Jeff Norris Richard D. Fairbank - Founder, Executive Chairman, Chief Executive Officer and President Gary L.

Perlin - Chief Financial Officer

Ryan M. Nash - Goldman Sachs Group Inc., Research Division Craig J.

Maurer - Credit Agricole Securities (USA) Inc., Research Division Sanjay Sakhrani - Keefe, Bruyette, & Woods, Inc., Research Division Bill Carcache - Nomura Securities Co. Ltd., Research Division Kevin J.

St. Pierre - Sanford C.

Bernstein & Co., LLC., Research Division Christopher C. Brendler - Stifel, Nicolaus & Co., Inc., Research Division Moshe Orenbuch - Crédit Suisse AG, Research Division David S.

Hochstim - The Buckingham Research Group Incorporated Brian Foran - Autonomous Research LLP Brian Foran Martin Kemnec - Jefferies & Company, Inc., Research Division Robert P. Napoli - William Blair & Company L.L.C., Research Division Kenneth Bruce - BofA Merrill Lynch, Research Division Betsy Graseck - Morgan Stanley, Research Division Christoph M.

Kotowski - Oppenheimer & Co. Inc., Research Division

Thanks very much, Matt. And welcome, everyone, to Capital One's First Quarter 2013 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 at www.capitalone.com and follow the links from there.

In addition to the press release and financials, we have included a presentation summarizing our first quarter 2013 results. With me today are Mr.

Richard Fairbank, Capital One's Chairman and Chief Executive Officer; and Mr. Gary Perlin, Capital One's Chief Financial Officer.

Rich and Gary will walk you through this presentation. To access a copy of the presentation and the 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.

For more information on these factors, please see the section titled Forward-Looking Information in the earnings release presentation and the Risk Factors section in our annual and quarterly reports, which are accessible at the Capital One website and filed with the SEC. And now, I'll turn the call over to Mr.

Fairbank. Rich?

Thanks, Jeff. Before we get started this evening, I want to take a moment and say a few words about my friend and our CFO, Gary Perlin.

As we announced a few months ago, Gary has decided to retire and will be transitioning out of the company over the course of this year. After a decade of great work at our company, this is Gary's last earnings call.

Now at Capital One, as you know, we always search the world to find the very best talent. And that's how we found Gary.

I tried to get Gary to join us in 1994. He chose other options, but we didn't give up and he finally saw the light in 2003.

And since then, Gary has made a huge impact to Capital One on every step of our journey to build a great company and reward our investors. He's been a strong leader and a wise and trusted advisor.

And as you know he's smart, he's rigorous, and he has the highest of integrity. I know you will join me in saying thanks to Gary and wishing him the best as he immerses himself in his many interests beyond Capital One.

I'm grateful for everything he's done to put our company in a strong position. As we wish Gary well, we're also welcoming Steve Crawford to our company as our new CFO.

Steve will officially take over the CFO role on May 24 and you'll be hearing from him during our second quarter earnings call. Steve brings more than 2 decades of big-time financial services experience to the table, including having been the CFO of Morgan Stanley, and he knows our company well.

Steve has already hit the ground running since joining us in February and he's fully engaged in having an important impact on how we continue to win in the marketplace, how we manage our business and get our investors paid. Gary and Steve have been exemplary in working together to ensure a smooth transition and I'm looking forward to working with Steve for many years to come.

And now, with my deep appreciation for all he's done over the last decade and for one last time, I'll turn the call over to Gary.

Thanks, Rich, for those very generous comments. It's been a personal and professional privilege to work with you and the entire Capital One team for 10 very exciting years.

I also count, as a highlight, the opportunity to meet and interact regularly with so many analysts and shareholders. You all have both challenged and supported me and I hope that I have returned the favor in the spirit of friendship and mutual respect.

Now as always, let's get down to business. We'll turn to Slide 3.

Capital One earned just over $1 billion or $1.79 per share in the first quarter, including $2.5 billion of pre-provision earnings, which, if we're adjusting for the benefit of moving our Best Buy partnership portfolio to held for sale, is about in line with the quarterly run rate we anticipated for 2013. In addition, earnings in the quarter benefited from lower provision expense, which was driven by a $261 million allowance release.

Lastly, we recognized a $97 million charge for rep and warranty expense in the quarter, which was driven by a $107 million charge in discontinued operations, offset by a slight benefit in continuing operations. There were also a few notable events in the quarter.

First, we redeemed $3.6 billion of high-coupon, trust-preferred securities on January 2, which had a benefit to net revenue this quarter of $9 million. This includes a $75 million benefit to interest expense, partially offset by a onetime, non-interest income reduction of $65 million attributable to the accelerated amortization of issuance costs.

Second, we announced our agreement to sell the Best Buy partnership portfolio and moved about $7 billion of loans to held for sale as of February 1. This movement to held for sale resulted in a $40 million benefit to revenue in the quarter and a $41 million reduction in provision expense.

The provision benefit results from the fact that expected charge-offs are absorbed by the carrying value of the held-for-sale loans after reclassifying some $289 million in loan loss allowance. Revenue similarly benefits as reversals of fee and finance charges are also taken against the carrying value of the loans, although the movement of loans to held for sale resulted in an $87 million benefit to income before tax in the quarter.

We expect earnings will be positively impacted for the first 3 quarters of this year until the partnership portfolio sale closes. This positive impact on 2013 earnings will be partially offset by the reduction in earnings once the sale closes late in the third quarter.

We have included an appendix slide in this presentation detailing expected quarterly financial statement impacts by line item. These estimates are limited to 2013 and do not necessarily reflect opportunity costs in 2014 and beyond.

That's because we expect to capture incremental cost savings going forward and because revenues would likely have fallen as a result of our choices around card practices, such as exiting payment protection. Turning to Slide 4.

I'll briefly discuss highlights of our first quarter income statement. Pre-provision earnings were up 7% in the quarter or 5% net of the benefit from moving the Best Buy partnership to held for sale.

This improvement was driven by a decrease in non-interest expense, partially offset by the expected seasonal decline in revenue. Revenue was down from the fourth quarter as seasonally lower balances and purchase volume in our Domestic Card business were partially offset by higher margins, which I'll discuss shortly.

Non-interest expense decreased 7% from the fourth quarter. The operating and marketing expense levels tend to be seasonally high.

The quarterly impact on operating expense from the amortization of purchased intangibles and integration costs are detailed on this slide and expected annual impacts, which really haven't changed in our estimate, are shown on Slide 12 in the appendix. At this point, non-interest expense is currently tracking a bit below our projected run rate for 2013, which I shared with you on last quarter's call, which we'll have more to say on expenses in a few moments.

Putting these items together, please recall that our January estimates for revenue and expenses for 2013 were approximately $22.5 billion and $12.5 billion, respectively, resulting in pre-provision earnings of about $10 billion. 3 months into the year, those estimates for the full-year remain within any reasonable margin of error.

We saw a 23% decline in provision expense in the quarter, primarily driven by a $261 million allowance release, partially offset by $67 million in other provision expense. The other expense was driven by a reserve build for unfunded commercial commitments, reflecting a one time change in estimate and by foreign currency adjustments.

The largest component of the allowance release was in Domestic Card, with a better-than-anticipated credit performance in the quarter, including delinquencies, and an improvement in drivers for our future outlook. Still, the coverage ratio of allowance to delinquencies in Domestic Card rose above the level in recent quarters.

Finally, we recorded a $97 million charge in rep and warranty in the quarter, of which $107 million was recorded in discontinued operations, offset by a $10 million release in continuing operations. This expense reflects our assessment of probable and estimable losses in light of the current environment, largely in relation to non-agency mortgage developments.

Turning now to Slide 5. I'll touch briefly on loan balances and margins.

Average interest-earning assets fell in the quarter as a result of both lower cash balances and a seasonal reduction in loan balances. The decrease in loan balances was offset by net interest margin expansion.

Reported NIM increased in the first quarter to 6.71% from 6.52% in the fourth quarter. Two factors drove the quarterly increase in NIM, offsetting the reduction resulting from the simple math of the first quarter having 2 fewer days' worth of recognized income.

The first positive impact was from the redemption of trust-preferred securities early in the quarter. This resulted in an 11-basis-point benefit to interest expense as well as an 8-basis-point benefit from reducing the cash balances that had been built up in anticipation of the call of those securities.

It's also a 7-basis-point improvement from the $40 million revenue benefit from the announced sale of the partnership portfolio. Although those loans are now accounted for as held for sale, the balances remain as interest-earning assets.

Looking forward, we continue to expect about $12 billion in loan runoff in 2013, about $10 billion in mortgage runoff and about $2 billion in Domestic Card. Planned runoff will continue in 2014, which we estimate at about $8.5 billion, of which $7.5 billion is in mortgage and $1 billion in card.

As for NIM, we continue to expect that we'll experience some cross-currents. Like the rest of the industry, low interest rates and relatively flat yield curve and weak loan demand represent headwinds.

However, we expect to see the continued beneficial effect of lower rates in deposits and other borrowings and a rotation from lower-yielding mortgages to a broader mix of consumer and commercial loans. Turning to Slide 6, our Tier 1 common ratio on a Basel I basis was about 80 basis points in the quarter to end at 11.8%.

We expect that we will continue to generate substantial amounts of capital in coming quarters, inclusive of our previously announced intention to increase the quarterly dividend to $0.30 per share beginning this quarter, subject to final approval of our Board of Directors at its scheduled meeting in May. As noted on our last call, we have formally begun our journey to adopt Basel II, also referred to as advanced approaches, which, for Capital One, will take effect on or after January 1, 2016.

Using our evolving estimates of this impact, Capital One's Tier 1 common ratio, under currently proposed rules for implementing Basel III over coming years, will be about 8.5%. This estimate incorporates the amortization of PCCR and the scheduled pay down of capital punitive investment securities.

Let me remind you that this ratio is now above our assumed target when Basel III is fully phased in over the next several years. Rich will address in his comments our intentions for capital management in light of our strong balance sheet position and expected generation of substantial amounts of additional capital going forward.

With that, let me hand the call back to Rich.

Thanks, Gary. I'll begin on Slide 7, which provides an overview of solid business results in the first quarter.

Our Domestic Card business posted strong profitability in the quarter. As Gary already discussed, first quarter results reflect the impacts of the planned Best Buy portfolio sale and held-for-sale accounting.

Excluding held-for-sale accounting impacts, ending loan volumes declined 7.4% in the quarter, which compares to quarterly declines of about 6% in the first quarters of 2012 and 2011. Expected seasonal patterns and planned runoff of some of the acquired HSBC-branded loans drove the first quarter decline.

Purchase volume, excluding HSBC, increased about 5.5% compared to the first quarter of 2012. First quarter last year had 2 more processing days than the first quarter this year.

Adjusting for the difference in day count, the year-over-year growth in purchase volume would've been about 8%. Domestic Card revenue margin, excluding held-for-sale accounting impacts, was about 16.3% in line with normal seasonal patterns.

Charge-off rate increased 8 basis points in the quarter to 4.4%. Delinquency rate improved 24 basis points to 3.4%.

Charge-off and delinquency trends were both modestly better than expected seasonal patterns. As we've discussed for several quarters, we believe that cautious consumer behavior is one of the key drivers of persistently weak consumer demand and the resulting pressure on loan growth.

However, the flip side of relatively weak loan volumes is relatively strong credit performance, which we've observed over the last couple of years. The Consumer Banking business delivered another quarter of solid results.

Ending loans declined about $1.5 billion, in line with our expectations. About $800 million of continuing growth in Auto Loans was more than offset by about $2.2 billion of expected mortgage runoff.

Auto Loan originations were down $500 million compared to the first quarter of last year, a decline of about 11%. The year-over-year decline in originations reflect increased competition and our choice not to chase growth that might compromise the sustained returns or resilience of the business.

Consumer Banking revenue was stable compared to the fourth quarter. Loan yields were stable and deposit interest expense improved modestly.

Provision expense was relatively stable. The Auto Finance charge-off rate showed modest seasonal improvement and the overall Consumer Banking charge-off rate remains below 1%.

Our Commercial Banking business delivered another quarter of solid growth and profitability. Loans grew 1% in the quarter and 12% year-over-year.

Revenues were up about 4% compared to the first quarter of last year, driven by growth in loans and deposit balances. Revenues grew despite increased competition and pressure on margin.

Our loan yield was down 56 basis points from the first quarter in 2012, which is largely due to the continuing impact of the low rate environment, movement of our portfolio to more floating rate loans with better credit and the absence of a favorable onetime impact we had in the first quarter of 2012. Non-interest expense improved about 12% in the quarter, driven by the absence of several non-recurring items from the fourth quarter of 2012.

Quarterly operating expense was down about 1% compared to the first quarter of last year. Our charge-off rate in the quarter was 7 basis points.

We continue to see improvements in non-performing loans and credit-sized loans, so we expect a strong credit performance of our Commercial Banking business to continue. Turning to Slide 8.

Let me pull up and talk about how our businesses are positioned. Our Commercial Banking business is in a strong position to continue to deliver steady growth and profitability.

While increasing competition, particularly in middle-market lending, may continue to impact the pricing of new loan originations. We have a diverse set of businesses in attractive markets.

For example, our focus on strong local market, commercial real estate and our deep industry verticals and C&I lending continue to drive solid growth and profitability. Across our Commercial Banking businesses, loan growth, credit and profitability trends remain healthy.

In Consumer Banking, both our direct bank and branch-based deposit franchises remain very well positioned. We continue to see the benefits of local scale and attractive markets and we've made great strides in operational and customer improvement in our branch franchise.

On February 1, we rebranded ING Direct to our new direct banking brand, Capital One 360. Rebranding efforts and customer communications are going well.

Capital One 360 is now the leading digital bank positioned at the forefront of where banking is going. Our home loans credit trends remain strong and meaningfully better than the assumptions we incorporated into credit marks on the acquired Home Loans portfolios.

And our servicing operations are solid. In our Auto Finance business, our focus on building deep relationships with our most-valued auto dealers continues to pay off.

We're delivering surefooted growth by expanding this relationship approach to new geographies. We still see solid overall profitability and above-hurdle returns in new originations, but we expect that increased competition will drive returns from our current levels closer towards cycle average.

We expect that our Auto Finance business will continue to deliver solid growth and returns. Our Domestic Card business is very healthy and delivering attractive results.

Margins and returns are strong, even as we invest in franchise enhancements. Charge-off and delinquencies are normalizing at strong levels with the expected seasonal patterns.

And it's important to note that reported results in our Domestic Card business are inclusive of our partnerships business, which has lower margins, average charge-off rates and lower returns compared to our branded Card business. The key issue is loan growth, which reflects both some weak demand and, just as importantly, the strategic choices we're making.

We are choosing to let the least-resilient loans we acquired from HSBC runoff. We're also continuing to emphasize resilience in our new originations, as we remain largely on the sidelines of the high-balance revolver space in the Domestic Card market.

This choice to avoid high-balance revolvers swamps the other factors that impact loan growth, because this part of the market presents the greatest opportunity to grow loan balances through the use of balance transfer teasers and through balanced stimulation offers to existing customers. For years, we've talked about the resilience issues with high-balance revolvers and we've consistently chosen to avoid this part of the market.

By definition, the value and benefit of resilience is harder to see during the good times. But our choice to largely stay out of this part of the market was one of the key drivers of our relatively strong performance through The Great Recession.

We continue to actively pursue revolver customers that have lower balances and indebtedness levels, as well as transactor customers where we are gaining share. While the transactor business does not deliver near-term loan growth, it does deliver attractive and sustained economic value through high-spending and interchange revenue, low attrition, low credit losses and franchise-enhancing customer relationships.

Our choices are evident in selected Domestic Card metrics. Loan volumes reflect both significant planned runoff and our choice to stay out of the high-balance revolver space.

The fact that only 6% of our Domestic Card loan balances are on promotional rates is another result of avoiding high-balance revolvers. Purchase volume growth reflects the continuing growth of transactor customer relationships.

And over time, we expect the runoff will subside and that the gains we are seeing in the customer segments we're focused on will more clearly drive loan growth. Our Domestic Card business is delivering significant shareholder value today in the form of strong and sustainable returns and capital generation.

I'll conclude my remarks this evening on Slide 8. Our businesses continued to deliver solid results in the quarter.

We have great businesses with attractive and resilient risk-adjusted returns, led by strong and sustainable profitability of our Domestic Card business. Our Auto Finance and Commercial Banking businesses are delivering solid growth.

Our balance sheet is strong and we continue to generate significant capital. In the near term, we continue to navigate the challenges of the prolonged low interest rate environment, weak consumer demand and significant planned runoff of certain acquired mortgage and card loans.

We are not content to simply watch these market challenges and runoff trends play out. We are fully mobilized to protect the profitability and returns of our business by managing costs and to deliver shareholder value by returning capital.

I'll discuss cost management first. Our outlook for non-interest expense in 2013 remain $12.5 billion, comprised of $11 billion in operating expense and $1.5 billion in marketing expense.

In 2014, we expect operating expense to improve to about $10.4 billion. We expect acquisition-related intangible amortization to decline by about $100 million compared to 2013.

While this is a non-cash item that amortizes away, we intend to manage our businesses to ensure that the savings hit the bottom line. We'll also manage down our integration cost by about $160 million versus 2013 and intend to manage so that these cash savings hit the bottom line as well.

We expect to realize the remaining operating expense improvements through our continuing efforts to manage expenses tightly and operate more efficiently across our businesses. Our operating expense outlook does not include the potential impacts of either positive or negative non-recurring items, which we do not forecast.

As always, we will make decisions about how and when to spend marketing dollars based on our current and expected view of opportunities in the marketplace. Moving now to capital.

As Gary discussed, we're in a strong capital position today and we continue to generate capital on a strong trajectory. With the successful completion of the 2013 CCAR process in March, we're planning to increase our quarterly dividend to $0.30 per share beginning in May, subject to approval by our board.

As we've discussed, we see this as the first step. Based on our current forecast and subject to regulatory approval, we would expect to request share repurchases that would drive 2014 total payout ratio to a level well above current bank industry norms, driven by several factors.

We expect that our business will continue to generate attractive returns, adding to our existing capital strength. We expect significant planned runoff to continue through 2014 and we believe purchase account -- excuse me, purchasing our own stock is a particularly compelling alternative at the current time.

We've started discussions with our regulators to seek approval to begin share repurchases in 2013. While we have not yet reached agreement for this -- while we have not yet reached agreement for the sale of the Best Buy portfolio at the time of our CCAR submission in early January, our CCAR plan indicated that, in the event we reach an agreement to sell the assets, we would seek approval to distribute capital freed up by such a sale.

Any said share repurchases would be subject to approval by our regulators and, if approved, would not be executed until the time the portfolio sale actually closes. Pulling up, our outlook for the next couple of years implies that diligent expense management and significant capital return will be key levers to create shareholder value.

And we are highly focused on delivering that value as quickly and effectively as possible. And now, Gary and I will be happy to take your questions.

Jeff?

Thank you, Rich. We'll now start the Q&A session.

[Operator Instructions] If you have any follow-ups after the Q&A session, the Investor Relations team will be available after the call. Matt, please start the Q&A.

Just a follow-up on the comments on CCAR. You talked about that the plan contemplated the -- you being able to go back and repurchase some stock that was freed up.

Can you give us a sense of what that incorporates? So is it you're allowed to repurchase stock of the capital that was actually freed up from the transaction?

Or is there a different amount? And second, just when you say total payout way above banking industry norms, can you kind of try to quantify that or, at least, put it in a range for us?

Yes, Ryan, first of all, when we -- there's not an official kind of CCAR process that we are reentering here. So our intent is consistency with what was in our original CCAR process or application, if you will.

And that was very explicit about this Best Buy component. So what we are trying to free up is the capital associated with the Best Buy sale.

But again, what actually happens along the way in these conversations is something that there's not an official process and we'll have to see what happens in the Fed conversation. With respect to what we mean by the payout above sort of industry norms, bank industry norms, well, as we look out there, I think the bank industry norms are running kind of around 50% in terms of total payout ratio.

And our intent for 2014 is to distribute well above that.

So quickly, if the buyback -- if you were to get new approval for the buyback, the earliest we could hope for is basically fourth quarter as you expect the sale to close in the third, correct? And secondly, you discussed loan growth being still the big challenge out there.

Can you discuss what you're seeing from competitors, especially in the card industry, that could be limiting that availability?

Yes. Craig, it's Gary.

I'll take your first question. And again, as Rich said, there's not a formal process.

But just following our own capital plan, we would wait until after the sale closes and the capital is freed up to begin any repurchases that are approved by the regulators. So that would be probably end of the third quarter, early fourth, yes.

Craig, in terms of the competition, I assume we're talking about, in the Card business -- I think competition in the Card business is at a -- I mean, it's always intense. But it's at a fairly stable and reasonably rational level.

The biggest issue, I mean, I think we should start with this just sort of demand itself industry -- I mean, revolving debt is generally going sideways. It's been going sideways for an extended period of time.

Certainly, purchase volume in the industry is -- I mean, the card industry, since it's kind of bottomed at the downturn, the card industry has seen their own purchase volume grow faster than retail sales in the same way that the reverse effect happened on the way down. So I mean, that's been a pretty good thing.

And I think the industry has settled out to a place where supply is down from where it went to in 2011. I think what happened is, as competitors saw the sun just start to peek out a little bit in -- with respect to the great recession, they stepped on the gas with respect to direct mail volumes and marketing in 2011 and, I think, found that there wasn't nearly kind of the response that they had hoped for.

So what has happened is direct mail volumes are now kind of like 30% down from there. Generally stable.

Pricing out there in the marketplace is generally stable, I think, going up just a little bit. And so I don't think our opportunities are really being driven by competitor actions.

I think they're really being driven by the choice that we make in the -- sort of again, if we denominate our conversation by loan growth and really the choice is about the high-balance revolvers and the balance transfer sort of teaser rate gain, that is the thing that sort of most dominates the metrics with respect to loan growth. But if I look beyond that, yes, demand is weak.

We are gaining share in all the segments that we are investing in. I think we very much like the economics of what we're booking.

And the -- we don't want to push anything in an unnatural way. But the key thing is we're saying we want to make sure that our -- that we can maintain the exceptionally high returns we have in the Card business.

And we got to do that through managing our expenses carefully. Redoubling that imperative, of course, is having Best Buy move out of the equation.

So there's tremendous energy on the expense side in the Card business and then across the company on both expenses and in terms of capital return.

I had one question specifically to Best Buy and then one for Rich. Just on Best Buy, I was looking at that table that you guys had in the slide deck towards the end of it.

And I was wondering, is the fourth quarter the number to kind of look at and annualize? And when I do annualize that number, it kind of approximates about $0.38 in EPS after tax.

I was just wondering whether in that fourth quarter number, there's some seasonality. And then you talked about getting some operating leverage into 2014, so does that mitigate that impact?

And then secondly for Rich, perhaps you could just talk about marketing because that was one point you made into 2014. I was just wondering kind of how much of that number is discretionary and how much of it is allocated to cards.

And to the extent that you're not seeing the growth, how much of that can you kind of pare back?

Okay, Sanjay, it's Gary. Let me address your question.

Looking now at Slide 11 of the presentation in the appendix. We've given you the quarterly estimates for this year of the impact to Best Buy, because you're going to see those playing through from one quarter to the next.

If we closed late in the third quarter, we wanted to show you what you might expect in terms of impact in the fourth quarter. But as I said earlier, it would be wrong to simply take the fourth quarter and annualize it in terms of the opportunity cost, both because of the additional non-interest expense that we expect that we can take out of our base, some of it related to the moving out of that particular partnership.

But also because the revenue stream associated with that book of business we would've assumed would have started to decline because of the choices we've made around some of the card practices. I mentioned payment protection being one of those.

In terms of the bottom line EPS impact, remember, as well, that there's not only the opportunity loss of the earnings. But to the extent it freeze up the capital, to the extent we're able to use that freed up capital to repurchase our shares, we think we can mitigate significant maturity of any opportunity loss in terms of EPS.

Rich?

Yes. Sanjay, on your question with respect to marketing, we have the whole information-based apparatus of Capital One geared toward very rigorous measurements about what we're marketing and what we're getting for that.

We don't measure success of marketing by our loan growth metric. It's really measured by the creation of value and before we originate, after we originate and after programs have aged for many years, we, of course, we estimate and then reestimate and go back and assess and see what we have learned.

In this environment of certainly not a lot of torrid loan growth, there still is good opportunity to create real value. And we are very comfortable with what we see and we have a lot of evidence for the, I think, the positive choices that we're making.

And that's why as we're managing expenses so tightly, we're sort of separating out our kind of commitment, if you will, that this is where we think operating costs are going to go. And then the marketing call, we'll continue to be more of a line of scrimmage call, really based on what we see the market has to give us.

I was hoping you guys could help me reconcile some of the commentary, just trying to make sure that I understand how you guys are thinking about the capital return from a value-creation perspective. You've described the value-creation aspects of capital that can be freed up and returned as a result of Best Buy.

But my understanding was that you guys had paid an 8.25% premium or thereabouts to acquire the Best Buy portfolio and you, essentially, got back par for it and now you're returning that capital. So can you kind of help me understand the economic value-creation element of that?

And then I have one follow-up.

Sure. Bill, it's Gary.

And the premium that we paid for the HSBC business of just over 8% was across the entire business. We obviously, ascribe different parts of that premium based on the value that we thought existed in various parts of the portfolio.

We ascribed very little value and therefore, very little of the premium, to the Best Buy portfolio. And so that's how it looks to us in terms of being able to get back to a point where we're really creating value by returning that capital and improving performance.

And the follow-up is, there's been some evidence that post the payroll tax cuts that lower-income customers has faced greater level of financial stress. Have you seen any signs among your -- certainly, if not at an overall aggregate basis, maybe just within some of your lower-income customers of any kind of weakness from that subgroup?

No. Bill, we have looked specifically actually for that effect.

There are several things going on sort of in the broader political marketplace and we've tried to look for any evidence of actually any of those effects in the actual performance metrics of our customers, overall or within a particular segment. And we have not seen that.

On the capital commentary, Rich, I know there is -- there are a lot of investors are going to be happy to hear what you offered. Maybe I could ask you to just take one more step and think about capital deployment opportunities that could arise between here and the time when Best Buy closes and whether you would or would not look at portfolio acquisitions or any other types of acquisitions.

Well, Kevin, first of all, overall, as a general comment, we believe we have plenty of capacity to return capital to our shareholders and add attractive partnership relationships. In 2013, I think, in particular, any deal would need to be an extraordinary opportunity with identifiable near-term returns to forego an opportunity to return capital to you in 2013.

I mean, I think we're really kind of saying we're going right down this path. It's a very near-term path and we want to make sure that -- I mean, it's been an important event here to have the Best Buy portfolio.

Even though we valued it at par, it's a big event when this comes out of the portfolio. And we've got a lot of capital in a sense sort of trapped in the company here.

And we want to make sure that we get this out as fast as we can. But I don't think that, that will take away from our opportunity over time, Kevin, to get the kind of attractive partnerships that are out there and that we're well positioned to take advantage of.

Great, that's clear. And then just a quick follow-up.

Just to clarify the -- your outlook for operating expense in 2014, that would be inclusive of any savings related to Best Buy?

Yes, that's correct, Kevin.

I had 2 questions, the first one being relative to Domestic Card business. Can you give, Rich or Gary, any sort of metrics or sense that the strategy that you're embarking on -- it's obviously a difficult macro environment to grow that business.

But you seem to be spending a lot of money on marketing. The spending growth, the purchase volume growth has been fading a little bit.

That could be macro. You're still doing better than most of your peers, but the lending growth has been challenging.

Do you feel like you're getting a good ROI on your investment these days, all the money you're spending on marketing, in all the television advertising. And you -- Rich, you referenced the fact that these transactors, they don't tend to create balances right away.

But is there a potential that some of this growth you've been putting on from these high-spending transactors could just spool up and start to add more meaningfully in later years? Any signs of success would be helpful.

And I have a follow-up as well.

Yes, Chris. So the -- so metrics for the strategy that we're embarking on, I think, the -- probably the most significant metric I would point to is in the sense of risk-adjusted margin that, in our business, we are -- we are so focused on doing the equivalent of a mini stress test on every kind -- every origination that we do.

We have, over our long track record, been very, very focused on what is the credit risk and what is the revenue that we have to protect that and how does that revenue behave under stress. Now of course, The Great Recession was kind of Exhibit A of that.

But I would point right now, while we spend a lot of time talking about growth metrics to the very, very strong returns that we have in the business. And in our branded books, those returns are higher because those are blended with partnerships that are an auction-based business and it's inherently -- it's an above hurdle but lower-return business than, certainly, the business that we spent all these years building here.

So that, the revenue and the credit is really the heart of that thing and, therefore, really, the ability of this business to really generate returns. Now there's another very important thing that's going on that probably slows down our growth in what is a little bit of a seam, but I don't want to overemphasize that.

But that is just the -- this emphasis on creating value through kind of long-term franchises. So the classic long-term franchise is this -- the heavy-spender marketplace.

And these cost a lot of money to acquire. They have the lowest attrition rates of anything that I've ever seen in the Card business and that's a great thing, too.

But these things build over time. And yes, the more traction we have with that and the more other things settle out, that will continue to build success.

But it will happen even more so, I think, on the revenue side than on the -- just in terms of balances. Another metric related to that, though, is something that we don't -- we have to sometimes give you a little more color on is what's the relationship between purchase volume growth and interchange growth.

And there's also been a transition as we've gone out with more of an emphasis on getting these new transactor relationships and more of our mix comes from the new high-value reward cards instead of just the building of balances by the rest of our portfolio. The interchange growth has lagged the purchase volume growth overall.

And they also have to normalize for the partnership side of that, which has a whole different kind of economic. But anyway, long story short, the interchange growth has now also caught up to the growth of purchase volume in our branded book.

These are all things, some of it kind of beneath the surface that you can't see, but showing the sort of vertical things catching up with the tremendous horizontal economics that we have. But slowly but surely also, we are continuing to build revolver customers.

We just tend to shy away from the big balanced ones. But on a broad basis, we're continuing to build that business and they're generating very good returns with high resilience.

So we feel good about this. The key thing is, we just -- to us, is we've got to make sure that we respond to the opportunity we see in the market.

Right now, the best opportunity is to really make sure that we maintain our margin and get capital to shareholders even as we continue to build a long-term franchise and look forward to also the runoffs subsiding, which will also really get the metrics going.

That's helpful. I'm sure macro and higher consumer confidence would also help.

A related second question is HSBC. And I know you guys are fanatics about testing and measuring and evaluating your own performance.

And is this a transaction that you'd still do again? I mean, we're kind of struggling at this point to see the financial benefit.

Are there strategic benefits? The private-label business, I think, has the potential to be something special in a mobile world.

Is this part of the strategy that private label could potentially be a growth engine for Capital One over the next several years?

Well, Chris, I think that because there had been so many moving pieces, it's hard for -- it's hard to really kind of see the absolutely separable effect of HSBC. But I want to show it through -- I want to talk about it a little bit as we have seen it.

We initially set out to buy $30 billion of this and then -- and we talked about that and arranged a capital raise associated with a bit of a larger number. As you know, by the final time -- the final thing that we bought and paid for was around $27 billion something.

But since then, everything about the HSBC deal has come in consistent with own expectations. Even paradoxically, our hunch that the Best Buy portfolio was something that, in fact, we might be able to move out early.

We valued it at par. We didn't know what the timing would be and so on.

But our initial hunch was this wasn't going to be the right probably fit with us strategically. It might be great with somebody else.

And so that has even moved along in a sense consistent with expectations. So we're still very happy with this deal.

I think that the bigger kind of story there is in the face of the challenges in the marketplace and the weakness of demand and all the building of pressures on expenses that -- in the regulatory environment and everything else, to really make sure that -- I mean, our job is to drive the real return and shareholder value that can come from the position that we have put ourselves in and now with this deal coming on, these 2 deals coming on. And that's what we are very, very focused on.

So yes, we still very much like this deal.

Rich, could you actually talk about the credit card runoff over '13 and '14? Is that going to include the underlying loan growth that you're talking about that's already net of that?

And what are the characteristics of those loans that you're running off?

The credit card runoff is, the size of it, it is $2 billion. And I'm looking for an itemization of this.

I don't want to do just do this off the top of my -- oh, you got it.

Well, just getting back to Moshe's point, it's $2 billion in '13, about $1 billion in '14. And to your question, that's a gross runoff, Moshe.

That is not a forecast of what our actual balances are going to do. That's the amount that we're going to have to build in order to stay even.

Obviously, as Rich has said, we're looking to build. And we expect to offset some of that runoff.

But it's just the runoff amount. It's not an assumption about where overall balances are going.

And what distinguishes those loans from the rest of the HSBC portfolio?

And again -- well, as far as the HSBC loans go, Moshe, as Rich described, it is the -- mostly the less resilient of those loans that as they pay down, we'll see them start to run off. Also included in that number is the runoff of the very tail end of the closed-end loans that have been accounted for as part of our Domestic Card segment for many years.

And in fact, Moshe, by -- if you forgive me for possibly being only directionally accurate, I -- as I do recall of the $2 billion we're talking about in '13, $500 million is the Installment Loan portfolio. That number goes to about $200 million in 2014.

So what we have in this runoff portfolio is mostly the HSBC runoff. And essentially, just to give a little more color on that, Moshe, it is some of the highest loss, in our opinion, least resilient part of the branded book that we got from HSBC.

So you have some of the really kind of lowest-margin stuff with Installment Loan and some of the kind of highest-loss stuff. Things like the old metrics book.

Right. The -- on the Payment products, could you just remind us what you're doing going forward and what the impact is going to be as those run down?

The Payment Protection, Moshe?

Yes. Payment Protection, yes.

Yes. So Moshe, as we announced in the -- it was actually, I believe, in early a year ago that early in the year, we shut down the origination of Payment Protection products in our Credit Card business.

And so we announced there would be a -- the economics of all of that is on our existing book. We would continue the Payment Protection products, but it would just be a case of the math of runoff from there forward.

And by the way, also on Best Buy, there was kind of a similar effect that was part of the declining economics of Best Buy that Gary had talked to you be about. Gary, do you happen to have the -- talk to Jeff to maybe get the component of that runoff.

We did give some information that from which you could determine the kind of annual effect of this tail, Moshe. We're not in possession of it right at this moment.

Moshe, it's Jeff. I can get you that.

I don't have it in front of me right now. It -- the story, though, is that it hasn't changed our estimates.

And the run rates we're absorbing haven't changed. And what we're seeing is consistent with what we laid out a couple of quarters ago.

And I was wondering if you guys could speak a little bit more about operating expenses and marketing expenses. And if you were to do a little bit better than your target, where do you think there could be some additional savings?

For example, in marketing, as you do more and more cuts for acquisitions online, shouldn't that be less expensive than direct mail? And where else could you save some money on expenses, do you think?

Well, let me start with operating expenses. Operating expenses is -- this is not a program, per se.

This is, what we're talking about here, is a central basic way of life of running this business. And there are a number of factors that are significant macro trends that give an opportunity for continued expense opportunities beyond the kind of forecast window we're talking about.

And even in the forecast window, we're taking advantage of some of these. But you've got the whole trend toward digital.

So it happens on the -- that's not only in the marketing side. But the more and more customers that we can get into digital servicing, there's a key thing there on the Retail Banking side, the more and more customers that we can get to really become digital bank customers instead of such heavy users of the branches.

Even the role of things like smart ATMs that we put all over our network, these are important trends. But they don't happen automatically, David, they have to be actively managed to get the customer behavior changes and then to make sure that the money drops to the bottom line.

We are also working to drive significant improvements in technology delivery. And really, the way that we do IT projects, these are very complex projects and we've done a lot of process redesigning that and there's significant opportunity there.

The -- one of the big, big themes around banking is complexity. Banks have inherent complexity.

But certainly, with all the things that have become part of what running a bank is these days, there's a lot of leverage to complexity reduction and we're all over this. And -- but I do want to say also, again, we just bought ING Direct.

That is the leader in the way banking is going to be in the future. Now in a few ways, they were maybe too far ahead of their time and this is not a change that everyone is ready to sign up for right now.

But I think there are big opportunities there. There are big opportunities in procurement.

Big institutions like our own have very big, third-party expense budgets. And to really, really drive best-in-class kind of procurement capabilities, this is incredibly important as well.

So our entire -- I mean, we are just laser-focused. Because I -- as a guy who came out of the strategy business, I want to go -- I want to say what I think -- what we've always said, what is strategy?

Strategy isn't about bubble charts and just about market position. Strategy is about finding where the leverage is and driving great outcomes.

The things we're talking about here have tremendous leverage over a long period of time. And we are sizing them, driving them, and we want to make sure that, that's going to be a key way from customers to economics to the customer experience that we stay ahead in this marketplace.

And the same things would happen in marketing, do you think? In leverage?

Oh, sorry. And just in terms of marketing, one thing I want to say is that mail has a role -- mail is certainly declining over time, but mail has a role that is a different role than digital originations have.

And that is that mail allows you to proactively target in ways that actually aren't -- are not possible on the Internet and so on. So we -- look, I mean, we are a big player in digital originations, but our choices on the direct-mail side, the nice thing is we have an absolute expense.

We have a response rate and we have the economics that allow us to very efficiently measure how and how fast to drive down that cost as the world changes.

I guess on capital return, when you think about payout ratios, should we be thinking about it against GAAP earnings or some kind of cash earnings concept that's closer to the actual annual capital generation?

Well, Brian, I think you'd really want to mostly be thinking in terms of GAAP. Obviously, most of the non-GAAP impact on revenue will be completed in 2013.

So all that's really left next year will be the significant but predictable and slowly declining impacts on operating expense. But in general terms, Rich is talking largely GAAP, but with wide enough range, would probably cover both.

And then just on the expenses, I mean, the comments you've given are definitely very helpful and kind of show where you want to go long term. If I just think about the Card business and expense to loans, I know it's not a perfect metric but it's one metric.

You're kind of at 9% this quarter, 8% and change last quarter, expense loans and Domestic Card. And I guess, historically, used to be -- to be like 5% to 6% and some of your peers are still around 5%.

Can you help us kind of dimension how much of that is temporary versus how much of that is business mix changes or regulatory changes that have happened just as we kind of think about where that could go long-term?

Yes. Brian, look.

We have very energetically benchmarked ourselves by expenses relative to just about every dominator that we can find out there. And I want to say a few things.

First of all, there are certain things that create near-term pressure on expenses that -- and ratios like Best Buy coming out and certain things like integration costs and other things that are a little bit more in the temporary thing. One thing I do want to say is that I think our expense ratio to loan is inherently higher than other players because of our strategy of pursuing -- of kind of avoiding the higher balance accounts.

And so expenses -- loans don't actually drive expenses, they drive charge-offs, but what drives expenses is really accounts. And on a per-account basis, our metrics are much closer to some of the other norms.

But all that said, where we absolutely need to go from here is to continue to drive more and more efficiency. And there are a lot of different levers to do it and that strategy, with a capital S, that's where the opportunity really is.

And that will help us preserve what has been something we've treasured for a long time, is to have returns at the top of the industry in the Card business and then helping us to have returns for our overall corporation that are at the higher end of banks. And so again, always look ROA, again, as one of the key metrics there.

Okay?

This is Martin Kemnec in for Daniel Furtado. A question for Gary relating to the Domestic Card business.

Can you help me, kind of, just -- just aggregate how much of the $5.3 billion decline in card balances was kind of seasonal? And what was related to the runoff portfolios?

Well, Martin, it's hard to pinpoint the run-off portfolio. The 2 things that would've been driving the decline in loans, first would've been per card.

It would have been the move of Best Buy loans to held-for-sale. So you're going to see a reduction in the held-for-investment loans.

And then the balance is largely going to be seasonal. So actual runoff would be hard to measure and is almost certainly a very small portion of that, it's the seasonal effect of going from fourth quarter to first quarter, plus the impact in moving the Best Buy portfolio to held-for-sale.

Remember that was done on February 1.

2 questions. One, first, on strategy with what you have today and then on growth.

On the International Card, that business really hasn't grown in a long time, I guess the card industry hasn't grown, but does this strategically fit, Rich? Does it -- I mean, do you have an international strategy beyond the markets that you're currently in, a growth strategy to move into new markets?

Or does it make sense to sell those portfolios and redouble your efforts in the U.S.?

So, Bob, we are in Canada and in the U.K. in credit cards only.

And we chose those 2 markets, it doesn't -- one didn't have to hire McKinsey to figure that one out. I mean, in a sense, they're the markets that are most similar to the way the marketplace works the availability of data and a lot of things.

It was kind of a natural to go there and it helped that they spoke our language. But beyond that, all jokes aside, we are not at this point -- we're very focused on the agenda that we've talked about here.

Those 2 businesses, I think, the Canadian business has been a good earner for a long period of time. The U.K.

is -- had a couple of challenges along the way. Certainly, the amazing WACC the whole industry has taken on some of the payment protection thing has led to some charges and so on.

But we think we're well-positioned in both markets. And while geographically they look far away, synergistically, it's just like another part of our Card business.

We transfer talent across, we use them as training grounds for talent, new insights come out of those 2 marketplaces that we adopt here. It is synergistic, it makes money and I think it's an appropriate thing to continue in our portfolio even as we're not pushing out farther in the geographical expansion.

Okay. And then, I guess, the Payments industry is more dynamic today than ever.

And it seems like maybe Capital One who has always had a really good Credit Card business might be at a little bit of a competitive disadvantage versus some of the dynamics going on in the industry. Many of your big competitors are either closed loop or owned merchant acquirers, which we know with the JPMorgan Chase Paymentech with Visa strategy.

Does -- with the capital that you have, is there -- are there any thoughts of investing further and, say, buying a merchant acquirer or other -- investing more heavily in other areas of the Payments business that could be synergistic with your U.S. Card business?

Such as prepaid or...

Bob, we -- Chase, of course, just announced this little opportunity they're working with, with Visa. That, I think, pretty much all of the card players in the industry jumped to attention on that thing.

And we -- look, I don't think we know much about that. I think that it's a divergence from Visa's normal, more level playing field, treatment of the industry here.

But we're all over kind of paying attention to that. It would be -- the answer is no, we're not out looking to go deeply into the merchant-acquiring business.

Probably like any bank, there's some areas that we have disadvantages, but look, I think the -- I really like the positioning we have. We are not looking to significantly change the bone structure we have.

What I really want to do is capitalize on the opportunities to create value with the bone structure that we have worked for years to get and I think we're particularly well-positioned.

My first question relates specifically to revenue margin, my -- probably my favorite topic for Capital One. And I'm hoping you might be able to provide a little bit of context around the 123 basis point lift that you're getting from the Best Buy part of the portfolio coming out.

And when you look at that, it's 1633 net of the 123 basis points, it's curiously similar to the first quarter 2012. And I just want to understand how you think that's going to migrate over the next few quarters once the Best Buy portfolio is completely out of the numbers.

I'll start. It's Gary.

Rich might want to add a few things. First of all, let me just remind you that in addition to the impact that Rich described of the Best Buy in Q1, it will have an incrementally higher impact on Q2 because we'll have 3 months rather than just 2 months in the quarter when any of the reversals of finance and fee charges will not be going through revenue but they'll be going against the mark on the loans.

By and large, most of what we've seen otherwise has been kind of normal seasonal impacts. But again, you will see some pretty big impacts over the course of the year.

The Card business, in particular, when we're looking at revenue margins, because the revenue from the Best Buy portfolio will show up in the numerator of that calculation, but the denominator is just loans held for investment, so excludes that -- I mean, that's going to be the biggest single driver along with, kind of, normal seasonal trends, at least for the next couple of quarters.

And then as a follow-up, just with the $40 million revenue lift that you pointed out from the fee reversals. Is that just -- that you had $265 million of revenue suppression?

So without that, it would've been $305 million? Am I understanding how that is running through the numbers correctly?

More or less, yes.

A couple of questions. One was, I just wanted to follow-up on the expense side.

I want to make sure I understood what you're saying regarding where you anticipated expenses to go from 2013 around $11 billion, net of the marketing expense, to $10.4 billion, is that accurate?

Yes, that is, Betsy.

Okay. So excluding the integration and the acquisition-related costs, that essentially means a 3% decline, which seems eminently doable there on this non-marketing expenses.

On the marketing expense side, though, I guess the question is if you're looking to replace the runoff portfolio to the degree possible, does that imply either an increase in marketing expense to try to incent either usage or track new card accounts? And if you could also give us some color on how progress is going on implementation of the CARD Act changes that went into place last fall on extending line utilizations, is there balances for card?

Or is there any progress there you can talk to us about and help us understand how to get the balances up?

Okay. Yes.

So on the expense side, Betsy, you've got it right with respect to $10.4 billion. And again, from the $11 billion going down to the $10.4 billion, that's $100 million of acquisition-related intangible amortization, a decline in that.

$160 million of integration costs that we'll -- that we have to manage to come out, but we're dropping that to the bottom line. And then all the rest is just other operating cost savings.

When you -- I want to give you a window into how we think of marketing. We're really not out on a quest to replace the runoff portfolio.

I mean, to me the runoff portfolio is just a thing that is running its course and, in many ways, it is irrelevant to -- not in many ways, it's just flat-out irrelevant to our marketing decisions and our growth choices net of that. It's very relevant, when it comes to things like capital distribution, it's very relevant that we make sure that we manage our economics working backwards from what comes with the territory with these portfolios running off.

But underneath it all, it's the same way we make choices all the time. And we look at opportunities and we model them under stress and we pursue all the opportunities that really look good in that context.

And the marketing is really -- the marketing choices are dependent on that. And I think that however you've seen our marketing over the many years, this is really the same whole methodology there.

I'm glad you asked about the CARD Act thing because one other factor and we didn't -- we have mentioned it in other conversations but we did not today. One other moderate factor that has held back our loan growth has been the adapting to the regulatory requirements with respect to credit line increases.

And let me just talk just a little bit about this. Coming out of the CARD Act in the downturn, the regulators, understandably, have heightened expectations regarding credit line increase programs and put in -- they put in place new requirements on regarding the use of modeled income to demonstrate a customer's ability to pay.

And so they, essentially, increase the requirement in terms of validating an assumed income before one could give a line increase. And of course, as you can imagine, we have built very sophisticated models associated with line increases and we have a very dynamic and ongoing and important line increase strategy with respect to our customers.

So starting really in 2012, we work to retool, to create a line increase program that met these various conditions. And we're going to be pretty much back pretty close to our run rate later this year, so that will give an extra boost.

But it's not game-changing, but it's something that we're -- it's important that we get back to.

First of all, after the Best Buy news hit, I went back to your April or your mid-2011 filings and looked at the Kohl's portfolio. And that was a $3.7 billion portfolio and it looked like your purchased credit card receivable intangible only went up by $13 million, which is something like 35 basis points.

So that led me to think, I mean, here we have 2 cases of these partner cards and you seem to have never ascribe any value to them. And so why is it a good business if we never seem to ascribe value to these?

I mean, do you give out just too much of the economics with the partners?

Let me just answer your accounting question, Chris. So we're typically going to see more value, more PCCR-type value.

Whatever premium is paid has to be attributed to the various sources of value and the credit card relationships, because they are direct between us and the borrower, in general purpose credit cards, because those accounts will often remain over many, many years, you'll just see more of whatever is paid associated with PCCR in branded books. So that's what you're going to see there.

And if you go back to the Kohl's portfolio, remember the nature of that business, it's very particular, it's a wonderful partnership, it's a -- it's high-performing and they are a great partner. But also, remember that there is a very heavy cost and revenue-sharing aspect to that business, which is also going to affect the economics there.

So that's what would pretty much account for what you've seen in those 2 particular portfolios when it comes to PCCR. And remember, value can be ascribed to businesses that's going to be showing up in places other than in PCCR.

Is that kind of typical for a partner card, that it's that low?

For partner cards, again, there is no single representative situation, Chris, you've got to take a look at the partner, their history, the nature of the contract and what is being paid. But it's going to be different for each one.

It's not surprising that we saw what was in there. Also, remember that with these partnership transactions, there is, typically, a -- an expiration date on the contract.

There is no expiration date on our account relationship in the general purpose business. So with Best Buy, for example, because the contract was coming due in 2014, as we said earlier this year, all we did was to kind of end that a little bit earlier, that's going to have a huge impact on what's there.

So just because there is a fixed term to partnerships, that's going to affect the accounting as well. But I wouldn't read too much into the accounting as a measure of long-term, value-creation potential.

As Rich has said, we're looking for good partnerships that will deliver that over the long-term.

Chris, let me just talk strategically about partnerships. We have had an interest in partnerships for many years because it's an alternative way to get access to customers.

And in some ways, actually advantaged access to customers. Because there are people who do certain things and they choose to do with a retailer and that can be a good thing.

And, plus, you have retailers who subsidize the activity and so that can be an economically good thing. Now, it's also been very attractive to us because as a huge player in the Card business, this not only represents a significant additional source of volume, but the skills required are right down the plate in terms of how we operate the business and headlining it is credit skills.

And also in some of these partnerships, the ability to do credit across a variety of different customer profiles is also a very important thing to retailers and we have pretty -- a pretty big skill experience at that. So credit and information-based strategy is very important part of that.

Now, also very important is expenses. And as -- if you look at the Best Buy economics, it'll show you something that you probably already knew about the business and we know, which is that this is a scale-driven business.

So the marginal economics of a partnership, whether it's in unloading Best Buy or whether it's in getting another one, are particularly attractive because there's a lot of fixed cost in the business. It's a scale-driven business.

And if you look at the Private Label business, you'll find this is not an all-comers kind of thing. Capital One is third in a business with 3 big -- frankly, with 3 big players, because they're -- it is a scale-driven business.

So we have seen some companies get themselves into trouble in this business and I believe what happened is in the quest for scale, they might -- there might have been some indiscriminateness with respect to what customers are being booked or what's happening at auction. So the other thing I want to say about this business is and why it is inherently less profitable than the regular old-branded Card business is it is auction-based, it does have periodic auctions.

And the -- that is something that makes it hard to generalize, this is why things are so situation-specific. So while scale matters, what we have said is we want to selectively grow this business, going after great retailers with a strong brand, retailers that view the Credit Card program as a strategic opportunity to build a franchise rather than just a way to make more money and a contract, and this is an incredibly important point, a contract that aligns the parties' interests and has the right market-clearing price to it.

For that reason, we stayed out for a bunch of years from that business. We also stayed out because we didn't have the scale to really get -- to get in all that effectively.

Now we have the scale. We're in a great position.

I think there are relationship benefits to the incumbent that can help you in auction time if they like how you're servicing them. But bottom line, this is never going to scare the branded Card business in terms of its returns.

But relative to the opportunities that we see in banking and across Capital One's portfolio, I think it offers well above hurdle rate returns, but it has to be managed selectively. And that selectivity is both in choosing new partners and also being willing to sometimes move on from some of the ones we have.

Okay. Well thanks, everybody, for joining us on the conference call today and thanks for your interest in Capital One.

Like I said before, the Investor Relations team will be here this evening to answer any further questions you may have. Have a great evening.

Thank you.