Q1 2021 Capital One Financial Corp Earnings Call

[music].

Good day, ladies and gentlemen, welcome to the capital of one first quarter of 2021 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 he would like to ask a question. During this time simply press the star key.

Then the number one on your telephone keypad, if you'd like to withdraw your question from the queue. Please press the star key than the number two thank you I would now like to turn the call over to Mr. Jeff Norris Senior Vice President of Finance, Sir you may begin.

Thanks, very much Keith and welcome everybody to capital one's.

The first quarter of 2021 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, the capital one dot com and follow the links from there.

In addition to the press release on financials. We've included a presentation summarizing our first quarter 2021 results.

With me today are Mr. Richard Fairbank capital one's chairman and Chief Executive Officer the.

The Mr. Andrew Young capital ones, Chief Financial Officer Rich.

Richard Andrew will walk you through this presentation.

The access a copy of the presentation and the press release. Please go to the 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.

The 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 those 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.

And with that I'll turn the call over to Mr. Young Andrew.

Thanks, Jeff and good afternoon, everyone I'll start on slide three of the Tonight. The presentation in the first quarter capital one earned $3 3 billion or $7 <unk> per diluted common share pre.

Pre provision earnings increased 1% in the quarter to $3 4 billion and we recorded a provision benefit of $823 million.

After recognizing $535 million of gains during 2021 on our snowflake investment.

We had a loss on our position in the first quarter of 75 million or <unk> 12 per share.

We've now fully exited our position with a cumulative gain of $460 million.

Turning to slide four I will cover of the quarterly allowing smoothed in more detail.

Yeah.

In the first quarter, we released $1 6 billion of allowance.

The release was driven by strong credit performance across all of our businesses.

And a more favorable economic outlook that includes the $1 nine trillion stimulus package passed in March.

Yeah.

Our allowance continues to assume that the relationship between economic metrics and credit performance reverts to historical patterns.

And despite the strong credit performance and more favorable economic outlook, we continue to hold significant qualitative factors to account for a number of the remaining uncertainties.

Turning to slide five I'll provide some detail on the allowance coverage by segment.

After the impact of the $1 6 billion of allowance release, our coverage levels declined modestly across all segments from the prior quarter.

And remain well above pre pandemic levels.

Our domestic card coverage is now 10, 5% down from 10, 8% last quarter.

Our branded card coverage is $12 one per cent.

Recall that the difference between branded and domestic coverage is driven by the loss sharing agreement and our partnership portfolio.

Coverage in our consumer business declined 38 basis points to three 6%.

And coverage and our commercial banking business fell 23 basis points to 2%.

Moving to slide six I'll discuss liquidity.

You can see our preliminary average liquidity coverage ratio during the first quarter was 139%.

Well above the 100% of regulatory requirement.

Our liquidity reserves from cash Securities and Federal home loan bank capacity ended the quarter at approximately 151 billion the.

The 7 billion increase in total liquidity is largely attributable to strong inflows of consumer and commercial deposits in the last few weeks of the quarter.

Yeah.

Turning to slide seven I'll discuss our net interest margin.

NIM declined six basis points in the linked quarter due to a 14 basis point headwind from having two less days in the quarter as well as a higher mix of cash.

These factors were partially offset by the full quarter effect of deposit pricing actions, we took in the fourth quarter and a modest increase in loan yields.

Lastly, turning to slide eight I will cover our capital position.

Our common equity tier one capital ratio was 14, 6% at the end of the first quarter up 90 basis points from the fourth quarter, and 260 basis points higher than a year ago. We.

We continue to estimate that our CET one capital need is around 11%.

Recall that in January our board of directors authorized the repurchase plan of up to $7 5 billion of the company's common stock.

In the first quarter, we repurchased 400 million of.

$490 million of common stock at an average price of approximately $114 per share.

Based on the Feds extension of the trailing four quarter average earnings rule, our share repurchase capacity will be limited to approximately $1 7 billion in the second quarter.

The timing and amount of all future stock repurchase activity will be a function of any regulatory restrictions stock trading volumes and our holistic view of our capital position with that I will turn the call over to rich rich.

Yeah.

Thanks, Andrew and it's great to have you as our CFO.

I'll begin on slide 10, with our credit card business.

Year over year credit card loan balances and revenue declined in the first quarter driven by the continuing impact of the pandemic.

Purchase volume rebounded compared to the first quarter of 2020.

And the biggest driver of quarterly results was the provision for credit losses, which improved significantly.

Credit card segment results are largely a function of our domestic card results in trends.

Which we show on slide 11.

For the third consecutive quarter the story of our domestic card business continues to be too.

Two sides of the same coin.

The historically high payment rates amplified by the effects of government stimulus continue to put pressure on loan balances.

And on the flip side the same factors are driving exceptional credit performance.

Looking first at growth.

We continued to see purchase volume rebound from the sharp declines early in the pandemic.

Domestic card purchase volume for the first quarter was up eight 4% year over year with growth accelerating in March.

Compared to the first quarter of 2019 purchase volume is up 17%.

Most spend categories are now exceeding the pre pandemic levels, we saw in 2019.

The <unk> spend is still lagging pre pandemic levels, but it's catching up.

DNA purchase volume is growing faster than overall purchase volume.

The payment rate, which has risen to a historically high level.

<unk> to put pressure on loan balances.

Even with the pick up in consumer spending.

At the end of the first quarter domestic card ending loan balances were down $18 $5 billion for about 17% year over year.

Excluding the impact of of partnership portfolio moved to held for sale last year for.

First quarter, ending loans declined about 15% year over year.

The year over year percentage change in ending loan balances this quarter.

It was approximately the same as it was last quarter.

Strikingly strong credit was the biggest driver of domestic card financial results in the quarter just as it has been for the prior two quarters.

The domestic card charge off rate for the quarter was $2 $5 four per cent.

214 basis point improvement year over year.

The 30, plus delinquency rate at quarter end was $2 two 4%.

145 basis points better than the prior year.

First quarter provision for credit losses improved by nearly $4 billion year over year.

We had a large allowance release in the first quarter of this year versus the large allowance build in the first quarter last year.

Strong credit and purchase volume growth were also key drivers of domestic card revenue margin.

Which was up 229 basis points.

Year over year to 17, 2%.

Total company marketing was up modestly compared to the first quarter of 2020.

Our choices in card marketing are the biggest driver of total company marketing trends.

In the midst of the pandemic, we're finding opportunities to continue to build the business and.

And we continue to lean into marketing.

Pulling up our domestic card business is delivering significant value and building momentum.

Slide 12 summarizes first quarter results for our consumer banking business.

Auto growth.

Continued strength in retail deposits.

And exceptional auto credit or the.

The main themes in the first quarter consumer banking results.

Driven by auto first quarter, ending loans increased 10% year over year in the consumer banking business.

Average loans grew 9%.

Auto originations were up 16% year over year.

And up 20% from the linked quarter.

We've seen competitive intensity increase through the second half of 2020 and in the first quarter of 2021.

And and with most competitors holding excess deposits, we expect that competitive intensity will continue to increase going forward.

First quarter ending deposits in the consumer bank were up 36, $4 billion or 17% year over year.

The average deposits were up 16%.

On a linked quarter basis, ending deposits were up 2% and average deposits were flat.

Elevated consumer savings rates fueled by continuing government stimulus are driving year over year deposit growth.

First quarter consumer banking revenue.

The increased 22% from the prior year quarter, driven by growth in auto loans and retail deposits.

First quarter provision for credit losses improved by $986 million year over year.

Driven by an allowance release and lower charge offs in our auto business.

Yeah.

Credit results in our auto business are strikingly strong and continue to benefit from historically high auction values and government stimulus.

Year over year, the first quarter charge off rate improved 104 basis points to 0.4 dollars seven per cent.

And the delinquency rate improved 217 basis points to 312%.

A sharp uptick in used car values, coupled with a stimulus driven surge in customer payments.

Resulted in a negative net charge off rate in March.

We expect the auto charge off rate to increase from its unusually low level as auction prices normalize and stimulus impact play out.

The consumer banking business continues to deliver a resilient growth in auto loans and retail deposits.

Moving to slide 13, I'll discuss our commercial banking business.

First quarter, ending loan balances were down 9% year over year.

Average loans were down 3%.

In C&I, we have seen a reduction in commercial line utilization, which peaked early in the pandemic as customers.

<unk> elevated uncertainty drew down their lines.

That behavior has since diminished.

Yeah.

In our commercial real estate business originations were down and Paydowns increased compared to the first quarter of 2020.

Quarterly average deposits increased 24% from the first quarter of 2020.

And 4% from the linked quarter as middle market and government customers continued to hold elevated levels of liquidity.

Okay.

First quarter revenue was up 4% from the prior year quarter.

Higher loan and deposit spreads and growth in average deposits were partially offset by lower average loan balances.

Provision for credit losses improved significantly compared to the first quarter of 2020, driven by a swing from an allowance build to one.

On the allowance release.

And lower net charge offs.

For the first quarter, the commercial banking annualized charge off rate.

It was nine basis points.

The criticized performing loan rate was nine 2%.

And the criticized non performing loan rate was 0.9%.

Our commercial banking business is delivering solid performance as we continue to navigate the pandemic and build our commercial capabilities.

I'll close Tonight with some thoughts on our results and our strategic positioning.

Three key themes are evident in our first quarter results.

High payment rates continue to put near term pressure on loan balances and revenue growth.

Particularly in our domestic card business.

On the flip side strikingly strong credit drove a third consecutive quarter of record earnings per share.

And our investments to transform our technology and.

And transform how we work are paying off.

Our modern technology is powering our response to the pandemic and putting us in a strong position for opportunities that emerge as sweeping digital change transforms banking.

Pulling way up we continue to focus on the things that create enduring value when delivered and sustained over the long term.

Continuing to transform our technology from the ground up.

Capitalizing on our transformation to drive innovation and growth.

Generating positive operating leverage and improving efficiency over time.

And managing capital efficiently and effectively including significant planned capital distributions.

And now we'll be happy to answer your question Jeff.

Yep.

Yeah.

Thank you rich.

We will now start the Q&A session.

Courtesy of the other investors and analysts who may wish to ask a question. Please limit yourself to one question plus a single follow up.

And if you have one 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 everyone.

So a lot of your signal to reach our equipment again star one for questions, we'll pause for a moment to allow everyone an opportunity of the signal for questions.

We will take our first question from John <unk> with Evercore ISI. Please go ahead.

Good evening.

One of the things you could talk a little bit about the loan growth outlook, perhaps maybe a timing of the inflection just given as the stimulus benefits ultimately abate in payment rates peak and I wanted to see similarly, when you would expect to see the peak.

Speaking of payment rates for at least some inflection there. Thanks.

Alright, Thanks John.

Good evening.

The growth story.

Is it.

You know I'm sure you're mostly focused on card with that question. So let me let me turn there.

You know it is really striking that.

Of all of the asset classes.

One really stands sort of unique in the industry.

It's the one asset class that shrank since the start of the pandemic and that's credit cards.

And of course, that's because it is a discretion a discretionary spending and borrowing product.

In the current environment, the biggest drivers of card growth.

Our.

Spend then and payment behavior.

And of course, the traction that we're getting in the marketplace.

Let's just talk about spend for a minute, which is recovering in the first quarter you.

You saw the domestic card purchase volume was up eight 4% year over year and you know.

We're seeing just about every spend category rebounding and even by the way on.

On on TNT.

While it's down it's certainly accelerating let's just give you a few stats here TNF spending.

At the beginning of the pandemic was down more than 80 per cent.

And by December It was down about 50% and in March it was down about 25%.

So.

From a growth point of view, both the growth of purchase volume and loan growth.

There's there's some strength.

That we see on the on the spending side.

Yeah.

Turning to <unk>.

The payment rates, which are of course historically high.

Hi.

The <unk>.

The government the government stimulus.

How big of a driver is that of what's going on the payment rates, obviously consumers have been very conservative as well, but but.

It certainly really amplifying the payment rates.

And I think while not a perfect proxy for our overall domestic card results.

You can get an idea of what's happening with.

Payment rates and our publicly disclosed trust results.

For example in March the payment rate in our Master Trust was just under 46%.

That's an all time high for capital, one and more than 12 percentage points year over year.

Now remember that the payment rate represents the percent of the prior months ending balance that one that was paid off.

So a 46% payment rate means that nearly half of our beginning balances in the trust were paid off in March.

Which is just remarkable.

Said another way all of US all else equal each percentage point increase in payment rate as the percentage point decrease in year over year of.

Now you know we need to always remember that's a really important point the flip side of high payment rates is strikingly strong credit performance, which drives strong profitability and capital generation.

Now the other big driver of growth is what happens with originations and line of increase.

And as the pandemic has played out.

We're seeing.

Some attractive origination opportunities.

And these opportunities are enhanced by our technology investments.

And so we are continuing to lean into marketing.

Yeah.

That's the originations we are also gradually increasing credit lines as well.

So.

Pulling way up.

We're certainly very pleased with our opportunity to continue to grow our customer franchise.

The net growth of Outstandings will of course be.

Effected.

By payment rates.

So.

Here is you know we're not now to your question John.

We're on.

We're not predicting the.

The timing the timing of an inflection point I think we have certainly learned that high payment rates, while they slow down growth or just a really good guy for you.

Not only the earnings power of the company, but just the.

The the performance quality of the consumer we encourage our customers to pay down whenever they can we find every opportunity actually to encourage them and remind them to pay down. So I think there's certainly a good thing going on what we're focused on from a growth point of view.

Is.

You know.

What we can do to drive the underlying franchise and you.

We like our opportunities there.

And so we're not.

Dictating exact timing of the inflection points and things like that what I would what I would leave you with is.

We like our opportunity on growing the underlying franchise.

And we will see how payment rates play out in terms of of of driving sort of the final kind of the outstandings growth number but to us an underlying.

You know.

Growth of the of the franchise.

And the the really strong dynamics that are going on with the on.

On the payment side of the business, it's just a healthy place to be and we feel.

Really good about that.

Thanks, Richard for all the details on that's helpful. Just one quick follow up on the marketing side and making the change of bigger so you're still continuing to lean in there on the low single digit growth year over year of market of your expense was better than we had expected can you just possibly give us the way to think about how much of a lean in the you're looking at here.

Italy has been looked at for the remainder of the year.

Thank you John So you know.

From a marketing point of view.

We this this first and foremost is going to be.

<unk> by what we see on the the opportunity to grow.

Origination marketing and originations are really something that's very length of course, you know outstandings growth is.

Yes.

It is not as closely linked in time or as directly but so we see good opportunities to grow account originations.

Yeah.

And we're investing in marketing consistent with those opportunities.

<unk>.

In card, we're certainly in all of our businesses, we're leaning in where we see some signs of strength.

We also are continuing and sort of increasingly so two of them you know.

Tell our story in terms of the customer experience who are building the.

Some of the benefits of our.

On the technology, we're building and that's a.

Part of our story.

Of that gets reflected in the marketing and.

You know that.

It's something that that powers the growth as well and then we're continuing to invest in our brand and our national banking strategy. So.

That's why it kind of pulling way up.

With the collective set of opportunities we're seeing.

We're continuing to lean in to the margin.

Great. Thank you.

Next question please.

We'll take our next question from Ryan Nash with Goldman Sachs. Please go ahead.

Hey, good evening guys.

Hum.

Maybe to ask about capital so.

If I look at the 11 per cent and target you have over $10 5 billion of excess you've got $3 5 billion of reserves of about day, one and if I look at the expectations I think the market's looking for almost $10 billion of earnings the next few quarters. So.

Hi, I wanted to get a sense for how we should think about capital allocation timing of the execution of the $7 5 billion, you previously announced and could we see either upsizing of the current program.

And into the next year or how do we think about the ability to sustained capital returns at these levels. Thanks.

Yeah.

Sure.

That's the Andrew.

You know the first thing I would highlight is as you know we are still under the capital preservation reservation rules from the fed so in the the second quarter as I mentioned in my prepared remarks on repurchase capacity is going to be limited to to just under one point.

$7 billion and we will also be limited to our prior dividend.

And so.

We recognize that the.

The capital distribution is important component of of our returns and.

And our current position in at least the prospects of of earnings from here.

So you know how quickly we complete that seven and a half billion debt. The board has already authorized is going to the tie back to any unforeseen net additional regulatory restrictions, but also.

Trading volume in in our stock and then just taking a step back and looking holistically at our at our capital position, but what I can say is one we're excited at the prospect of of moving under the SCB framework in the third quarter. So we'll have more flexible.

The flexibility in our choices are looking ahead.

We will take our next question from Sanjay separately.

The CW. Please go ahead.

Thanks.

Rich you mentioned the strikingly strong credit backdrop I'm, just curious using your analogy of sort of borrowing through the mountain sort of do you think we'd get through to the other side with this round of stimulus and maybe I'll just ask my follow up now Andrew maybe you could just give us some sense of how the NIM.

Projects for the rest of the year of understanding those different puts and takes maybe you could just walk us through year of sort of baseline assumption. Thank you.

<unk>.

Yeah. The Sanjay So you know I think the main factor, particularly in the near term with with NIM is going to depend on the how the the pandemic impacts on our balance sheet, most notably what you've seen over the last few quarters in terms of ex.

Asset mix in <unk>.

Deposit balances and in our cash position I think those are the things that are mostly going to have the the impact for.

For the next few quarters ending over the.

Longer term I'd expect our cash position and the size of the investment portfolio to a to come back down to more normal levels of I'll call, it and and be a tailwind to the NIM all else equal, but it's important to know that the uncertainty of.

Of what we're seeing in deposit volumes and the impact of payment rates as rich said on on loan growth and those are all factors that are going to create some some variability and uncertainty in NIM in the near term.

And the Sanjay.

Sanjay with respect to your credit question and the the burnt through the mountain a metaphor.

Let me just kind of pull up and give thoughts about what's going on with credit.

The U S consumer continues to demonstrate.

Striking resilience.

Okay.

And you know consumers went into this downturn with.

Like twice the savings rate that they had before the great recession.

Lower payment obligations and none of the structural issues they faced a decade ago with the housing sector.

And.

Because everything sort of went into vertical drop at once as the pandemic began they certainly reacted strongly and rationally.

And you know launched this.

Trilogy of behaviors.

Of spending less saving more and paying down debt.

Yeah.

And then of course of year end of the pandemic.

In the direct government support to consumers.

Including enhanced unemployment benefits.

Remains in place.

And in fact last month.

In March.

Was the single largest month of direct government payments to consumers in dollar terms.

Since the pandemic began.

On the consumer savings rate was 17% in the first two months of 2021 more than double what we saw before the pandemic and you know something like five times, what it was in the years before the great recession.

Okay.

And then we also have the forbearance factor.

Although forbearance is winding down in card and auto.

It is still relatively widespread for student loans and mortgages.

And as we've said before the benefits of some of these effects.

Higher savings are probably cumulative to some extent.

Improving consumer balance sheets in ways that could lead to some sustained credit benefits.

And now to the demand for of it I know I use all the time every.

The every month that the consumer remains healthy.

We're borrowing a longer tunnel underneath the mountain of.

Still high unemployment.

And we're reducing the cumulative losses through this downturn.

Other than just delaying the impact.

Yeah.

Now.

We should all keep in mind the few.

The things here there remains a great deal of uncertainty.

As you know COVID-19 cases remained elevated weighted <unk>.

New variants continue to emerge.

And while the U S has been moving in a pretty good direction of course, a lot of the world as it is moving in the other direction.

With respect to COVID-19.

You know the economy while.

In improving still has a lot of strained elements in it.

And the.

So that you know we still look at this you know just extraordinary kind of paradox of the separation of some of what happened to the economy and what happened the consumer credit.

But we should all keep in mind.

The uncertainty that still remains out there.

And then there's one other point that I'd, just like to put on the table here.

In the spirit of pattern recognition.

I do want to flag that this parent this period of unusually strong credit could lay the ground the groundwork.

For credit worsening down the road.

As an industry point.

And let me elaborate on that just for a moment here.

Reliance on consumer credit characteristics that may be more temporary.

Driven by things like stimulus in forbearance.

Can be a real challenge for credit modeling.

And the the benign rearview mirror could encourage lenders to reach for growth and the loosen underwriting standards.

Which as you know kind of invite adverse selection.

And then overlay on top of that the excess liquidity in capital that's out there and that could push lenders to stretch for less resilient business.

So what we have here is a.

You know a pretty benign period, where we are right now.

We're also watching the physics of.

Of how markets are.

Not only economic markets, but how credit markets work and.

And so what we're doing at capital one is leaning into the opportunities that we have.

But by having.

Having a view of how the physics of of some of these things work, we're very much watching out for that and all of the choices that we make and it's again. Another reason why we're focusing as always on making sure that we book resilient business.

So pulling way up.

We're not ready to predict that the debt.

Tunnel comes out you know just all the way across the mountain and we are talking about you know some.

Topography.

That you know can exist out there longer run as the consequence of some of the physics of how the current situation last but.

Those are some thoughts on the credit environment Sanjay.

Next question please.

Take our next question from John Excuse me, Don <unk> with Wells Fargo. Please go ahead.

Rich could you talk a little bit about where you're seeing on used car values. In April we've heard from some competitors of course are apparently on them a lot for a day and then what is your strategy on loan growth because of competition. Obviously is picking up across the board yet the returns are still very attractive how are you thinking about that business.

Yeah.

So the Don on the used car prices.

No.

Pretty electrifying ear auction prices ended the quarter at all time highs.

Driven by COVID-19.

The strong demand and.

Persistent constraints on new vehicle supply.

And overtime, we still expect offs auction prices the normalized as.

As these vehicles supply constraints work themselves out.

But the time horizon for normalization has expanded.

Given the strong recovery of demand and the continuing stress on global supply chain.

So for example, microprocessors shortages.

Have held back Newfield vehicle production for some time.

The first quarter saw disruptions due to of winter weather events.

And you know that impacted petrochemical supplies used for parts.

And then most recently rubber shortages have.

Manifested themselves.

You know the supply.

On the supply shortage there are signs of it everywhere.

And for example, we see rental car companies are normally a source of used vehicle supply.

But they have very lean fleets at the moment with little access to sell.

<unk>.

We still expect auction prices to normalize over time.

And a very important thing is.

As in our underwriting we made conservative assumptions with faster.

The normalization.

Now.

With that very unusual context, there you know and again my view.

Our view is that.

You know.

We cannot underwrite under an assumption that we're going to get the benefit of those things. It's certainly something we're enjoying on our portfolio, but as we always do and particularly.

At this point.

We need to look past that in our underwriting.

And that's certainly what we're doing.

With respect to growth.

You know industry retail auto sales were strong in the first quarter and especially in March.

And.

In addition to tax refund the seasonality.

You know I'm I'm sure payments the stimulus payments likely really held strong sales both in the new and the used vehicle <unk>.

<unk>.

So the capital one over the course of the pandemic, we actually have we tightened up in certain segments of especially early on.

But we are we are we are still probably net tighter.

Then we were at the outset, we're watching things closely but we have benefited by the tide rising for everyone in the industry certainly it's been a very exceptional the time, but also on top of that our investments in industry, leading technology products.

Have allowed us to maintain very strong relationships.

With with dealers during these uncertain times.

And.

Generate.

It was the ability to have.

Less in person face to face the interaction during the pandemic has also really helped the.

Lift the digital products and.

And the digital capabilities.

Capabilities.

That we are we have both for customers and for dealers. So we have found on top of the the rising tide, maybe a little bit of extra boost at capital one.

But I have all of Ivo.

Also said that even more so than the card business.

The auto business.

Is hypersensitive to sort of the level of competition and that's because of dealer sits there and holds an auction.

In ways that doesn't happen in a direct to consumer business like card.

So it's not lost on us that.

Of the tide rising everywhere in auto is called caused quite a buoyancy in the order of business. So.

What we're going to do is continue.

Continue to lean into the opportunities at the moment, but again.

To use my my physics term again really keep a watchful eye on the physics of how are the the markets work and be looking for some of those things that can come on the side of the excessive competition.

As well as of.

You know over time a.

Breaking of the.

Extraordinary.

Things going on.

You know a a normalization of the used car prices.

Next question please.

We'll take our next question from Rick Shane Jpmorgan. Please go ahead.

Hey, guys. Thanks for taking my questions. This afternoon.

When we look at the non interest income, particularly in the domestic card business.

It seems to be decoupling and outperforming our the increase in spend I'm curious how much of that is being driven by some sort of release of suppressed tier or how we should be thinking about.

The catalyst for that.

Hey, Rick it's Andrew the the suppression of is.

The actually flowing through net interest income so that's not a that's not driving it I think the biggest driver if youre looking at it on a margin basis is we are seeing a spend volume and interchange spend growing at a faster rate than loans. So that's providing a little bit of a.

Tailwind to <unk>.

The non interest income as it relates to the overall revenue margin in card.

Okay, great that debt.

I think that helps but if we look at the at the year over year increase in spending we look at the year over year increase.

Noninterest income there is there is still a pretty significant GAAP.

One of the things, it's always a little bit hard to figure out with capital one is where some of the rewards run through is it a function of potentially of lower rewards rates.

Given what's going on in the market or is there something else as well.

Yeah, I don't think Theres, the big story, there with respect to rewards or our interchange a Rick.

Yeah.

Okay I will follow up offline. Thank you guys.

Thank you.

We will take our next question please.

She orenbuch with credit Suisse. Please go ahead.

Great. Thanks, Richard I was hoping to go back to the the competitive.

The dynamic maybe.

Little less from a credit standpoint.

For you guys had taken some actions recently with respect to your tier E products, just talk a little bit about the rewards of environment at your high end consumers have been maybe.

The the things that you did discuss with respect to kind of concerns about the competitive environment and what it kind of how it informs your credit line increase side of the business.

Ah Okay most of the Moshe.

Great questions there.

But just kind of pull up and talk about card competition.

The competition can show up in a variety of ways, including the.

The marketing intensity.

On the product.

Offers.

Including their the upfront bonuses enhanced rewards pricing.

And and other things.

Competitive intensity is back to its high levels.

Particularly as you point to Moshe and the rewards space at the higher end the heavy spender in.

So you.

The less let's talk about marketing the marketing and media spend obviously dropped dramatically in the second quarter and since then activity has steadily increased we get our data on a bit of of lag basis, but you know I feel it's very likely that marketing levels are now at or above.

Pre pandemic levels.

The rewards offerings remain intense.

And let's talk about some of the elements of that upfront bonuses.

<unk> actually been relatively stable with some modest increases mainly in the travel space.

And you know likely in anticipation of returning demand.

You know, we as far as for rewards.

Earned on spend we've seen additional categories like groceries and restaurants qualify for enhanced rewards over the past year.

And while the shifts have slowed down.

Reward levels overall remain.

Hi.

And you know, we've even seen a couple of.

A few competitors talk about.

Still planning to be tinkering with their.

Their rewards here.

So I think it's the very natural thing that's happened with.

Spending haven't been way down and also some of the things Moshe debt are naturally rewarded or not the activities people tend to be doing that much of right now.

There's been somewhat of a mix change and I think our forward lean by the industry on this.

So.

I think it's the.

Things that I've I've said, so often about the card business. You know these days I think it's very it's very competitive industry, but there's a rationality to it that I'm pretty struck by and and one that I would not use some of those terms to describe some of the other markets.

That we're in so what are we doing we are continuing to you know look at our opportunities lean into where we have opportunities I think we feel good with the the general structure of the rewards products, we have but we do know that competition is high and it's probably going to be.

The increasing.

We ourselves are going to lean into marketing.

But you know I I.

I don't necessarily see some.

You know I'm sort of dramatic changes in the structure of offers out there.

To change to us the attractiveness of this part of the thing is most of this operate on a on a relatively thin net.

The net margin because while interchange rates are high we are passing on most of the interchange rates on the consumers in the form of a really attractive deals so pulling way up we continue to like our opportunities.

We have.

A lot of years of experience with the.

The the the high level of intensity and I think we should probably prepare for that.

Yeah.

Then on the other side of the Oh, sorry the line.

Yeah, Yeah, sorry, Moshe yeah. So.

You know as you know the.

Gosh I think about the the number of years, we talked about even before the the pandemic probably for 18 months maybe Moshe.

We were talking about kind of per.

Pulling back on lines when the when the the.

We were.

The the recovery was so long in the tooth.

And we saw some of the.

The things going on in the marketplace. So we we took a pretty conservative policy with lines and then during the pandemic.

A particularly conservative.

You know strategy with lines and.

So you know that debt that contains some potential energy as we've always talked about it turns into kinetic energy. One of course, we grant the line increases and you know, there's there's more opportunity for people to spend.

And the the opening of lines has been something we've we've been doing over the last number of months, it's been kind of.

Invisible with you know to the outside world in terms of growth because it's getting washed over by the extraordinary payment rates.

But we continue.

Continue to see an opportunity to.

Open up some of the lines are gradually and Moshe I think that represents an extra.

Part of growth opportunity, we're not doing anything really dramatic but it is just part of you know the the gradual leaning into the opportunity.

With the.

What we're seeing.

With the performance of our customers.

Yeah.

Next question please.

We will take our next question from Bill for catchy.

Wolfe Research. Please go ahead.

Thank you good evening I'll ask my questions on upfront on the efficiency rich can you give us an update on how you're thinking about the strategic significance of your physical branch footprint is there any room for further branch optimization either to fund further investments in the Digitization of the business are simply extract.

Greater efficiencies and then also if you could give us an update on the cloud migration that would be great.

Yeah.

Yeah.

Okay.

Bill so.

Let me start with the branches.

You know as you know capital one has.

Over the years.

Sort of leaned into the claw.

Closing of branches in conjunction with our building of our more national.

The banking business and also.

The.

All of the digital investments, we were making because we spent so much energy on.

Creating an experience that doesn't need to have a branch on every corner.

And you know we've been.

So pleased with our strategy so far but you know there's.

You know we don't.

You know I think that there's more of a continuation of of of where we are I think we're in.

You know continuing to lean into the same strategy, we've had for quite a period of time there. So.

I wouldn't I wouldn't look at our network and say Wow. There is you know a huge kind of.

The potential to unleash their we've just been gradually making our choices and continuing to develop our digital opportunities watching customer behavior and.

And then just continue down.

On the same path.

With respect to our cloud strategy.

As you know we.

Completely exited data centers.

The last year.

So we are 100% in the cloud.

And are.

We are.

Enjoying the benefits of.

Of being in the public cloud.

The the hassle free access to infrastructure.

The ability to ride the incredible wave of innovation, that's happening on the cloud both from the cloud providers as well as from the rest of the World software companies that are building on the cloud.

We.

So the.

This is something we've been many years in the making.

And we.

One.

We're happy to be all in on the cloud, but it doesn't mean, our journey has done on the cloud we find as we get there there's.

There's the opportunity to build <unk>.

Any more capabilities the opportunity to really enhance the resilience operating resilience fail over capabilities.

Efficiency the ability to.

Overtime move.

Basically one of the real benefits of the cloud is the ability to abstract.

The developers from.

Being burdened with the details of the the.

Of the infrastructure that they're operating on an over the cloud itself isn't of distractor.

Of.

Of that the infrastructure.

Worked for a developer but within.

If you just look at what's happening to cloud the.

The the continuing migration sort of abstracting up the tech stack.

And you know where cloud has gone with containers and know where it's going with server less just continues to liberate developers.

So that they can focus on doing what they are.

Came to do which is to you.

No create great things and ship products all of that doesn't happen automatically.

Companies have to continue to stay on the forefront. So you know of capital one is <unk>.

To invest in the surplus side of the business for example, as we continue to move.

Move the level of just one of them distraction of the tech stack and.

Create more opportunity.

Opportunity for the software to be developed faster and more effectively.

And safer.

Next question please.

We will take our next question from Betsy <unk> with Morgan Stanley. Please go ahead.

Hi, good afternoon.

Right.

Hey, Betsy.

I had a couple of questions one.

Just Richard and thinking about the marketing investment spend and also of the opportunity to.

Pick up some new customers I just wanted to understand the kind of timeframe that you think you'll be getting that return on investment relative to you know maybe pre COVID-19 and I'm wondering if it might be a longer timeframe to get that return on investment given the stimulus for us in People's pockets right now or could it be the same.

Because of.

You know the target market, you're going after is not on a stimulus.

We're seeing for just just trying to think how one about how that's going to happen.

Well I I.

The first thing to think about marketing always is.

The marketing.

While it can influence balance levels marketing is really about growth of the franchise growth of accounts.

And building brand in and those kinds of things.

So I think of way to think about the pandemic.

Is that.

It took the company like capital, one and our card business and just set us back like 15% behind the starting line.

And you know that's that's that's the that's a pretty jarring thing to happen in our flagship business and you know.

The very successful and profitable business.

You know this whole payment phenomenon essentially did that now in that context, as we start farther behind the starting line.

As we look at the opportunity to grow accounts the opportunity to build the franchise the opportunity to get out there with some of our really great.

Digital products and things like this the ability to.

And of course on the banking side of the ability to grow the national Bank.

That is still very.

You know that opportunity is still very much there.

And.

You know isn't really.

It isn't really that changed by the pandemic now on the outstanding side.

Your first of all have the Paydown story, so that that definitely is you know pushing us and others you know further back.

All other things being equal the.

There is the sort of the issue for how much credit demand. There is that we'll see from so folks on the.

We certainly have the spend weakness on the travel side of the business as well.

So I think that we feel the effect of the most of our marketing and build the building the franchise.

Is very much like.

Like it was before the.

The.

The the Outstandings metrics of the company started farther behind than they have headwinds to them, but you know since we've always talked about if payment rates stay high we're gonna have to live with all of the great credit credit performance.

That we have in the in the earnings and the ability to distribute capital. So the the benefits come in a different way, but the you know we're very focused on continuing to build the franchise and I think capital one.

Is.

In the similar position to do that as.

As we were pre pandemic in many ways, maybe even a little bit better position because we're further along on our tech transformation.

Okay.

Okay.

Well did you ever call out of pets.

Well take our final question. This evening from John Hecht with Jefferies. Please go ahead.

The afternoon and thanks for fitting me in here.

We've talked about competition quite of bit them on this call, but maybe an extension of that of I guess, how does the calculus of competition change with all of these neo banks and other kind of digital product platforms.

The competing for first time customers does it change anything with respect for the opportunity set.

John.

Let's talk about that from a couple of perspectives.

First of all as I, often say you know capital. One was you know one of the original syntax before anybody use that word.

I think pentax here, particularly near and Dear to my heart and I I I watch with tremendous interest.

And the growth of of fin techs, the some of the really clever innovation, they're coming up with we.

Should all know of course that all of the syntax are born in the cloud, they're starting with modern technology.

And.

Of that already gives them a bunch of advantages relative to a lot of banks.

Capital one being in the cloud I think it's been a.

It's been a.

You know a sort of a much better position competitively relative to that but we.

But we should you know all favor about the <unk> is the.

Of the modern tech platform, they have and that's it's always and I think those advantages are larger nowadays than they were in the past <unk>.

Because the difference between being built on a modern tech stack versus not is just a greater advantage and something that motivated us to a very big tech transformation.

As you know.

No.

The the.

And the fin techs journey is not just sort of use for some clever technology Theyre also very much positioning themselves to take advantage of some of the opportunities to gather more data of different data than typically gathered and to leverage it in real time. So there. There's some bunch of are impressive.

Ah things there.

When we.

When we look at the Pentax you know.

We we.

Both you know generally impressed we are.

We think that they do represent.

You know of threats.

To the business, but to us I think there.

Much also to just.

On a a.

Good examples of the kind of innovation that is possible in the kind of innovation that companies like capital one.

Who are in the cloud with on on a modern tech stack, the kind of things that debt that we can do.

As well so.

You know, we we look at it from.

That perspective, and and we fire at the worrying and inspiring at the same time.

Then you have the lending side of business I want to make a special comment about lending.

On a half an hour ago I'd put of caution note out there that we've got.

You know that I worry about where in the marketplace lending goes from here with with people building models that are looking at of recession.

That was very very unusual with sort of the spectacular credit.

And I worry, particularly about fin techs, who are not that experienced in some of the credit choices. They can do and the and the impact on our marketplace.

So.

I think you know the thing.

Text and you can see on the in the in the commentary by banks I think banks are becoming a lot more sort of realizing the the scale of the growth that the collective.

Size of the.

The growth rate and the innovation that the tech the fin techs are bringing.

And.

They're gonna be a force to reckon with.

And.

There are continued the impetus that we've got to lean forward. We've got to continue on our tech transformation and we need to lead the way of.

Ourselves with innovation.

Yeah.

I appreciate that thank you.

Thank you.

Well, thanks, everyone for joining us one of the conference call. This evening and thanks for your interest in capital one and as a reminder, the inverse.

The relations team will be here. This evening to answer any further questions you might have.

Have a great night everybody.

Ladies and gentlemen. This concludes today's conference. We appreciate your participation you may now disconnect.

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