Capital One Financial Corp (COF) 2018 Q2 法說會逐字稿

Welcome to the Capital One Second Quarter 2018 Earnings Conference Call. (Operator Instructions)

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

Thanks very much, Leanne, and welcome, everyone, to Capital One's Second Quarter 2018 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 second quarter 2018 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 are going to walk you through the 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 the Capital One website and filed with the SEC.

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

Thanks, Jeff. I'll begin tonight with Slide 3.

Capital One earned $1.9 billion or $3.71 per share in the second quarter. We had 3 adjusting items in the quarter, which are outlined on Page 13 of tonight's slide deck. We had a $400 million gain from the previously announced sale of our mortgage portfolio, which was recorded in our other category. There was a $49 million build in our U.K. Payment Protection Insurance customer refund reserve, and we had a $15 million charge for restructuring events related to our previously announced business divestitures.

Net of these adjusting items, earnings per share were $3.22. In addition to the adjusting items, we had a nonrecurring adjustment to a vendor agreement, which reduced operating expenses in our card segment by around $75 million in the quarter.

Pre-provision GAAP earnings increased 13% on a linked-quarter basis and 15% on a year-over-year basis to $3.8 billion. Provision for credit losses decreased 24% on a linked-quarter basis and 29% on a year-over-year basis, primarily driven by allowance releases in our Domestic Card and auto businesses.

Let me take a movement to explain the movements in allowance across our businesses, which are detailed in Table 8 of our earnings supplement.

Improving delinquencies and lower charge-offs resulted in a $72 million allowance release in our Domestic Card business and a $77 million release in our auto business. Also, the impact of the home loan sale and the transfer of the remaining portfolio to held for sale resulted in an allowance decrease of $54 million. We increased our commercial reserves by $41 million in the quarter as we increased our allowance coverage ratio.

Our effective tax rate in the quarter was 23.1%. Excluding discrete items and the impact of the U.K. PPI reserve build, the quarterly rate would have been 21.2%. We continue to expect our 2018 corporate annual effective tax rate to be around 20% before discrete items.

Turning to Slide 4. You can see that reported net interest margin decreased 27 basis points on a linked-quarter basis. About half this decrease is seasonality as card customers typically increase payments after tax season, which is only partially offset by having 1 more day in the quarter. The other half of the linked-quarter decrease was largely driven by 3 factors: the contra revenue portion of the U.K. PPI reserve build; a temporary increase in our cash balance due to the mortgage portfolio sale; and finally, the accelerating cost of deposits, which we believe will be a continuing headwind going forward.

Turning to Slide 5. Our common equity Tier 1 capital ratio on a Basel III standardized basis was 11.1%. We completed our full 2017 CCAR authorization purchasing $800 million or 8.4 million shares of common stock in the quarter. As previously announced, following the Federal Reserve's non-objection to our 2018 CCAR plan, our board has authorized repurchase of up to $1.2 billion of common stock through the end of the second quarter of 2019, and we expect to maintain our quarterly dividend of $0.40 per share, which is subject to board approval.

Our current view of our capital need remains at around 11% of CET1. We believe that we have sufficient earnings power to support growth and capital distribution. As I mentioned last quarter, how the capital frameworks ultimately incorporate the effects of CECL may impact our longer-term view of capital.

With that, I'll turn it over to Rich. Rich?

Thanks, Scott. I'll begin on Slide 8 with our credit card business.

We posted strong year-over-year growth in pretax income, driven by revenue growth and significant improvements in provision for credit losses. Credit card segment results and trends are largely driven by the performance of our Domestic Card business, which is shown on Slide 9.

In the second quarter, Domestic Card ending loan balances were up $7.8 billion or about 8% compared to the second quarter of last year. Average loans also grew about 8%. Second quarter purchase volume increased 17% from the prior year quarter.

Revenue for the quarter increased 3% from the prior year. Growth in average loans was partially offset by a decline in revenue margin. Revenue margin for the quarter was 15.9%, down 74 basis points from the second quarter of 2017, largely driven by the expected margin pressure from adding the Cabela's portfolio.

Non-interest expense for the quarter was down about 3% compared to the prior year quarter. Operating expense in the quarter benefited from about $75 million in nonrecurring items that Scott discussed.

Improving credit trends were a significant driver of second quarter Domestic Card results. The charge-off rate for the quarter was 4.72%, down 39 basis points year-over-year. The 30-plus delinquency rate at quarter end was 3.32%, down 31 basis points from the prior year. We are now on the good side of Growth Math.

Credit performance on the loans booked during our growth surge in 2014, 2015 and 2016 has now turned and is improving year-over-year. This improvement is a good guy for overall Domestic Card credit.

Pulling up, the competitive marketplace remains intense but generally rational. Supply of card credit is on the high side, although it continues to settle out a bit, and our growth initiatives are gaining traction. We see increasing opportunity to grow card loans.

Slide 10 summarizes second quarter results for our Consumer Banking business. In the quarter, we completed the sale of substantially all of our home loans portfolio, and we summarized selected impacts to segment results in the commentary section on Slide 10. As you can see on Slide 10, ending loans decreased about 22% compared to the prior year.

Growth in auto loans was more than offset by the home loans portfolio sale. The auto business continues to grow with ending loans up 8% year-over-year. Competitive intensity in auto is increasing, but we still see attractive opportunities to grow.

Ending deposits were up 4% versus the prior year, with a 29 basis point increase in average deposit interest rate compared to the second quarter of 2017. We expect further increases in average deposit interest rate, driven by higher market rates and increasing competition for deposits as well as changing product mix as our national banking strategy continues to gain traction.

Consumer banking revenue for the quarter increased about 1% from the second quarter of last year with growth in auto loans and deposits, offset by the home loans portfolio sale.

Noninterest expense for the quarter decreased 9% compared to the prior year quarter, driven by the exit of the mortgage business, the benefits of prior branch rationalization and our ongoing efforts to tightly manage costs.

Provision for credit losses was down in -- from the second quarter of 2017, primarily as a result of strong credit performance in our auto business. The auto charge-off rate improved compared to the prior year quarter. Recall that the second quarter charge-off rate last year was elevated by changes in how we recognize bankruptcy-related charge-offs. Adjusting for this impact, the auto charge-off rate still improved modestly year-over-year in the second quarter. And as Scott discussed, favorable credit trends drove an allowance release. Over the longer term, we continue to expect that the auto charge-off rate will increase gradually as the cycle plays out.

Moving to Slide 11. I'll discuss our commercial banking business. Second quarter ending loan balances were flat year-over-year, and average loans decreased 2%. Both trends were driven by our choice to pull back in several less attractive business segments in the second half of 2017. With many of these choices behind us, ending loan balances increased about 3% from the sequential quarter. Ending deposits were down 6% from the prior year, driven by increasing price competition.

Second quarter revenue was up 1% year-over-year as strong noninterest income in capital markets and agency offset the decline in average loans and the effect of the lower tax rate on tax equivalent yields. Noninterest expense was up 7%, primarily as the result of technology investments and other business initiatives.

Provision for credit losses was $34 million in the quarter, down 76% from the second quarter of 2017 driven by lower charge-offs. The charge-off rate for the quarter was essentially 0. The Commercial Bank criticized performing loan rate for the quarter was 3.1%. The criticized nonperforming loan rate was 0.3%.

In the second quarter, Capital One delivered year-over-year growth in loans, deposits, revenues and pre-provision earnings. We tightly managed costs even as we continued to invest to grow and drive -- and to drive our digital transformation. We saw credit improvement across our businesses, and Growth Math established itself as a good guy for overall Domestic Card credit trends. We continue to see opportunities to book attractive and resilient loans in our card, auto and commercial banking businesses and to grow deposits in our consumer banking business. We continue to expect marketing in 2018 will be higher than 2017, with essentially all of the increase coming in the second half of the year. And we continue to work hard to drive operating efficiency as we transform our technology infrastructure and change the way we work.

After 2 years of significant improvement, we expect 2018 operating efficiency ratio, net of adjustments, will be roughly flat compared to 2017. While efficiency ratio can vary in any given year, 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 long-term improvements in efficiency ratio will mostly come from improving operating efficiency ratio.

Pulling up, we continue 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. Our digital and technology transformation is accelerating and we're strengthening our position to succeed in a rapidly changing marketplace and create long-term shareholder value.

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

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

(Operator Instructions) And we'll take our first question from Ken Bruce with Bank of America Merrill Lynch.

My question really relates to kind of the growth that you see in the U.S. credit card business. You'd kind of suggested that you're seeing opportunities to grow again. I'm wondering if that's, in a sense, in the primary and the sub-primary? If you could you give any sense as to what that product mix will look like going forward? Obviously, you had a shift in the quarter.

Right. Ken, first of all, let me just comment on the mix shift in the quarter. So our asset mix, the percent subprime is 32%, down 4 percentage points year-over-year. And that's basically close to our historical portfolio mix of about 1/3, plus or minus. An important part of that reduction is the addition of the Cabela's portfolio, which is kind of a heavily prime-oriented portfolio. Also, our credit lines have been a little bit lower the last couple of years. So -- but the main thing is our strategy remains the same. And so -- and that's also my -- as I turn now to your question about where is the growth opportunity, we see the growth opportunity across the spectrum of where we play. So I don't think there's any important strategic change here. We just -- I think -- as you know, we always talk about the marketplace, and we try to give a calibration of where we see opportunity. And we see the growth picture looking a little bit more positive. Now this is partly in the context that Capital One's growth has been pretty modest over the last year. And even over the last quarter or 2, we've said as we look out, actually, we see a more positive picture, and I would again say that. So we like what we see in the performance of recent vintages. We see promise in our innovation pipeline, and we've already said we expect marketing levels to be higher. So I think we see an enhanced growth opportunity over time.

And just -- there's been some speculation about Capital One's involvement with the Walmart private-label card and the co-brand. Can you -- and I understand you're not going to comment specifically on any particular transaction, but can you lay out for us what would be one of the -- what would it be a classic retail partnership for Capital One? What makes it work specifically for Capital One?

So as you know, the card partnership business, Ken, is an auction-based business. So in that way that we believe -- and we've been -- we'd said for a long time, we're not out to go just be the very biggest. Of course, we love to get growth opportunities when they emerge, but it's certainly all about fit and discipline frankly in the context of the auction process. So to your question, what do we look for? We look for a strong partner fit in a world where a lot of companies out there, certainly a lot of retailers and overall companies in America are struggling in the context of the rapidly changing environment. We look for a strong partner with strong brands and a cultural alignment and a commitment to the card program as an avenue for growth. We look for a partner that's motivated for the right reasons. If you look at the spectrum of card partnerships out there and essentially the partners behind those card partnerships, on one end of a continuum are the partners who view the card program as a central element for building a franchise and deepening customer relationships. The other end of a continuum is partners who sort of view the card program as a profit center. And we have consistently kind of tried to focus on the former side of the spectrum because not only is that where we think the better opportunity lies, also the value that we have to add, what we can bring to the table in the context of a lot of our digital capabilities and underwriting and marketing would be consistent with those players who really are looking to card partnerships as a means to grow and really build a franchise. And however important card partnerships were in the past, I think we should all understand they are more important in the emerging digital world just because of the centrality of how payments play in the digital e-commerce environment relative to in the physical environment. The final thing that we look for is an economic deal that's attractive and -- especially in light of the good growth opportunities that we see. So that's what we've been saying for years about the partnership opportunity. I think the key thing is that we have felt and expressed so many times is it really needs to be a story of selectivity and discipline, and that's a window into how we view those things, Ken.

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

I saw that you put the impact of what the home loan business did for the -- it was in the consumer bank for Q2. But can you talk a little bit about any balance sheet restructuring that you might be doing and things that might -- as you go through the second half of the year and things that could continue to kind of help improve net interest income or net interest margin as a result of that, or other actions that you could take?

Moshe, thanks for the question. With the sale -- so we sold around $16.8 billion of mortgages in the quarter. We reinvested a significant portion of that. Around $9 billion went right into our investment portfolio. And so that was to really preserve liquidity associated with that. We used the rest of that to reduce our overall funding requirements. So we've more or less already worked through all of the balance sheet dynamics of that. And if you think about what that might mean to net interest margin, on the one hand, we've gotten those home loans out of the book but we added the AFS securities. Actually, we put them into held to maturity. So we've added those into the portfolio. So we do see a little bit of a pickup overall in terms of the margin, but it's going to be pretty modest given the fact that we've reinvested a substantial portion.

Great. The follow-up is talking -- Rich, you talked a lot about kind of continued technological investments and the importance of payments. Could you talk a little bit about how -- any tools that you think you might have with respect to -- that can be brought to bear in the partnership area with respect to the technology investments that you've made in the payments?

Well, there are -- I think our -- so there are kind of 2 approaches to a partnership business. One can build a lot of custom technology associated with any particular partner or, on the other hand, one can build general capabilities that would be very compatible with partners who are really looking to build a franchise. And the way our tech transformation has -- happened by design, which is really about building foundational technology and sort of working up the technology stack to create a lot of digital capabilities and flexibility within our card business. That is a very natural thing to bring into the partnership business. So our philosophy is more create a way that we can help our partners ride on a -- our technology path as opposed to go create a new technology path one partner at a time. And that's really just about -- and what I'm struck by, I think, at the end of the day, many companies, most companies in businesses in and around what we do have a set of capabilities that they need that are on a shared path with the very kind of thing that we're building. So as we've said over the years that one of the benefits of our tech investment should be our ability to be a better partner out there.

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

Maybe I'll start with credit. So Rich, we've clearly seen Growth Math transition from a headwind to a tailwind. If I look, you've provisioned $6 billion annualized run rate year-to-date. Now if I look out to next year, consensus is you're assuming something in the 7-plus -- $7.5 billion-plus range. So I was just wondering, given that Growth Math has transitioned to, as you referred to it, a good guy, can you just talk about the puts and takes on credit? And given the backdrop, how should we think about provisioning given that losses in almost every business are now down on a year-over-year basis?

So I think the way to think about it -- at times, I kind of have joked in the past, I'd say over the last year, that we're almost ready to retire Growth Math. And then I kind of said actually that, that's kind of -- that misses an important nuance about how Growth Math works and how earnings power is created in a business with high upfront costs. And of course, the way Growth Math works is that when there's a surge of growth, losses accelerate early on and the cost of those, and then things finally settle out. And then all other things being equal, there is a very gradual, it's not dramatic, but a very gradual kind of good guy out there in terms of a gradual decline in charge-offs for -- for as long as that vintage is around, all other things being equal. And so this is why we kind of adopted the language here that credit for that growth surge of 2014 through '16 has turned to be a gradual good guy. So I think the way to think about credit -- the credit outlook for Capital One is to think of you've got the Growth Math, which has kind of turned to be a good guy, and then, of course, credit's going to be impacted by the competitive cycle and other industry effects and by the economy. And with respect to that, the card industry has enjoyed a pretty long period of benign performance, and we've seen losses kind of gradually tick up as people's growth rates have gone up, et cetera. But I think given where we are in the economic and the competitive cycle, I think it's very reasonable to expect that card industry losses probably have an upward tilt over time. And so you got the card industry effect. And then to whatever one's assumption about the card industry effect, I would just overlay the sort of good guy of Growth Math with Capital One, and that's how to think about -- that's basically how we think about our card outlook.

Got it. And if I could ask one follow up. Can you just talk strategically about what you're doing in the deposit business? I know you talked about the potential for a changing product mix. Can you expand on that and what you think it will mean for the deposits business over time?

So we have talked for -- really, for years about building a national banking strategy, and let me just comment on that for a moment and then talk just a little bit about mix. So as you know, Capital One is really quite an anomalous institution relative to institutions that are anywhere near our size in the sense that we are not really -- even though we're the size of the biggest regional banks, Capital One is national in just about everything that we do and especially our consumer businesses where scale really matters the most: information scale, brand scale, operating scale, customer scale. I think digital really increases the importance of scale in -- frankly, in a number of different ways. But -- so in banking, here we have a local bank in about 20% of the nation and a national direct bank in the other 80%. So while I think the history of banking is to -- the history of the quest of banks to build national banks is through buying other banks. We are more organically building our national bank and basically trying to go do it by not building how banking works today but in the sense try to go where banking is going within physical distribution in key metropolitan areas, and for us, a full suite of products at the forefront of digital capabilities and a brand with a digital lean to it. So I think this is a natural for Capital One because we can leverage our national customer base, our investments in technology and transformation -- and digital transformation and our national brand. So this has been a strategy that's been playing out gradually over time for Capital One. Let me now turn to the mix point that the -- we launched our -- what we call 360 -- Capital One 360 money market account a couple of years ago. And that's competitive with the large national direct banks. And we have seen solid growth in this product, and also -- and we expect to continue to lean into our national banking strategy. And so I think the mix of -- in a sense, the national bank component relative to the local banking component, I think the mix will -- you already see it happening inside Capital One. I think the mix change will continue. That's more of a Capital One point. But then along the way, of course, we also have just what's happening in general with the competitive environment with rates. So a combination of the natural thing that's going on with rates and the fact that we are organically growing a national bank. These are factors that will lead to both a gradual mix change, but what it will sum up to is an increasing cost of deposits as a very natural byproduct of the marketplace and our strategy.

And we'll take our next question from Sanjay Sakhrani with KBW.

Had a question on CCAR. And obviously, it was a lot more onerous this time around, and it's going to get onerous -- more onerous all else equal. With all these discussions of the portfolio deals out there, was anything else but capital return asked in this past submission? And I guess, Scott, as you'll be looking ahead and talking through CECL, has there been any progress made on discussions with regulators?

Yes. Sanjay, thanks for the question. So when I look at what happened in CCAR, really, the decrease in the [NADR] year-over-year in CCAR was really driven by 3 primary things. The first thing is that -- and this was an overwhelming driver, we really saw that the impact of tax reform was a significant component of the increase in losses that we had in CCAR, and that caused the decline in our NADR . And we think that, that was primarily driven by the Federal Reserve's modeling of deferred tax assets. And you know that with the Tax Act, the -- there was a loss of NOLs. And it looks like the Fed fully incorporated that into their modeling of deferred tax assets, so that was a significant component of the decrease. And then, yes, we had a more severe scenario. And as you know and as we've talked about, there were some adjustments to models that impacted us, card and some prime auto, which had an effect as well, but the biggest of those things being the effect of the change in deferred tax assets. I would also just mention that in our modeling, we did not include the -- nor did the Fed include the impact of our mortgage sale. That was done after the submission, and we were not able to incorporate that because you can only incorporate sales that have concluded in your CCAR model. So that kind of gives you a sense of the puts and takes of what happened in CCAR.

Okay. Just a follow-up question on the credit quality, Rich. Obviously, being on the good side of Growth Math, when we think about how it manifests itself to the charge-off rate going forward over like the short to intermediate term, is it fair to assume that, that small tail that you had of Growth Math is now completely out of the charge-off rate? And then as you alluded to, the mix getting -- improving towards prime and super prime, will that be an additional tailwind to the credit metrics?

Okay. With respect to the small tail of Growth Math, yes, I'm actually glad you asked that question because definitionally what the small tail of Growth Math meant was as the surge -- as the impact of the growth surge settles out and starts to turn, the small tail meant a slight up -- a modest uptick in charge-offs related to the surge in growth. That is actually now a good guy, so it's got the other sign. It's modest on the other side, but thank you for that clarification opportunity there. With respect to mix. The mix -- the subprime mix, which dropped several hundred basis points in the quarter, that was -- I really would not view that as any important change that's going to play out in the future in the sense -- I mean, the Cabela's effect is an enduring one, so that -- we should all internalize that. But as I said earlier, we -- our strategy is pretty much the same across the credit spectrum that we have had. We think the growth opportunities will be -- that we see opportunities across the spectrum, and we -- our bullishness about being able to improve growth -- albeit off a fairly low level at the moment, but the optimism that we have is really one that kind of spans the spectrum of what we do. And so I think you should look more for consistency there.

Sanjay, just to come back to your CECL question. We've submitted a response to the Fed's NPR on CECL. I know there's been a variety of industry discussions going around about how CECL might impact capital and how the capital regime might be adjusted. We'll just have to see how the Fed takes all that feedback and what they may do from here.

And our next question comes from Eric Wasserstrom with UBS.

Rich, just one question on the auto space. The -- it seemed over the past few quarters, the competitive intensity may have decreased a little bit with the exit of 1 significant new and used bank player. But recently, that player's indicated that they're coming back to the market. Are you seeing any change in competitive conditions in that lending group?

Eric, we are seeing a change, if there's -- let me just try to just kind of -- informally, just kind of across the last several years, try to calibrate this thing. Because the auto business -- I've said many times, the auto business is hypersensitive to competition even more so than the card business because there's a dealer standing in the middle of every transaction. And the dealer -- when the dealer sees a particular lender who is more aggressive or has loose rendering or whatever. There's a big movement that way and they try to drive others there as well. So this is an important question that you're asking. Years ago -- so in the wake of the Great Recession, with the retreat of a whole bunch of players, we had kind of a once-in-a-lifetime competitive situation. And then we said, "Look, it's only going to get more competitive from there." And things gradually became more competitive over the years. Still, there was significant opportunity there. Sometime around 2015 -- as I recall, '14, '15 time period, we started flagging. We were concerned about competitive practices. It was -- the competitive thing's partly a supply issue and a practices thing. But we saw supply increasing, but we saw some competitive practices, and we raised some alarm bells about that. And Scott, maybe help me with the timing here, but I think sometime near the last quarter of 2015, we actually had a pretty significant decrease in origination volume around there related to this competitive intensity and the practices. A couple of quarters after that, so I think now we're into sort of the middle of '16, we saw that some of that -- the competitive practices started. I think competitors were pulling back a little bit from that. And then we saw another player start pulling back significantly. So from -- for, let's call it a good part of '16 and pretty much all of '17, there was again this -- it's sort of in the middle of the competitive cycle or even as the competitive -- that the economic cycle's moving well along this anomaly that the card business had “less than you would expect” competition -- the auto business, excuse me. Thank you, Jeff. What we are seeing in the context of that is more competition returning a little bit more frequency with respect to practices that we're not fans of. But I -- the way I would describe it is this is returning more to the way things were a couple of years before this. We still see good growth opportunities, but it is very clear that the unusual window that we enjoyed for about 1.5 years, we should not expect that to be there. And we -- what is our expectation is things will return to a more normal competitive environment and it will move along in the cycle as things do. But we still see good growth opportunities, but we know which direction this thing is moving.

And if I may just -- one quick follow-up on NIM. Scott, do I understand that it seems that this current level of, call it, 6.7 is sort of the run rate level from here? But it seems like given the mix of asset growth and the deposit or just funding beta phenomenon that the bias continues to be to the downside? Is that a fair characterization right there?

Well, I think that you got to kind of unpack all the things running through NIM. First of all, with respect to rates, we've been talking about this for a while, but we're effectively neutral to rates. And so I wouldn't expect that if rates follow implied forwards, you shouldn't see a lot of movement for us against that type of a change. And then as I said in my talking points, about half the decline, looking back on the prior quarter, was just seasonal pattern. And you've historically seen NIM kind of drop down in Q2 and then climb back from there. And that is really associated with the timing of some tax-seasonal payments that come in, and that's offset a little bit by some day count. And then in the quarter, the other half of kind of what was going on there were really 3 factors. One was the contra revenue portion of the U.K. PPI reserve. Obviously, that's a quarter-only impact. We had the additional cash that we carried because of the sale of the mortgage. That's also a quarterly impact that wouldn't continue. And then we talked about the accelerating cost of deposits, which we do think will continue to be a headwind. So when you kind of work your way through that, there's really -- the one thing that we think is going to be a continuing headwind to NIM is going to be the cost of deposits, but we'll also see kind of puts and takes from mix on the business and what the balance sheet ultimately looks like. So that's kind of the recipe that I would describe in terms of where you should think about NIM going from here.

And we'll take our next question from Don Fandetti with Wells Fargo.

Rich, 2-part private-label question. One, have you made any executive changes in that area? And then number two, a little bit more complex. If you could talk about sort of how you weigh, let's say, doing a large private-label deal with alternatively just doing more general-purpose cards in other parts of your business? Because you look at private label, they do tend to skew lower on credit. The pricing, obviously, is pretty competitive. You have CECL, a tougher Fed on cards. And then lastly, they do tend to be very high touch, where you can -- sometimes you need to have 100 people on site at the retailer. And so there's arguably execution risk, et cetera. And so like how do you look at that? Are the returns so good? Or is it more of a longer-term scale-type thing that you'd be considering as well?

So I think in the -- so we talk often about the partnership business -- the card partnership business, and it's a very natural sibling to having a branded business. We have tended to lean harder into going out to win general-purpose programs generally than private label, just only because there is just 1 whole notch of synergy more with our own credit card business and we really like the opportunities to build customer relationships where they're -- you're -- we're doing everything we can to increase sales with the partner but also leveraging the opportunities to get out-of-store or out-of-partner sales, which, in a number of partners, can be a very significant thing as well. So general-purpose cards, I think, have some structural advantages over the private label, but it's all part of the sibling businesses that exist right next to what we do. That's why we're in both of them. And we evaluate 1 opportunity at a time.

Okay. And I didn't know if you were able to comment on any staffing changes or maybe you can't really talk about that.

Okay. We don't talk about staffing issues on calls.

And our next question comes from Rick Shane with JPMorgan.

I want to follow up on something that Scott mentioned. Scott, you talked about essentially a $75 million expense true-up related to a vendor. Obviously, I realize you can't name that vendor, but if you could give us a sense of the nature of that relationship and any implications in terms of the business going forward.

Yes, Rick, thanks for the question. You can imagine that for a company of our size, we have a number of large vendor relationships. And so during the quarter, we concluded a negotiation that resulted in some adjustments to that arrangement and we had some release of accruals. And so that's a onetime thing that came and went. And as we mentioned, that hit our card segment so you know where to put that.

Got it. I'm curious if it's perhaps related to credit reporting or scoring in particular?

Well, I'm going to have to let you continue to guess because I'm obviously not going to comment on specific vendors or areas. That's not something that I think makes sense for us.

And we'll take our next question from Bob Napoli with William Blair.

Rich, just the -- I wondered what your views were on the health of the consumer from a spending perspective. There was a slight deceleration in your spend growth and I think across the industry a slight deceleration. Are you seeing an any more conservative consumer at all? And just your views on where we are in the economic cycle would be interesting.

Yes, I think -- well, pulling way up, the economy certainly looks strong over the short term. And I think consumers are benefiting from job growth, wage increases and tax cuts. And tax cuts have both -- had some benefit on take-home pay for taxpayers, but of course, through the large corporate and business tax cuts I think will increasingly make their way through hiring and investment by companies. Now -- so all of that is just all sort of things that stimulate. I think beyond that, we've been watching most closely things like debt growth and competitive intensity, which impact consumer credit over time. And we've seen some pullback in that growth recently. Although it's still the growth of -- revolving debt is growing at 5.3%. The growth of non-mortgage debt, so that's student lending, auto lending and installment lending is down a bit. That growth is down a bit also, but it's at 4.6%. So what is clear is that the total indebtedness of consumers is growing. So I think the -- so I think as we look at it over the near term, you've got a number of planets sort of aligning in a good way. It's sort of pulling up on the economy beyond the near term. There are longer-term issues like, in addition to the consumer indebtedness, growing government deficits, trade issues and sort of the big sort of gradual demographic shifts that are going on. So we operate with a view that this benign economy, which, by the way, is heading toward record levels for how long it's been since the last recession, we should understand and embrace it for what it is, but not mistake that for things that are structural because I think a number of the structural elements probably operate in the other direction.

And then, I guess, on the spend trends. I mean, a slight -- are you seeing -- there seemed to be a slight deceleration. I mean, it's like [hard]. But I mean, are you seeing the -- any change in spend? Does any of that have to do with the shift of Easter maybe?

I -- we've had quite a bit of growth going on in our consumer spending, and I think that's probably more a result of Capital One-specific things that are going on. There is no near-term sort of development on the spending side that we would note, but I think we should all be cautious consumers of the consumers' behavior lately as we make our business decisions.

And we'll take our next question from Steven Wharton with J.P. Morgan.

I just wanted to follow up one more time on the NIM. You said that you expect -- you said that half of the decline sequentially was due to seasonality, which I understand. But then you also mentioned that the impact of the contra revenue portion of the U.K. PPI reserve also impacted the NIM. Does that go away in 3Q? And how much was it?

Yes. So the way that U.K. PPI works, you book some of it as a return of revenue, and so it actually comes in as a reduction of revenue or a contra revenue, which will impact just the quarter. And that was roughly sized in the 3 basis point range.

And then you also mentioned the sale of the mortgages themselves, but then you said you had reinvested the proceeds of the securities. So is that to imply then that the impact to the NIM sequentially from the whole mortgage and the securities thing, that's pretty much in the run rate. This is not going to be a change sequentially from here.

That's correct. And so we did hold some higher cash during the quarter as we worked through putting that to work, which was again another drag to NIM, and it was roughly about the same size as the U.K. PPI item.

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

I've got a question on capital. You indicated that for your CCAR submission, that was before the mortgage sale had been finalized. So now that you're at 11%, where you need to be, and you're accreting capital obviously with earnings, would you consider going in for an either de minimis or a top-up request for capital return later this year?

Well, Betsy, we -- those are certainly options that are available to us. And what I would just say is, as we've done in the past, we're going to look at all of our options, all the levers that we have to deploy capital, whether that's capitalizing growth, distributing it to shareholders. And we definitely recognize that, that's a really important way for us to drive value for our shareholders, so we'll be looking at all of our options going forward.

Okay. And then, Rich, you mentioned earlier the subprime obviously having fallen in the quarter. How much of that was your own actions versus your customer set FICO increasing given the improvement in the economy? Obviously, we get a positive FICO drift in a strong economy. And the other part of the question here is does it give you room to then reinvest in that customer set going forward? Or are your new loans that you're originating more likely to be above 660? Can you give us some color there?

Yes. I would doubt the FICO drift over any short period of time would be a very big factor. I haven't specifically looked at that, but I wouldn't place too much on that. We don't operate with a precise subprime mix target. It is striking for how many years we have been around 1/3. So whether this number was at 32% or 35% I don't think would have much impact on our pursuit of opportunities. To us, much -- I mean, look, if the mix got way different than normal, obviously -- we always watch it. But I think the main thing is what is the nature of the competitive environment, the nature of the consumer and probably most importantly the results of all the tests that we've done and the vintages. And we put it all together to just -- to calibrate what is the opportunity that we see. And if -- my point has been Capital One has been posting some pretty modest numbers on the lower end of the league tables for a number of quarters for a variety of reasons. But part of it probably was, as we've talked about, pulling in around the edges on some of the choices and things like that. I just think if we look at the opportunity, we see some increased opportunity off of that lower base and that opportunity is across -- it's from -- it's really across the spectrum all the way to very top of the market.

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

Just wanted to ask one about your -- the auto lending side of the business and about the mix of it. Because with the prospect of tariffs on imported new vehicles, I'm just wondering what percentage of your business is used at this point.

Chris, we have not -- we don't give out that number. However, certainly relative to a number of auto lenders, our mix is more towards the used side because we do not have a big partnership with a captive -- a captive auto finance partnership that, for some of the banks out there, can lead to very significant volumes of new loans. So we are really more taking the mix of business that exists in the non-subvented. Big part of the marketplace, but relative to the overall U.S. marketplace, that is shifted more toward the used car side. So with respect to your particular point, we probably have less exposure than some others might.

And our final question tonight comes from Chris Brendler with Buckingham Research.

Just wanted to ask on the U.S. consumer credit card business. Interchange growth lagged spending growth by a little bit, but it was still pretty solid low double digits. Can you comment at all about the rewards environment and how it's affecting your numbers and how you feel about the competitive intensity of the U.S. card business, especially among transactors and your success there?

Yes. Chris, the rewards -- let's call it the heavy-spender business, is a very competitive business. And it's been very competitive for -- really, for a long time. But marketing levels are intense. The competition in rewards -- I think the most notable thing over, let's say, the last, say, 5 years, was the step up in rewards competition products and that kind of thing in the sort of 18 months to 2 years ago time period. And also not just for the banks but also, at the same time, co-brand offerings. I think all of that continues to be intense. I would describe it though more as stable recently at an intense level. Upfront bonuses continue to be aggressive. Although they have also seemed to stabilize and are down off the real high they went to over a year ago. So I think -- this is a business, where, in order to succeed, one has to -- there's a lot more than throwing products out there. This is really, I think, a company needs to do. And there are a small number of players who would fit this description, I think, committed to what it takes to be in this business and build the sustained levels of brand equities over time to -- committed to the sustained levels of marketing that is required there and the investments from digital to high-level servicing and everything else. So for many years, we have been kind of all in on this business. We believe that it continues to be a good opportunity. You've seen Capital One really for many years posting quite good growth numbers. And I think into the teeth of a very competitive but fairly stable marketplace, we see continuing positive opportunities to grow this business and to build a franchise which can be very profitable over the longer term and very resilient and be the cornerstone of a brand franchise that we are building.

Do you think that brand is actually helping you gain market share without being as aggressive in rewards? You have been investing in this brand for decades now, and I would think that you're actually getting some benefit and some market share gains from the power of your brand.

Adding brands is a very important part of this thing. I don't think a company -- I don't think a bank can just win this game by just product offerings. It's too easy for people to match product offerings. There's so much more. And there's great product offerings now all over the place. So I think it's really about a comprehensive all-in strategy, it's all about franchise, and it's all about brand and customer experience. And the key point I would leave with you is we have literally leaned into this business with a tremendous amount of priority and investment and focus for a whole bunch of years. And I think through all the kinds of up and downs in the competitive marketplace, I think you've seen some pretty consistency in the growth numbers that we've been -- the organic growth numbers we've been able to post in this business. And we are optimistic for our prospects over time.

Thank you for joining us on the conference call today, and thank you for your continuing interest in Capital One.

The Investor Relations team will be here this evening to answer any further questions you may have. Thanks for joining us. Have a great evening.

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