expectsto recognize approximately $160 million branch optimization expenses in 2016 — morethan 3x the amount it incurred in 2015 — as the company accelerates a shift designedto address evolving customer preferences.
Speakingon a conference call to discuss first-quarter results, Chairman and CEO Richard Fairbank said Capital Oneis still formulating specific plans and timing for the optimization initiative.It spent approximately $50 million in full year 2015 and $11 million in the firstquarter of 2016 on the effort.
The extracosts are one of several items Capital One expects to impact results through thebalance of the year. Fairbank said he expects growth in loans and charge-off ratesin the domestic card segment to necessitate further allowance builds, and he notedthat FDIC surcharges and premium changes would add about $20 million to quarterlyoperating expenses beginning in the third quarter. He also cautioned about the potentialfor further reserve-building in Capital One's oil-and-gas portfolio after a quarterin which the provision for credit losses in Capital One's commercial banking segmentincreased by $168 million on a year-over-year basis.
"Weexpect that oil-and-gas loans will continue to present challenges and we've beenbuilding reserves to reflect that concern," Fairbank said. He later added thatthere remains a need for deleveraging in the oil-and-gas industry.
"Ithink it's our expectation that it will take a while and have continuing creditimpacts as this thing fully plays out," Fairbank said.
The commercialbanking segment maintained a $262 million allowance for loan and lease losses inthe oil-and-gas portfolio, representing 8.15% of loans of held for investment withinthat book of business. That marked an increase from a $189 million allowance, whichrepresented 6.06% of oil-and-gas loans held for investment in the fourth quarterof 2015.
Fairbankdiscussed at length Capital One's success in driving growth in loans and purchasevolumes in the domestic card business. Domestic card loans held for investment roseto $84.56 billion as of March 31 from $74.13 billion on the same date in 2015. Thecompany said that first-quarter domestic card purchase volume of $62.62 billionmarked an increase from $52.03 billion in the year-earlier period.
"Wecontinue to like the earnings profile and the resilience of the business we're booking,"Fairbank said.
Responding to an analyst's question about competition in the domestic card businessas issuers step up the attractiveness of rewards programs, Fairbank described theenvironment as "very competitive" but also "very rational,"and he said that he believes there remains more opportunities for expansion.
"Thecompetitors have staked out different positions in the marketplace with differentstrategies and several are succeeding all at the same time," he said. "Ithink we still are quite bullish about this opportunity."