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capital oneSanford C. Bernstein & Co. Strategic Decisions Conference Presentation
 

capital oneSanford C. Bernstein & Co. Strategic Decisions Conference Presentation

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    capital oneSanford C. Bernstein & Co. Strategic Decisions Conference Presentation capital oneSanford C. Bernstein & Co. Strategic Decisions Conference Presentation Presentation Transcript

    • Capital One Financial Corporation Sanford Bernstein Strategic Decisions Conference May 31, 2008
    • Forward looking statements Forward-Looking Information Please note that the following materials containing information regarding Capital One’s financial performance speak only as of the particular date or dates indicated in these materials. Capital One does not undertake any obligation to update or revise any of the information contained herein whether as a result of new information, future events or otherwise. Certain statements in this presentation and other oral and written statements made by the Company from time to time, are forward-looking statements, including those that discuss strategies, goals, outlook or other non-historical matters; projections, revenues, income, returns, earnings per share or other financial measures for Capital One and/or discuss the assumptions that underlie these projections, including future financial and operating results, and the company’s plans, objectives, expectations and intentions. To the extent that any such information is forward-looking, it is intended to fit within the safe harbor for forward-looking information provided by the Private Securities Litigation Reform Act of 1995. Numerous factors could cause our actual results to differ materially from those described in forward-looking statements, including, among other things: general economic and business conditions in the U.S. and or the UK, including conditions affecting consumer income, spending and repayments, changes in the credit environment in the U.S. and or the UK, including an increase or decrease in credit losses, changes in the interest rate environment; continued intense competition from numerous providers of products and services that compete with our businesses; financial, legal, regulatory or accounting changes or actions; changes in our aggregate accounts or consumer loan balances and the growth rate and composition thereof; the amount of deposit growth; changes in the reputation of the credit card industry and/or the company with respect to practices and products; the risk that Capital One’s acquired businesses will not be integrated successfully; the risk that synergies from such acquisitions may not be fully realized or may take longer to realize than expected; disruption from the acquisitions making it more difficult to maintain relationships with customers, employees or suppliers; the risk that the benefits of the Company’s restructuring initiative, including cost savings, may not be fully realized; our ability to access the capital markets at attractive rates and terms to fund our operations and future growth; losses associated with new products or services; the company’s ability to execute on its strategic and operational plans; any significant disruption in our operations or technology platform; our ability to effectively control our costs; the success of marketing efforts; our ability to recruit and retain experienced management personnel; changes in the labor market; general economic conditions in the mortgage industry; and other factors listed from time to time in reports we file with the Securities and Exchange Commission (the “SEC”), including, but not limited to, factors set forth under the caption “Risk Factors” in our Annual Report on Form 10-K for the year ended December 31, 2007, and our Quarterly Report on Form 10-Q for the quarter ended March 31, 2008. You should carefully consider the factors discussed above in evaluating these forward-looking statements. All information in these slides is based on the consolidated results of Capital One Financial Corporation. A reconciliation of any non-GAAP financial measures included in this presentation can be found in the Company’s most recent Form 10-K concerning annual financial results, available on the Company’s website at www.capitalone.com in Investor Relations under “About Capital One.” 2
    • Home prices became clearly unsustainable Indexed Average House Prices and Average Household Income Indexed to 1980 Average Home Price 400% 350% 300% Average Household Income 250% 200% 150% 100% 50% 0% 1980 1982 1984 1986 1988 1990 1992 1994 1996 1998 2000 2002 2004 2006 3 Source: Census Bureau
    • Home prices became clearly unsustainable Indexed Median House Prices and 60th Percentile Household Income Indexed to 1975 700 Median House Prices 600 500 60th Percentile Household Income 400 300 200 100 1975 1978 1981 1984 1987 1990 1993 1996 1999 2002 2005 4 Sources: Census Bureau
    • The housing story is really three different stories Boom / Bust Markets Laggard Markets The Rest 43 MSAs 27 MSAs 311 MSAs + rural areas 25.0% of population 8.5% of population 66.5% of population House Price Appreciation House Price Appreciation House Price Appreciation 30 30 30 25 25 25 Florida 20 20 20 Boom & 15 15 15 Bust 10 10 10 5 5 5 0 0 0 -5 -5 -5 Jan- Jul- Jan- Jul- Jan- Jul- Jan- Jan- Jul- Jan- Jul- Jan- Jul- Jan- Jul- Jan- Jul- Jan- Jul- Jan- Jul- Jan- Jul- 04 04 05 05 06 06 07 04 04 05 05 06 06 07 07 04 04 05 05 06 06 07 07 Note: MSA is Metropolitan Statistical Area 5 Source: OFHEO, Capital One analysis
    • Credit metrics reflect weakening in the U.S. economy Monthly Managed Net Charge-off Rate 8% Bankruptcy Filing Spike 7% National Lending Q108: 6% 5.34% 5% 4% 3% 2% Q108: Local Banking 1% 0.31% 0% Jan-00 Jan-01 Jan-02 Jan-03 Jan-04 Jan-05 Jan-06 Jan-07 Jan-08 6
    • Three key indicators are critical to determining the length and depth of the current cycle House Price Index Unemployment Oil Prices 1989-2007 1989-2007 1989-2007 $120 10% 20 $100 15 8% $80 10 6% 5 $60 4% 0 $40 -5 2% $20 -10 $0 0% 19 Q2 19 Q2 19 Q2 19 Q2 20 Q2 20 Q2 20 Q2 20 Q2 20 Q2 20 Q2 20 Q2 20 Q2 2 Q 95 96 97 98 99 00 01 02 03 04 05 06 07 1989 1990 1991 1992 1989 1993 1994 1995 1996 1990 1991 1997 1998 2099 2000 1992 2001 2002 1993 1994 2003 1995 1996 2004 2005 2006 1997 1998 2099 2007 08 2000 2001 2002 2003 2004 2005 2006 07 19 19 19 7 Note: Inventory is average for the year based on monthly data Sources: Economy.com; NAR, Case-Shiller, BLS
    • In the last two recessions, credit card delinquency rates moved before increases in unemployment rate Unemp. DQ Rate % Rate % 5.50 8.00 s bp 7.50 0 ps 10 5.00 0b + 7.00 12 s bp + 4.50 6.50 50 0- Q 3 2 + thru 6.00 4.00 5.50 3.50 5.00 4.50 3.00 Credit Card 30+ DQs* 4.00 2.50 Unemployment 3.50 Rate 2.00 3.00 19 1 19 1 19 1 19 1 19 1 19 1 19 1 19 1 19 1 19 1 19 1 20 1 20 1 20 1 20 1 20 1 20 1 20 1 20 1 1 Q Q Q Q Q Q Q Q Q Q Q Q Q Q Q Q Q Q Q Q 88 89 90 91 92 93 94 95 96 97 98 99 00 01 02 03 04 05 06 07 19 8 Credit Card data is Visa/Mastercard $30+ Rate from 1988-2003, and Equifax $30+ rate from 2004-2007
    • Three key decisions we have made position Capital One to navigate cyclical challenges and deliver value over the cycle Risk Choice of Banking Management Businesses 9
    • Institutions and markets will be hit differently U.S. 30 Day+ Delinquency Rate Indexed to Q1 1998 Mortgage-Related Commercial Other Consumer 250% 250% 250% 200% 200% 200% Mortgage C&I 150% 150% 150% Card 100% 100% 100% Auto CRE 50% 50% 50% Home Equity 0% 0% 0% 1998Q1 2000Q1 2002Q1 2004Q1 2006Q1 1998Q1 2000Q1 2002Q1 2004Q1 2006Q1 1998Q1 2000Q1 2002Q1 2004Q1 2006Q1 10 Sources: FFIEC Consolidated reports of Condition and Income, Equifax
    • The credit card industry is structurally very attractive Rational Resilient • High margins • Originate-to-retain risk mentality • Ability to re-price for safety and soundness • Meaningful barriers to entry • Diversified across millions of small loans • Small number of rational players • Variable cost origination infrastructure • Limited auction • Not dependent upon collateral risk 11
    • Relative to other asset classes, credit cards are holding their own Credit Card Industry Auto Loan Industry Mortgage Industry 8% 8% 8% 7% 7% 7% Charge-offs 6% 6% Charge-offs 6% 5% 5% 5% 4% 4% 4% 3% 3% 3% ROA ROA 2% 2% 2% ROA 1% 1% 1% Charge-offs 0% 0% 0% -1% -1% -1% -2% -2% -2% -3% -3% -3% 07 20 01 20 02 20 03 20 04 20 05 20 06 20 00 20 01 20 02 20 03 20 04 20 05 20 06 07 19 93 19 98 20 99 20 00 19 94 19 95 19 97 19 96 19 93 19 94 19 95 19 97 19 98 20 99 19 96 19 93 19 94 19 95 19 96 19 97 19 98 20 99 20 00 20 01 20 02 20 03 20 04 20 05 20 06 07 19 19 19 Note: For auto, ROA and charge-offs are a weighted average between COF and AmeriCredit for 2000-2005Q3 and COF, AmeriCredit, and JPM 12 Chase for 2005Q4-2007Q4 Sources: Company filings, FDIC, Visa profitability study, FFIEC Consolidated reports of Condition and Income (seasonally unadjusted)
    • Paradoxically, the least secured lending tends to be the most resilient Collateralized by Collateralized by Unsecured Depreciating Appreciating Assets Assets Assets Charge- Peak to trough of 1.9x Peak to trough of 3x • • Peak to trough of 1.7x • Offs: – ~Every 5-7 years – ~Every 20 years – ~Every 5-7 years Ability to pay Retention/appreciation of • • Ability to pay • Underwritten asset value Based On: Expected depreciation • 13
    • Our approach to risk management has served us well Rigorous Assume Save Repricing Lower Empirical Recessions and for Safety and Lines Testing Degradation Soundness • Don’t assume it in underwriting • Don’t use it during good times 14
    • We’ve transformed Capital One into a diversified bank with significant deposit funding Managed Liabilities Managed Loans $176B $180 $160 $150B $160 $140 Banking(1) $44 $140 $83 $120 $120 Deposits Global $100 Financial $29 $100 $80B $88B Services $80 $80 Auto $33 Other $25 $60 Loans $60 Unsecured $11 $40 $40 U.S. Credit $22B $52 $20B Cards $20 Securitization $49 $20 $0 $0 1999 2004 2007 1999 2004 2007 Baa3 Moody’s Rating Baa3 A3 (1) Banking includes: legacy North Fork, Hibernia loans 15 Note: 2007 loans excludes those held in “Other” category from closure of Greenpoint
    • We continue to maintain ample liquidity First Quarter Highlights Readily Available Liquidity $B • Liquidity position is 5x next 12 months 35 of capital markets funding plan $30B $29B 30 • Moved Auto Finance to be a subsidiary of National Bank Undrawn FHLB Capacity 25 • $5.7B Holding company cash: – Covers parent obligations for over 2 20 Unencumbered years Securities 15 • Maintained strong, diversified funding 10 • Highly liquid, low risk investment portfolio Undrawn Conduit 5 0 1Q06 2Q06 3Q06 4Q06 1Q07 2Q07 3Q07 4Q07 1Q08 16
    • Despite credit headwinds, we remain capital generative Tangible Common Equity to 2008 Expectations Tangible Managed Assets Ratio • TCE ratio at or above high-end of 5.5%- 8% 6% target range 7% • Expect to continue $0.375 quarterly 6% 6.03% dividend 5.83% 5% 4% • Share buybacks dependent on economic outlook 3% – 2H08 at the earliest 2% 1% 0% Q107 Q207 Q307 Q407 Q108 17
    • We’re leveraging our strong position and acting decisively to navigate near term challenges and deliver value over the cycle Entering the downturn Decisive action in the with strength downturn • Resilient businesses • Pulled back on loan growth across lending businesses • Conservatism imbedded in underwriting decisions • Retrenching and repositioning Auto Finance • Banking transformation • Pulled back or exited least resilient businesses • Shut down GreenPoint Mortgage origination businesses • Increased pricing to strengthen margins • Driving strong operating efficiency gains • Enhancing and leveraging strong balance sheet • Managing capital with discipline 18