Capital One Financial Corp (COF) 2017 Q3 法說會逐字稿

Welcome to the Capital One Q3 2017 Earnings Conference Call. (Operator Instructions)

I would now like to turn the call over to Mr. Jeff Norris, Senior Vice President of Global Finance. Sir, you may begin.

Thanks very much, Leanne, and welcome, everyone, to Capital One's Third Quarter 2017 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 capitalone.com and follow the links from there. In addition to the press release and financials, we have included a presentation summarizing our third quarter 2017 results.

With me this evening are Mr. Richard Fairbank, Capital One's Chairman and Chief Executive Officer; and Mr. Scott Blackley, Capital One's Chief Financial Officer. Rich and Scott 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 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 Information in the earnings release presentation and the Risk Factors section in our annual and quarterly reports accessible at Capital One -- at the Capital One website and filed with the SEC.

Now I'll turn the call over to Mr. Blackley. Scott?

Thanks, Jeff. I'll begin tonight with Slide 3. Capital One earned $1.1 billion or $2.14 per share in the third quarter. Net of adjusting items in the quarter, earnings per share were $2.42. Adjusting items in the quarter, which can be seen on Slide 13 in the appendix of tonight's slide deck, included the following: $108 million or $0.14 per share of restructuring charges related to realigning our workforce as our business continues to evolve and we change the way we work; $105 million or $0.14 per share related to the impact of closing the Cabela's acquisition in the quarter. This included $76 million of allowance build and $29 million of deal-related costs.

In addition to these 2 adjusting items, I would also like to highlight 2 notable items that impacted the quarter. First, we had $114 million or $0.15 per share related to the estimated impacts of hurricanes Harvey and Irma. We have included a slide in the appendix of tonight's deck outlining hurricane impacts. And secondly, we had $69 million of gains or $0.09 per share related to investment portfolio repositioning that we did during the quarter.

Preprovision GAAP earnings increased 4% on a linked-quarter basis and 10% on a year-over-year basis at $3.4 billion. Provision for credit losses increased 2% on a linked-quarter basis and 15% year-over-year. We have provided an allowance roll forward by business segment which can be found on Table 8 of our earnings supplement.

Let me take a moment to explain the movements in allowance across our businesses. In our Domestic Credit Card business, we built $330 million of allowance in the quarter. That includes $76 million for the onboarding of the Cabela's assets and $35 million related to the estimated hurricane losses. We expect that the hurricane effects will impact delinquencies in the fourth quarter and charge-offs in 2018.

Allowance in our Consumer Banking segment increased $16 million in the quarter, driven by a $23 million auto allowance build related to estimated hurricane-related losses. Net reserves in our commercial banking segment were impacted by the change in value of taxi medallions during the quarter. As a reminder, since last year all of our taxi medallion loans have been carried at the lower of cost or the fair value of the medallions.

During the third quarter, we continued to see deterioration in taxi medallion values. This had 2 effects. First, we marked the entire loan portfolio to the lower fair value estimate. Second, we moved the remainder of our performing asset medallion loan portfolio into nonperforming asset status. As a result of these effects, we took a net provision charge of $92 million, which was comprised of $167 million of net charge-offs for the updated portfolio valuation and which was partially offset by $75 million of allowance release related to the loans that we moved from performing to nonperforming status.

Turning to Slide 4. You can see that reported net interest margin was up 20 basis points from the second quarter, primarily driven by day count, higher short-term interest rates and asset mix. Net interest margin was up 29 basis points on a year-over-year basis, primarily related to higher short-term interest rates and asset mix.

Turning to Slide 5. Our common equity Tier 1 capital ratio on a Basel III standardized basis was 10.7%, which reflects current phase-ins. On a standardized fully phased-in basis, it was 10.6%. Consistent with my past commentary, based on our current mix of business, we believe our CET1 ratio is around destination levels. Quarter-over-quarter, our CET1 ratio was flat as dividends, our organic growth and the closing of the Cabela's transaction essentially consumed the capital that was generated.

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

Thanks, Scott. I'll begin on Slide 9, which summarizes third quarter results for our Domestic Card business. On September 25, we completed the acquisition of the $5.7 billion Cabela's co-brand card portfolio. We're really excited to partner with Cabela's, a great retailer with a powerful brand and highly engaged and loyal customers.

Scott already discussed the third quarter impacts of the acquisition from allowance builds and deal costs, which are included in our adjusting items for the quarter.

We expect purchase accounting credit marks on the acquired loans to temporarily suppress the domestic card charge-off rate through November. We'll continue to break out the Cabela's impact in our monthly credit 8-Ks through the end of the year. We also expect the addition of Cabela's to reduce the run rate of some of our domestic card metrics, particularly delinquency rate, charge-off rate and revenue margin going forward, all else equal.

Compared to Capital One, the Cabela's portfolio has a lower margin and lower delinquency and charge-off rate, and our partnership includes a revenue and loss-sharing agreement, which further impacts the metrics. Cabela's reduced our September domestic card delinquency rate by 21 basis points, and we expect the run rate reduction to be about 15 basis points.

Beginning in the fourth quarter, we expect Cabela's to reduce the Domestic Card revenue margin by about 65 basis points. And after the impacts of the purchase accounting credit marks subside, we expect that Cabela's will reduce the run rate Domestic Card charge-off rate by about 25 basis points, beginning in December.

Turning to the third quarter results. Ending loan balances were up $9 billion or about 10% compared to the third quarter of last year. Excluding Cabela's, ending loans grew $3.3 billion or 3.6%. Average loans were up 4%.

Third quarter purchase volume increased 7.7% from the prior year. Excluding Cabela's, purchase volume increased 7.2%. Revenue for the quarter increased 5% from the prior year, largely in line with average loan growth. Revenue margin for the quarter was 16.7%. Noninterest expense increased about 3% compared to the prior year quarter. The efficiency of our Domestic Card business continues to improve.

The charge-off rate for the quarter was 4.64% and the 30-plus delinquency rate at quarter end was 3.94%. Excluding Cabela's, the charge-off rate would have been 4.66%, and the 30-plus delinquency rate would have been 4.15%.

We've been guiding to a range of high 4s to around 5% for full year 2017 Domestic Card charge-off rate. With 9 months of actual results already booked, we expect to come in at the high end of the range, both excluding and including the expected impact of Cabela's. We expect that impact to be favorable to the 2017 full year charge-off rate by single-digit basis points.

We expect the effects of Growth Math will continue to moderate with a small tail in 2018. As Growth Math runs its course, we believe that our delinquency and charge-off rate trend will be driven more by broader industry factors.

Slide 10 summarizes third quarter results for our Consumer Banking business. Ending loans grew about 5% compared to the prior year. Auto loans were up about $7 billion or 15% year-over-year. Growth in auto loans was partially offset by planned mortgage runoff. Ending deposits were up about 3% versus the prior year with a modest 6 basis point increase in deposit rate paid.

Compared to the third quarter of 2016, auto originations were up 4% to $7 billion with balanced growth in prime, near prime and subprime. As we discussed last quarter, competitive intensity in the auto finance marketplace remains a bit muted, which continues to contribute to our growth. While we still see attractive opportunities for future growth, there are also reasons for caution in the auto industry included -- including expected declines in auction prices and an increasingly indebted consumer. Our underwriting assumes a decline in used car prices, and we've dialed back on some less resilient programs even as overall originations have grown. As the cycle plays out, we continue to expect the charge-off rate will increase gradually and loan growth will moderate.

Consumer Banking revenue for the quarter increased about 10% from the third quarter of last year, driven by growth in auto loans as well as deposit pricing and volume. Noninterest expense for the quarter increased 2% compared to the prior year quarter, driven by growth in auto loans. Third quarter provision for credit losses was up from the prior year, primarily as the result of charge-offs and additions to the allowance for loan losses for the auto portfolio.

Moving to Slide 11. I'll discuss our Commercial Banking business. Third quarter ending loan balances increased 2% year-over-year. Average loans increased 3% year-over-year. Higher average loans as well as higher noninterest income in our capital markets and agency businesses drove revenue growth of 4% compared to the third quarter of 2016. Noninterest expense was up 13%, primarily as a result of growth, technology investment and other business initiatives.

Provision for credit losses was $63 million, up $2 million from the third quarter of last year. Scott already discussed the third quarter charge-off and allowance impacts from the taxi medallion portfolio. There were additional allowance releases related to the oil and gas and health care loan portfolios. The charge-off rate for the quarter was 96 basis points. The Commercial Bank criticized performing loan rate for the quarter was 4.3%, up 40 basis points from the second quarter. The criticized nonperforming loan rate was up 1.2%, up 20 basis points from the second quarter.

Credit pressures continue to be focused in the taxi medallion and oilfield services portfolios. We provided summaries of loans, exposures, reserves and other metrics for these portfolios on Slides 16 and 17.

Capital One continued to post year-over-year growth in loans, deposits, revenues and preprovision earnings. We continued to tightly manage costs and improve efficiency even as we invest to grow and drive our digital transformation. And we continued to carefully manage risk across all our consumer and Commercial Banking businesses. We are planning to resubmit our CCAR capital plan by December 28, and we remain fully committed to addressing the Federal Reserve's concerns with our capital planning process in a timely manner. We're affirming our 2017 guidance for Domestic Card charge-off rate, total company efficiency ratio and EPS growth. As I mentioned a few minutes ago, we expect full year 2017 Domestic Card charge-off rate to be at the high end of our range with and without Cabela's.

With 9 months of actual results already booked, we expect 2017 total company efficiency ratio to come in at the low end of the 51, net of adjustments. Over the longer term, we continue to believe we will be able to achieve gradual efficiency improvement, driven by growth and digital productivity gains. And while the margin for error remains tight, we continue to expect 7% to 11% growth in EPS in 2017, net of adjusting items. Going forward, we expect to deliver solid EPS growth in 2018, net of adjustments and assuming no substantial change in the broader credit or economic cycles.

Pulling up, the pace of the digital and technology transformation of the world is accelerating. The seismic changes in the marketplace are creating huge fault lines that will forever change banking and create defining challenges and opportunities. We are well on our way to transforming our company to capitalize on these opportunities. We are rebuilding our infrastructure with a modern technology architecture and changing the way we work. We are delivering great value to our customers with simple, innovative products, caring service and a compelling digital experience. We are driving resilient, high-value growth. And we are improving efficiency.

We continue to be in a strong position to deliver attractive growth and returns as well as significant capital distribution subject to regulatory approval.

Now Scott and I will be happy to answer your questions.

(Operator Instructions) And we'll take our first question from Sanjay Sakhrani with KBW.

I appreciate all the disclosure. I guess, first question on future allowance build. I guess, when we look ahead over the next year, should we assume that the provisions more closely are aligned to loan growth, but not for that small tail of Growth Math going forward?

Sanjay, thanks for the question. We've been talking about the effect of Growth Math on the allowance for some time and with Growth Math moderating and having a tail in 2018, there is still some effects that are yet to come into the allowance. But beyond that, I would expect that we'll see the allowance being driven by the growth in the portfolio as well as factors that should be impacting the broader industry.

Okay. And a follow-up just on the overall health of the consumer. I guess, Rich, you've talked about how the consumers have more choices in terms of leverage for the last 1.5 years or so. But as we look at the underlying state of the consumer, I mean, do you feel like their ability and health has been fairly consistent and not deteriorated much over that period of time?

Yes, Sanjay. I feel we're kind of in the credit cycle, sort of middle of the cycle. And I mean, you can -- there are things that are locally relevant about the credit card business that are different from the auto business. But kind of pulling way up on the consumer, while we're very obsessive about indebtedness and competitive intensity, I think that we're in a relatively stable part of the cycle. The economic indicators continue to look pretty benign. We saw trends actually lagging over the last 1.5 years with a little bit more alarm trends in the auto and the credit card business related to -- well, in the credit card on the supply side, the auto on the underwriting side. But just going back to credit card, the surge of credit card supply in the second half of 2015 and especially in '16, we were concerned by that, and especially if you extrapolate that. Since then, we've subsequently seen some pullback, which may be a response to the recent credit results of the card players. So it feels like it settled out a little bit and something that would be consistent more with the middle of the cycle, still moving forward as the cycle progresses there. Then you look on the supply side, mail volumes, marketing levels, new originations, they're still intense, but they're settling out, I guess, a little bit here. Then we look at the revolving debt data from the Fed, and that's down a little bit to 5.8% growth year-over-year. Now obviously that's well above the rate of income growth, but at least within the sort of middle of the cycle, you feel things a little bit more settling out. We can't help but point out, though, the sustained growth in the other nonmortgage debt, student lending, auto lending, installment lending, which have recently been growing at about a 6% rate. But if you look at the total level of that debt, it's significantly above the pre-Great Recession peak, and that's especially true of student lending. And then the other factor on the consumer, of course, is the tremendously low sustained interest rate that they have enjoyed, and therefore, at this point, the debt servicing burdens and other measure of financial obligations are pretty stable and they're lower than they were pre-Great Recession. So if I pull way up on all of this, it feels kind of mid-cycle. We were -- we spoke with a little more alarm over the 18 months and 12 months ago. But I think we'll obviously be very obsessive about this. But within this context, I think there are growth opportunities in our credit business.

And we'll take our next question from Ryan Nash with Goldman Sachs.

A 2-part question. Scott, can you maybe expand on the comment you made about some of the pieces haven't made it into the allowance just yet? And then second, most issuers have provided 2018 charge-off guidance. So can you maybe give us a sense where you think, assuming a stable environment, charge-offs would be? And if you're not going to give us a specific number, can you just talk about some of the puts and takes in terms of the impact of Growth Math, the impact of peaking of some of the vintages and then everything else including competition in the environment?

Ryan, on the allowance side, the allowance window is 12 months, we're sitting here in Q3. So we still got the fourth quarter of Growth Math in 2018 that we would expect will be impacting the allowance. So not more than just that. And then in terms of kind of where 2018 is headed, I'll turn that one over to Rich.

Yes. Ryan, on the -- Growth Math has been the big story for Capital One for a long period of time. And it was the -- as a company that generally hasn't guided to credit loss numbers for the following year, we felt it was very important to step up and give guidance for the significant effects that were going to happen that were going to be independent of the industry worsening or things like that. And the Growth Math is well on its way. You can see, I think September is a particularly strong month, but things bounce around from month to month, but you can see the Growth Math effects settling out. And as we've said for a long time, we expect a small tail of Growth Math in 2018. So the other thing to watch, of course, is the back book, because by definition, in fact, when we speak about this, our front book is 2014 and on and our back book is 2013 and before. And our back book, and I think it's very much an industry point, it's been a good guy for a long time, stable or improving, really mostly improving for many years. Recently, kind of stable. We have recently seen a little bit of uptick in back book charge-off rates, and I think this is an indication of some industry normalization. If you look at the industry securitization trust, which I know you do, Ryan, you can see this effect. You can see it in the Capital One securitization trust, you can see it in most of the other competitor trusts, particularly those that have not been added to recently. And I don't think this is a different effect than all the things we talk about, about the credit card industry moving to the middle of the cycle. But I think for all of us, we won't have the benefit of a tailwind from our back book anymore. And I think that -- so as we look forward about our own performance, Growth Math is going to be playing out, and we will be subject to the industry effects that will play out with others. There's only little qualifier I'd say on that when we watch the credit performance of others, some who are in higher growth -- in a higher growth period will have their own Growth Math effects playing out in their numbers that may be company specific. But for us, I think we -- our numbers will be driven by a Growth Math that is at the more advanced stages plus the overall industry effects.

And our next question comes from Don Fandetti with Wells Fargo.

Rich, you guys obviously worked pretty hard to get Cabela's done. It's possible that there could be some large private-label RFPs out there. Would you look at those, given Cabela's and the sort of resubmission? What is your thought process there?

Well, I mean, I think that those would be independent choices on the merits of whatever the opportunity is. So I do want to say it's been kind of a long journey to get to the finish line on Cabela's, and we're grateful to be in that position. I think it's a great business. We're really going to enjoy that. As you know, our considerations are always very deal specific. But I don't think that having of Cabela's or the Cabela's journey affects our view about opportunities going forward, I think we'll take those on the merits of the particular case.

And our next question comes from Rick Shane with JPMorgan.

Rich, if the organic growth on the U.S. card business sort of slows to the 3% to 4% range, I'm curious where you see the leverage in terms of that slower growth. Is it tighter underwriting? Is it reduced awards? Is it reduced marketing and advertising? Where should we see the benefit of that come through as you basically stop gaining so much market share?

Right, well, I mean, I don't speak of reduced growth so much in terms of, "Wow, we have reduced growth. I can't wait to take advantage of the benefits." I think there are things that happens when growth slows. But the main thing I want to say is we have capitalized with exceptional growth during a window, a kind of sweet spot in the competitive environment and where the consumer was, really where the whole industry was, that led to exceptional growth for several years. And as you know, Rick, we don't set growth targets. We want our people to very much take the opportunity that the market gives them. And we've been saying for some time, we think it's a more kind of -- maybe I'll describe it as a more normal opportunity at the moment instead of the exceptional one that is there. Now what -- the thing that took us from exceptional growth to sort of normal growth was a combination of a significant increase in the competitive environment. And then also in reaction to that, our own pullbacks around the edges, and it was just trimming around the edges and picking the stuff that I think had the most resilience and the best performance. So the -- so what will all that mean? I think that we feel very good about the value that's being created by the 2017 vintage. We think the growth opportunities continue on a pound-for-pound basis, the sort of NPV per account or any of these things to be at the high end of our experience. But the slowing of the growth also advances Growth Math toward its destination where, in 2018, there's a small tail, and then this thing is pretty much -- at some point actually, an important point, the Growth Math turns into a good guy down the road as it moves more and more toward a back book status and enjoys the -- some of the real payoff from all of this growth really comes in. If you call kind of phase 1, the upfront and rapidly increasing losses; phase 2, the sort of stable part where everything is settling out; and then phase 3 is that, all other things being equal, generally be the steady gradual improvement of these vintages as they season. And I think that will be a good guy for the sustained earnings power from this surge of growth that we've had.

We agree with you. We think what you guys did was you made significant investments in '15 and '16 that are going to come to fruition. We're starting to see it now. We think it continues through 2018. But at the same time, it does appear that whereas you were growing probably 2x the industry 18 months ago, you're growing 75% of the industry today. And so beyond the seasoning that you're talking about, which, again, is very -- is virtuous, I'm wondering if there are going to be other impacts we should be thinking about in terms of either tighter underwriting or lower expenses.

Well, I mean, the expense story, I think you've watched it play out, and we are continuing to drive efficiency both from growth and from, frankly, just good old-fashioned old-school squeezing out and being very cost efficient as well as what I might call new school efficiency, which is really related to leveraging, in many ways transforming how we work, how we leverage technology for our customers and for our company. So those are certainly good guys over time. Let me also just say one other thing about the industry growth. And you may remember along the way, I've been calling out from time to time, "Hey, we're in a period where there's -- I remember in 2014, we said, I just want to point out we have an unusually high amount of line increases because there had been some deferral of line increase in the couple of years prior to that. So there's always kind of 2 growth stories that play out for any company. And in many ways, 1 relates to potential energy and 1 is kinetic energy in the sense of physics. But we do all our marketing and so much of the energy of the company goes into generating accounts. And then there are choices about when we grow the lines on those accounts and that creates a second -- a kind of a second wind of growth opportunity. One of the things that has happened in Capital One, for us, over this last period of time, is the actual growth machine of account origination has grown probably more than meets the eye. We continue to be pretty bullish, frankly, about the opportunity to continue to get accounts. And when a lot of that kind of what we've called trimming around the edges relates to let's just go a little slower, a little lower in terms of the line increases. Let's save some of that potential energy. But partly why you hear quite a bullishness in my voice is the underlying marketing and origination and value-creation machine at Capital One is going strong and probably even higher than the sort of year-over-year growth numbers might indicate.

And we'll take our next question from Chris Donat with Sandler O'Neill.

I wanted to just follow up on that last point you were making about the potential energy. Should we think about your line increases as something where you apply sort of a same analytics and run tests and experiments to see what sort of results you get with line increases or -- and do you use that potential energy as something that can stay in the bank for multiple years? Or is it something that deteriorates over time? Just curious how you think about it.

Well, first of all, it's subject to all of the information-based strategy and massive kind of scientific testing that we have done for over 2 decades in building this company. The distinction that I would make, and I feel on a customer origination, a customer is ripe for an origination at a certain period of time, and if you don't get them at the right moment, you're probably not going to get that growth opportunity. When that customer is a customer, I think the -- when you make the choices to increase line, I mean, it's not like entirely just do it whenever it's right for us kind of thing, but it certainly is one that there's a lot more discretion, I think, and a lot more opportunity to feel the marketplace, really size up where we think the consumer is at the moment and where adverse selection and various things are and then make the choices. But a very common thing that we do when we see things and see risks kind of bubbling out there in the marketplace and competitive things going on, we often pull back on that form of energy a lot more than we pull back on the kinetic form. And that's partly what you see going on here. So Capital One growth engine is continuing pretty darn strong.

Okay. And then just to clarify with Scott, the 7% to 11% EPS growth, that includes the adjusting items but not the notable items, correct?

Yes. So the 7% to 11% excludes adjusting items, but it includes the notable items. So it includes the effects of the hurricane and it includes the gains on the security sales.

And we'll take our next question from Chris Brendler with Buckingham.

I wanted to ask a question on the deposit side, just sort of blocking and tackling, what you're seeing as rates rise and maybe if you could comment on deposit costs and trends within the 3 segments being Consumer Bank, Commercial Bank and other? I guess, I'm surprised -- and should we be disappointed that the bank segments are shrinking and other is rising? Or is that part of the strategy?

Yes, Chris, why don't I kind of give you just kind of a general high-level overview kind of where we're thinking about deposit betas. Directionally speaking, we would expect our overall betas are going to be more or less in the higher end of regional banking peers really because we've got a deposit mix that includes more savings in money markets than many of our peers, so we'll be a little bit on the higher end there. But if you think about us just in total about, relative to the peers, most of our commercial deposits are operating accounts, and we have a smaller portion of commercial deposits than many of our peers. Our online deposits are -- typically have a relatively low average balance, so those are a little bit stickier than you might expect. And then when I look at kind of our branches, the rates in our branches are already competitive with traditional bank branch players. And then finally, we have a relatively low amount of noninterest-bearing DDA. So when I kind of look at all those moving pieces, our portfolio level beta has really more or less been in the middle of the pack. When I think about -- brokered obviously has a very high beta, and so we'll certainly see that impacting our overall cost of funding for the company. But from an overall perspective at this point in the rate cycle, betas, for us, have moved pretty modestly. And we think we've picked up some of the benefits of that in our net interest margin. But I still think there is a ways to go yet before betas starts to be more responsive to additional rate moves.

And the segment question?

In terms of the segment, the brokered deposits are sitting in our other category. If you look at across all the segments you see a pretty small amount of movement in rate paid in Consumer. Commercial has a larger move, which is not surprising. I think those are deposits that are a little bit more sensitive to rate moves. And then with brokered, those have very high betas, and so you've kind of seen those move proportionally with the market.

And we'll take our next question from Bill Carcache with Nomura.

You reiterated your guidance for 7% to 11% EPS growth in 2017, and I know that you're not giving 2018 guidance. But intuitively, shouldn't there be an inflection in 2018 growth relative to '17, given that the provision will grow -- or should grow more in line with loans, all else equal? Just trying to make sure I understand the dynamics of the moving parts. I know there are a lot of moving parts, but just all else equal the provision dynamic, if maybe you could speak to that, Rich and Scott.

Yes. Bill, just remember on provision, we still are talking about Growth Math in 2018. It's the tail of that, so we're starting to see the end of that effect. And so on the one hand, you've got kind of the tail of Growth Math. We've got a little bit of the normalization of the back book that we're seeing through in the current quarter that's going to influence 2018. And then on the positive side, a little bit of an opportunity in terms of on -- where we're going with efficiency, but that's -- we've made a lot of progress on efficiency, so we continue to make progress there. It should really be tough work, but we think we can grind some of that out. So on balance, we've got some pressures that are going in different directions still and that kind of gets us to solid EPS in 2018.

Okay. If I may, for Rich. Rich, you've talked about on one hand issues surrounding increases in the supply of credit and also Growth Math. Could you perhaps comment on the interplay that you foresee in card between, on one hand, those normalization headwinds from growing supply and the seasoning effect tailwinds from slower growth on the other?

Yes, I mean, I think the -- let's talk about our front book and Growth Math. So we're in the advanced stages of that journey, and I think relative to a lot of players whose growth has come more recently, we're in the more advanced stages of that. And so I think we will -- as we say, we still need -- there's a small tail of Growth Math for 2018. But that is moving farther along to where it goes from being sort of a bad guy on the overall credit numbers to, in the longer run, actually, becoming a good guy. So that's a little bit more of a long-term effect, but we certainly look forward to that, and that's one of the -- it is in that part of the cycle for -- it's in that part of the life cycle of the vintage where a lot of the value gets created. The -- and then there's the back book, which is going to move right along with the industry. I'd be very surprised if pretty much all the seasoned back book of the competitors, I'd be surprised if they didn't pretty much move very closely together. We're not in the prediction business, and I think we'll watch how those move. The only thing we did is just make note that, in recent months, there has been a bit of an uptick that you see across the industry. And again, I don't think it's surprising. I think what's been striking really about back books is they have been such a good guy for so long, at some point, I think we're seeing natural industry cycle effects playing out there. But -- so I think our biggest point is that the sort of unique story of Capital One and the Growth Math that was so intensely playing out because of the magnitude of our growth, I think, relative to our seasoned book and relative to what the industry was doing, I think that has mostly played its course.

And our next question comes from Moshe Orenbuch with Crédit Suisse.

Rich, clearly you're not tremendously concerned about the consumer, the auto business continues to grow quite nicely. And you talked about the origination machine on the card side being very strong. I guess what would it take for you to see in order for that to kind of trend upward again in terms of growth to a faster level, particularly given that, at least at this stage, the industry is growing somewhat faster, not a lot, but somewhat faster. I've got a follow-up also.

Moshe, is that a credit card point?

Credit card. Yes, yes, credit card. I'm sorry.

Credit card point. Yes. Well, see, in fact, it's interesting that you mentioned auto. You've known Capital One for a long period of time, and we read the marketplace, and then really seize opportunities when we see them. But a lot of times, we're near the top of the league tables or near -- sometimes near the bottom of the league tables of growth, depending on the situation. So we were dialing back during the period of time over the last 18 months when there was a surge in industry supply. There was a surge in growth of subprime supply in the industry where you started to see credit metrics coming in a little bit higher than expected, and that has mostly characterized the journey over the last 18 months. I did mention that, in response to some of these effects, it appears that the industry has dialed back a little bit. Several players have actually talked about dialing back. And Moshe, that could open up more opportunities. We're not planning on it. We need to see validation before we do that. But I feel better about the industry and what it has to give us now than I did, say, a year ago when we were saying, boy, you look at second quarter 2016 for the whole industry, vintage curves were gapping out a little bit and there were a lot of -- there were a lot of things bubbling that I think, frankly, it settled out a little bit between then and now. So we've got our underlying origination machine going. If we see more opportunity, we'll certainly take advantage of it, but we're not here to predict that. If you look at the auto business, Moshe, you have seen how much we have moved from capitalizing on a growth opportunity after the Great Recession -- in the early stages in the wake of the Great Recession growing at really pretty high rates for years. We started speaking alarm about underwriting practices. We pulled back quite a bit. Then the competitive situation softened, and we really stepped into it and leaned into it again. So we will always be very vocal about these opportunities. I think that, paradoxically, while the actual growth numbers for Capital One are down, our bullishness about sort of the quality of the opportunity and the bullishness that the card business is not sort of running away -- the industry isn't running away with things is actually up a little bit.

Got it. And just as a quick follow-up for Scott. You talked a little bit about deposit betas. We don't have the third quarter numbers yet, but back in the second quarter your benefit from a rising rate environment kind of ticked down over the course of 2017. Can you talk a little bit about -- because it seems to be that you're a little more, I don't know if it's more conservative or actually have less beneficial outcome than some bank peers into a rising rate environment.

Yes, I think, Moshe, if you looked at, as you obviously have, our rate risk disclosures, you can see that we're pretty close to flat against kind of where forwards are headed. And we are modestly and have been modestly asset sensitive for small changes in rates. We're more liability sensitive for larger changes in rates. But we certainly aren't trying to place a bet on where rates are moving. We're trying to be pretty neutral to where forwards are headed.

And our final question tonight comes from Betsy Graseck with Morgan Stanley.

Two questions. One, just on the mix of the portfolio with the above and below 660, obviously, you put that in your deck. Just wanted to get a sense as to, when you're thinking about portfolios, does it matter to you whether or not that portfolio would come in and skew the split you have here of above and below 660, the 65/35 that you have this quarter or if you'd be willing to let that skew change in any material way?

Well, Betsy, we would take that one case, one opportunity at a time. As a general observation from years of doing this, when we have looked at subprime skewed portfolios, we have -- in the card business, we have tended not to be comfortable with the risk and especially the amount of credit line that has been extended to so many customers. The -- Cabela's interestingly, obviously, is an acquisition at the top of the market. It did move the metrics of our mix, but that -- we just really liked that particular opportunity, and we went for it on its own metrics. But I think over time, it is more likely that you'll see Capital One in pursuit of higher-end opportunities than lower-end opportunities just because of the 2 decades of experience we have in the sort of upper end of subprime, and we are very familiar with the many dangers that can come when folks haven't underwritten it conservatively enough.

Okay, now that's helpful. And then my follow-up was just on how you're thinking about the benefit of the digitization on expense ratio over time? I'm not asking for what 2018 is going to be. But as you think more on a 3-, 5-year kind of time frame, do you feel that the investment spend that you're making today is something that could materially move the expense ratio from here? Or it's more likely to be a grind, grind, grind? I guess, my question is, is there a step function you see coming? Or are we grinding our way through the better efficiencies over time?

Well, I'm a big believer that investment in technology ends up being a good guy. Well, it doesn't happen automatically. But investment in technology the way that we're doing it by not just putting a piece of technology in or not just building an app or some customer-facing thing, but really focusing on transforming from the bottom of the technology stack up. Our foundational technology, and also leveraging that to transform how we work, I think that's going to be a significant good guy way down the road. On the way to that journey is a lot of technology investment. So as you may recall, Betsy, over the last number of years we've been saying, look, we're investing a lot in technology. And there are 2 meters that are running. One is the increase in investment in technology itself, which has been significant over that period of time. And another meter is the cumulative run rate benefits that we also are now starting to generate from that technology investment combined with really proactively transforming how we work. The nice thing is, I think, that second meter of the cumulative benefits, that's a meter that will keep growing. I just want to say, along the way, we continue to invest in technology a lot. I don't think a day will come when we say, we have arrived. We're not going to keep investing in technology. But what happens is the second meter, the benefits of this are going to just keep increasing over time. And so I think it is a contributor to long-term better efficiency for the company. There's no moment of -- there's not, like in our near future a step change in economics. But one thing that I think we're very focused on at Capital One is -- and a very critical way that investors will get paid is through increasing -- improving efficiency. And to do that, both through the old school techniques of just really trying to manage tightly, but then really getting so much of the opportunities from the transformational opportunity that technology gives, that's what this journey is about. It's a long-term journey but I think you can already start to see the benefits. And I think you will gradually see more and more of them over time.

Thanks, Rich. Thank you, Scott. And thank you, everyone, for joining us on the conference call tonight. Thank you for your continuing interest in Capital One. Remember, the Investor Relations team will be here this evening to answer any further questions you may have. Have a great evening.

And that does conclude today's conference. Thank you for your participation. You may now disconnect.