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"There will be a renaissance in lending on the other side because the playing field has been so cleared of excess supply, irrational lending practices, and over-the-top consumer practices," Mr. Fairbank said in an interview Tuesday.

To safeguard against further credit deterioration, the company has curbed loan originations across all business lines and is scrutinizing its auto lending to determine whether it should shed a business that has lost nearly $200 million since mid-2007. On Tuesday Mr. Fairbank would not give his long-term support for the business.

In banking, the $150.6 billion-asset Capital One is trying to compete with both national and community banks, and believes it can do so, Mr. Fairbank said. In credit cards, he said, the company sees more flexibility to navigate through a down cycle because of the ability to change credit limits and annual percentage rates, though he said Capital One has never engaged in practices regulators are looking into, such as universal default or double-cycle billing. Though federal regulators' proposal to define unfair and deceptive practices in the credit card industry would mean higher costs for Capital One, Mr. Fairbank said it could also "level the playing field," allowing it to resume marketing credit cards to prime borrowers who typically maintain balances on their accounts.

"There are potential longer-term benefits," he said. "We are probably better positioned than any credit card player, because … many of the practices such as universal default and double-cycle billing were things we have never done." (See related story on page 9.)

Capital One's first-quarter profit fell 18.7% from a year earlier, to $548.5 million, as its loan-loss provision grew threefold from a year earlier, to $1.08 billion. (The provision actually fell 17% from the fourth quarter.) It has said that it expects managed losses to reach $6.7 billion through the first quarter of 2009. Last week it said the chargeoff rate in May for its $67 billion credit card portfolio rose 20 basis points from a month earlier and 54 basis points from the end of 2007, to 6.28%.

Mr. Fairbank said he is convinced that credit cards offer the most flexibility for lenders, allowing them to manage the business on an ongoing basis, though he said no asset class "is infinitely resilient." The advantage of the current situation is the focus on a borrower's ability to repay rather than the value of collateral, he said.

Capital One also said last week that 30-day delinquencies in credit cards fell 9 basis points from April and 114 basis points from the end of 2007, to 3.81%. However, Scott Valentin, an analyst at Friedman, Billings, Ramsey & Co., wrote in a June 17 research noted that believes the May results are a "temporary" benefit from government stimulus checks.

Mr. Fairbank said that growth in any kind of lending is not as high a priority as "weathering the storm" until the economy improves.

"We are very committed to generating strong risk-adjusted returns in all parts of our business," he said. "We're being extra cautious, so you will see very little asset growth at Capital One, on average, until the economy rebounds."

In the past Mr. Fairbank has shown a willingness to tighten up or jettison businesses that failed to meet such criteria. The decision to shut down GreenPoint Mortgage Funding Inc. last summer forced Capital One to swallow more than $1.1 billion in losses. Capital One inherited the mortgage wholesaler when it bought North Fork Bancorp of Melville, N.Y., in December 2006. "We have made quick and decisive moves" to fight through the credit cycle, Mr. Fairbank said.

Capital One wants to be ready to meet demand when the current cycle ends. Mr. Fairbank points to an internal effort that he said is constantly reviewing consumer trends, such as payments, borrowing, and spending habits, in search of an anticipated "inflection point" that shows improvement. Managers have been told to make preparations to ramp up lending when that moment occurs. "The challenge for each of our businesses is knowing when you see it and what you plan to do when it gets here," he said.

Mr. Fairbank continues to tout a sound capital and liquidity position, balanced by a continued ability to securitize credit card assets necessitated in part by the deposit base it gained from buying Hibernia Corp. of New Orleans in 2005 and North Fork a year later. Capital One has continued its monoline practice of stockpiling funding such as subordinated tranches of credit card funding, and it did not invest in securities such as collateralized debt obligations. As other banking companies cut dividends, he said Capital One remains committed to paying 37.5 cents a share. (It raised the payout in February from a meager 2.7 cents.)

In banking, he said there is room to expand consumer lending, as nearly three-quarters of the $44 billion portfolio in its local banking segment is commercial, with a concentration in commercial and industrial lending and multifamily commercial real estate. "We have very little exposure to construction loans," he said.

That distinguishes his company from small banks that have allowed residential CRE to account for as much as half of their loan portfolios. Some of those companies have reduced the size of their consumer portfolios by as much as 70% and focused too much on home equity, Mr. Fairbank said. Home equity "may be the most poorly positioned asset in the whole consumer lending family because you're right at the levered end of a primary mortgage that in many cases is losing value right now."

Capital One, meanwhile, is dealing with $1.6 billion of mortgages and home equity loans originated by GreenPoint. It is moving those loans on to its balance sheet after closing the alternative-A originator.

Though asset growth is not a priority, Mr. Fairbank said Capital One continues to make loans and develop products that it hopes will provide a competitive edge for its banking business. It plans to compete against smaller banks, particularly around New York, where it recently rebranded North Fork branches with the Capital One name, by offering "product bundles" that could involve rewards or pricing discounts.

Capital One is offering consumer products such as credit cards to its bank clients, but it also wants to capitalize on its data-gathering to pitch "proactively preapproved" consumer products to those customers. "We have to put in the capabilities to do that," Mr. Fairbank said. "We want to get to a stage where you walk in and we can tell you we have a pre-filled application form. More of that needs to be done."

Mr. Fairbank readily acknowledges that such efforts will not differentiate Capital One from larger banks. He said he believes, however, that many of those rivals may be preoccupied, at least in the near term, with keeping a handle on the deteriorating credit quality that came with being in too many business lines and overly exposed to businesses such as residential mortgages and home equity.

"One of the big emerging issues in risk management is the governability of large banking institutions," he said. "This downturn is really calling that into question and causing a rethink about the benefits of the superlarge institutions. While they are certainly more diversified, it sometimes means being there when anything bad happens in the world."

"Our ability to gain leverage by cherry-picking the best businesses with the most resilience is creating a balanced and stable institution," he said.Fairbank on Slow Growth, Flexibility, and Timing
American Banker | Thursday, June 26, 2008

By Paul Davis

Capital One Financial Corp. is looking hard at its business model in order to emerge stronger from the current credit cycle, said Richard Fairbank, its chief executive.

"There will be a renaissance in lending on the other side because the playing field has been so cleared of excess supply, irrational lending practices, and over-the-top consumer practices," Mr. Fairbank said in an interview Tuesday.

To safeguard against further credit deterioration, the company has curbed loan originations across all business lines and is scrutinizing its auto lending to determine whether it should shed a business that has lost nearly $200 million since mid-2007. On Tuesday Mr. Fairbank would not give his long-term support for the business.

In banking, the $150.6 billion-asset Capital One is trying to compete with both national and community banks, and believes it can do so, Mr. Fairbank said. In credit cards, he said, the company sees more flexibility to navigate through a down cycle because of the ability to change credit limits and annual percentage rates, though he said Capital One has never engaged in practices regulators are looking into, such as universal default or double-cycle billing. Though federal regulators' proposal to define unfair and deceptive practices in the credit card industry would mean higher costs for Capital One, Mr. Fairbank said it could also "level the playing field," allowing it to resume marketing credit cards to prime borrowers who typically maintain balances on their accounts.

"There are potential longer-term benefits," he said. "We are probably better positioned than any credit card player, because … many of the practices such as universal default and double-cycle billing were things we have never done." (See related story on page 9.)

Capital One's first-quarter profit fell 18.7% from a year earlier, to $548.5 million, as its loan-loss provision grew threefold from a year earlier, to $1.08 billion. (The provision actually fell 17% from the fourth quarter.) It has said that it expects managed losses to reach $6.7 billion through the first quarter of 2009. Last week it said the chargeoff rate in May for its $67 billion credit card portfolio rose 20 basis points from a month earlier and 54 basis points from the end of 2007, to 6.28%.

Mr. Fairbank said he is convinced that credit cards offer the most flexibility for lenders, allowing them to manage the business on an ongoing basis, though he said no asset class "is infinitely resilient." The advantage of the current situation is the focus on a borrower's ability to repay rather than the value of collateral, he said.

Capital One also said last week that 30-day delinquencies in credit cards fell 9 basis points from April and 114 basis points from the end of 2007, to 3.81%. However, Scott Valentin, an analyst at Friedman, Billings, Ramsey & Co., wrote in a June 17 research noted that believes the May results are a "temporary" benefit from government stimulus checks.

Mr. Fairbank said that growth in any kind of lending is not as high a priority as "weathering the storm" until the economy improves.

"We are very committed to generating strong risk-adjusted returns in all parts of our business," he said. "We're being extra cautious, so you will see very little asset growth at Capital One, on average, until the economy rebounds."

In the past Mr. Fairbank has shown a willingness to tighten up or jettison businesses that failed to meet such criteria. The decision to shut down GreenPoint Mortgage Funding Inc. last summer forced Capital One to swallow more than $1.1 billion in losses. Capital One inherited the mortgage wholesaler when it bought North Fork Bancorp of Melville, N.Y., in December 2006. "We have made quick and decisive moves" to fight through the credit cycle, Mr. Fairbank said.

Capital One wants to be ready to meet demand when the current cycle ends. Mr. Fairbank points to an internal effort that he said is constantly reviewing consumer trends, such as payments, borrowing, and spending habits, in search of an anticipated "inflection point" that shows improvement. Managers have been told to make preparations to ramp up lending when that moment occurs. "The challenge for each of our businesses is knowing when you see it and what you plan to do when it gets here," he said.

Mr. Fairbank continues to tout a sound capital and liquidity position, balanced by a continued ability to securitize credit card assets necessitated in part by the deposit base it gained from buying Hibernia Corp. of New Orleans in 2005 and North Fork a year later. Capital One has continued its monoline practice of stockpiling funding such as subordinated tranches of credit card funding, and it did not invest in securities such as collateralized debt obligations. As other banking companies cut dividends, he said Capital One remains committed to paying 37.5 cents a share. (It raised the payout in February from a meager 2.7 cents.)

In banking, he said there is room to expand consumer lending, as nearly three-quarters of the $44 billion portfolio in its local banking segment is commercial, with a concentration in commercial and industrial lending and multifamily commercial real estate. "We have very little exposure to construction loans," he said.

That distinguishes his company from small banks that have allowed residential CRE to account for as much as half of their loan portfolios. Some of those companies have reduced the size of their consumer portfolios by as much as 70% and focused too much on home equity, Mr. Fairbank said. Home equity "may be the most poorly positioned asset in the whole consumer lending family because you're right at the levered end of a primary mortgage that in many cases is losing value right now."

Capital One, meanwhile, is dealing with $1.6 billion of mortgages and home equity loans originated by GreenPoint. It is moving those loans on to its balance sheet after closing the alternative-A originator.

Though asset growth is not a priority, Mr. Fairbank said Capital One continues to make loans and develop products that it hopes will provide a competitive edge for its banking business. It plans to compete against smaller banks, particularly around New York, where it recently rebranded North Fork branches with the Capital One name, by offering "product bundles" that could involve rewards or pricing discounts.

Capital One is offering consumer products such as credit cards to its bank clients, but it also wants to capitalize on its data-gathering to pitch "proactively preapproved" consumer products to those customers. "We have to put in the capabilities to do that," Mr. Fairbank said. "We want to get to a stage where you walk in and we can tell you we have a pre-filled application form. More of that needs to be done."

Mr. Fairbank readily acknowledges that such efforts will not differentiate Capital One from larger banks. He said he believes, however, that many of those rivals may be preoccupied, at least in the near term, with keeping a handle on the deteriorating credit quality that came with being in too many business lines and overly exposed to businesses such as residential mortgages and home equity.

"One of the big emerging issues in risk management is the governability of large banking institutions," he said. "This downturn is really calling that into question and causing a rethink about the benefits of the superlarge institutions. While they are certainly more diversified, it sometimes means being there when anything bad happens in the world."

"Our ability to gain leverage by cherry-picking the best businesses with the most resilience is creating a balanced and stable institution," he said.

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