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Transcript of capital one Lehman Conference Presentation
Capital One Financial Corporation
Lehman Brothers Conference
2
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.”
Forward looking statements
3
Capital One continues to execute against the vision of national lending and local banking
• $92.4B in deposits1
– 14th largest depository institution in the U.S.2
– Full service banking in the New York metropolitan area, Louisiana and Texas
• $44B in Local Banking managed loans
• $102B in National Lending managed loans • 5th largest credit card issuer3
1) Total Deposits of $92.4B, including brokered deposits2) Deposits total as of Q2 2008; ranking as of Q1 2008. Ranking includes domestic deposits.3) VISA, MasterCard, Amex, Discover reported domestic Outstandings, Q4 2007
National Lending
Local Banking
4
Capital One delivered an operating profit of $463M despite significant cyclical credit headwinds
Net Income from Continuing Operations ($Millions)
Q208 Q108 Q407 Q307 Q207
National Lending
US Card $ 340.4 $ 491.1 $ 498.7 $ 626.8 $ 592.9
Auto Finance 33.6 (82.4) (112.4) (3.8) 38.0
International 33.7 33.3 54.7 47.4 18.2
SUBTOTAL 407.6 442.0 441.0 670.5 649.1
Local Banking 67.1 75.8 103.6 195.5 154.8
Other (12.2) 114.6 (223.0) (49.6) (36.3)
Total Company $ 462.5 $ 632.6 $ 321.6 $ 816.4 $ 767.6
5
Three key decisions we have made position Capital One to navigate cyclical challenges and deliver value over the cycle
Risk Management
Choice of Businesses
Banking
6
0%
50%
100%
150%
200%
250%
1998Q1 2000Q1 2002Q1 2004Q1 2006Q1 2008Q10%
50%
100%
150%
200%
250%
1998Q1 2000Q1 2002Q1 2004Q1 2006Q1 2008Q1
U.S. 30 Day+ Delinquency RateIndexed to Q1 1998
Auto
C&I
CRE
Card
Sources: FFIEC Consolidated reports of Condition and Income, Equifax
Institutions and markets will be hit differently
0%
50%
100%
150%
200%
250%
1998Q1 2000Q1 2002Q1 2004Q1 2006Q1 2008Q1
Mortgage
Home Equity
Mortgage-Related Other ConsumerCommercial
7
Rational Resilient
The credit card industry is structurally very attractive
• Originate-to-retain risk mentality
• Meaningful barriers to entry
• Small number of rational players
• Limited auction
• High margins
• Ability to re-price for safety and soundness
• Diversified across millions of small loans
• Variable cost origination infrastructure
• Not dependent upon collateral risk
8
-3%
-2%
-1%
0%
1%
2%
3%
4%
5%
6%
7%
8%
1992
1993
1994
1995
1996
1997
1998
1999
2000
2001
2002
2003
2004
2005
2006
2007
2008
Mortgage Industry
ROA
Charge-offs
Relative to other asset classes, credit cards are holding their own
-3%
-2%
-1%
0%
1%
2%
3%
4%
5%
6%
7%
8%
1991
1992
1993
1994
1995
1996
1997
1998
1999
2000
2001
2002
2003
2004
2005
2006
2007
2008
Credit Card Industry
Note: For auto, ROA and charge-offs are a weighted average between COF and AmeriCredit for 2000-Q3 2005 and COF, AmeriCredit, and JPM Chase for Q4 2005-Q4 2007Sources: Company filings, FDIC, Visa profitability study, FFIEC Consolidated reports of Condition and Income (seasonally unadjusted)
ROA
Charge-offs
-3%
-2%
-1%
0%
1%
2%
3%
4%
5%
6%
7%
8%
2000 2001 2002 2003 2004 2005 2006 2007 2008
Auto Loan Industry
ROA
Charge-offs
9
Paradoxically, the least secured lending tends to be the most resilient
Unsecured Assets
Collateralized by Depreciating
Assets
• Peak to trough of 1.7x
– ~Every 5-7 years
• Ability to pay
Collateralized by Appreciating
Assets
• Peak to trough of 3x
– ~Every 20 years
• Retention/appreciation of asset value
• Peak to trough of 1.9x
– ~Every 5-7 years
• Ability to pay
• Expected depreciation
Charge-Offs:
Underwritten Based On:
10
Our approach to risk management has served us well
Lower Lines
Rigorous Empirical Testing
Assume Recessions and
Degradation
Save Repricingfor Safety and
Soundness
• Don’t assume it in underwriting
• Don’t use it during good times
11
$49
$11
$33
$83
$0
$20
$40
$60
$80
$100
$120
$140
$160
$180
1999 2005 2007
We’ve transformed Capital One into a diversified bank with significant deposit funding
$52
$25
$29
$44
$0
$20
$40
$60
$80
$100
$120
$140
$160
1999 2005 2007
(1)Banking includes: legacy North Fork, Hibernia loans
Note: 2007 loans excludes those held in “Other” category from closure of Greenpoint
Managed Loans Managed Liabilities
Securitization
Unsecured
Deposits
Other
GlobalFinancial Services
Auto Loans
U.S. Credit Cards
Banking(1)
$150B
$20B
$176B
$111B
$22B
Baa3 Baa1 A3Moody’s Rating
$106B
12
0
5
10
15
20
25
30
35
1Q06 2Q06 3Q06 4Q06 1Q07 2Q07 3Q07 4Q07 1Q08 Q208
Quarterly Highlights
We continue to maintain ample liquidity
• Liquidity of 5x next 12 months of capital markets funding plan
• $5.5B Holding Company cash covers parent obligations for over 2 years, including current dividend
• Quarterly funding favored deposits– $4.7B net deposit growth
– $2.6B AAA US Card ABS
• Increased investment portfolio by $3B to $25B
– Highly liquid, low risk assets
– No SIV’s, CDO’s, leveraged loans
– No exposure to equity or hybrids
$B Readily Available Liquidity
Undrawn FHLB Capacity
Unencumbered Securities
Undrawn Conduit
$33B12-Month Forward
Capital Markets Issuance Plan
13
Despite economic headwinds, we remain capital generative
• Continue $0.375 quarterly dividend
• Share buybacks unlikely until economic outlook improves
• Expect TCE ratio to remain above target range of 5.5%-6.0%
• Tier 1 risk-based capital ratio of 11.4% (estimated)
6.18%
6.03%
6.80%
0%
1%
2%
3%
4%
5%
6%
7%
8%
Q107 Q207 Q307 Q407 Q108 Q208
Tangible Common Equity to Tangible Managed Assets Ratio
14
Despite continuing economic headwinds, Capital One remains well positioned to deliver value through the cycle
Strong Position Decisive Actions
• Resilient businesses
• Conservatism imbedded in underwriting decisions
• Banking transformation
– Fortified funding and liquidity
– Strong capital position
– Broad funding flexibility
• Pulled back on loan growth across lending businesses
– Tightened underwriting across lending businesses
• Retrenching and repositioning Auto Finance
• Pulled back or exited least resilient businesses
• Recalibrated underwriting models and approaches
• Increased collections intensity
• Enhancing and leveraging strong balance sheet
• Managing capital with discipline