Q2 2021 Capital One Financial Corp Earnings Call
[music].
Please standby.
Good day, ladies and gentlemen, and welcome to the capital 1 second quarter 'twenty 'twenty 1 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 for the number 1 on your telephone keypad. If you would like to withdraw your question press the star key the number to.
Thank you I would now like turn the conference over to Mr. Jeff Norris Senior Vice President of Finance, Sir you may begin.
Thanks, very much Holly and welcome everyone to capital ones.
Quarter 2021 on earnings Conference call.
As usual, we wrote 1 casting volume over the Internet to access the call on the Internet. Please log on to capital one's website at capital 1 dot com.
Follow the links from there.
In addition to the press release on financials. We've included a presentation summarizing our second quarter 2021 results.
With me today are Mr. Richard Fairbank capital one's Chairman and Chief Executive Officer, Mr. Andrew Young capital ones Chief Financial Officer.
Richard Andrew Who'll walk you through this presentation.
I ask us a copy of the presentation and press release. Please go to capital one's website click on investors then click on quarterly earnings release.
Please note that this presentation may contain forward looking statements information regarding capital one's financial performance and any forward looking statements contained in today's discussion and the materials speak.
Speak only as of the particular date or dates indicated in the materials.
Capital 1 does not undertake any obligation to update or revise any of this information whether as a result of new information future events or otherwise.
Numerous factors could cause our actual results to differ materially from those described in forward looking statements for more information on these factors. Please see the section titled forward looking information in the earnings release presentation, and the risk factors section in our annual and quarterly reports accessible at the capital 1 website and filed with the SEC.
Now I'll turn the call over to Mr. Young Andrew.
Thanks, Jeff and good afternoon, everyone.
I'll start on slide 3 of Tonight's presentation.
In the second quarter capital, 1 earned $3.5 billion or $7.62 per diluted common share.
Included in the results for the quarter was at $55 million legal reserve build net.
Net of adjusting items earnings per share in the quarter was $7.71.
On a GAAP basis pre provision earnings increased slightly in the sequential quarter to $3.4 billion.
We recorded a provision benefit of $1.2 billion in the quarter.
That's $541 million net charge offs was offset by a 1.7 billion dollar allowance release.
Revenue grew 4% in the linked quarter.
Largely driven by the impact of the strong domestic card purchase volume on non interest income and the absence of the mark on our snowflake investment a quarter ago.
Period end loans held for investment grew $6.5 billion for 3% inclusive of the effect of moving for point 1 billion of loans to held for sale during the quarter.
The loans moved to held for sale consisted of $2.6 billion.
Of an international card partnership portfolio.
And $1.5 billion in commercial loans.
Turning to slide 4 I'll cover the changes in our allowance in the quarter.
We released $1.7 billion of allowance, primarily driven by observed strong credit performance and an improved economic outlook.
Turning to slide 5 we provide the allowance coverage ratios by segment.
Okay.
You can see allowance coverage declined in the quarter across all segments, largely reflecting the dynamics I just described.
However coverage ratios remain well above pre pandemic levels due to continued economic uncertainty. It's our allowance is built to absorb a wide range of outcomes.
Okay.
Our domestic card coverage is now 8.9%.
Down from 10, 5% last quarter.
Our branded card coverage is $10.1 per cent.
Recall that the difference between branded and domestic coverage is largely driven by the loss sharing agreements in some of our partnership portfolios.
Coverage in our consumer business declined about 60 basis points to 3.0%.
In addition to continued strong credit performance and improved economic outlook historically.
Historically high auto values aided the reduction in coverage.
Coverage in our commercial banking business declined about 25 basis point to 1.7%.
With the single largest driver being the improvement in our energy portfolio.
Turning to page 6 I'll now discuss liquidity.
You can see our preliminary average liquidity liquidity coverage ratio during the first during the quarter was 141%.
The LCR continues to be well above the 100% regulatory requirement.
Our liquidity reserves from cash Securities and Federal home loan bank capacity ended the quarter at approximately $137 billion.
The $14 billion decline in total liquidity was driven by lower ending cash balances.
Our cash position declined in the quarter as it was redeployed.
For net loan growth holds.
Wholesale funding maturities.
Modest increase in our securities portfolio and share repurchases.
Moving to page 7 I will now discuss net interest margin.
You can see that our second quarter net interest margin was 589%.
10 basis points lower than the prior quarter.
The linked quarter decline in NIM was largely driven by lower yield in our card portfolio, where the typical seasonal decrease in revolve rate was exacerbated by higher transaction volume and associated higher payments.
These impacts were partially offset by the favorable impact from 1 more day in the quarter.
Lastly, turning to slide 8 I will cover our capital position.
Our common equity tier 1 capital ratio was 14, 5% at the end of the second quarter.
Down 10 basis points from the first quarter.
Loan growth and capital actions were largely offset by earnings growth.
During the quarter the Federal reserve released the results of their stress test.
Our stress capital buffer requirement, which will be effective on October 1 of this year.
Is 2.5%.
Resulting in a total capital requirement by the fed of 7.0 per cent.
While we saw a decline in this year's FCB, it's important to note that the fed stress testing results can move around meaningfully from year to year and are only 1 of many factors that we use in our capital planning process.
Based on our internal modeling, we continue to estimate that our CET 1 capital need is around 11%.
Turning to share repurchases, we repurchased $1.7 billion of common stock in the second quarter.
The full amount allowed under the Feds capital preservation measures.
We have approximately $5.3 billion remaining of our current board authorization of $7.5 billion.
Now, let me move on to dividends.
In the third quarter of 2020, we reduced our dividend to <unk> 10 cents due to the fed's capital preservation measures.
We chose to continue this reduced level of dividend in the fourth quarter of 'twenty 'twenty out of an abundance of caution.
The difference between our historical 40 cent dividend and the reduced level for those 2 quarters was 60 cents per common share.
Therefore, we expect to make up for the reduced level of dividends from the second half of 2020 by paying a 60 <unk> special dividend in the third quarter of 2021.
In addition to the special dividend, we expect to increase our quarterly common stock dividend from <unk> 40 per share to <unk> 60 per share in the third quarter.
Both the 61 special dividend and the increase of our quarterly common stock dividend to <unk> 60 cents will.
Will be subject to board approval with that I will turn the call over to rich rich.
Yeah.
Thanks, Andrew and good evening everyone.
I'll begin on slide 10, with our credit card business.
Strong year over year purchase volume growth drove an increase in revenue compared to the second quarter of 2020.
Then offsetting a modest year over year decline in loan balances.
And provision for credit losses improved significantly.
Credit card segment results are largely a function of our domestic card results in trends, which are shown on slide 11.
Second quarter results reflect building momentum in our domestic card business as we emerge from the pandemic consumers are spending more and continuing to make elevated payments.
Accelerating purchase volume growth, partially offset the impact of a historically high payment rates, resulting in strong revenue growth and a more modest year over year decline in loan balances high.
High payment rates are continuing to contribute to strikingly strong credit results.
Domestic card purchase volume for the second quarter was up 48% from the second quarter of 2020 purchase volume was up 25 per cent from the second quarter of 2019, which is an acceleration from the first quarter.
When we saw.
Rows of 17% versus 2019.
D and E spending continues to catch up to overall spending and accelerated through the second quarter.
In June TNA purchase volume was up 3% compared to June of 2019.
At the end of the quarter domestic card loan balances were down $4.1 billion or about 4% year over year.
Excluding the impact of our partnership portfolio moved to held for sale last year.
Second quarter, ending loans declined about 2% year over year.
Compared to the sequential quarter ending loans were up about 5%.
Head of typical seasonal growth of 2%.
Credit performance remains strikingly strong.
The domestic card charge off rate for the quarter was 2.28 per cent, a 225 basis point improvement year over year.
For the 30, plus delinquency rate at quarter end was 168%, a 106 basis points better than the prior year.
Provision for credit losses improved by about $3.5 billion year over year, we swung from a large allowance build in the second quarter last year to a large allowance release this year.
Let me turn to the domestic card revenue margin.
Purchase volume growth outpacing loan growth and strong credit.
Were the key drivers of domestic card revenue margin.
Which was up 226 basis points year over year to $17.7 per cent.
Revenue margin increased over 50 basis points quarter over quarter.
Higher than our typical seasonal pattern.
Okay.
Total company margin marketing expense was $620 million in the quarter up $347 million compared to the second quarter of 2020.
Our choices in card marketing are the biggest driver of total company marketing trends.
As we emerge from the pandemic, we're seeing strong originations and purchase volumes our growth opportunities are enhanced by our technology transformation.
We are leaning further into marketing to drive future growth and continue to build our franchise at the same time, we're keeping a watchful eye on the competitive environment, which is intensifying.
Pulling up our domestic card business continues to deliver significant value and.
Build momentum.
Slide 12 summarizes second quarter results for our consumer banking business.
Auto growth and exceptional auto credit are the main themes in second quarter consumer banking results.
Driven by auto second quarter, ending loans increased 12% year over year in the consumer banking business.
Average loans also grew 12%.
Although originations were up 50.50.
56% year over year, and up 47 per cent from the linked quarter.
Pent up demand and high auto prices drove a second quarter surge in growth across the auto marketplace.
In the context of increased industry growth, our digital capabilities and deep dealer relationships strategy continued to drive strong growth in our auto business.
Second quarter ending deposits in the consumer bank were up $4.4 billion or 2 per cent year over year.
Average deposits were up 9% year over year.
Consumer banking revenue increased 27% from the prior year quarter, driven by growth in auto loans and retail deposits.
Yeah.
Second quarter provision for credit losses improved by $1.2 billion year over year, driven by an allowance release and lower charge offs in our auto business.
Credit results in our auto business are strikingly strong.
Year over year, the second quarter charge off rate improved 120 basis points to negative.
0.12 per cent.
And the delinquency rate was essentially flat at $3.2 6 per cent.
In the quarter elevated used car prices drove an increase in auction proceeds amplifying the normal seasonal benefit we see from tax refund around this time of the year.
As used vehicle prices normalize.
They will become a headwind to the auto charge off rate.
We expect the auto charge off rate to increase from the unusually low second quarter level.
Moving to slide 13, I'll discuss our commercial banking business.
Second quarter, ending loan balances were down 5% year over year.
Average loans were down 7%.
Commercial line utilization continues to be down year over year, and we moved $1.5 billion of commercial real estate loans to held for sale.
Quarterly average deposits increased 22% from the second quarter of 2020, and 5% from the linked quarter.
As middle market and government customers continued to hold elevated levels of liquidity.
Second quarter revenue was up 3% from the prior year quarter and down 6% from the linked quarter.
The linked quarter decline is more than entirely driven by a 1 time cost associated with moving the commercial real estate loans to held for sale.
This decline was offset by an equivalent 1 time gain in the other category.
And is therefore neutral to the company.
Excluding this effect commercial banking revenue would have increased about 13% year over year.
And 4% from the linked quarter.
Provision for credit losses improved significantly compared to the second quarter of 2020, driven by a swing from an allowance build to an allowance release and a swing from net charge offs to net recoveries.
In the second quarter, the commercial banking annualized charge off rate was negative 11 basis points the.
The criticized performing loan rate was 7.6%.
And the criticized non performing loan rate was 1.0 per cent.
Our commercial banking business is delivering solid performance as we continue to build our commercial capabilities.
I'll close Tonight with some thoughts on our results and our strategic positioning.
Several key themes are evident in our second quarter results.
Credit remains strikingly strong.
Purchase volume and loans are rebounding we're.
We're continuing to invest to propel our future results.
And we're returning capital to our shareholders.
We are seeing increasing near term opportunities to build our domestic card business as we emerge from the pandemic. We are leaning further into marketing to seize these opportunities. We are also increasing our marketing for auto national banking and our brand.
We are now in the ninth year of a journey to build a modern technology company from the bottom of the Tech stack up our progress is accelerating and the stakes are rising.
Petitor Tech investments are increasing as technology.
It is increasingly seen as an existential issue the investment flowing into fintech.
Is nothing short of breathtaking.
And the war for Tech talent continues to escalate including levels of compensation.
We continued to invest in technology and the opportunities that emerge as our transformation gains traction.
Our modern technology is powering our current performance and setting us up to capitalize on the accelerating digital revolution in banking.
And now we'll be happy to answer your questions.
Jeff.
Thanks, Rich, we'll now start the Q&A session as a courtesy to other investors and analysts who may wish to ask a question. Please limit yourself to 1 question plus a single follow up.
You have follow up questions. After the Q&A session. The Investor Relations team will be available after the call.
Hauling please start the Q&A.
Absolutely. Thank you so much and again, ladies and gentlemen that US star 1 to ask a question at this time. Our first question today will come from John <unk> with Evercore ISI.
Good evening.
I Wonder if you can get your thoughts on the payment rates did you see a peak in the <unk>.
<unk> and if not you can talk about the timing of inflection and then separately how does that impact your.
Growth assumption for card receivables from the timing on that front. Thanks.
Yes.
You know John.
In our card business payment rates remain at historically high levels.
And as you know government stimulus has been amplifying payment rates.
And while these programs have been winding down.
Customer balance sheets are extremely healthy and payment rates remain elevated.
You can see the payment rate trends and our reported trust metrics.
And while not a perfect reflection of our total portfolio Q2 payment rates remain at historically high levels.
And you know these high payment rates are.
Muting balanced growth even as.
Spend is.
Very strong.
And of course, the flip side of high payment rates is strikingly strong credit performance, which drives strong profitability and capital generation.
We actually are always happy when our customers are paying at high levels and it's indicative of a healthy consumer.
And those high payment rates correlate with the really strong credit results that we continue to see.
Yes.
We are you know.
We look at the monthly.
Numbers.
We can see John a little bit.
Of easing.
The payment rates I don't know if that would be a trend to indicate it was certainly.
Would be very plausible to me that as consumers know us.
Pump and spend more and more and they're going out and you know returning hopefully back to normal.
It would be a natural thing that payment rates.
Would.
He's a little bit here and and that.
Also credit metrics would would move towards normalizing a little bad So I guess, John I would say we've seen the earliest have indications of that.
Still running at really quite a breathtaking level.
Yes.
Next question please.
Of course, our next question will come from Moshe Orenbuch with credit Suisse.
Great. Thanks, rich putting together the comments you made about you know.
About the significant amount of excess capital and then the comment in the release about.
She increasing near term opportunities to build your franchise could you talk a little bit about whether you are looking at primarily kind of organic opportunities or organic ones as well.
Moshe as you know well because you you've been there.
From the beginning.
And following us and having great insights.
We really built our company as sort of wired for organic growth.
We installed at debt in the founding days, what I call horizontal.
Accounting, where we track.
You know every action in cohort and everything on a on a lifetime.
Hum economic basis, and we measured before enduring and afterwards to see how it's going and that and so we always put organic at the top of the list and here's a great example, I mean, while every bank that every national Bank that's been created.
Good day.
It has come.
Through.
Many many acquisitions, we've had some acquisitions in our journey, but but but we are really leaning into a organically driven you know national growth strategy in banking.
So and as I said, a few minutes ago.
We see good organic growth opportunities, which are partly a function of the market and where it is right now and very much. These opportunities stand on the shoulders of the technology that we built in some of the innovation that we're rolling out.
On with respect to acquisitions.
<unk>.
We're not putting any energy or strategic.
Our focus on doing bank acquisitions, what we are looking at is a technology acquisitions and really in fact, there's a spectrum.
On the technology side with respect to fin techs and tech companies.
On the continuum at 1 end is is just you know being a partner with them.
And then the next notch on the continuum as being a partner and an investor in them and you saw that with Snowflake. For example, and then there are sometimes acquisitions on.
All of those have we've been active in all of those.
Races on the continuum over the last few years and I'm struck by the traction and success that were having when we look back at some of the.
The.
Acquisitions are a little thin tax for example, and tech companies.
We are very very pleased with the performance and in many ways. These things are generally outperforming 1 of the big benefits that we have is that we have a modern tech stack. So does the pentax or tech companies that were buying and so the.
The integration and the compatibility the ability to attract and then really retain that talent.
Past the sort of the contract contractual period is something that I think leans in our favor so.
Lots of positives there, there's 1 big kind of elephant in the room with respect to acquisitions on the tech side and that's the valuations.
So.
We have we've recently gone to.
A few of these conversations and said.
Loved the company, but not.
Not at that price. So we are we're very aware about about the where pricing is but strategically I think you know if you kind of opened the aperture and don't talk about necessarily this very moment I think for capital 1 it's an organic first strategy, but but acquisitions.
And syntax and tech companies at the right price usually be little ones.
I think will will help.
You know fill out our business and accelerate.
Our opportunities.
Next question please.
Absolutely next we'll hear from Kevin Barker with Piper Sandler.
Okay.
Thank you.
Considering these trading at on a regular we saw on the first store in 2020 do you expect them.
Normalized credit to maybe run below pre pandemic levels as we go into 2022 on potentially into 2023.
Kevin time hearing that.
Yeah, but I think we.
We are it was a little echo, but I think we.
Besides I felt I heard what you were saying there Kevin.
From where we are right now which is at a an extraordinary benign level that.
You know virtually has never been seen before in modern times.
It's got a ways to go to normalize.
We are not.
Choosing to us.
Make a prediction on where that is not because we want to be coy about it but that's because in fact.
I think it's it's a hard thing to predict these days what we like to talk about is the drivers so talking about the drivers the consumer is in a.
A very.
A strong play.
Place.
Right now and I think what's striking is.
And I mentioned this earlier when you look at what the average consumer and this is average because the experience for an individual consumer can be way different from what I'm describing on average but.
The the accumulated sort of surplus that consumers have been able to build up is something that that even when the government.
Stimulus monthly benefits ease.
I think there is a bit of a accumulated.
Balance there that that will be beneficial.
For the credit performance of consumers.
<unk>.
You know so I you know, we there's really only 1 way for the credit to go from here and that us and normalizing.
I think it starts with a bit of a head start and I think that.
The rate at which had normalized this is gonna be pretty linked to consumers choices on payment on payment rates.
You know as I've mentioned earlier I think it's a natural thing for payment rates day gradually decline and for credit to gradually normalize that debt.
The directions are inevitable.
Timing is.
No speculative.
Our philosophy, our view is during this period of time, let's take advantage of debt market opportunity that is here is the place to the consumer is.
But let's also be cognizant of how markets work, how credit markets work in particular and be on the lookout for some of the natural indicators.
Overheating.
Okay.
Next question please.
Thank you next we'll hear from Rick Shane with J P. Morgan.
Hey, everybody. Thanks for taking my question this afternoon.
Look where we're at.
And this topic has come up a couple of times, we're looking at the reserve rates and thinking about them in the context of day, 1 reserve levels.
I'm curious how you now reflect on day 1 our.
Allowance coverage and what that could look like on a long term basis as we return to normal I'm curious.
In particular, if you think some of the policy initiatives we've seen during.
During the crisis changed your long term outlook in terms of potential loss rates.
Okay.
Thanks, Rick This is Andrew I'll take that and.
As we look at the allowance every quarter, we're going to take into accounts.
On a large number of variables and assumptions, which would certainly take policy and other factors.
So as I reflect back on net.
The ratio that we had upon adoption you know a lot of things have changed since then.
So within every single asset class you know the mix is going to a net.
Impact our coverage needs and then you look at overall the balance sheet mix across each of those asset classes will will impact things.
So you know I I look at all of those factors and it you know I don't think that the the ratio at adoption is necessarily a destination.
But I also think that if you put into.
The formula like all of the economic assumptions and in all of the asset mix I still believe that the pre pandemic coverage ratio can still serve us a very rough benchmark of of what coverage ratios might look like but again it'll take into account.
Each successive quarter all of the things that are that we're looking at in terms of the mix and and broad economic assumptions, including policy as you mentioned.
Next question please.
Thank you next we'll hear from that Betsy graphic with Morgan Stanley.
Hi, good afternoon.
Hey, Betsy.
On just a question here on how youre thinking about the opportunity to invest for that account growth you indicated the count growth, it's off maybe give us a sense as to how much.
More its up than usual I know, usually you don't give numbers for that but it would be helpful to understand the benefit that those marketing dollars us generating today and then how much more you think are the opportunity set is here to ramp up some marketing in the back half of the year given us.
Yeah, the opportunity set that you have in front of them.
Thanks.
Betsy Yeah, we don't tend to give out the specific head count.
Growth numbers, the origination numbers, but.
You know they do.
They are strong right now there they are not the strongest debt we have ever seen and we're pleased that there.
Really quite strong because obviously there was some weakness a year ago.
And those kind of numbers so.
We we have seen very solid.
Performance, we'd feel really good about the account originations.
So we are leaning further into marketing to drive future growth.
And also did just continue to build the underlying franchise.
And you know as we've said these opportunities are.
Partly because of what the market has to give right now and partly opportunities that are enhanced by our technology transformation.
And the marketing of course is especially going into the card side of the business, but also.
So if you just look on T V you've seen us.
Steadily investing in National banking, we're very happy with how that's going and you may have seen for the first time this quarter.
We have now gone on National T V in the auto.
Side so.
These are.
Advertising that is.
You know.
<unk> billings some of the.
Technology innovations that we have capital 1 some of the exceptional customer experiences that we've built and we're seeing good traction.
In the origination side of the business and so we continue to lean in to marketing.
Yeah.
Yeah.
Next question please.
Thank you next we'll hear from Don Vendetti with Wells Fargo.
Richard I was wondering if you could talk a bit about the tech spend outlook I saw on a reported capital 1 was hiring a large amount of software programmers to take advantage for the public cloud move and then you mentioned fintech.
Just curious if your thoughts on the regulatory landscape whenever balance out.
Sure.
Something that's not true.
Okay.
Okay.
Yes, Don Thank you.
So.
Now, let me talk about <unk>.
Tech and the tech hiring.
You know winning in technology.
Really kind of begins and ends with 1 thing.
During World Class Tech talent and it is the easiest thing to talk about and possibly the hardest thing to pull off net business today.
As you.
Because while this.
Principal is you know this this talent principle is true in any business. It is profoundly true in technology as the demand for World Class Tech talent.
Lastly.
Exceeds the supply.
So we've built a tech brand and have had great success in attracting top talent.
And we're competing head to head with a leading tech out for technology companies in the us.
And we've been leaning into tech hiring for years.
And this is a strong year of hiring.
Yeah.
No most of the new roles were hiring for our engineering roles in software development cloud infrastructure and machine learning.
And these are the most sought after roles in the world.
And we're getting real traction here.
But.
You know essentially if you pull way up and we think it's more than just words, when we say it we've really been living this would choose to from the ground up build a technology company that does banking.
Essentially what capital 1 is.
On the technology and data are increasingly what the business is at.
And at the heart of that journey is the tech talent.
I also mentioned 1 other thing Dan is that the cost.
Of technology talent.
Is visibly moving upward right.
In front of our eyes, and I wanted to flag that to investors.
That is just something that.
Again, it's the natural.
The consequence of the.
You know demand greatly exceeding the supply, but so I think it can be hard for most companies for all companies to do hiring and get the numbers that they want.
We are leaning into bad I think we're in a very good tradition.
But it's a you know us.
We're going to need to pay appropriately for that talent.
John you asked about syntax and.
You know, what what we feel about syntax and possibly a comment on the regulatory side.
I just have a tremendous interest in fintech.
Maybe that's because capital 1 was an original fintech.
Before there was such a word.
And I look at the Fintech marketplace, and I think some of these fintech or bringing great innovation to the market.
Yeah.
And.
We.
We very carefully study these innovations and.
I think debt.
You know we look at these boats as you know threats to our business, we look at them as opportunities maybe we can partner with the fin techs in some case, they're acquisitions associated with that and in some cases, what they were doing our us beacons of opportunity that we can pursue.
It's been tax today, I think what banks have to stare at is that Fintech today are.
Benefiting from their modern cloud based technologies.
And their innovative and entrepreneurial approach to disrupt in markets.
The tremendous amount of funding that is out there I mean for example these.
These days the venture capital funding going into fin tax is close to it I think I don't have this day to right in front of me, but it was close to double the next category in terms of the amount of venture funding going into this. So this is a this is pretty elect.
You're buying.
And the Fintech benefited from a lower level of regulation than financial institutions have.
No I don't think right now the success of syntax that 1 can look at syntex and says say the primary reason, they're succeeding in areas, sometimes more than the banks are is because they are less regulated.
They're succeeding for the factors that we talked about I think when you look.
Over time and envision these fintech.
With tremendous growth and being a large disruptors. It is an elephant in the room relative to what's the regulatory context, the capital that they are going to be carrying the regulatory requirements and and you know the level most of the playing field. So we certainly.
Have a a.
Watchful.
I on that but.
But when we look at the Fintech.
But the success, we're seeing in them to.
To me is indicative of the opportunity that exists to re imagine banking and that's what we've been focused on for years and then if we kind of.
Take our you know focus on Fintech for a minute and think about capital 1 like deferred tax we have a modern technology infrastructure based on the cloud.
We also have other benefits they don't have it on most of them.
Tremendous customer scale, a powerful brand and literally decades of underwriting and banking.
<unk>.
So you know when I pull up you know I think we and the fin techs are well positioned for success.
In some ways for the same reasons in some ways for different reasons.
But.
I think the biggest takeaway of all of this is.
That.
The banking industry.
Is.
It's changing on an accelerated basis.
The competition.
Is unbelievably and increasingly well funded.
And you know we look at that and we say it indicates that the the magnitude of change the magnitude of the opportunity, but it also is a.
A indicating imperatives that we need to make sure that during the windows of opportunity that we lean in and invest where we need to invest.
Because these opportunities won't last forever.
You're done.
Next question please.
Thank you next for her kind of Sanjay Sock Ronny with Cape G capital.
Thanks.
I guess I had a follow up question on the opportunity in the U S card for growth.
I assume a lot of the account growth that youre seeing right now is coming in the super prime or the trans actors space because of the growth in transaction volumes is that correct and I guess, if we think about the subprime consumer maybe you could just talk about.
What their behaviors are today, and how you see growth from that segment unfolding.
Yeah.
So on J M.
You know the.
Certainly.
What's the biggest news worthy thing that's happening in the short run.
Is this surge on the Super Prime side B B.
The return to.
Travel and entertainment spend powered a lot by you know.
Heavy spenders.
And.
That you just you just can feel and a sense, though the world pent up and just bursting out and I think that's a.
That's sort of the biggest.
News that we see inside our numbers as we look at it.
The.
The subprime business I think has been more.
Characteristic of in general the sort of mass market of America.
And that is that things have not been as dramatic in terms of pullbacks or are there is dramatic in terms of leaning in.
But.
We've just continued to take the same.
The strategy, we've had in in the subprime business really on the prime business for us.
For years and we.
We are you know carefully leaning into originations and growing.
Knowing the underlying franchise and then at the right opportunities raising the lines when we.
Feel that the opportunity.
If the conditions warrant so we continue to lean into originations really across our business and we are opening up our credit lines.
Gradually opening up credit lines, because we see.
Good results for consumers and a pretty good position our customers are on a good place and you remember Sanjay we talked about the.
The sort of years of you.
You know holding back on that it's not like we're unleashing with credit lines right now, but we are.
It's sort of net net more on the opening upside than the than the tightening side at the moment and that's of course with a watchful eye on all the key indicators of things that naturally will change.
Because of our credit markets work.
Next question please.
Thank you and our next question comes from Ryan Nash with Goldman Sachs.
Hey, good evening everyone.
Yeah.
Hey, Ryan.
So rich you mentioned several times that youre leaning into marketing I guess from the outside looking in how should we assess the return on these investments should it come in the form of accelerating growth or improved efficiency and I guess Richard on the efficiency point, we obviously saw improvement year over year for the first time in several quarters.
Like the top line should be improving.
This combined with the technology investments that you're making at what point do you think you'll be ready to reintroduce the 42% efficiency target or what do we need to see for you to reinstate a timeline for that thanks.
Okay. Thanks, Oh first a word on marketing as us as I said the Betsy.
You know we.
Our.
You know leaning into the marketing right now and.
Sort of leaning a little further into it because.
1.
What we do is always so windows driven as you know.
Ryan and so.
That's that's where we are on the marketing side. So from an efficiency point of view you know you noticed pretty.
You know high levels of spending on marketing that you know marketing goes up marketing goes down but that at the moment has been more on the upside.
Let me.
Turn and 1 thing I want to say about competition, if I could just.
Because this is very relevant to these growth conversations and then I'll pivot to the efficiency point.
You know there.
You know most competitors have been.
The feel of their earnings calls is they too are leaning in.
To the opportunities that they see at the moment and.
You know we see this we see competition heating up.
You know all around us, especially in rewards for typically that kind of the flash points, where you see these things.
The most but you see it in the marketing and the media activity.
You see it in direct mail numbers.
We see it in.
On the rewards offerings and the heating up on some of that.
Competition is intense right now Ryan, but it is not yet irrational.
But I wanted to just.
Kind of take the moment to reflect on what.
I call that sort of the physics of competitive cycles, because I've seen this enough that is pretty much.
You can.
You can count on these things happening that timing is always the question but.
You know right now credit us historically, good across the industry and the consumer is in great shape.
The longer this persists the more competition will likely be to extrapolate these trends to inform their decision making.
And this can embolden them to make more aggressive offers market more intensely and that particular, 1 I worry about loosening underwriting standards.
And in this particular environment the benign rear view mirror could encourage lenders to reach for growth.
And it could be exacerbated by credit modeling that relies on consumer.
You know the credit data that frankly, maybe very unique to the downturn.
And not as good for predicting where credit performance is going to be over time, you know Ryan if you're building a credit model right now.
And you're looking back at the data on the last year or 2.
What are you going to do with that with respect to what that tells you about the next time things turned down.
So.
The and and you know Theres also.
A lot of earnings and capital and liquidity in the system and then you've got the Fintech that are really ramping up as I talked about earlier so that.
That the they're there.
We eat.
Even as we're leaning into this opportunity we remind ourselves every day that.
Yeah.
The scenes for.
The.
The next challenge is coming up in the credit cycle as opposed to the economic cycle in the credit cycle. These seeds are being planted right now.
So what we do is we do.
Don't just look at our models to make decisions, we pull way up and we have a very watchful alive for the key indicators of these.
In.
Not only likely basically inevitable things to happen and and and then we.
No well act accordingly, we just never want to be surprised let.
Let me turn to talk about operating efficiency.
We've been focused on improving our operating efficiency ratio for years.
And from 2013 to 2019, we delivered 400 basis points of improvement.
Where the combination of revenue growth and tight expense management.
And of course, the pandemic interrupted our progress, particularly on revenue growth.
Now as it turns out the pandemic also accelerated the technology race and raised the stakes for all players across many industries and frankly, particularly in banking.
And so as I talked about earlier, you know I think everyone can feel the clock ticking companies everybody in banking feeling the clock ticking on their tech readiness.
The investment flowing into Fintech the arms race for talent.
And so we are struck by the emerging opportunities in the marketplace.
There are significant but the windows aren't on.
Unlimited.
No.
We feel we're very well positioned on this but.
We are continuing to invest in this moment.
In our technology and in the opportunities that we.
We see out there.
So <unk>.
Meanwhile, we continue to focus on operating efficiency.
Our tech transformation is the engine of long term efficiency gains you know both through revenue growth.
And digital productivity gains.
<unk>.
Continuing.
Continuing to invest in our technology opportunities and driving for efficiency improvements are on a shared path.
So we're still driving towards the same destination of operating efficiency, but the timing of operating efficiency improvement needs to incorporate the imperatives of the current marketplace.
And <unk>.
Delivering positive operating leverage over time continues to be 1 of the important pay offs of our technology journey and a key element.
Of how we deliver long term shareholder value.
Okay.
Next question please.
Absolutely next we'll hear from Bill Cook, our Kashi with Wolfe research.
Thank you.
Rich as you think about the process of normalization of payment rates and revolve rates that you described would you expect that to provide an incremental tailwind to loan growth such that we could actually see loan growth outpace our spending.
Spending growth.
As we look ahead.
Yeah.
I think 1 of the 1 of the things that I think the debt the.
On the banking industry I.
I mean, we've talked about this relationship between payment rates and growth you know from time to time, but I think it's been more of a an occasional conversation with the street and.
You know I think that the whole banking industry and the investment community has really sort of collectively gone through and learned an important lesson.
Here about the metric that really honestly wasn't talked about that much which is payment rates and the profound impact payment rates has.
On both growth both loan growth and in fact.
You know credit performance.
And you know the striking thing is it's not only.
Empirical that relationship, but it's intuitive as well which to me really.
Reinforces there's something very important here now as I've said to you, we kind of root for higher payment rates.
Because I think it reflects a healthier consumer even and we get paid on the credit side and sometimes paid very well as you can see here.
But it is a natural.
The thing that will happen over time, the normalization of credit will will very likely corp.
Come along with the.
Lowering of payment rates and bad in turn is likely it sort of mathematically all other things being equal that will.
Be a boost to our loan growth.
Yeah.
So.
When you say we'll book.
But I think for for those numbers to move significantly enough to in fact have loan growth lead the race of growth.
Relative.
2 metrics like spending and.
Some of the other.
Things or for us.
Originations and things like that that that's got quite a journey to do to get there I'm not saying that it won't.
But I wouldn't run for the bank counting on a.
Loan growth.
Topping the league tables of the various growth metrics, but.
You know I think what is what is banking.
What what really essentially is baking in the oven is a gradual normalization of credit.
Corresponding.
Wait for the same reason a lowering of payment rates.
And.
You know we are probably seeing the very early sort of on a monthly basis, the very early indicators.
Bad phenomenon.
Uh huh.
Next question please.
Thank you and our final question comes from Bob Napoli with William Blair.
Thank you and good afternoon.
Rich appreciate your comments on Fintech and how you're looking at us partnering.
Partnering buying and.
But.
Just was hoping to get maybe a little bit more color on your thoughts around what areas of Fintech I know it's been a few years. Since you bought a pair of us are on the online price tracking, but there's a lot of day. There's as you talked about all of that investment is going into a very broad.
Group those are whether it's buy now pay later BTB payments.
<unk> management.
No business spend management kind of charge card business spend management areas.
I just wondered are you know.
What areas are most attractive to you where we would see.
Partnerships or acquisitions.
Well, Bob what we do is and you mentioned a bunch of interesting areas for example, but.
What we do is rather than say these 3 areas are our priority areas and let's go look for Fintech, we have a and it's 1 of the really 1 of the the benefits.
Of years on our Tech transformation is we see opportunity and a lot of areas across the portfolio of businesses that we're in.
And.
So rather than say vs..3 here are the priority, let's go see what we can partner with or by what we do is 1.
We massively study.
Fintech marketplace.
Across.
All of the areas that we are also leaning into frankly, we study it beyond that because we can learn a lot.
So.
And then what we do is the sheer learning on alone is worth the effort.
And so we go to school on this and we try to say 1 and a bunch of times, we say Wow look at that they thought a bad idea we didn't net capital 1 they're good or bad but look let's see what we can learn from that.
And.
But but also along the way.
We look across that continuum of partnering investing or buying these fees.
But.
But if we really look from the other end of the telescope rather than.
What we need what.
What we look for is what do we find and especially what do we find relative to.
A company with the debt.
Talent.
And the the culture and.
And the business model that would be really accelerated.
Accelerated to us and so every once in a while we do an acquisition and but but.
There is a lot of focus on.
The debt that particular business model, we always ask ourselves could we build that rather than buy it and then we really look hard at the at.
The talent because.
In the end.
What really has made our most successful acquisitions has been that the talent comes in stays and leads.
It becomes a leading executives in the company and so.
That's that's how it works in a lot of times, we don't buy anything, but we always come out having learned a lot.
Bob.
Thank you.
Well, thanks, everybody for joining us on the conference call today. Thank you for your continuing interest in capital 1 and remember Investor Relations team will be available on just a few minutes. If you have any further questions have a great night.
Yeah.
And again, ladies and gentlemen, thank you for participating you may now disconnect.
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