Capital One Financial Corp (COF) 2017 Q4 法說會逐字稿

Welcome to the Capital One Q4 2017 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. Sir, you may begin.

Thanks very much, Liane, and welcome, everybody, to Capital One's Fourth 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've included a presentation summarizing our fourth 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 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 Information in the earnings release presentation and the Risk Factors section in our annual and quarterly reports accessible at the Capital One website and filed with the SEC.

And with that, I'll turn the call over to Mr. Blackley. Scott?

Thanks, Jeff. Turning to Slide 3, I will cover results for the quarter. In the fourth quarter, Capital One posted a net loss of $971 million or a loss of $2.17 per share. Excluding adjusting items, we earned $1.62 per share in the fourth quarter and $7.74 for the full year of 2017. Adjusting items in the quarter, which can be seen on Slide 14 in the appendix of tonight's slide deck, included the following: $1.77 billion or $3.61 per share of tax expense related to the impacts of the Tax Act; $76 million or $0.10 per share of restructuring expenses, largely related to the shutdown of our mortgage originations business; and $31 million or $0.07 per share from the build in our U.K. payment protection insurance customer refund reserve.

In addition to the adjusting items in the quarter, I'd also like to highlight a few notable items that also impacted the quarter. $169 million or $0.22 per share of charges for a mortgage rep and warranty settlement, which is included in our discontinued operations; $113 million or $0.15 per share of charges related to our commercial Taxi Medallion lending portfolio.

Before I go into our results for the quarter, I'd like to spend a minute on a few tax reform items which are highlighted on Slide 4. The total net impact of tax reform on Q4 earnings was $1.8 billion, of which the biggest piece was the DTA write-down, reflecting the change in the federal corporate tax rate from 35% to 21%.

For 2018, we expect our annual effective tax rate to be around 19% plus or minus. I'll caution that since tax reform was only recently passed, there's still the potential for adjustments to all of our current tax-related estimates.

Pre-provision GAAP earnings decreased 5% on a linked-quarter basis. Provision for credit losses increased 5% on a linked-quarter basis as a smaller allowance build compared to the third quarter was more than offset by higher charge-offs. 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 our allowance across our businesses. In our Domestic Card business, we built $118 million of allowance in the quarter driven by seasonally adjusted growth and the effects of the small tail of Growth Math on credit losses in 2018. Allowance in our Consumer Banking segment increased $29 million in the quarter. The allowance in the quarter was driven by a planned accounting change to accelerate timing of charge-offs to repossessed vehicles, which was partially offset by an allowance release as hurricane-related losses came in lower than our prior estimate.

Net reserves in our Commercial Banking segment were impacted by our move of a significant portion of our Taxi Medallion business to held-for-sale. We've marked that portfolio to our estimate of a reasonable market clearing price and coupled with other tax-related adjustments. This drove provision expense of $113 million in the quarter.

In the quarter, we settled a mortgage rep and warranty litigation matter which drove a loss of $169 million in discontinued operations. With this settlement, we have closed all of the material active litigation from our legacy rep and warranty-related exposures.

Turning to full year 2017 results. Capital One earned $4.1 billion or $7.74 per share on an adjusted basis. Adjusted pre-provision earnings of $13.4 billion were up 11% year-over-year as higher revenue more than offset higher noninterest expense. Net income for 2017 on an adjusted basis was up 4% as higher pre-provision earnings more than offset higher provision for credit losses. Full year efficiency ratio was 51% excluding adjusting items, down from 53% in 2016.

Turning to Slide 5. You can see that reported net interest margin was down 5% or 5 basis points from the third quarter, primarily driven by lower Domestic Card deals from the full quarter impact of the Cabela's portfolio as well as slightly higher rate paid on consumer deposits. Net interest margin was up 18 basis points on a year-over-year basis primarily driven by higher mix of card assets on the balance sheet and the benefits from higher short-term interest rates.

Turning to Slide 6. On common equity Tier 1 capital ratio on a Basel III standardized basis was 10.3% which reflects current phase-ins. On a standardized fully phased-in basis, it was 10.2%. We continue to believe that CET1 under stress is our binding constraint. After digesting the effects of tax reform and adjusting our capital plan, we believe our CET1 ratio on a fully phased-in basis will transact towards the mid-10% range. Lastly, we submitted our capital plan to the Federal Reserve at the end of December. While we cannot comment on any aspect of our regulatory feedback, we are committed to addressing the Federal Reserve's concern with our capital planning process.

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

Thanks, Scott. I'll begin on Slide 10 with fourth quarter results for our Domestic Card business, which include a full quarter of impacts from the addition of the Cabela's portfolio. The run rate, Cabela's impact on charge-off rates, delinquency rate and revenue margin played out as expected in the fourth quarter. Ending loan balances were up $8.2 billion or about 8% compared to the fourth quarter of last year. Excluding Cabela's, ending loans grew about 2%.

Fourth quarter purchase volume increased 15% from the prior year. Excluding Cabela's, purchase volume increased about 8%. Revenue for the quarter increased 4% from the prior year. Revenue margin for the quarter was 16%, down 73 basis points from the fourth quarter of 2016, driven by the expected 65 basis point impact from Cabela's.

Noninterest expense increased 1% compared to the prior year quarter. The efficiency of our Domestic Card business continues to improve. The charge-off rate for the quarter was 5.08%, and the 30-plus delinquency rate at quarter-end was 4.01%. Excluding Cabela's, the charge-off rate was 5.36%, and the 30-plus delinquency rate was 4.18%. The full year 2017 charge-off rate was 4.99%. Excluding Cabela's, the charge-off rate was 5.07%.

In the second half of 2017, we've seen the effects of Growth Math moderate, and we continue to expect a small tail in 2018. As Growth Math runs its course, we expect that our delinquency and charge-off rate trends will be driven more by broader industry and economic factors.

Slide 11 summarizes fourth quarter results for our Consumer Banking business. Ending loans grew about $2 billion or 3% compared to the prior year. Average loans were up $2.6 billion or 4%. Growth in auto loans was partially offset by planned mortgage runoff. Ending deposits were up $3.9 billion or 2% versus the prior year with a 12 basis point increase in deposit rate paid compared to the fourth quarter of 2016. In the quarter, we exited the mortgage originations business. We determined that our originations business did not have sufficient scale to be competitive in a market where scale really matters. Scott discussed the adjusting item related to our exit, which runs through the other category.

While fourth quarter auto originations were down 5% compared to the prior year quarter, the auto business continues to grow with ending loans up 13% year-over-year. Competitive intensity in auto is increasing, but we still see attractive opportunity to grow. We remain cautious about used car prices, and our underwriting assumes that prices decline. 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 9% from the fourth quarter of last year, driven by growth in auto loans as well as deposit spreads and volumes. Noninterest expense for the quarter decreased 3% compared to the prior year quarter, driven by our ongoing efforts to tightly manage costs. Provision for credit losses was down from the fourth quarter of 2016, primarily as the result of a smaller allowance build. Compared to the sequential quarter, provision for credit losses increased driven by additions to the allowance that Scott discussed.

Moving to Slide 12. I'll discuss our Commercial Banking business. Fourth quarter ending loan balances decreased $2.3 billion or 3% year-over-year driven by our choice to streamline and pull back in several less attractive business segments, late-year pay-downs on agency multifamily loans and the write-down of Taxi Medallion loans.

Compared to the fourth quarter of 2016, average loans increased 1% and revenue was up 2%. Noninterest expense was up 11%, primarily as the result of technology investments, foreclosed asset expense related to the Taxi portfolio and other business initiatives.

Provision for credit losses was $100 million, up $34 million from the fourth quarter of last year. Scott already discussed the fourth quarter impacts from the decision to move most of the Taxi Medallion portfolio to held-for-sale. The charge-off rate for the quarter was 85 basis points. The Commercial Bank criticized performing loan rates for the quarter was 4.1%, down 20 basis points from the third quarter. The criticized nonperforming loan rate was 0.4%, down 80 basis points from the third quarter.

The ongoing recovery in oil and gas markets has improved the credit performance of our oil and gas business. We've seen our E&P portfolio return to health, but we continue to see credit pressure in oilfield services. We've provided summaries of loans, exposures, reserves and other metrics for the oil and gas portfolios on Slide 17.

Capital One continued to post year-over-year growth in loans, deposits, revenues and preprovision earnings. We continued to tightly manage costs even as we invest to grow and drive our digital transformation, and we continued to carefully manage risks across all our consumer and Commercial Banking businesses.

We met our guidance for 2017, coming in at the high end of our Domestic Card charge-off rate guidance, the low end of our total company efficiency ratio guidance and delivering 7.4% growth in EPS, net of adjustments. Our 2017 results put us in a strong position as we enter the new year. Loan growth decelerated in 2017, but we still see opportunities to book attractive and resilient loans in our card, auto and Commercial Banking businesses. Marketing was down a bit in 2017. We expect marketing in 2018 will be higher than 2017.

On the credit front, the impact of Growth Math on our overall charge-off rate began to moderate in the second half of 2017, and we expect a small tail of Growth Math in 2018. As Growth Math runs its course, we expect that our Domestic Card charge-off rate trends will be driven more by broader industry and economic factors.

Our efficiency ratio improved significantly in 2017. Over the long term, we continue to believe we will be able to achieve gradual efficiency improvement, driven by growth and digital productivity gains.

We expect the new tax law will also give us a significant boost. In the near term, we expect a majority of the tax benefits will fall to the bottom line. Why only a majority? I believe markets behave in predictable ways, passing some of the benefit from companies to consumers and the economy. A surge in tax benefits has a way of working its way into the marketplace through increasing competition, including higher levels of marketing, lower prices and higher wages. Responding to these actions will likely consume some of the tax benefit in 2018, and these competitive effects will likely increase over time.

As all these effects play out, we will continue to lean in to our long-standing investment in talent, technology, innovation and growth. We are bullish about the long-term benefits of our investments.

Taking all of this into account, we expect that our current trajectory, coupled with the new tax law, will enable us to accelerate 2018 EPS growth, net of adjustments, and assuming no substantial adverse change in the broader economic or credit cycles.

[Pulling] up, in 2017, we advanced our quest to build an enduringly great franchise with the scale, brand, capabilities and infrastructure to succeed as the digital revolution transforms our industry and our society. We made strategic moves to position our businesses for long-term success. We continued to grow and serve customers with ingenuity and humanity. Our digital and technology transformation is accelerating, and we delivered solid near-term financial results for shareholders while investing in our future. We continue to be in a strong position to deliver attractive growth and returns as well as significant capital distribution subject to regulatory approval and market conditions.

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

Thank you, Rich. We'll now start the Q&A session. (Operator Instructions) Liane, please start the Q&A.

(Operator Instructions) And our first question comes from Ryan Nash with Goldman Sachs.

Rich, maybe you could expand a little bit on the last comment regarding accelerating of EPS. I guess, one, would that exclude the benefits of tax? And when I look back on 2017, you made $7.74, yet there was almost $0.50 of notable items. You had business exits like mortgage, parts of wealth. So can you maybe discuss for us, give us a little bit more color on the components of the accelerating EPS? And I have one follow-up.

Ryan, this is Scott, I'm going to start and talk about kind of some of the items that were in 2017. If you think about it, there's -- in this business, we always have a few things that come and go. We make decisions about tradeoffs along the way. So we feel like $7.74 is a good benchmark to start our guidance for 2018. Beyond that, I would just say that we call those items out as notable because I think they're important for you to understand, kind of the trends, but as I mentioned, I think there's tradeoffs that we make along the way when we look at those kinds of things. Rich?

So Ryan, as you know, we typically do not gave EPS guidance, and we're not giving a specific 2018 EPS forecast. In the prior quarter, we told you that we expected solid EPS growth, and then tax reform passed, which is clearly a good guy for EPS growth. Although we expect the benefit to make its way into the marketplace over time, the timing of how that plays out is hard to predict. So all said, we expect that our current trajectory, coupled with the new tax law, will enable us to accelerate 2018 EPS growth, net of adjustments, and assuming no substantial adverse change in the broader economic or credit cycles.

Got it. Maybe I could -- on a different point. So when I think about some of the comments that you made on credit, we have Growth Math fading. Last quarter, there was mention of back book normalization. You have Cabela's, plus the impact of tax reform should be positive. So we heard from another issuer that some of their recent vintages have been getting better. So while I understand that you don't want to give credit guidance or EPS guidance, could you maybe just talk about how you're thinking in terms of credit going forward? And then -- and I guess, a small piece for Scott, you talked about a small piece in Growth Math and seasonal growth, how should we think about reserves going forward?

So yes, we've said that in 2018 Growth Math still has a small upward tail, and then eventually it becomes actually a good guy in the long run. The earlier vintages of our front book, vintage 2014 and 2015, have stabilized, and eventually they'll start coming down gradually. And that would be our expectation. Now of course, losses on the newer vintages of our front book, 2016 and after, which are earlier in their seasoning process, are still increasing. So when we take the blend of all of that, the risk of the overall front book is still increasing modestly in 2018. But we are getting pretty close to the point when maturation on earlier vintages of growth fully offsets the impact of newer growth. And this is all again kind of what we call Growth Math.

Ryan, just to come to your last question on reserves. From here going forward, I think that the biggest drivers of what's going to impact the allowance, as Rich said, really are the things that are going to be impacting our overall loss rate, which are broader industry events and trends, economic factors and the growth that we have during each period.

Our next question comes from Sanjay Sakhrani with KBW.

Maybe to approach Ryan's questions a little bit differently. When we think about expenses in 2018, I think, Rich, you talked about the efficiency ratio, and Scott, at 51%, and the fact that marketing might go higher. Could you talk about how that efficiency ratio might trend through 2018 as you're reinvesting a little bit of the upside from tax?

Well, our -- my primary comment about tax -- the tax effect was how we think over time, and I've seen it -- I think there are some parallels that I've seen in the past of how these things have a way of making their way into the marketplace. So again, that one we'll have to see over time. With respect to the efficiency ratio, we've been working so hard on this, and it's kind of a blend of what I might call old school and new school progress. Old school being the classic really work hard and drive every penny of savings, and new school, of course, really is leveraging the benefits of the extraordinary technology transformation that is literally going to change everything about how the industry works. It's certainly going to change everything about how Capital One works, it's going to change how the business works, how the customer interaction model works, and it will affect how we work and the nature of our underlying operating model. Now that takes many, many years. That's a continuous evolving process. But we've seen 300 basis points over the last couple of years of benefit. And that's a blend of the old school and new school kind of thing. We don't have any -- we are not making any specific guidance about 2018. And frankly, efficiency ratio can vary in any given year. But I think, over the long run, we continue to believe that we can achieve gradual efficiency improvements driven by growth and the many types of productivity gains that come from technology transformation.

Okay. And maybe on credit quality, just specifically, when we think about where the opportunities might arise going forward, I mean, is there a greater opportunity to go a little bit more downmarket as a result of some of the tax benefits in terms of profitability? I mean can that impact credit quality as we look ahead? And then just to clarify on Taxi Medallion, I mean, should we expect that, that portfolio will be sold and there wouldn't be any major impacts going forward?

Yes, why don't I start with the Taxi Medallion. So as I mentioned in my prepared remarks, we put the majority of that book in held-for-sale. That means that I've got an expectation that we're going to be able to sell that within a reasonable period of time. We marked it at a price that we thought was a reasonable estimate of where that would clear the market. So while -- we'll have to see where that settles out. We feel pretty good that we've put that risk principally behind us and that we won't be talking about that any further. But again, that's a portfolio that, at this point, is going to be carried at the lower cost for market. And so if we did see any adjustments, we would make those along the way.

With respect to the tax reform, the impact on the U.S. consumer and maybe specifically the subprime consumer, I'll give you just a few thoughts on that. I think it's hard to predict how this will play out. It's likely there will be positive effects, both to the consumer and to the broader economy. While there is some direct benefits to the consumer, I think with respect to this particular tax reform, the primary benefits of this are indirect, and they're going to play out over time. And in many ways, it's a little bit the flip side of the same coin of what I was saying with respect to what happens to the tax windfall relative to companies. And I believe firmly that it just, over time, makes its way into the marketplace in terms of more competition, lower pricing, higher wages, more investment. And these things do have an impact on consumers. Now with respect to the subprime consumer, it's possible that this might have a stronger impact. More subprime borrowers struggle with day-to-day expenses and modest increases in wages and take-home pay will likely have somewhat differential impact. But I think we shouldn't exaggerate this impact because many subprime borrowers are doing well in the current economy with relatively solid incomes. So we are not baking any impacts into our outlook for subprime credit, although we're certainly hopeful that tax reform will have a benefit. I do want to put a cautionary note relative to the credit opportunity. And that is, because my primary point about tax reform and trying to predict how it plays out is one of predicting competitive effects and the way things move into the marketplace. As you know, I think the biggest driver -- I mean, other than very big changes in the economy, the biggest driver of our appetite to grow credit, and particularly in this segment, is really driven by the supply and demand that we see in the credit marketplace. And if we look back to the -- I think there's an interesting lesson I myself want to go off -- go back and dust it off a little bit from the '05 bankruptcy reform. The 2005 bankruptcy reform created a -- somewhat of a windfall in the marketplace. And what -- in that period of time now, of course, there were a lot of factors going on. We saw that windfall make its way into the marketplace in the form of more marketing, more aggressive pricing and, frankly, in that particular case also, and then there are other things going on, more aggressive underwriting. And so at the end of the day, the competitive intensity became problematic. So I think -- so we're going to have to see how this thing plays out, but we are not putting into our credit forecast, or really our business growth forecast, the direct impact of this because we're going to watch as it plays out. But if I pull up, I'm hopeful that we can find some more growth opportunities in the near term as -- by, overall, how the marketplace appears to us, and one factor would be this one.

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

Rich, if you look at the December domestic card delinquencies on a year-over-year basis, it actually improved a little bit again in December. Can you talk a little bit about how you see that trending? And then I think in the past, on the charge-off rate in card, you sort of have called it out when you expect it move, so is no news, good news, meaning that maybe you could kind of hang out around this sort of 5% -- low 5% range?

So Don, I think our Domestic Card charge-off rate increased on a month-over-month basis by 21 basis points between November and December. That's kind of in line with what we would expect from normal seasonality. Now when things come in just consistent with seasonality, that's a good thing because there's also other effects, Growth Math and things going on. So we certainly saw that as a good month. On a year-over-year basis, the increase in our December losses was a few basis points more than December -- I mean, more than November, excuse me. But the underlying trend of moderating year-over-year increases is clear. So it's another month of performance that's consistent with our own expectations of how Growth Math works. But with every month that plays out, we like the confirmation of that, and so we view it as a good thing. But again, notice our guidance about a small tail of Growth Math, et cetera, our commentary on this is really unchanged from the last quarter and, frankly, several quarters. But it's -- this is certainly playing out consistent with how we would have expected.

Got it. We were sort of looking ex Cabela's on the delinquencies. But quickly, on the auto delinquencies. It looks like they were up a good bit year-over-year. Was there some type of one-time adjustment?

On the auto nonperforming loan side, there was an impact of we made an accounting adjustment to include some of the repossessed asset as loans, we moved those out of Other, that's impacting that. I don't think that -- I can't recall anything otherwise that would impact DQs particularly in the quarter.

I think our own view of the data we see over -- the monthly data we've seen this quarter is consistent with our view that we've been talking about that I think the auto business is really performing quite well from -- and probably the industry right at this moment performing quite well from a credit point of view. We worry about the things that -- the risks that are out there like used car prices in particular and possibly a increase in competitive activity. But for right now, my observation is the auto marketplace is in a pretty good place competitively. The competitive intensity steps up a bit in the fourth quarter, which is why our origination volume was down off the kind of unusually high levels of a year ago where the competition had backed off quite a bit. But I think we are still seeing generally performance that's consistent with the middle of the cycle and something that confirms our own confidence and happiness about our own choices and our performance.

And we'll take our next question from Betsy Graseck with Morgan Stanley.

Two questions. One, just on the Growth Math. How much Growth Math do you think was in this quarter versus in the prior quarter? I'm just trying to understand if we saw some deceleration already that you're looking for.

We are seeing deceleration, but my point is not so much a -- well, I mean, yes we've seen it in the second half, we saw the deceleration in the third quarter. I'm speaking of our Growth Math itself. And that's the impact on the year-over-year loss rate driven by our front book. So we saw deceleration in the third quarter and again in the fourth quarter. So I mean, every quarter is a small effect, but it's all part of the natural phenomenon here, and I think that's why we expect a small tail in 2018.

Okay. And then just a follow-up on the use of the tax benefit. You're in a position where you could have a pretty important impact on your earnings if you ratchet up the marketing. And I get your point that in prior periods when you had one-time changes, there was a lot of heavy competition that might not have had a long tail benefit to it, but we're in a different spot now with a pretty permanent decline in the tax rate. So I'm just wondering if you think that we're in a -- given that more permanent tax rate change, does it make sense to wait and see what others do or to take a leader position in trying to get that incremental customer in the door with a stepped-up marketing program? Why wait to see what the competitors do?

Well, Betsy, I think that we have a hypothesis about how this thing plays out over time. I think we already carried into -- on Capital One, we carry an investment agenda that we believe very much in and that we will continue to invest in. I think we feel pretty good about the growth opportunities that are there. We're going to take advantage of them. But I think we're going to continue doing the kind of things that we have been doing. And my primary point -- my kind of 2 points about the tax law is, one, we're reluctant to give guidance to investors about how much this is going to drop to the bottom line because I think it will have a way over time to make its way into the marketplace and, of course, we're going to need to respond to that. And my other point is that it will -- I think there will be impacts that it has on the consumer, and I think, in the near term particularly, some of those may be good. But I think what we already feel pretty good about our growth opportunities, marketing is going to be a little over up last year, and we're going to just watch very carefully how this plays out. I'm struck by others who say -- who are so confident about what percent of the tax impact is going to fall to the bottom line because I don't feel that we have that particular ability to predict this because I think it's a marketplace thing.

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

I just like to talk about that Domestic Card business for a second. The growth ex Cabela's has slowed down to low single digits. It's obviously a competitive market, but you're still out there with a pretty aggressive marketing on both Quicksilver and Venture products. Is that something that you expect to rebound in '18? Or is this the new normal?

Well, the -- I think you've seen our purchase volume metrics there, and the purchase volume growth continues to be pretty strong. The slower growth of Capital One outstandings is probably partly a comment on the marketplace a little bit but -- the direct impacts of the marketplace, but I think it's more so a comment about the choices that we have made. So I want to -- if we kind of think back to the last -- well, really, back to 2014, in sort of early to mid-'14, we said that we anticipate an outsized growth benefit and told the marketplace we expected to grow significantly. And in the second half of '14, all through '15 and into '16, we grew pretty much at the top of the league tables. Around that time, we started flagging that we are concerned about certain supply -- competitive supply issues out there, we're very carefully monitoring what's going on in our own metrics and we started to dial back a bit. Not a huge dial back, but dial back progressively around the edges in 2016. In early 2017, you remember when we said that we saw in our own data and in industry data a gapping out of vintage curves a bit in the second quarter 2016 vintage. And we said it's striking that it happened, but it's not surprising because this is sort of the natural effect. So over this period of time, we have been -- as the marketplace has been increasing in supply, we have dialed back and want to be sure that we can get confirmation about exactly where that read is with respect to the consumer and the impact of competition. Over the course of this year, competitive intensity has settled out a little bit. Supply, the growth of revolving credit, the -- it has slowed down. It's still above GDP growth, of course, but I think there are a number of signs that things are settling out a little bit, and that's a good sign. What we worry about is whether things rapidly go toward a bad place competitively, and I don't think that is happening. So hopefully, there will be a little bit more growth opportunity next year than there was this year, but I think mostly, the numbers on the outstanding side that you see from Capital One are really a reflection of choices on our part and the actuals -- the marketing that we're doing and the products that we are selling, we feel very good about and I think are generating nice results.

Great. And then my follow-up, I'll ask about deposits. The consumer deposit costs ticked up a little bit this quarter. You also saw some decent growth in the consumer deposits. I get the question all the time about your online deposits business and how robust that business is and how sensible it is to rising rates. My sense is it's doing pretty well, it's just hard to see with your current disclosures. Can you just talk about the deposit pricing environment and what you see going forward, maybe a little bit of focus on online versus off-line?

Yes, I think if you want to understand Capital One on the deposit side, I think there -- the first thing I would say is just study direct banking and study local banking because we're a blend of the 2. And we -- our deposit pricing will reflect that blend over time. And for example, at the end of last year, we made some pricing moves and a little bit at the beginning of this year that will make their way into our numbers as we make sure, on the direct side of the business, that we stay in a reasonably competitive place. The other thing to understand about Capital One, as you think about our deposit business, is that we, over time, are working to build a national business. We, over time, have brought in -- we have grown a lot -- our outstandings have grown a lot both from organic growth but also from acquisitions like the GE Healthcare acquisition, the Cabela's acquisition. So if you look at the deposit-to-loan ratio, it's on the low end of sort of our norms. And over time, we would expect that to grow because our assets have grown, they will be growing, and we're building a national banking capability. The reason I mention that is that pretty much any bank who is looking to grow its deposits quite a bit will end up paying up more for deposits than a bank who's at the high end of the deposit-to-loan ratio. So it's really not just an issue of what somebody's beta is, it's really kind of the -- it's kind of -- it's the double strategic question of what the beta of a business is and what is the growth appetite and needs of that particular business.

And we'll take our next question from Rick Shane with JPMorgan.

Scott, one of the things that's jumped out to me is that the tax rate that you're suggesting for 2018 is substantially lower than many of the other companies we've spoken with. I assume that this is a reflection of differences between GAAP and tax accounting. And I'm specifically wondering if this is another signal that charge-offs, which drive tax, are going to potentially exceed provision which drives GAAP?

Rick, I think actually the answer is a bit simpler than that. If you think about Capital One, virtually, the lion's share of our income is from U.S. sources. And so taking down the domestic tax rate from 35% to 21% was a huge tailwind for us because that impacts the lion's share of our income. And then on top of that, if you think about it, we do have some tax-advantaged assets that we own that generate some credits, and that's what takes the fully loaded rate, inclusive of kind of the state costs down to the 19% level. I don't think there's more to it than that simple explanation.

Got it. It's interesting because, historically, your tax rate has been a little bit lower, but this is substantially lower. Just one quick follow-up question. The $1.62 adjusted number, did that include or exclude the discontinued operations?

The $1.62 excludes discontinued operations. And you can see we've got a slide there in the appendix that gives you the specifics of what we adjust out.

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

Rich, if we see that year-over-year change in delinquencies that you talked about earlier actually turn negative, which doesn't seem that far-fetched given that we were at 70 basis points year-over-year change back in February down to kind of like around 6 now. And I wonder if you could maybe help us think about whether that could actually provide a basis for releasing reserves, all else equal?

So one thing I want to say, as you look at the year-over-year change in delinquencies, of course, think about the Cabela's impact that will be in the new numbers and not in the year-ago's numbers, so all the way up until the fall basically, the fall of next year, there will sort of be that effect. So we'll have to keep that one in mind. So the year-over-year change, well, in delinquencies or charge-offs or any of these, are going to be driven really by a combination of Growth Math and industry factors. The good news is the Growth Math is reaching the latter stages of being a bad guy, if you will. Long run, we think it can be a gradual good guy. But of course, we have the industry effects that I don't want to -- I want to make sure we shine a little bit of light on that. We've talked about in the last couple of quarters' earnings calls about back books. If you look at -- if you want to get probably the purest look at sort of industry effects, just go to the securitization trust, and just look at everybody's back books. And what you will see is, for many years, the back book -- everybody's back books were a good guy relative -- they were improving year-over-year. And what's striking, if you graph the year-over-year change in people's back book delinquencies and also charge-offs, you just see this packed kind of set of lines that goes from the negative below the horizontal axis, which is a good thing, and it just moves over time to the horizontal axis, and even in the last year has been above that, which is a nerdy way to say it's gone from being a good guy to a little bit of a bad guy. So there are industry effects. It's very natural that at this stage of the cycle, there would be industry effects. And the other thing for each issuer then is, on top of whatever happens with each of our back books, is to think about what's happening to everybody's front books. Capital One is, I think, a little benefited by the fact that we're farther along in that particular journey than some of the other players. But it is through the -- everybody's front book that most of the industry normalization happens because it is the credit-hungry people that get the new accounts, and then that tends to be right there at the frontier of how normalization happens. So we believe there is an industry effect that is happening. We expect it will continue. And we'll have to -- and how that thing plays out relative to the Growth Math going from a -- over time, for us, from a bad guy to a neutral guy to a good guy, that's going to, in the end, drive our overall credit numbers.

Thanks, Rich. And if I could just follow up, I -- it seems like that all of the discussion around the things we're talking about with delinquencies bode well for revenue suppression. Can you talk a little bit about how we should think about the trajectory, I guess, on revenue margin? Just I think there's a lot of focus on slowing growth and the impact that that's having on the top line, but I wonder just if there are some offsetting benefits that we should also be thinking about kind of along those lines. Any thoughts would be helpful.

Yes, Bill, this is Scott. So certainly suppression has been driven by the same set of factors that have been impacting the credit metrics and the allowance. So as those start to moderate, I think that we would certainly expect that suppression will also be driven by broader industry factors and the things that are impacting our overall loss rate.

And we'll take our next question from Ashish Sabadra with Deutsche Bank.

My question was about when I look at the portfolio, the subprime portfolio has continued to come down from 37% earlier in the year to 34% to end the year in the fourth quarter. Should we -- given the underwriting refinements that you've done, should we continue to see that trend continue going forward? And then just as we think about when the growth is coming from higher credit scores, does that change the shift between transactors and revolvers? And any implications of those on the loan yield?

Yes, Ashish, I think that -- I don't think there's any big news with respect to what's happening to the subprime mix of Capital One. I mean, gosh, how many years has it been that we've been generally around 1/3. That number did rise -- during the growth surge of 2014 through '16, that number rose. And I think it's headed back to a little bit more normal level. So on -- inside Capital One and the conversations we're having, we don't see a big mix conversation happening. In every segment and subsegment, we look at the market and see what it has to give us. And there was a little bit more a few years ago, and I think now it's probably more just a kind of normal mix. With respect to transactor versus revolver, that is not much about subprime mix, that is really most driven by the growth in heavy spenders and the success of our efforts to drive purchase volume. And when you look at that growth rate, and for many years now, it's been outstripping the growth rate of outstandings, it's a manifestation that the transactor component, depending how you define it, that -- the mix of transactor and basically spender inside our portfolio is growing over time.

That's so helpful. And then just regarding the window of opportunity, and you've -- my understanding is you've started sounding cautious in looking at the competitive environment there. But what are the metrics that you're watching for in particular? Is there anything -- like you called out a couple of them, so given that competitors have been burned in the second half of '16 with aggressive promotions, do you think the large issuers will be a lot more cautious this time around? Or will they take the benefit of the windfall? So just any more color on that front.

Yes. Well, the -- and I tend to simplistically look at the marketplace as the revolver marketplace and the spender marketplace. And they are 2 different marketplaces. Certainly, the most intense one competitively is the spender marketplace. And we have just seen the sort of steady ratcheting up of rewards and other forms of giveaways, very striking what has happened over the last few years with respect to upfront bonuses, and also by the way, the -- some of the co-brand products and the little bit of an arms race there with respect to some of their offerings, all of this has happened on a pretty gradually intensifying basis over the last several years. To your point though, I think it has moderated a bit. Certainly, the early spender bonus has moderated a little bit. I sense a bit of -- I mean, this is with a small b, but a bit of settling out with respect to the spender competitive marketplace, but it's settling out at a very intense level. And I think that -- I would guess, from my years of experience in this thing, only the players that have really built a branded franchise-based position in this marketplace are going to be able to continue to grow profitably, and we are one of those, and we continue to like our chances, but we certainly watch very carefully that marketplace. And one thing that we are focused on is, because the value of this franchise is primarily driven by how long your customers stay with you, it is nothing but expensive to get them, and they tend to, over the long term, be an amazing franchise of low attrition and tremendous credit performance and heavy spending and all that nice stuff. But -- so we tend to be on the low side with respect to going after all the promotional near term kind of stuff. It's a little -- makes it a harder way to make a living, but I think that we like the long-term performance with that philosophy. In the revolver marketplace what -- certainly, the best news in the revolver marketplace has been the stability of pricing over many years. APRs have been stable and actually increasing a little bit over time. And if you -- while it's hard to exactly get a really good metric on the industry's APR in this marketplace, I would say I think it has increased a little bit more than interest rates have. So relative to say the middle of the OOs when things were going crazy, I think that's a good sign relative to the marketplace. To your question, what we worry most about is just the amount of supply and how aggressive people are in expanding credit boxes and going out there. And while I think pricing has been stable, there was some aggressiveness in that revolver marketplace that we were uncomfortable with in 2016 in particular and somewhat in '17, I think people have dialed back a little bit, I think things have settled out a little bit, and that might be a good sign. So all in all, this -- I've said this for many years, relative to a lot of markets I've seen, I think the credit card market is intensely competitive but really pretty darn rational. And I think it's -- there's an opportunity to grow successfully, profitably and resiliently, and we believe that we see that opportunity in front of us.

And our next question comes from Chris Donat with Sandler O'Neill.

I wanted to revisit from a little different angle the question of deposit pricing. And Rich, I'm wondering if, with some of the investments you've made in technology over the last few years, if you're in more of a place with deposit pricing where you were decades ago with the other side of the balance sheet on loan pricing and being better able to target or at least market on a more direct basis, that's competitive advantage that other traditional brick-and-mortar banks don't have. Anyway, I'm just wondering where you think you stand kind of competitively on the technology related to deposit pricing?

So I don't -- I wouldn't say that I think the big advantage that we hope to obtain is the technology for really micro targeting deposit pricing, although that's certainly -- there's a lot of investment in that across the industry. I think the technology that I am bullish about being very helpful to us is actually the consumer-facing technology of online banking and the -- being able to have a great online experience combined with -- and built on the shoulders of an infrastructure that we've spent years investing in to modernize and integrate the -- from our direct bank and our local bank to modernize and integrate and, in a sense, rebuild the full technology stack, to able -- to be able to really credibly offer online banking, backed by a thin physical distribution, and be able to compete against some of the really great established players. So my bullishness is really more about that technology than necessarily a real advantage in terms of micro pricing at the margin.

Okay. And then just one question on your expectations for used vehicle pricing. You said you're looking for them to be down, and that seems appropriately cautious and conservative. But do you think the -- or were these expectations set before factoring in the Tax Act? Or does that not really factor into how you expect used vehicle prices to play out this year?

We have not yet rolled any particular assumptions about a tax impact making its way into the used car pricing. I think if you just look historically at used car pricing, there's not a lot of science and amazing analysis behind, honestly, if you just eyeball used car pricing, it just has been -- it sat for a long, long time at very high levels. While cars, I think, are lasting longer and so on, I think this thing had only one way to go, and it has gone down. Interestingly, Manheim does not reflect this, but our own -- well, we have a Capital One Index, our own index, which has a little bit more of an -- a mix of used cars than some -- I mean, in older cars, that certainly has gone done. It's been locally -- it's been lately stable and even probably rising a bit over the last few months. But I think that the -- the way I look at this, from an underwriting point of view, it doesn't matter how high -- where used car prices are, what really matters is where they end up relative to where they were when people underwrote them. And so when an industry is sitting near all-time highs, while Capital One puts in our own underwriting quite a significant decline in used car pricing, my intuition is the industry just gets too comfortable with the recent history of high used car prices. And so again, it's not about where you are, whether they're high or low, it's just whether -- where they are on underwriting versus going forward, and I think there's a way higher chance that they're going down from here than that they're going up, and that's concerning from an underwriting point of view.

And we'll take our next question from Moshe Orenbuch with Crédit Suisse.

Rich, you had mentioned the prospects of strong growth opportunities, and it's been referenced a couple of times on the call that you had some fairly significant deceleration in the credit card and a little bit of deceleration in auto. Maybe -- and the fact that you think that competitors could get a little more aggressive following -- seeing those big tax benefits. So maybe if you could just tell us where you think that growth -- where we should be expecting that growth to come from.

Yes, so -- first of all, I mean your list is a compelling list of things, too, to be concerned about. And I don't want -- when I say that I'm hopeful for some enhanced growth opportunity, this is off the base of where we came in with a -- not counting Cabela's, a 2% year-over-year growth in the card business. So it's a bit of a low bar of competition when we're talking about up or down from here. But not being flippant about that, what I would -- on the positive side -- let me start with the negative side. So the negative side is the potential impact of competitors getting more aggressive from this windfall and the -- empirically, some of the things that we've seen competitively, particularly last year, and also the fairly high levels of growth of credit, of indebtedness, of revolving credit, for example. On the positive side is, over the last number of quarters, a little bit of a reduction in supply. You can feel people trimming in their underwriting a little bit. The -- we also have the benefit of more and more months of watching vintage curves settle out. And you just -- no matter how many years I've been in this business, it -- you can believe these things go up and settle out, and some day they go down. But it's comforting to see them move in the way that we would expect. And so as we get more of our own experience watching these curves settle out and then retro analyzing on every micro segment and so on, it tends to lend itself to a little bit more of a growth opportunity. But we'll have to see how this plays out. This is not a -- I'm not sitting here saying I really think there's a big dramatic growth play here. I just feel pretty good about the opportunity in card. I think if I could comment on auto, the experience over the last number of years has been, in a business that's intensely -- it's got amplified. The impacts of competition get amplified in auto because there is an auction -- there's an auctioneer sitting in the middle of our lending. And so the -- we have seen the value of some competitors backing off in the auto business. You've seen such significant growth from Capital One. Lately, it's a little bit more competitive than before. I think if I pull way up and calibrate relative to all times in the cycle, I think the growth opportunity is still pretty good in the auto business, and the overall -- the industry dynamics for an industry that is so hypersensitive to supply, I think, are pretty good. Moshe, on the commercial side, we really haven't talked much about that. I think, probably for all players, certainly, Capital One at the latter part of the year, growth was kind of slow. I think overall though, in the commercial space, the -- I think that there's a lot of supply out there. I think investors have been pushed out on the risk curve a little bit to seek returns, and I think that -- and the impact of nonbanks in the lending space is becoming more significant. So I think our view is pretty moderate there, but we'll have to see.

Just maybe a quick follow-up on capital. Your capital levels right now are kind of just actually just above where they were at the beginning of the CCAR cycle last year. And so how do we think about -- when you said significant capital distributions, I mean should we think about comparable amounts to what had been in the plan for '17 as we go further? I mean recognizing you'll have -- you should have more -- higher levels of earnings in '18.

Moshe, when you think about capital distribution, I mentioned that we want to see our CET1 kind of drift back to what we think a destination level is as kind of in the mid-10s. And so in the near term, I think some of the positive effects of tax reform are going to help us to get there while still having room for growth and for capital distribution. And then over time, we'll see exactly how earnings play out and how much competition we see. But if there's a windfall from tax reform that is enduring, that certainly gives us more opportunity for growth than for capital distribution.

And we'll take our next question from John Pancari with Evercore.

Just another way to ask the vintage question. If I'm looking at the Domestic Card charge-offs and the current charge-off rate ex Cabela's of 5.36%, that's up from the 4.64% last quarter. And I know there's seasonality there. But can you tell us how much of that 70 basis point differential -- or 70 basis point change was from the front book Growth Math versus back book deterioration?

John, there were -- there was -- I'm not really going to precisely break those 2 things out, but they were both factors in that. And the -- over the -- in 2017, the back book effect grew and the front book effect, over progressive quarters, declined consistent with Growth Math. But both factors were meaningful in the year-over-year delta. But the bigger of the 2 was the Growth Math.

Okay. All right, that's helpful. And then lastly, the -- on the auto origination side. I heard what you said about that it still represents an opportunity for you, the growth in the auto business but also flagging that it's still somewhat competitive. As we look at originations, I know they are down 5% year-over-year, what's a -- how should we think about overall originations as you look at '18? Is it fair to assume that we're up low single digits?

Gosh, we are the company that has no -- sets no growth targets for any of our businesses because we believe so strongly that in a risk management business and a business in which underwriting isn't just an actuarial science, it's very driven by adverse selection and the nature of supply and demand at the margin. We make predictions internally as we budget. But -- and if you just look at our prior behavior -- in fact, I'll take you back to the -- I think it was the last quarter of 2015 when we cautioned -- we came in with a really big drop in originations and said that what we had been generally cautioning about really was kind of quite a bit -- a big deal competitively with respect to some bad practices and the nature of supply. So we had much lower volumes there. By the time we had fully gotten our investors to internalize our concerns, we posted a very -- it's almost like record originations and origination growth in the following couple of quarters. So I think that what I was -- so what we do is we describe the conditions that we see in that marketplace. But as a company that doesn't set growth targets, we work incredibly hard to create growth opportunities but, at the end of the day, we take what the market will give us. And as I said before, the auto business relative to something like the card business is amplified in the impact of competitive effects. And therefore, we seize the opportunity for as long as we can, we generally like this part of the auto marketplace where it is. But it is noteworthy that in the fourth quarter, we posted a lower origination than we have for some time now. And I think that's just because the competitive thing is, in fact, stepping up a little bit.

And our last question for the evening comes from Ken Bruce with Bank of America.

My question relates to the -- I guess, the guidance that the earnings growth will accelerate in 2018 and off the $7.74 benchmark. I mean, most of us, I think, had expected that to occur anyway just with the cold spring beginning to release some of the earnings growth potential. The tax rate going from high 20%s to 19% should really put that on steroids. I'm trying to kind of figure out if you're just being extremely cautious around what -- or conservative around kind of what that acceleration can be. Or if you're seeing anything that, as you think about the competitive intensity and the potential for this to be competed away, that it's coming sooner than later. I mean I think that, that would take place over some period of time. Most of your bank peers are trying to rebuild capital after the DTA write-downs and the like. So if you could just maybe kind of give us some thoughts as to kind of where you're most concerned about repricing credit cards and auto loans lower or other kind of really aggressive marketing activity that could significantly undermine your earnings growth potential because it seems to me it's going to be really good.

So well, I mean, as we -- so first of all, how we feel about our business and its prospects is very similar to where we were the day before. And in fact, last quarter, when we were talking to you and so what happened this quarter, well, along came the tax reform bill. So our -- we -- so first of all, we're the same company with the same kind of feeling about our prospects that we had prior to the tax effect. And our point is, in the near term, the tax thing has to be -- I mean it's hard to imagine that it couldn't be an important good guy relative to financial performance for ourselves and, really, everyone else. And all we are saying is that we're very reluctant to get in the prediction business and, in fact, not only reluctant to get in the prediction business, but my own experience from just doing this business for over 2 decades now is I have seen windfalls and shortfalls that hit the industry, over the next couple of years, they have a striking way to make their place -- their way into the marketplace. So examples, I mentioned the example of the bankruptcy reform in 2005, there was the Tax Act of 1986. Now I wasn't born yet so that was -- I'm more reading a history book there. But from our little kind of retro study of that, not as experts, but -- that there was a lot of sort of -- making its way into the marketplace there. And then conversely, when -- I've been struck over the years how -- when the times get tougher and tighter and there are credit pressures and things like this, there are ways that the credit card business, in particular, has a way of offsetting that with respect to the overall metric. So for example, you know how volatile the credit card charge-offs are, and it's a little bit of a scary exercise to take any P&L of a credit card business and then just project the wild volatility that can happen with respect to losses and then you say, well, gosh, if losses were that high and you just had all the same things, that will be terrible, or if losses got incredibly good, you would be printing money at a staggering kind of level. But the offsetting effects that happen in the marketplace have been striking to me in both directions over the years. So I look at this -- and to my point, it's partly -- we certainly don't want to be in the guidance business about that number, but you all can draw your own conclusions. And we're not -- by the way, I want to make it clear, we're not going to try to be one that sets an arms race off at all with respect to this. This is more of a -- just a prediction that things have a way of going into the marketplace. And that my caution to investors would be I wouldn't book this stuff before it totally happens. The biggest question is not whether, it is when and the timing. And to your point, there's a good case to be made that this is a gradual thing, it's not an immediate thing. And therefore, particularly, in 2018, this, I think, stands to be quite a good guy.

And just lastly and hopefully quickly, the -- in terms of the increased competitiveness in auto, are you seeing that in terms of expanding of credit box again? Or are you seeing it in terms of pricing or something else?

No, I think it's a mild -- it's a little -- locally, a mild thing. Like we go running down the street, waving red flags when we see bad underwriting process -- practices. We don't really have anything new to report there. I don't think there's anything dramatic. I think what is happening is, we've had an usually benign, if you will, period of competition in the 2016 and '17 period that I think we will look back at that and say, it normalized from there. And I think that it's just a natural thing, people move into those spaces a little bit more. Some of the folks that maybe had backed off a little bit, particularly one of them is stepping it up a bit, and I think all this is natural. So I think it's much more likely this thing will normalize competitively than that it will be as good as it was for these last couple of years for us.

Thank you very much, everyone, for joining us on this conference call today, and 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.