COF
#Okay, <UNK>, let me start with the interchange.
The net interchange metric can have quite a bit of quarter to quarter variability because it includes partnership contractual payments.
It includes international card and we periodically adjust our rewards liabilities based on customer trends and redemption rates and things like that.
So as such, in any particular quarter, there tends to be a lot of noise around that.
But if you pull up beyond the quarterly noise, you're absolutely right in pointing out that net interchange growth has generally lagged general-purpose credit card interchange growth, purchase volume growth.
We would expect this trend to continue.
In many ways it's really a byproduct of the success that we're seeing.
Our rewards programs have been and continue to be enjoying a lot of growth.
We are making the choice to upgrade a lot of our customers to these products and we're also extending rewards products to existing customers who don't have rewards.
If you look at the effect of all of those together, that's why interchange growth lags purchase volume growth, and I think that while that will bounce around from quarter to quarter.
I think over the longer run those two metrics will converge.
I think it still will be some time before they fully converge.
And with respect to the alternative lenders for example, small business lender's.
We're very intrigued with some of these startup companies.
I think that they have demonstrated a lot of innovation from which I think we can learn a lot at Capital One.
The way that they do their underwriting, obviously, the digital capabilities that they have.
In a number of cases they're using very sophisticated and interesting data analytics.
The way that they do cash flow-based underwriting.
The way that they do the daily collections thing.
There's a lot of very creative activities going on in that particular space.
We're watching it carefully and we'll continue to see and learn from the people that are leading in this space.
First of all, <UNK>, you are right.
While overall, generally, the mix is about the same there has been a very small increase in the subprime mix.
But overall when we look at our originations, when we look at the strategy that we have, there's a real consistency and the phrase I say, sometimes the more things change the more they stay the same in terms of how the opportunities we're pursuing and the nature of the growth that we're getting.
When you asked the question what is the canary in the coal mine with respect to this business.
Obviously, we look incredibly carefully at the metrics that begin on the origination side.
We look at the nature of the mix of applicants that we get and that tends to be an indicator of whether there's positive or negative selection.
And then we track very closely every single month all of the metrics and early indicators of whether there are any issues.
At Capital One we predict outcomes before, during and after every single origination.
We monitor this incredibly closely.
You also know that in things like the subprime space, we have about more than 15, approaching 20 years experience in this particular space.
What I would say for it is what I would say for any part of the card business, we watch very carefully for adverse selection.
We monitor the metrics extremely closely and we stay mobilized to move and also to let our investors know when things change relative to our own expectations.
All that said, we continue to see really across the card business a stability in the competitive environment, a stability in the origination environment, a stability in the consumer and their own behavior and really a stability in the vintages of our originations.
And, clearly, if we saw a canary in the coal mine I don't think you be seeing the type of growth that we are currently seeing in the card business.
Obviously, that business we're very, very closely monitoring and on numerous calls recently we have been talking about that segment.
One of the benefits of the upstream oil and gas business is the ability to do the borrowing base re-determination.
So loan balances were down 6% from the prior quarter as a result of the spring borrowing base re-determination.
Our E&P borrowers decrease their balances to conform to the lower commodity prices and oil field services company's reduced their balance sheets.
We've seen particularly ---+ what we've seen pretty much across the energy business, a pretty darn quick reaction by reducing expenses, particularly capital expenditures, and taking advantage of the receptive capital markets.
All of that said, obviously, you don't have to look very far to notice what's happening in oil prices and the volatility and risks there.
The allowance builds that we have had for several quarters now have been significantly driven by energy, as well as in the taxi business as well.
That one we'll really have to monitor carefully.
But we do like some of the inherent resilience dynamics that exist particularly in the upstream part of the business as they move quickly to adapt to the oil pricing pressure.
Next question please.
<UNK>, I do not have a metrics right in front of me, but, I think, there is a gradual migration away from a revolving toward the transacting side of the business.
But I don't have the metric in front of me, nor do we report that.
Just looking as you can see the pretty eye-popping growth in purchase volume that would be consistent with that.
Yes.
All else being equal, more growth would lead to more of a reserve there.
I think the thing that you should really focus on in trying to forecast the primary drivers of provision are, obviously, charge-offs and allowances.
We've given you a little bit of help on charge-offs over the near-term, and the two things I really want you to spend your time on in terms of the allowance builds are really the loan growth expectations and the charge-off replacement phenomenon that I talked about.
Qualitative factors can be important from time to time in terms of adjust over the next 12 months, but I think if you focused on those two, that's going to be the most important factors.
<UNK>, this has been a gradually running off revenue stream ever since we stopped originating new payment protection in 2012.
And that will continue to just gradually run off until the event happens over the course of the first quarter, it won't be on a single day, it will happen over the course of the first quarter, where we basically shut down the back book business.
And so from a run rate point of view where you'll see that affect fully is starting with the second quarter.
And what we're saying is relative to full-year 2015 this is a 25-basis point effect.
We are not ---+ I wouldn't look for any specific thing to offset that.
It's one of many, many things that effect revenue over time.
Our point is, other things being equal, that would take down the revenue margin by 25 basis points.
We have a very healthy revenue margin.
We have great things going on in the business, but we are not intervening to do something on the revenue side to offset this.
What we're doing is really just accelerating and getting over with something that was going to happen anyway over the next couple of years.
Next question please.
That's, as you can imagine, a very good question, <UNK>.
Because, of course, this is many vintages and various effects all happening on top of each other.
I think the best way to think of this is that the majority of our originations and growth is from new account acquisition.
As just a general observation, the majority is coming from new account origination and the very natural, early balance growth associated with that.
A sizable minority is coming from credit line increases on more seasoned book.
But we are approaching an equilibrium with respect to those effects.
I flagged several quarters ago that we had a bit of an outsized credit line increase going on because we had had a brownout for the period preceding that.
And we are pretty close to an equilibrium now, maybe just a little bit still residual on that credit line increase side, but what you see is approaching an equilibrium with respect to the mechanics of how growth works.
Next question, please.
Thank you, <UNK>.
Digital is becoming so all-encompassing into how life works and how the business works.
It's increasingly difficult to even, in a sense, technically answer your question.
But we don't start with a thing that says okay, we have $X million to spend on digital and that's it.
What we do is, we start strategically with the environment and say where's the world going and what does winning entail as the world goes there.
And we work backwards and then develop a strategy and we figure out where we need to go as a Company.
Along the way you can imagine that digital is a centerpiece of that entire strategic agenda.
And so everybody from the bottom up builds the economics of their business working backwards from where they're trying to go as a business and all of that adds up to our overall economics.
We see if it makes sense.
We drive incredibly hard to wring costs that are not directly related to digital innovation and growth.
I know you can't necessarily see those effects but they are very significant.
As are the digital investments on the other side.
But I think that I'd just like to stop and reflect a little bit on what is it that we're investing in.
Because I think a lot of banks say, and I've heard several of them say it, we're going to self-fund this digital investment.
You tell me how much you can save and that's how much we can invest.
That is a really, really tough we to take any institution to where it needs to go because the marketplace isn't waiting for us to do that on those terms.
On the other hand, we're not just investing in science experiments or seeing what's new and shiny object.
When we talk about digital investment it starts with talent.
We're talking about of bringing in top engineers, product managers, designers, data science that's often tech companies and startups outside of financial services.
This is a very important thing and, obviously, it costs money to do that but that's a foundational thing.
We're talking about providing the digital workspaces and the most modern tools for these folks.
That's essential in terms of recruiting them and essential in terms of leveraging them.
So often I think banks when they think about digital, they think, I've got to go build apps.
We have to get customer facing or associate facing apps.
Most of the leverage is really in infrastructure, in terms of things like rationalized and simplified core infrastructure.
Increasingly we're focusing on cloud computing and building the underlying capability such that product development will be faster and faster and more effective over time.
We're obviously investing in terms of product development itself and we're on an accelerating basis shipping product and you can go to the app store and take a look at some of the stuff, it's pretty highly rated.
We're investing in cyber security.
This is an incredibly important area and we are putting a lot of very top talent and a lot of energy and investment into that.
The key thing is this is not because we think this digital thing is cool and there's opportunity someday.
These are delivering benefits right now on many fronts.
While you can't necessarily see it in the numbers that you see, but the enhancements to productivity, the power of innovation, the dramatically growing customer experience benefits and it's inextricably linked to the growth that we're generating right now.
Pulling way up from that it doesn't really start with, this is the number.
It's really increasingly who we are and how we think about the business.
But the keys ---+ so pulling way up.
What we are so focused on is making sure that we can generate very strong returns for our shareholders and continue to invest in a future that has very strong returns for our shareholders over time.
And right now we see right in front of us two very, very big opportunities.
One of them is card growth and the other one is this digital opportunity.
Both of them involve spending money to make more money later, but at the end of the day I go back to the thing that we focus on every single day.
<UNK>w can we create value for our shareholders today and ensure that we can create book value for them tomorrow.
And the way to do that is to generate well above hurdle rate returns, to make sure that our investments are very disciplined and driven by a net present value framework to the absolute most rigorous extent possible, and be sure that we are really obsessive guardians of capital and in the end distributing capital to our shareholders.
So that's the long answer to your question.
But I'm glad you asked because increasingly digital is who we are and it's where the leverage is.
Thanks, <UNK>, and thank you, everybody, for joining us on this conference call tonight.
We thank you for your continuing interest in Capital One.
Just a reminder the Investor Relations team will be here this evening to answer any questions you may have.
Have a great evening everybody.
Thanks.
