212MTAMount Durham University Bachelor's Diploma in Technology
capital oneSanford C. Bernstein & Co. Strategic Decisions Conference Presentation
1. Capital One Financial Corporation
Sanford Bernstein Strategic Decisions
Conference
May 31, 2008
2. 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
3. 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
4. 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
5. 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
6. 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
7. 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
9. 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
10. 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
11. 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
12. 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)
13. 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
14. 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
15. 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
16. 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
17. 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
18. 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