Capital One Financial Corporation

Welcome to the Capital One second quarter 2020 earnings conference call. All lines have been placed on mute to prevent any background noise. After the speaker's remarks, there will be a question and answer period. If you'd like to ask a question during this time, simply press the star key and the number one on your telephone keypad. If you'd like to withdraw your question, please press the star key and the number two. Today's conference is being recorded. Thank you. I would now like to turn the call over to Mr. Jeff Norris, Senior Vice President of Global Finance. Sir, you may begin.

Thanks very much, Matt, and I'd like to also welcome everyone to Capital One's second quarter 2020 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, CapitalOne.com, and follow the links from there. In addition to the press release and the financials, We've included a presentation summarizing our second quarter 2020 results. With me this evening are Mr. Richard Fairbank, Capital One's Chairman and Chief Executive Officer, and Mr. Scott Blackwood, Capital One's Chief Financial Officer. Rich and Scott will 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 entitled Forward-Looking Information in the earnings release presentation and the Risk Factors section in our annual and quarterly reports that are accessible at the Capital One website and files of the SEC. Now I'll turn the call over to Mr. Blackley.

Scott? Thanks, Jeff. Capital One recorded a net loss for the second quarter of $918 million, or $2.21 per diluted common share. primarily driven by a $2.7 billion allowance bill, reflecting the economic downturn related to the COVID-19 pandemic. Adjusting items impacted operating expenses during the quarter and totaled $276 million or $0.60 a share, including the provision for legal matters as well as costs related to our cyber incident. Net of these adjusting items are EPS with a loss of $1.61 per share. Turning to slide four, I'll cover the allowance in more detail. The second quarter allowance bill of $2.7 billion consists of $1.7 billion in card, $668 million in auto, and $330 million in commercial. Our allowance is based primarily on an economic forecast derived from the consensus of third-party economists. That forecast includes unemployment in the second quarter of 16.9%, falling to 11.5% at the end of 2020 and gradually improving over the course of 2021 to end at 8.1%. Of course, our strong credit performance so far shows that the normal relationship between unemployment and consumer credit has been significantly altered by lending hardship programs and especially by government stimulus, including direct consumer support through the CARES Act. Looking ahead in our allowance, we've assumed no such benefit from further stimulus beyond the residual benefits of the existing legislation, which starts running out after July. On slide five, you can see the impact of our coverage ratios for various businesses. Our total allowance coverage now stands at 6.7% of loans, compared to 2.7% at the end of the year for 2019. Our domestic coverage ratio Our domestic card coverage ratio is now 11.6%, and our branded card ratio is 13.5%. Recall that the primary difference between these ratios is driven by loss-sharing agreements in our partnership portfolio. Our auto coverage now stands at 4.3%, and our commercial reserve coverage is 2.5%. Moving to slide six, I'd like to discuss our liquidity position. As we've talked about for years, we have always focused on conservatively managing capital and liquidity, and that's serving us well as we navigate the COVID-19 pandemic. You can see that our preliminary average liquidity coverage ratio during the second quarter was 146%, up from 145% at the end of the first quarter, and well above the 100% regulatory requirement. Our liquidity reserves from cash, securities, and federal home loan bank capacity increased to $149 billion at the end of the second quarter, including about $56 billion in cash driven by strong inflows of consumer deposits. Turning to slide seven, I will cover capital. Our common equity tier one capital ratio was 12.4% at the end of the second quarter, 40 basis points from the first quarter, notwithstanding our large allowance billed in the quarter. Recall that beginning in 2020, our CET-1 calculation excludes the market-to-market impact from our available for sale security portfolio. At quarter end, that portfolio had an unrecognized after-tax gain of $2.4 billion, which represents approximately 80 basis points of potential regulatory capital. During the quarter, the Federal Reserve released the results of their stress tests. Our capital requirement under the stress capital buffer framework as calculated by the Federal Reserve, was 10.1%, or approximately 230 basis points below our current capital levels. In conjunction with the release of the stress test results, the Federal Reserve also announced an additional fall stress test and a limitation on third-quarter dividends based on the average quarterly net income for the prior four quarters. While our recent CCAR capital plan included a planned $0.40 quarterly dividend, based on the Fed's new cumulative earnings rule, we expect to reduce our third quarter common stock dividend to $0.10 per share, subject to board approval. Turning to slide eight, you can see that our net interest margin was 5.78% in the quarter, which is approximately 100 basis points lower than the first quarter and the prior year linked quarter. The quarter-over-quarter decline was largely driven by a shift in our asset mix as average cash increased to $43 billion and average card balances shrunk by 11%. In addition to this mix shift, the low-rate environment further pressured that interest margin. With the low interest rate environment and continued economic uncertainty, We expect to maintain elevated levels of cash in the near term. During the quarter, we deployed approximately $15 billion of cash to increase the size of our investment portfolio, prepay federal home loan bank advances, and to buy back a portion of our senior unsecured debt in our first-ever debt tender offer. Even with these actions, our cash at the end of the quarter was at an all-time high of $56 billion, up $25 billion from the end of the first quarter. The low rate environment is also a headwind to new improvement. To give you a sense of magnitude, our disclosed year-end 2019 interest rate sensitivities would suggest an approximately $500 million reduction in annual interest income based on the over 100 basis point decline in the yield curve that we've seen year-to-date. Looking forward, our NIM trends will depend on how the impacts of the downturn play out across our balance sheet, including asset mix, deposit balances and deposit pricing, and our cash position. And with that, I'll turn the call over to Rich.