Q4 2020 Capital One Financial Corp Earnings Call
[music].
Good day, ladies and gentlemen, and welcome to the capital one fourth quarter 2020 earnings Conference call. All lines have been placed on mute to prevent any background noise. After the speakers' 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 then the number one on your telephone keypad. If you would like to withdraw your question from a can you. Please press.
Starkey than the number two thank you I would now like to turn the conference over to Mr. Jeff Norris Senior Vice President of Global Finance, Sir you may begin.
Thanks, very much Keith and welcome everybody to capital one's fourth quarter 2020 earnings Conference call.
As usual, we are webcasting live over the internet to access the call on the Internet. Please log into the capital one website at capital one dot com and follow the links from there.
In addition to the press release from financials. We've included a presentation summarizing our fourth quarter 2020 results.
Me today are Mr. Richard Fairbank capital one's Chairman and Chief Executive Officer, and Mr. Scott Blackley capital ones, Chief Financial Officer, Chris.
Richard Scott will walk you through the 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 just from.
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.
Well there was a result from new information future events or otherwise.
Numerous factors could cause our actual results to differ materially from those described in forward looking statements for.
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 accessible at the capital one website and filed with the SEC.
Now I'll turn the call over to Mr. Walkley.
Hi.
Thanks, Jeff.
Good afternoon, everyone I'll start on slide three of Tonight's presentation in the fourth quarter capital one earned $2 6 billion or $5 35 per common share.
For the full year capital, one earned $2 7 billion or 5.18 cents per share.
Included in EPS for the quarter were two small adjusting items, which are outlined on this slide net of these adjusting items earnings per share for the quarter was $5 21 full year 2020 adjusted earnings per share was $5.79 and.
In addition to the adjusting items in the quarter, we recorded an equity investment gain of 60 million or 10 cents per share related to our equity stake in snowflake.
For the full year investment gain was $535 million were around 89 per share.
Turning to slide four I will cover the quarterly allowance moves in more detail.
In the fourth quarter, we released 593 million of allowance primarily in our card business economic assumptions underlying our allowance included unemployment of around 8% at the end of 2021 and the impacts of the 900 documents emailed us package passed in December.
The release was driven by the strong credit performance, we have observed and by this stimulus bill.
And our allowance we continue to assume that the relationship between economic metrics and credit quickly reverts to a historical norm and we've added significant additional qualitative factors for COVID-19 related uncertainty.
In our commercial business, we charged off certain energy loans and released allowance for these specific reserves that were previously established for those loans.
Turning to slide five you can see the allowance coverage levels declined modestly from the prior quarters across our segments, but remain well above pre pandemic levels.
Our domestic card coverage is now at 10, 8%, while our branded card portfolio coverage is 12, 7%.
Recall that the difference between these metrics is driven by loss sharing agreements and our partnership portfolios coverage in our consumer and commercial businesses also remained elevated at three nine and two 2% respectively.
Yeah.
Moving to slide six I'll discuss our liquidity position you can see our preliminary average liquidity liquidity coverage ratio during the fourth quarter was 145% well above the 100% regulatory requirement.
Liquidity reserves from cash Securities and Federal home loan bank capacity declined slightly from the third quarter to end the year at approximately 144 1 billion, including about 41 billion in cash driven by continued strong deposits.
Turning to slide seven you can see that our net interest margin increased 37 basis points quarter over quarter to 6.0% to 5%.
The increase was largely driven by higher card loan revenue margin and strong credit results led to lower suppression the impact of third and fourth quarter deposit pricing actions and a modest decline in our cash balance, which was partially offset by lower yields on cash and securities.
Lastly, turning to slide eight I will cover our capital our capital position.
Our common equity tier one capital ratio was 13, 7% at the end of the fourth quarter up 70 basis points from the third quarter and 150 basis points higher than a year ago. We continue to estimate that our CET one capital need is around 11%, which includes the buffer over our capital requirements under the <unk>.
Framework of $10 one per cent as.
As we close out 2020, we have approximately 270 basis points or around $8 billion of capital in excess of our CET one target.
Following the latest stress test results released by the Federal Reserve last month and in light of the strong capital position I. Just described we expect to restore our quarterly dividend back to <unk> 40 per share in the first quarter pending board approval.
Our board of Directors has also has also authorized the repurchase of up to $7 5 billion of the company's common stock inclusive of share repurchase capacity of up to approximately 500 million in the first quarter based on the fed's current trailing four quarter average earnings rule, the timing and amount of stock repurchase activity.
Informed by our outlook on the economy as well as actual forecasted levels of capital earnings and growth.
That I will turn the call over to rich.
Thanks Scott.
As I think everyone on this call knows Scott shared with me in November that he would be leaving capital one to join a tech startup.
Well he will be here through March 15th this will be Scott's last earnings call.
So I wanted to take a moment and thank you Scott for giving so much of your life the capital one over this past decade.
<unk> the last five years.
Our CFO.
You've built strong relationships with our shareholders and across the investment community.
And you've always brought their external perspective through our work inside of capital one.
You've been a key adviser and partner for me and for the board and a strong leader in our company.
I'm, particularly grateful for the legacy you built.
Transforming finance technology.
Strengthening processes and controls.
Building, a great team of talented leaders, including.
Your successor, Andrew Young.
We will Miss you and I'm sure you will continue to do great things.
Okay.
With that let me turn to.
Our domestic card business.
Exceptional credit performance was the biggest driver of domestic card financial results in the quarter.
Domestic card charge off rate for the quarter was $2 six 9%.
A 163 basis point improvement year over year, and a 95 basis point improvement from the sequential quarter.
The 30, plus delinquency rate at quarter end was 2.42%.
151 basis points better than the prior year.
The delinquency rate was up 21 basis points from the linked quarter consistent with typical seasonal patterns.
Fourth quarter provision for credit losses improved by $1.1 billion year over year, driven by the allowance release that Scott discussed and lower charge offs.
Several factors are driving continued credit strength.
Consumers are behaving cautiously spending.
Spending less saving more and paying down debt.
These behaviors have been amplified by the accumulative effect.
However, unusually large government stimulus.
And widespread forbearance across the banking industry.
Our one long standing resilience choices put.
To us in a strong position going into the pandemic.
And our strategic investments in digital technology, and transformation are paying off and enhanced capabilities and underwriting better powering our performance and response to the pandemic.
Strikingly strong consumer credit has persisted throughout 2020, even after the expiration of several parts of the cares Act.
Uncertainty about future credit trends remains high.
Especially in the context of an evolving pandemic that is difficult to predict.
As Scott discussed that uncertainty informs our allowance for credit loss.
We believe that each incremental months of favorable credit reduces the cumulative losses through the downturn rather than just delaying the impact.
At the end of the fourth quarter domestic card ending loan balances were down $21 billion or 17% year over year driven by three factors.
Cautious consumer behavior reduced spending and demand for new credit and drove payment rates to historically high levels.
Our marketing pullback at the outset of the downturn put additional pressure on loan balances.
And we moved our partnership portfolio to held per sale in the third.
Good quarter.
Excluding the impact of the move to held per sale ending loans declined about 15 per cent.
Fourth quarter average loans declined 16% year over year.
On a linked quarter basis, the expected seasonal ramp drove ending loans up by about 3%.
Yeah.
Purchase volume continued to rebound from the sharp declines early in the pandemic.
For the full year purchase volume was down 2% in 2020.
Fourth quarter purchase volume was essentially flat compared to the prior year quarter.
That compares to a year over year decline of about 30% in the first weeks of the pandemic.
Quarterly purchase volume increased 10% from the sequential quarter consistent with the expected seasonality and the continued rebound.
Despite the rebound purchase volume growth is still down compared to the double digit growth we were seeing before the pandemic.
Fourth quarter revenue declined 7% year over year as a result of the decrease in average loans, partially offset by higher revenue margin.
The revenue margin was up 121 basis points year over year to 16.91% largely driven by two factors.
Strong credit drove lower revenue suppression.
And year over year.
Net interchange revenue in the numerator of that margin is essentially flat.
While average loan balances the.
The denominator of the margin calculation.
Are down 16%.
Yeah.
Noninterest expense was down $186 million or 8% from the fourth quarter of last year, largely driven by our choice to pull back on domestic card marketing when the pandemic hit.
Yeah.
Total company marketing trends are largely driven by domestic card.
Fourth quarter marketing for the total company was down 20%, 21% year over year.
On a sequential quarter basis total company marketing increased significantly in the fourth quarter.
Looking ahead future marketing will be impacted by how things play out with the pandemic and the economy.
In the midst of the pandemic, we're finding opportunities and we're leaning into them.
These opportunities are enhanced by our tech transformation.
The ultimate level of our 'twenty 'twenty one marketing.
It will depend on our continuing real time assessment of the marketplace.
Slide 12 summarizes fourth quarter results for our consumer banking business.
Driven by our auto business ending loans increased 9% year over year.
Average loans grew 10% for the fourth quarter and 9% for the full year.
When the Covid downturn began we tightened our underwriting box and auto to focus on the most resilient asset.
We believe that several factors drove our growth.
The auto market rebound has been stronger for larger franchise dealers the part of the market where we're focused.
Our digital products and services drove growth in direct to consumer originations.
And growth with dealers we.
We want to provide a low touch car buying experience in response to social distancing.
And our dealer relationship strategy put us in a strong position to grow high quality auto loans.
Fourth quarter auto originations were down 2% year over year.
Competition picked up late in the third quarter and continued to increase in the fourth quarter.
Fourth quarter ending deposits in the consumer bank were up $36 $7 billion or 17% year over year, driven by the stimulus driven surge in deposits in the second quarter.
Average deposits were up 19% for the fourth quarter and up 15 per cent for the full year.
Our average deposit interest rate decreased 73 basis points year over year, and 19 basis points from the linked quarter as we reduced deposit pricing in response to the market interest rate environment and competitive dynamics.
Fourth quarter consumer banking revenue increased 18% from the prior year quarter.
<unk> revenue was up 4% both increases were driven by growth in auto loans and retail deposits.
Annual growth was negatively impacted by differences.
And the timing of federal reserve rate cuts preceding our deposit pricing reductions non.
Non interest expense in consumer banking was up 1% year over year.
Fourth quarter provision for credit losses improved by $275 million year over year, driven by lower charge offs, and a modest allowance release and our auto business.
Fourth quarter credit results.
Our auto business remain unusually strong even after seasonal linked quarter increases of 24 basis points and the auto charge off rate.
And 102 basis points in the delinquency rate.
Year over year, the charge off rate improved.
143 basis points to 0.47% and the delinquency rate improved 210 basis points to four points seven eight per cent.
Strong auto credit is the result of several factors.
In addition to the same general drivers of domestic card credit strength auto credit.
We also benefited from very strong auction values and our auto forbearance is having a temporary positive impact, particularly on delinquency rates.
We've provided updated auto forbearance information on appendix slide 18.
We expect auto credit metrics to increase from there unusually low levels as auction prices normalize and the temporary impacts of Covid forbearance play out.
Moving to slide 13, I'll discuss our commercial banking business.
Fourth quarter, ending loan balances were up 2% year over year, driven by growth in selected CNI and CRE specialties.
Average loans were also up 2% for the fourth quarter and six per cent for the full year.
Quarterly average deposits increased 21% from the fourth quarter of 2019 and.
And average.
And you have annual average deposits grew 14% in 2020 as middle market customers continued to bolster their liquidity.
Fourth quarter revenue.
It was up 10% from the prior year quarter.
Annual revenue was up 6% per the year.
Annual revenue growth from higher loan and deposit volumes and higher non interest income was partially offset by lower net interest margin non.
Non interest expense for the quarter increased by 1% year over year.
Provision for credit losses improved by $90 million compared to the fourth quarter of 2019.
Allowance release that Scott discussed was partially offset by higher charge offs largely related to our oil and gas portfolio.
Our oil and gas explode exposure declined year over year.
We've provided a breakout of our oil and gas portfolio composition and reserves.
An appendix slide 19.
The commercial banking annualized charge off rate for the quarter was 0.45 per cent.
The criticized performing loan rate for the quarter increased compared to both the prior year and linked quarters.
Two 9.5% driven by downgrades in our commercial real estate portfolio.
The criticized non performing loan rate rose modestly.
From the prior year quarter to 0.9 per cent.
I'll close Tonight with some thoughts on our results and how we're positioned for the future.
It's not a surprise that the pandemic shaped our 2020 results.
For the full year total company loan balances declined 5%.
Annual revenue was essentially flat.
Including $535 million.
In games on our Snowflake investment.
Non interest expense was down 3% with a decline in marketing and relatively flat operating expense.
Provision for credit losses increased by $4 billion.
And earnings.
<unk> per share rebounded from negative territory early in the year to $5 18 for the full year.
Down significantly from 2019.
Three key themes are evidenced evident in our 2020 results.
N demick pressured top line loan balances and revenue.
<unk> in the first half of the year.
On the bottom line.
Try kingly strong credit resulted in a return to positive trajectory and record profitability in the second half of the year.
And our long standing strategic choices put us in a strong position to respond to both the near term challenges and the emerging opportunities.
Turning first to the near term challenges.
Domestic card loan balances declined sharply as cautious consumers stimulus and widespread industry forbearance drove historically high payment rates and reduced demand.
Lower loan balances put pressure on revenue efficiency and scale.
The operating efficiency ratio net of adjustments.
One is 46 per cent.
It was 46.9% excluding snowflake games.
The flip side of this top line pressure was exceptionally strong consumer credit performance, which drove two consecutive quarters of record earnings in the second half of 2020.
Strong second half earnings coupled with a smaller balance sheet enabled us to increase our CET one ratio to $13 seven per cent.
Good day, we've announced our intent to raise the quarterly dividend to its prior level of 40 <unk> per share subject to board approval and we've also discussed our plant. We also discussed our plan for up to $7 $5 billion of share repurchases, which our board has already approved.
Throughout 2020, we have been well served by the choices we made before the downturn began since our founding days, we've hardwired resilience into the choices, we've made on credit capital and liquidity through good times and bad as a result, we entered the downturn.
With strong and resilient credit trends, a fortified balance sheet and deep experience in successfully navigating through prior periods of stress, including the great recession.
Our investments to transform our technology and how we work and our efforts to drive the company to digital are paying off.
Our transformation is powering our response to the downturn and putting us in a strong position for emerging opportunities as the pandemic plays out.
Pulling way up.
Despite the pressures of the pandemic in the near term nothing has changed about where we think our businesses are headed or the long term strategic opportunities that are being created as sweeping digital change continues to transform banking as.
As we manage through the near term challenges. We also continue to focus on the things that create long term value and deliberate and sustained overtime.
Continuing to transform our technology from the ground up.
Capitalizing on our transformation to drive innovation and growth.
<unk> generated positive operating leverage and improving efficiency.
And managing capital efficiently and effectively including significant capital distributions.
And now we'll be happy to answer your questions Jeff.
Thanks Rich.
Scott, Let me add my personal thanks for all the coaching and leadership, it's been a pleasure to work with you over the years.
Wish you all the success as we go forward.
And now we'll start the Q&A session.
Courtesy to other investors and analysts who may wish to ask a question. Please limit yourself to one question plus a single follow up question. If you have any follow up questions. After the Q&A session. The Investor relations team will be available after the call.
Keith Please start the Q&A.
Thank you, ladies and gentlemen, if you would like to ask a question. Please signal by pressing star one on your telephone keypad, if you're using a speaker phone. Please make sure. Your mute function is turned off to allow your signal to reach our equipment.
Please press star one to ask a question.
For just a moment hello, everyone an opportunity to signal for questions.
We will take our first question from Rick Shane with J P. Morgan. Please go ahead.
Good afternoon, everybody, Scott, Congratulations and Andrew I think when you look.
With that Scott, leaving you with a $15 $5 billion reserve is probably the best.
Yes, he could give you from.
I wanted to talk a little bit about that.
When we look versus day one the reserve is now a $5 billion I'm curious when we look at the current credit metrics. What do you think the scenarios would have to be to actually really utilize that reserve.
Over a lifetime.
Hey, Rick well, thanks for your kind words and I appreciate that.
Both rich and Jeff St such nice things Thats been honestly, just a privilege to be at this company and it's it's certainly a tough place to want to leave but let me turn to your questions.
In terms of the allowance.
You're right that when you look at our coverage levels versus our current level of losses and delinquencies, there's a big gap.
And I would just point out that you know that is because right now our allowance is built to absorb a very wide range of outcomes, which give us sense, which is sensible given kind of the circumstances that we are in at the moment and so I think that the biggest driver where they allowance Mike.
And what might drive releases is frankly, just certainty and.
Narrowing down the range of possible outcomes.
I think could come from things like you know.
Economic factors like unemployment or pandemic specific variables like broader rollout from the vaccine reduced restrictions on people's movements and activities and things like that so to me it feels like.
You know that certainty is is more likely to happen over time versus the step function. So you know I think we will see the allowance kind of play out in.
And in measured glades overtime.
Got it okay. Thank you I know, we're looking forward to seeing in the Bay area.
Next question please.
We'll take our next question from from day <unk>.
Any risk.
Hey, BW. Please go ahead.
Thanks, and congratulations Scott.
Yes, I have a question on the marketing expense in sort of the efficiency ratio targets that you guys had outlined some time ago. When we look at the marketing expense. It seems like run rate wise, we're back to 2019 levels on a quarterly basis can.
Can we keep that he's actually exceed that going forward, if there's opportunity in the marketplace and then.
As far as the efficiency ratio is concerned I mean, how long before we can get back to the 52 per cent target that you put out language.
So sanjay good evening.
You know, we are not making specific guidance about.
[noise] about marketing as you know this is a.
You know.
While there are certain things that are sort of a fixed mostly fixed about our marketing expenditures a lot of us based on real time assessment of prospects.
Or resilient growth in the competitive marketplace.
But let me just kind of pull up.
And talk about our journey this year with respect to marketing.
We pulled back early in the crisis.
But have since increased marketing spend as you saw in Q4.
And as expected the increase from Q3 was meaningfully higher.
Than typical seasonal patterns.
Right now we are seeing opportunities to invest.
We continue to invest in our brand and our national banking strategy.
And in our card business, we're leaning in where we see signs of strength.
And we feel pretty good about our origination opportunities.
And these are enhanced by us.
Our tech transformation as.
As well.
So we're keeping a very watchful eye on the marketplace.
But we do see opportunities and we're investing in them.
And with respect to our efficiency.
We still believe that we're on the path to achieve the efficiency.
<unk> targets that we had said that we had talked about in prior years, driven by growth and digital productivity gains.
And it really enabled by our tech transformation.
The pandemic has really impacted the timing of when we get there.
Particularly on revenue growth.
Now we feel good about you know our current revenue trajectory and.
You know, we're still on the same efficiency journey, but how the pandemic and the recession will play out remain uncertain.
And how the growth opportunity.
You know unfolds and also the the the the sort of the grade credit paradox with the strength of credit also comes the.
You know the high payment rates, which.
Certainly it's a great thing for the overall financial performance of the company, but its another thing that holds back.
The growth. So you know we're leaning into really Hum.
And the growth opportunities, but.
And we're on the same kind of heading.
Heading to the same destinations we talked about before.
But we're not.
You know, giving guidance about the timing.
Yeah.
Next question please.
We'll go next to Bill Kirk catchy with Wolfe research.
Did you mean.
Congratulations Scott.
He talked about the buyback authorization is it reasonable to expect that you would seek to be as aggressive as possible in executing on it such that you could see you do the full amount by the end of 'twenty 'twenty, one assuming a favorable backdrop, where the fed withdraws.
Restrictions and then within that how are you guys thinking about the regulatory capital impact of the seasonal seasons for day, one and two under the true yourself.
Yeah.
Thanks for the question Bill.
Look with respect to the share buyback program I think the most important thing I just want to underscore is that the seven 5 billion that was authorized by the board really underscores our commitment to returning excess capital to the shareholders and I think that.
We're certainly excited to start that journey.
We think about capital deployment.
I think the the hierarchy. There is first you know capital to growth opportunities and then share buybacks and dividends to follow and I would just point out that in our past practice you can see that we manage share buybacks dynamically and we take into account market conditions relative value our holistic view.
One where we are and our capital position.
In the first quarter will be limited to 500 million I mentioned that based on the fed rules.
After that the pacing of the share repurchases are really going to be guided by the factors I just talked about and by any regulatory guidelines that are that we might see I'll, just say that we find our current valuation compelling and with over 8 billion of excess capital.
We're really looking forward to getting started on the program.
Next question. Please will go next to John Hecht with Jefferies. Please go ahead.
Well, thanks, very much guys for taking my questions.
You.
Barked on your digital banking transformation several years ago.
At that point in time the team gives us the intent was to.
Scale, a traditional bank and you're using a digital platform.
Could do lot more from your customers and it really simplified fashion over the over digital channels, but digital banking I think has changed you know with the with the development of a company like so far in some of the Fintech.
Fintech companies kind of getting into a post dinner dinner banking offerings with digital wallets. Nonetheless, it I'm wondering is that the development of <unk>.
Migration of digital banking overall does that affect how you see investments going forward to capital one.
Yeah.
Well everything that we see.
John I think reinforces the or.
Our conviction about the strategy that we have and the journey that we're on and the destination where so.
Energetically pursuing.
And and.
First of all I'll talk about the pandemic.
I don't think the pandemic changed much about the destination of banking, but it changes the timing of that because it accelerated the digital journey and one thing that's been so.
Striking about banking products and you.
Even banking products relative to two credit card products is the.
You know the stickiness and the inertia inherent in the customer relationships that have existed sometimes for many decades.
And so one of the challenges for any digital banking is how do you go.
Go after that that inertia and create something compelling enough to cause people to switch.
And.
You know so it's really nice being on an in a sense the right side of history, because we can see the direction things go what I'm struck by is the.
The the amount.
Amount of acceleration that we've seen in these inevitable trends this year.
So you know that that's a good thing for us and we want to capitalize on that now the other.
Along the way not surprisingly we've seen the rise of some very intriguing banking syntax.
And you know, we watch with great interest there.
<unk> in many cases they have very.
Nice you know digital customer experiences.
Some cases, they have created strategies that.
The banking industry didn't come up with us.
And you know, we we look with interest in that and in many ways root for their success because it's all part of the same day.
Their success is is a manifestation also of the B b.
Accelerating.
Change in customer behavior, and the opportunity for digital banks. So we have a lot of respect for some of the players were impressed by their innovation and we're energized by their success and the success that we're having.
And.
So as a result, we're leaning in.
Moving to lean in and leaning in a little harder.
On our own.
Banking.
Strategy.
I appreciate the context, thank you very much.
Next question please.
Take our next question from Don <unk> with Wells Fargo. Please go ahead.
In terms of the things like discussion I was wondering if you could comment on buy now pay later does that impact your business from one thing competition perspective per sympathetic risk.
And is it material enough for us to keep them from.
Risk perspective.
Yeah.
So.
You know buy now pay later.
Is a really interesting.
Hum.
Marketplace.
It's kind of ironic because the original buy now pay later product.
Of course, the credit card.
And so it's interesting to be a very established a credit card.
Player and.
I'll feel a little bit like the old guard us we're watching these innovations on on a buy now pay later and you know I have a lot of respect for and I'm impressed by some of the things that the success of the point of sale.
Lending products.
Products.
And you know point of sale lending as of course existed since really the beginning of of of lending itself.
I think what's striking here.
Is that the way that it exists of course in the E Commerce space the way its got a shelf space right there on the at the checkout.
Page.
The.
Some of the elegance of the of the digital technology.
And interestingly right now.
Sort of financially how this marketplace works because the the the striking thing to me is that right now merchants.
Are actually paying the bill as opposed to consumers and that tends to create a healthy marketplace. It tends to create better selection dynamic.
And then very often you see in some of the short term lending products. They tend to have very high effective APR us and things that can sometimes.
Sometimes lead to adverse selection. So I think to me the thing that I'm most interested in watching from sort of the structure of the of that marketplace.
What happens to the.
In a sense that the merchant.
Discount with respect to those products as the competition from lenders heats up in that space. So that's something we'll have to watch so I think theres a lot per capital one to learn.
In this marketplace and and you know we're.
Watching it closely and.
And.
<unk>.
Really with with interest look to see how this opportunity evolves.
Thanks Richard.
We'll take our next week.
Thank you Sir our next question is from Ryan Nash with Goldman Sachs.
Hey, good evening guys.
Scott Congratulations.
Yeah.
Rich.
Maybe just to dig in a little bit further on the efficiency.
I understand that you don't want to put a timeframe on it. However, if we look at the performance. This year when the 46 per cent range still about 400 basis points from the 42% target that you had laid out so.
Maybe just talk about the path to getting there from a financial perspective is it all about the return of card loan growth and the revenue growth that comes with it or is there more from the digital transformation on the cost side and if cost is part of it can you maybe just talk about what some of those drivers are and and you know what the timing is in.
Terms of us getting there thank you.
Yeah, So Ryan.
Yeah.
The efficiency of our journey and the success, we had over a number of years really till the COVID-19 pandemic sort of set things back a bit.
It was driven.
Kind of mathematically of course by the two factors.
Sustained revenue growth.
And the.
The efficiencies that we're coming particularly from.
Transforming.
To a more digital operating model.
And you know I think the same things that drove him.
Our efficiency ratio down over the years are going to be the same drivers.
Going forward when at the time that we.
You know gave the guidance on on 42 one.
We were you know there were a lot of things coming together that are not.
Not only on the efficiency side things like getting out of data centers.
Things like the the step up.
That are in the in the in the Walmart revenue sharing relationship.
But very much we were looking at them.
Accelerating our growth opportunities.
In our businesses, particularly our consumer businesses so.
The pandemic set that back and so the I would still say the biggest driver of.
The the efficiency.
He games that we.
We'll we'll continue to work toward will be on the revenue side.
Cuz, we still continue to invest in the digital opportunities veteran fact, enabling the revenue growth and one thing that that we've talked about is that we were.
Where we're now.
Finish with our eighth year of our tech transformation and you know in many ways. This will be a lifelong transformation, but we this has been a starting at the bottom of the tech stack journey and over time, we've been working our way up the tech stack and the and the more we get up the tech stack the more of the opportune.
These are things that you know will actually the world can see things that customers can experience and things that can more directly enable growth and that's why I mentioned on the on my.
My comments about marketing.
Is that some of the marketing opportunities. We see are in fact, specifically enabled.
By our tech transformation. So therefore, while Tac continues to create efficiency opportunities. It is also the.
The basis for a number of our growth opportunity and we really want to take advantages.
<unk> of those were leaning in and of course, it takes investment to do that so that's why.
Uh huh.
I think growth revenue growth is you know I would expect it to still be the bigger driver of our efficiency journey on a net basis than on the cost side, but really the key is having.
Having the revenue growth that exceeds the growth in expenses of course.
Uh huh.
Next question please.
Take our next question from Moshe Orenbuch. Please go ahead.
Great. Thanks.
So Richard you know in the past.
You, you've always you kind a tendency to see the loan growth kind of lagged the marketing spending account growth based upon credit loans and you talked about the need.
True to kind of incubate those accounts and increase their credit lines over time to get that balance revenue growth kind of shrunk a little bit about.
So where you sit in that now given the unusual nature, you know kind of book, where we are and you know and.
It could be economic cycle.
Alright, well. Thank you Moshe you know the.
With our strategy of.
Relatively lower lines, we've often talked about how in many ways. The b you know.
Primary credit risk in the primary.
You know.
Growth comes really on the line increase side more so than just the originations themselves.
And so what we have often done in.
You know in times of distress or when there is extra caution and you you will remember Moshe in the probably 18 months prior to this downturn maybe two years. We were also talking cautiously about lines.
Because we said we are so long in the tooth on this.
You know this economy.
And so.
That has been our strategy for managing risk is to try to you know.
Hold the lines down where we can continue to lean into the origination side of the business and then.
I will open up the lines as we see more of the sun coming out and more opportunity.
One customer at a time.
So where we stand on that we've been particularly tight.
On the lines during this downturn, but I think that you know as.
As we watched the pandemic play out.
I think that we see opportunities.
One customer at a time, but collectively pulling up on this we do see.
Important opportunities for increasing those lines and you.
You know as we do that that can.
You know put some momentum around all day.
The loan growth in a way that.
You don't just get from originations, which we're also leaning into it.
And then maybe as a follow up when.
When I would get the question in the past about what could cause you know rewards rates to kind of moderate or come down I had set an economic downturn.
Obviously, we've got some form of an economic downturn, if anything it's gone the other way when he talks about the kind of intensity of rewards competition.
Think about that into the next year or two.
Yeah, you know, it's a really interesting question Moshe weather.
Whether rewards rates.
Whether a downturn caused us rewards rates to go down or up so the case for down in other words for people for the competition to get less intense about that is that people are pulling back their spending less and they're more concerned about.
You know.
Writing through the downturn than they are about trying to grow quite a bit here as the flipside to that argument and the thing that I think is dominating in that particular tug of war.
And that is that.
What what.
He is most striking about the pullback probably true in any downturn, but especially in this one.
Is how much the spending.
How much of a pull back there has been in spending and what a pullback there has been in spending by heavy spenders.
And I think that's not just a point about heavy spenders us partly what heavy spenders spend their money on which is travel and entertainment on a disproportional basis relative to others and those are the sectors that have been absolutely whacked here.
So.
It's generally the case that the heavy spenders are from a credit point of view.
Everything that we have seen would be consistent that they perform well in a downturn.
Just get more conservative in their spending.
Travel opportunities and things like that don't necessarily look so enticing and certainly the case in this downturn.
So I think what happens is a response from players to lean into.
You know increasing inducement.
To generate them.
You know the volumes that people want to get we have seen significant increases in them.
You know upfront.
Bonuses.
We've seen increases in reward levels.
And you know I think that's probably a natural thing for us to expect.
In this particular environment, even though paradoxically, it's associated with so much pull back.
Next question please.
We'll take our next question from Betsy <unk> with Morgan Stanley. Please go ahead.
Hi, good evening.
Can you hear me, Okay, yes, yes.
Okay. Thanks.
You know my question is just on how to think about the reserve levels in a reserve release from here and I know the question was asked a little bit.
But the reason I'm raising it is I think he said that your reserve today is based on unemployment rate of 8% at 2021, I know, there's a lot more input from just that but yeah. That's about 8% at year end 'twenty, one it's similar to last quarters.
Yet at the same time I know rich you mentioned that every quarter that goes by with good credit you know us.
Is it like a reduction of peak if not a push out.
So how should I triangulate that should we be anticipating Ah you know any more aggressive reserve releases as the quarters come through that are you know.
Not so bad.
Or is there something else going on in the reserving analysis, we should be thinking about.
Hey, Betsy why don't I take that one so.
Look I think that the us.
I mentioned, a couple times I think the biggest consideration in our reserve right. Now is just the uncertainty and trying to make sure that we're capturing all of the scenarios in thinking about that and that is resulting in us having a really high level of qualitative reserves on top of our <unk>.
<unk> risk.
And so even in the current quarter, where youre right our 2021.
Fourth quarter estimate of unemployment at around 8% is consistent with where we were last quarter. During the full year, we're expecting lower levels of unemployment than what we had forecasted.
In Houston, our allowance a quarter ago.
And so that coupled with with we saw the passage of stimulus where both factors that drove the release this quarter, but we still have even with that those positive trends, we put on even more qualitative factors because it's just really hard to forecast where this thing is going to go and how it may.
Play out and we're in the allowance we continue to expect that we will see the very low levels of credit come up and meet the high levels of unemployment that we see today.
And you know.
I I really do believe that we will over time see.
See that play out exactly how that relationship is going to normalize and if it doesn't normalize then we're going to have allowance releases and theyre going to come in over time, but until we start to see kind of more evidence that that relationship is going to stay kind of at the level to where it is I would expect that we're going to continue to reserve against.
You know a variety of downside scenarios.
Next question please.
We'll take the final question from Bob Napoli. Please go ahead.
Thank you and good evening and congratulations Scott and look forward to hearing where you are headed.
Thanks, Bob.
Rich cash.
On the interest on the tech investments in.
That is one if you can quantify at all for us and maybe for Scott the amount you're spending one technology versus several years ago with the growth from those investments and then maybe more importantly, what do you feel differentiates us the most from from other banks or Fintech.
<unk>.
With the changes or the upgrades and the technology and what's on the road map.
For further upgrades.
Okay Bob.
We don't break out our tech investments.
But capital one I think relative to banks our size invest quite.
Quite a bit more in technology than my sense is of what other banks our size invest in by the way. Our primary competitive set is is the big national banks and they have gigantic tech budget. So we don't.
You know we certainly are.
You know.
Also what we're up against but.
Let me just talk about again, so philosophically, what we've done but I think what most banks.
I think companies in general when you know when they're looking at you know everybody knows they've got to invest more in technology.
And and.
Even as recently as this quarter. So many companies said, they're they're increasing their technology spend.
And I almost can't imagine you know companies not feeling the need to do that as they face and accelerating digital revolution.
I think the thing that very common that companies do is they make their biggest investments at the top of the tech stack, meaning that the things that are closest to the consumer you know investing in apps investing in.
You know experiences for customers or our associates or things that can moor.
[noise] directly and immediately.
Manifest in improvements and there's no you know us.
It's a very natural thing to do capital one has taken the unlikely journey. The B you know a little bit the road less traveled by to have.
We have our investment primarily.
At the bottom of the tech stacks that were talking you know down in you know a core systems and data and and.
You know.
Addressing vendor products and their role in this thing, bringing lots of things in house.
Bringing a lot of engineering in house, and it's been a journey that and and you know this Bob and other investors on this call know that they would often say you know I know you're investing a lot you're talking about it but I can't see it.
Because the problem is if you if you work to improve one system in the core systems it doesn't really.
Manifest itself in.
You know something that the outside world can see and this is really the essence of the challenge that we and you know our investors who have patiently owned our stock.
Now if this journey that we're going through.
What we are so deeply believe that at the outset of this journey and absolutely believe now that in order to compete with the tech companies in order to be a modern company and be able to go where banking is going to go.
One really needs a modern tech stack.
And you know that that that's a hard thing for a startup bank to build a really hard thing for a legacy company to build I think it was a little easier for capital one only that we were in a sense an.
And original Fintech, three decades ago, and so maybe you don't have as much legacy us as a lot of companies do but it's still been a very significant.
I can't journey.
So, but I think you know when you say how do we compare ourselves with other companies I think other companies have you know I think there's a lot of good things other companies to go and they are doing they have really nice apps for their customers and everything else.
But I think more and more capital one is built like a like a tech company. Unlike some of the leading tech companies that are.
Changing the world and I think it was a little bit of.
Of a shock to some folks when one day, we said by the way.
We're getting entirely out.
One of Datacenters and into the cloud.
And.
That's the kind of thing that that could only come as the product of many years of this and it's not an accident that.
Almost no a big enterprise legacy companies have in fact made that journey now where it is.
But what it puts us in a position to do.
Is that is to us too.
Drive for opportunities and act more and more like a tech company and be able to.
Be more dynamic faster to the market create a offer better products.
A better customer experience and that gives us the opportunity to transform how we work really how a bank works on the inside from risk management broad credit.
Clients operational execution.
It enables us to.
Build our national bank and lean into that it enables us to win some partnerships that you know in head to head competition.
We I feel that we one by virtue of the some of the tech capabilities we had.
It enables us to achieve better economics, and not so much in saving on well, partly you know tack on tech costs like massive vendor costs that we can save.
But at the same time, we're investing a lot of it in Texas.
The big net net the big net net savings.
Not so.
So much tech costs.
As it is the opportunity to reduce analog costs overtime. So you know that's that's.
Kind of a long answer to your question, but.
When we looked out.
Ted you know over time, we're going to want to do that or we're going to want to do this thing over there or we're gonna do bad thing over there.
In each case, we sure saw a shared path of of investment and transformation that we would need to do and we're well down that path. We are not done in many ways. It's a lifelong journey, but I think our opportunities are increasing.
As we get farther down this path.
Thank you I really appreciate the detailed interest.
Okay.
Thanks, everybody for taking your book.
Like to thank everybody for joining us on this conference call today.
Thank you for your continuing interest in capital one and remember that the Investor Relations team will be here. This evening to answer any further questions you may have have.
Have a good evening everyone.
Ladies and gentlemen. This concludes today's conference. We appreciate your participation you may now disconnect.
Thank you.
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Okay.
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