio to perform over the next year, 1.5 years? Thank you.

Ken, it is performing consistent with our expectations. We've been in that business for a long period of time. And what we see is consistent with what we've learned over the years about that business. It's a profitable business. We like its resilience. And we are continuing to grow in that of one of many segments that we are growing in at the moment.

Next question, please.

Eric Wasserstrom, Guggenheim Securities

Thanks very much. Maybe just a follow-up on that last point. Could you give us a sense of -- in the new accounts that are being booked, how they compare from a FICO stratification standpoint, or some other underwriting metric to the historical growth?

Yes. Look, we are growing in segments in which we have a lot of history and a strong track record, even through the Great Recession. In our branded card business, it's probably not an exaggeration to say when we look at the major places we're investing, we are growing in all of them with the exception of one -- we are growing of those. And there's one place we're not growing, we're actively working to continue to dial that down and to shrink it. And that's the high balance revolvers. The combination of these factors has driven our portfolio mix of 660 and below assets a little higher over the past year. Generally though our portfolio mix has been about one-third, plus or minus. I think recently it's been a little bit more on the plus side.

Next question, please.

Arren Cyganovich, D.A. Davidson.

One of your competitors in the online banking business had acquired a brokerage and wealth management company. I was wondering what you see as the opportunities? I know you have some of that business that you've built organically. And are you pursuing that strategy? Is there an opportunity to grow that or acquire other businesses related?

So, we certainly are in that business. We are not a big player in brokerage and wealth management space. I think that it's not -- it's an area on an organic basis we continue to work to pursue growth opportunities. We're kind of a small player. I don't think that the big wirehouses are shaking in their boots about Capital One. But especially for our existing customers we've got some really nice, very refreshing high-value products for our customers. But it's still off of a very small base at this point.

Matt Burnell, Wells Fargo.

Rich, I wanted to follow up on a couple of earlier questions in terms of you've mentioned for several quarters the opportunity, particularly for growth, particularly in cards. I am curious what you see as a potential yellow flag or warning signal that might signal to you that maybe that growth opportunity is coming to an end? Is it economic factors or is it some of the competitive factors that you mentioned earlier?

So look, the economy is always a wild card there. But I don't think that that is where the -- our growth, I think, is going to be more driven, unless there's a dramatic change in the economy. I think it's going to be much more driven by the competitive environment and the related impacts of that competitive environment on that credit environment. And we just learned long ago one of the things that makes this business what it is in terms of the opportunity to make money and get growth opportunities, but on the same time is always something we have to remind ourselves is the relationship between competitive practices. That's both how intensive the marketing is, the underwriting practices, the pricing and those things. How much they impact not only growth but ultimately make their way into the credit side of the business as well.

This is one business where our own customers -- in a lot of credit businesses, customers have a lending product from one bank. In this case people can have credit cards with a lot of players. And then of course they hold the lending products from others as well. So as I have said, and I still actually would describe the credit card marketplace this way. On a cross-calibration with the rest of the industries that we are in, I think that this is the most rational of the marketplaces. But certainly the thing that we are watching the most is the level of supply out there. And I think the underwriting competition has been very rational, which is a good thing. But we will continue to watch that competition, and then look for impacts that can come with that that would signal to us that it would be appropriate to slow down or whatever.

But again, you always know us. We are always in the go out and look and obsess at things to worry about. But I think that we continue to like the opportunity in the card space.

Chris Donat, Sandler O'Neill.

Thanks for squeezing me in here. Was just curious to follow up on the last question. As we look at the disclosures in your 10-Q we see that your subprime credit card balances have been growing in the high teens or even 20% in the fourth quarter. In terms of the competitive landscape there, are you really facing much competition? Or do you have a lot of running room compared to what other issuers are doing?

So one of the things that has been striking to us is the amount of -- a lot of consumer credit is in that space. There's a number of major competitors who are actually growing in that space. And also what impacts that business a lot is what spills downstream from the prime business as consumers migrate. And so when you -- and you can look at the overall disclosures on how much the various banks have of 660 and below. And you can see that there is a pretty sizable amount of business that each of the players have.

I think they have different strategies with respect to them. Capital One's case, we explicitly actually target certain pockets within that business. Other players, it's more of a byproduct of more generalized marketing that they do. In some of the retail bank players, I think they go into this space with their own customers that they know well. So I think that it's a more competitive space than I think sometimes urban legend would have it. But Capital One I think just has a more unique approach to the business.

One of the striking things I will mention again about the card business is the major card players have staked out unique strategies for how they play in this business. And relative to most businesses that we are in, I am struck by the differences in those strategies. And frankly look around and see a lot of successful players doing smart things, given where they are and the bone structure of assets that they have. It leads to the simultaneous success, I think, of a number of players.

Thank you everyone for joining us on the conference call today. Thank you for your continuing interest in Capital One. As I mentioned before, the investor relations team will be here this evening to answer any further questions you may have. Thanks again. Have a great evening.

Ladies and gentlemen, this does conclude today's conference. We appreciate your participation.