Q3 2021 Capital One Financial Corp Earnings Call
[music].
Good day, ladies and gentlemen, and welcome to the capital one third quarter 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 he would like to withdraw your question from the Starkey impressed 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 third quarter 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 at capital one dot com and follow the links from there.
And to the press release and the financials. We've included a presentation summarizing our third quarter 2021 results with.
With me today are Mr. Richard Fairbank capital one's Chairman and Chief Executive Officer and me.
Mr. Andrew Young capital ones, Chief Financial Officer.
And Andrew will walk you through this presentation.
Access 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 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.
Capital one does not undertake any obligation to update or revise any of this information.
There was a result of new information future events or otherwise.
Numerous factors could cause the 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 to capital ones 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 three of Tonight's presentation.
In the third quarter capital, one earned $3 $1 billion or $6.78 per diluted common share.
Included in our results for the quarter was a $45 million legal reserve build.
Net of adjusting items earnings per share in the quarter were $6.86.
On a GAAP basis pre provision earnings were $3 6 billion.
An increase of 7% relative to a quarter ago.
Period end loans held for investment grew 11.8 billion or 5%.
We had strong loan growth across all of our businesses.
Recall that we moved $4 1 billion of loans to held for sale late in the second quarter. So average loans in the third quarter grew more modestly at 3%.
Yeah.
Revenue increased 6% in the linked quarter largely driven by the loan growth I just described.
Coupled with margin expansion in our card business.
Operating expenses grew 3% in the quarter.
With total noninterest expense increased 6%.
In addition to strong pre provision earnings the.
The P&L was aided by a provision benefit in the quarter.
As record low charge offs were more than offset by an allowance release.
Yeah.
Turning to slide four I'll cover the changes in our allowance in greater detail.
Yeah.
We released $770 million of allowance in the third quarter as the effects of continued actual strong credit performance and a reduction in qualitative factors.
Drove a decline in allowance balance.
Which was partially offset by loan growth in the quarter.
Turning to slide five you can see our allowance coverage ratios continued to decline across all of our segments.
Driven by the factors I just described.
Turning to page six I'll now discuss liquidity.
You can see our preliminary average liquidity coverage ratio during the third quarter was 143%.
The LCR remains stable and continues to be well above the 100% regulatory requirement.
Yeah.
Our liquidity reserves from cash securities and federal home loan bank capacity.
Ended the quarter at approximately $124 billion down $13 billion from the prior quarter as we continue to run off excess liquidity built during the pandemic.
The 9% decline in total liquidity was driven by a modest reduction in the size of our investment portfolio.
And $8 billion in lower ending cash balances, which were used to fund loan growth and share repurchases.
The decline in cash balances had an impact on our NIM, which I will discuss in more detail on page seven.
Yeah.
You can see that our third quarter net interest margin was $6 three 5%.
46 basis points higher than Q2 and.
And 67 basis points higher than the year ago quarter.
The linked quarter increase in NIM was largely driven by four factors.
First the decline in average cash balances I just described.
Second margin expansion expansion in our domestic card business.
Third loan growth in our domestic card business.
And lastly, the benefit of one additional day in the quarter.
Turning to slide eight I will end by covering our capital position.
Yeah.
Yeah.
Our common equity tier one capital ratio was 13, 8% at the end of the third quarter.
Down 70 basis points from the prior quarter.
Net income in the quarter was more than offset by an increase in risk weighted assets and share repurchases.
We repurchased $2 $7 billion of common stock in the third quarter and have approximately $2 6 billion remaining of our current board authorization of $7 5 billion.
At the beginning of the third quarter, we began operating under the federal Reserve's stress capital buffer framework.
Doping and a minimum CET, one capital requirement of 7% as of October one.
However, based on our internal modeling, we continue to estimate that our CET one capital need is around 11%.
Before I turn the call over to rich, let me describe a few items related to our preferred stock.
On October 18th.
We announced our intention to redeem our outstanding preferred stock series G and series H in early December.
As a result of the full quarter of recent issuances and a partial quarter of the planned redemptions, we expect fourth quarter preferred dividends to remain elevated at around $74 million.
Looking ahead to Q1, we expect the run rate for preferred dividends to decline to approximately $57 million per quarter barring additional activity.
With that I will turn the call over to rich rich.
Yes.
Thanks, Andrew.
Began on slide 10, with our credit card business.
And provision for credit losses improved significantly.
Credit card segment results are largely a function of our domestic card results and trends, which are shown on slide 11.
As you can see on slide 11 third quarter domestic card revenue grew 14% year over year.
Purchase volume for the third quarter was up 28% year over year and up 27% compared to the third quarter of 2019.
And the rebound in loan growth continued with ending loan balances up three point.
$7 billion or about 4% year over year.
Ending loans also grew 4% from the sequential quarter.
Had a typical seasonal growth of around 1%.
Ending loan growth was the result of strong growth in purchase volume as well as the traction we're getting with new account originations and line increases.
Partially offset by continued high payment rates.
Payment rates leveled off in the third quarter, but remained near historic highs.
Yeah.
The flip side of high payment rates is strong credit.
And credit results remain strikingly strong.
The domestic card charge off rate for the quarter was 1.36%.
228 basis point improvement year over year.
The 30, plus delinquency rate at quarter end was 193%.
A 28 basis points.
Improvement over the prior year.
The pace of year over year improvement is slowing particularly for the delinquency rate.
Okay.
Domestic card revenue margin was up 218 basis points year over year to 18, 4%.
Two factors drove most of the increase revenue margin benefited from spend velocity, which is purchase volume growth and net interchange outpacing loan growth.
And favorable current credit performance enabled us to recognize a higher proportion of finance charges and fees in third quarter revenue as well.
This credit driven revenue impact generally tracks domestic card credit trends.
Yeah.
Total company marketing expense was $751 million in the quarter.
Including marketing in card auto and retail banking.
Our choices in card marketing or the biggest driver of total company marketing trends.
We continue to see attractive opportunities to grow our domestic card business.
Our loan.
Our growth opportunities are enhanced by our technology transformation.
Turning opportunities into actual growth requires investment and once again, we're leaning further into marketing to drive growth and to build our franchise.
At the same time, we're keeping a watchful eye on the competitive environment, which is intensifying.
Looking ahead, we expect a sequential increase in total company marketing in the fourth quarter that's.
That's consistent with typical historical pattern.
Pulling up our domestic card business continues to deliver significant value as we invest to build our franchise.
Slide 12 summarizes third quarter results for our consumer banking business.
Consistent auto growth and strong auto credit are the main themes in the third quarter consumer banking result.
Our digital capabilities and deep dealer relationships strategy continued to drive strong growth in our auto business.
Driven by auto third quarter, ending loans increased 12% year over year in the consumer banking business.
Average loans also grew 12%.
Auto originations were up 29% year over year.
On a linked quarter basis auto originations were down 11% from the exceptionally high level in the second quarter.
As we discussed last quarter pent up demand and high auto prices had driven a second quarter surge in origination across the auto marketplace.
Third quarter ending deposits in the consumer bank.
We're up to $7 billion or 1% year over year.
Average deposits were also up 1% year over year.
Consumer banking revenue increased 14% from the prior year quarter, driven by growth in auto loans.
Third quarter provision for credit losses.
Improved by $48 million year over year, driven by an allowance release and are out of business.
Credit results in our auto business remained strong year over year, the third quarter charge off rate improved five basis points to 0.18%.
And the delinquency rate improved 11 basis point to 3.65%.
Looking at sequential quarter trends the charge off rate increased from the unprecedented negative charge off rate in the second quarter.
And the 30, plus delinquency rate was up 39 basis points from the second quarter consistent with historical seasonal pattern.
Moving to slide 13, I'll discuss our commercial banking business.
Third quarter, ending loan balances were up 4% year over year driven by growth in selected industry specialties.
Average loans were down 2%.
Ending deposits grew 18% from the third quarter of 2020 as middle market and government customers continued to hold elevated levels of liquidity.
Quarterly average deposits also increased 18% year over year.
Third quarter revenue was up 17% from the prior year quarter and 23% from the linked quarter.
Recall that revenue in the second quarter was unusually low due to the impact in moving one $5 billion of commercial real estate loans.
To held for sale.
Commercial credit performance remains strong.
In the third quarter, the commercial banking annualized charge off rate was five basis points.
The criticized performing loan rate was six 9%.
And the criticized nonperforming loan rate was 0.8%.
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.
In the third quarter.
We drove strong growth in domestic card revenue purchase volume and new account.
And loan growth is picking up.
Credit remains strikingly strong across our businesses.
And we continue to return capital to our shareholders.
In the marketplace. The pandemic has clearly accelerated digital adoption.
The game is changing from new and permanent shifts in virtual and hybrid work too.
Two more digital product and exceptional customer experiences.
New Fintech innovation and business model.
The common thread throughout all of this.
Is technology.
And the stakes are rising faster than ever before.
Competitors are embracing the realization that technology capabilities, maybe an existential issue.
The investment flowing into Fintech is breathtaking and it's growing.
We can see investors voting with their feet in stunning fintech valuation.
And the war for Tech talent continues to escalate, which will drive up tech labor costs, even before any head count increase.
All of these developments underscore the size of the opportunity for players.
Who lead the way in transforming how banking works.
And capital one is very well positioned to do just that.
We are in the ninth year of our technology transformation from the bottom of the tech stack up well.
We were an original Fintech and we have built modern technology capabilities at scale.
But what is also clear in the marketplace.
Is that the time frame for investment and innovation are compressing.
The imperative to invest is now.
We have been on a long journey to drive down operating efficiency ratio powered by revenue growth and digital productivity gains.
Our journey will need to incorporate the investment imperative of the rapidly changing marketplace and it is likely to pressure operating efficiency ratio along the way.
Pulling way up.
We're living through an extraordinary time of accelerating digital change our modern technology stack is powering our performance and our opportunity is.
Its setting us up to capitalize on the accelerating digital revolution in banking.
And it's the engine that drives enduring value creation over the long term.
And now we'll be happy to answer your questions.
Jeff.
Thank you rich.
Well now start the Q&A session.
As a courtesy to other investors and analysts who may want to ask a question. Please limit yourself to one question plus a single follow up question.
And if you have any follow up questions. After the Q&A session. The Investor relations team will be available after the call.
Keith Please start the Q&A.
Thank you, ladies and gentlemen, if you would like to ask a question. Please signal by pressing star one on your telephone keypad using a speaker phone. Please make sure. Your mute function is turned off to allow your signal to reach our glue equipment again. Please press star one to ask a question, we'll pause just a moment to allow everyone an opportunity to signal for questions.
We will take our first question from Ryan Nash with Goldman Sachs. Please go ahead.
Hey, good evening everyone.
Hey, Ryan.
Right.
Hey, rich so rich.
You talked about competition across the industry has intensified.
Noted in both traditional players and Fintech and yet it seems like your strategy is working as evidenced by the better than peer growth metrics in credit so I.
I was just wondering can you maybe just talk about the competitive environment, you're seeing out there how does that compare to maybe the middle part of the last decade.
I mean, we saw competition accelerating and where do you think it goes from here and then I guess, maybe wrap that in with what does it mean for growth for the company and I have one follow up question. Thanks.
Okay, Ryan great questions. So.
You know what there's let me let me really talk about the card comped.
Competition.
It's probably the heart of your questions here, but we can also expand on that but.
In the domestic in the in the card business competition has definitely intensified, especially in rewards.
Marketing and media activity are.
I would say approaching pre pandemic levels.
And competitors continue to lean into marketing and originations.
Direct mail is back to 2019 levels.
Originations have also recovered across the industry and are above pre pandemic levels.
The pricing continues to be mostly stable.
Our rewards offerings have become richer and we continue to watch that very closely.
We saw some modest increases in upfront bonuses, mainly in the form of limited time offers.
And in travel as demand returns.
Rewards earn rates have also increased with some of the new product structures introduced recently, particularly in the cash back space.
And of course, there's also.
A lot of increasing activity with phanteks, such as buy now pay later.
Installment lending and you know we talked about the breathtaking levels of investment by by venture capital into that industry.
So.
And by the way all of this is incredibly natural our market should be reacting if we didn't see everything that I. Just described to you I would you know wonder you know if I woke up and are in the wrong place. This is incredibly.
Natural.
But in the context of this increased competition, we continue to see good opportunities for growth.
Which are.
Enhanced by our tech transformation.
And we're keeping a close eye on competition.
Looking for adverse selection that may come as a result of that.
And we are underwriting with the expectation of higher losses.
In the future.
Now you asked for a comparison Ryan about.
How does this compare with the last decade.
Certainly in the middle of the last decade our.
Competition in the credit card space really started picking up.
Okay.
But.
And some of the descriptor I would use here I would use there in the sense that more spending on marketing.
And.
Originations being kind of robust for the industry.
Back then we saw a bunch of things that we really don't see now, but we'll have to keep in al and ni out for that.
What we what we saw back then is.
Very aggressive behavior.
In in ways that was more than just just marketing.
It really was in the form of looser underwriting and in practices. Some consumer practices that we did not feel worse.
You know fully in the customers' interests. So there were a lot of things to react to that marketplace and if you look back capital one's loan growth kind of slowed in the card business as we are.
<unk> moderated in the face of what we thought was.
You know competition that was over the top and that was going to not only make it more costly to originate but much more importantly.
Could impact the quality of the credit quality of of.
Of what is.
Being booked.
So.
We are we do not feel right now that we're at a time like that we have to be on the lookout for natural things that happens as competitors continue to.
Heat up there their efforts to grow but you know I think we're in a pretty good period Ryan right now are in.
In the marketplace and for capital one as indicated by my comment about marketing, we see we see good opportunities, we're leaning into that and we have our having.
Having learned that over the years and seen a lot of things right and we're going to have our eye out for things that we think are.
You know over the top.
Thanks for all the color there rich and you know what.
If I can just ask one quick follow up you know I know credit is as good as it's ever been and I know you don't have a crystal ball, but yours is probably better than mine. So I was wondering that given that this downturn has been like no. Other you know how are you thinking about the trajectory of credit over an intermediate timeframe do you think we could run well below normal for an extended.
Period of time or do you think there is the risk of fast normalization as the industry has become more concerned about thanks.
Yeah.
Well I think we are Ryan certainly in a in a pretty extraordinary well not even pretty extraordinary were in an extraordinary place from a credit point of view and I'm speaking of the industry and obviously a capital one.
As well.
And you know not only for our credit card business, but also really across the board at capital one.
So.
As we think about where it could go from here, let's think a little bit about what's driving where it is so obviously the high level of consumer support through the government stimulus has been a factor.
Although that's mostly in the rearview mirror theres, some lingering benefits and concern in terms of the consumer balance sheet that come from that but this will be a good time to watch how.
You know how credit performs in the basically in the absence of that we've also had widespread industry forbearance and and consumers themselves have behave very rationally through this period of uncertainty generally saving more spending less and paying down debt.
And then on top of that we've seen strong labor market. So far this year with very high demand for workers solid wage growth, which should support consumers as government stimulus.
Stimulus expires.
So.
No.
Where does everything go from here it feels inevitable that.
Losses will increase from the exceptionally low levels of the past year and the end of where we are.
But I think the timing, it's much easier to have conviction about what will happen and the timing of that.
We were looking for signs of normalization.
Card card delinquencies ticked up modestly in August and September.
Although this is the time of year, when we tend to see seasonal increases in delinquencies.
So.
We.
This is just a.
I think this is a very strong time.
And the.
I think most companies are enjoying the strength that most banks enjoying the strength that they have I think they are leaning into their opportunities and you know.
For capital one I think our opportunities are particularly good because of the technology that we are.
The shoulders that we stand on but.
You know with the with a watchful eye for normalization that will absolutely inevitably happen and by the way when it happens that's normal that's not necessarily alarming at all it would be surprising if it didn't happen.
But we'll just watch out for the extremes of behavior and in the meantime, lean into our opportunities.
Next question please.
We will take our next question from Moshe Orenbuch with Credit Suisse. Please go ahead.
Great. Thanks.
Rich you talked a lot about the competitive dynamic.
The credit card industry and talked about some steps you're chasing from an underwriting standpoint to you know to kind of make up for that could you talk a little bit about.
How you think about that.
The ability to expand credit lines for your customers, because that's always been a or.
Big factor in terms of generating you know kind of ongoing loan growth and strong scratched I do have a follow up question.
Yeah.
So.
Moshe we are you know.
As you know we.
Talked about.
Continuing our originations going in in prior years, sometimes why we while we were holding back on line.
With the caution about the environment that we were in and we talked about a coiled spring.
That that represents and you know so we always take the philosophy of trying to continue to.
Build.
The underlying franchise and then expand the lines as we see.
Validation about the strength of the marketplace and the strength of the individual customers.
And.
We are gradually increasing our credit lines.
Saying too dramatic, but consistent with how we're leaning in in general we are increasing.
Increasing our credit lines.
Gradually so that will be another boost.
On the on the <unk>.
Loan growth side.
Okay.
As a follow up you talked about.
The potential for pressure the efficiency ratio I mean, you've had some pretty strong revenue growth.
Could you talk about I mean, obviously you know one would think that that kind of helps from the standpoint of being able to fund the investment could you talk about what factors would drive.
Periods of time, where that efficiency ratio will be pressured versus times would be.
<unk>.
Yeah, well the revenue revenue growth as the best friend of efficiency ratio as you point out Moshe and.
Our our philosophy I think some companies sort of drive try to drive a very sustained efficiency ratio improvement by just squeezing costs out and we're certainly trying to drive a lot of efficiencies from technology.
But our philosophy is certainly that you know leaning into investing.
In technology and growth opportunities.
You know.
Can be an engine for revenue growth and that combined with digital efficiencies can help.
Drive a sustained long term.
Improvement in efficiency ratio and of course.
We've <unk>.
<unk> enjoyed a something like a 400 basis point improvement in efficiency ratio.
13 to 2019, when the when the pandemic kind of interrupted our process.
The reason I pointed.
Pointed out the.
My comment about efficiency ratio a few minutes ago.
Was.
Pointing out some of the.
Pressures on the cost side that really come from the sweeping digital change that is transforming the marketplace.
And the compressed time frame for investment and innovation.
And.
So.
New and traditional competitors embracing the need to invest in technology.
The arms race race for Tech talent is fierce and in fact, it's the it's the biggest talent arm arms race that I've seen in my three decades of building capital one and that Moshe that's that's a disappointing one because that that raises that.
Tide level of tech costs without you.
You know generating in a sense any benefits directly from that.
And just talking about the fintech for a minute.
Here's some striking data investments in fintech through the first three quarters of this year.
It has been more than $90 billion.
Or on an annualized basis of course, you know that is 120 billion.
And that's more than double last year's total.
And I mean, those are just breathtaking.
Investment.
Number is.
And you know that's a huge assault on our industry from a kind of a defensive point of view as we react to that but also I look at this and say that's a clear indication.
That banking is ripe for transformation, which we have believed core.
Many many years.
So.
This all shows up in the need to invest both in technology itself and in leading digital products to gain competitive advantage and the clock is ticking.
Yeah.
So we're in a strong position to take advantage of the opportunities in the marketplace.
And we have invested for years to build a modern tech stack.
We have a deep heritage and big data and analytics.
And we.
We have a large customer franchise and of national brands, So I really like our positioning and our chances.
But we do have to invest to capitalize on the opportunity. So moshe the pulling way up the pressures come really from two things, which both derived from one thing which is the the rapidly changing marketplace. So you've got the cost pressure in terms of our tech wages.
Yeah.
And the.
The compressing.
Timeframes.
Timeframes.
For our innovation across the industry and we just.
I just wanted to share that with investors and.
That we are.
Leaning into capitalized.
This opportunity and all other things being equal that pressures efficiency ratio of course, when you pull way up everything I just talked about maybe not so much the tech labor costs, but the.
The investment imperative is in service of the same longer term objectives.
Enhancing growth building a franchise.
And very importantly, driving greater efficiency.
Right.
Next question please.
We'll take our next question from Betsy <unk> with Morgan Stanley. Please go ahead.
Hi, good evening.
Hello Betsy.
Rich wanted to understand in the spend numbers that you generated in the quarter I just wanted to get a sense as to what you're seeing in terms of.
Where there has been change at the margin you know is this spend been accelerating in any specific type of customer you know maybe the higher end or at the start of routers and then the degree to which you think that's sustainable here going forward. What are you sensing in terms of our.
And I know trajectory from here and then I have a follow up thanks.
Yes.
Okay.
I mean.
Okay.
Can you hear me Okay. Betsy. This is this is Andrew sorry, I can hear you, but we had Richard sorry.
I was on mute sorry, let me, let me start over Betsy a great. It was it was so eloquent I can't repeat what I said about it.
But the.
The the spend mm.
Yeah.
Our growth.
Is really an across the board thing from mass market.
<unk> customers to the.
Heavy.
Spenders that we have in our portfolio.
And virtually every spend category is up and it's up over its up over last year, it's up over two years ago.
The only laggard versus two years ago, I shouldn't say laggard basically the travel and entertainment category has kind of caught up with.
Where it was two years ago, but given that you saw our overall purchase volume numbers are up 27% compared to 2019. It just kind of shows you.
How much are pretty much all the rest of the categories are surging ahead. So that's partly a comment on the marketplace.
And it's also partly a comment about capital one and our.
You know the traction that we're getting.
In and spend across our business, obviously, you can see from our marketing and from our products and we spent years.
Investing in building a sprint spender franchise.
And.
The numbers that that we've been posting our and.
Indicative of.
A lot of traction there now you.
You know I'm I'm.
I'm not going to give a guidance on where it's going to go from here.
I think it's got a good momentum, but also I think.
Consumers have been sort of making up for lost time, and I think as they break out being so cooped up in the pandemic that our spend levels have been up.
And you know.
Well, we'll see.
Where things go from here, but we certainly carry quite a bit of momentum.
Into.
The marketplace.
And the purchase volume success ends up being.
A giving a boost to the outstandings growth of capital one which of course like all the banks is still.
Being a constrained somewhat by the high payment rates, but you.
We were really happy to see that even the a.
Even the outstandings growth as a needle start to move there.
There in the quarter.
Got it Okay. That's helpful. I'm just the other follow up question I had has to do with how you think about not only the cost per account, but the value of that account and how long it takes for that account to be calm.
Run rate.
I asked because you mentioned earlier, how the competition is quite hot So you might you know someone might come away from this call thinking okay cost to acquire a countertop, but then the value of that account.
Getting to full run rate levels.
How do you feel about that in this environment versus you know what.
<unk> seen in the past is that something that takes a.
12 to 18 month timeframe or you know given where we are with the job growth inflation pick up all that is it possible that there's a longer tail on the value nothing accounts that you're generating today. Thanks.
So the time to pay back for any of the originations. We do obviously is dependent on that particular segment, but.
You know we've been investing for years in.
And not just you know spending money on marketing, but spending money on building the franchise of capital one.
And.
The.
You know building a.
Our brand.
Yeah, creating b.
Okay.
Really exceptional technology that powers the products that we have with customers, creating exceptional customer experiences.
And.
I think what we're seeing is the continued benefit of our investment in the franchise.
Now, we talked about leaning into marketing, which we have been doing and.
As I said, we're continuing to do that.
We see good opportunities in the places we've been investing for years and while there is.
Increasing competition.
We continue to see a a good.
Origination.
<unk> and a cost per account originated that is a very reasonable for us by our historical standards.
And we really like everything we see about the early performance of the things that were bookings so that would suggest that see that.
The values the value of these accounts are should be.
Strong.
And so.
Given all of this we see opportunity to continue.
As we've been going and keep a close eye on things that may change in the marketplace.
One segment.
At a time.
But.
So right now we think the opportunities.
Our good and the return on the growing investments that we've had.
He is good.
Next question please.
We'll take our next question from Rick Shane with J P. Morgan. Please go ahead.
Thanks, everybody for taking my questions. This afternoon rich look you've.
Been very clear about the opportunity generally speaking in terms of technology. When we think about technology I think there are probably four places or for opportunities its product its customer experience it's back office.
And it's potentially underwriting and adding value there.
Curious when you think about those four.
Factors, where those four elements.
Where you see the biggest opportunity to enhance return and argue school misuse of technology and people driving bad decisions or bad outcomes.
Many of these factors.
So hello, Rick and good evening.
I know all of the areas that you mentioned a R.
Opportunity areas.
I think that.
The.
The list is even more expensive than what you have but I certainly agree with the fore because I'm looking at products customer experience.
The back office.
And underwriting and.
You know I, let me just kind of.
I think through some of that.
The real opportunity areas for us.
And importantly, what I want to say is what I'm, what I'm going to talk about here.
Stands on the shoulders of our modern tech stack and we're <unk>.
Working to build breakthrough capabilities and solutions.
For example, our new marketing platforms leverage big data streaming in real time to reach more customers with the right offers.
And.
Driving to improve and optimize conversion rates.
Our new credit Decisioning platforms enable us to use way more data and more sophisticated machine learning algorithms to make better credit decisions.
Our new fraud platform enables us to approve more transactions for our customers while simultaneously reducing broadcast.
And just let me pause on fraud for Rod for a second because one thinks that while investing in fraud is really important of course to getting fraud costs down because fraud costs have continued to sort of a rise in the industry.
But it's also the.
Opportunity.
Having breakthroughs in the management and fraud creates an opportunity on the customer experience side and the business opportunities. We have I'll give you. Two examples one is and in credit cards for very heavy spenders ware.
The card always works is an incredibly important battle cry in at the top of the marketplace and so the spillover benefits there are significant.
And also in building a national digital bank so.
You know if a bank just goes out there and it hangs out a shingle and says you know come on and then you know.
No.
Folks that sign up for a.
Digital bank accounts, it turns out while fraud rates in the branches for people if they want to commit fraud don't typically walk into a branch to commit account opening fraud, but.
It's very easy to do that online so that what we have found a you know.
Is that our heavy investment in fraud has been instrumental to our national banking strategy that you see featured on television and.
The ability.
To.
Due to really on a mass basis open up accounts nationwide and B you know.
Comfortable with respect to the fraud costs.
So.
B.
So we've been talking about some of the risk management side of things. Let me also say just another key area not really directly on your list, but sort of risk management beyond.
There's underwriting or fraud.
As you know just banks the business risk management is the business and the ability to.
Automate risk management processes, and the ability to move to 100% monitoring all the time in real time of things that we're otherwise just sample. There's just a lot of benefits that come from transforming how we work.
Then to your customer experience category, we're building growing franchises. In addition to the core card business.
Enhancing the experiences of our flagship cards.
Growing franchises with innovative products like capital, one shopping and credit wise.
In the auto business, we're delivering innovative products like auto navigator, which offers real time underwriting and any color on any lot of merit in America in a fraction of a second.
It enables customers to know in advance what their financing terms will be on any car before they visit the dealership.
And that was a little word of mouth thing until we put it on national T B and.
In the last few months I'm sure you've seen.
<unk>.
We're strengthening our brand and customer franchise are evidenced by high net promoter scores and J D power naming capital one of the leading mobile banking app.
I turned to the card partnership business, we're winning card partnership opportunities, where increasingly retailers are focusing on digital capabilities as like an a preemptively important part of the conversation.
We're partnering with tech leaders like Snowflake, where we are their largest customer.
And in addition to getting valuable early investment stake in them, we've been able to leverage the world's leading data management platform for our own innovation.
On the operating side, we are steadily working to automate our operating processes, enabling us to reduce risk and to reduce costs.
Hum.
You know then there's the tack on tax savings or investments in modern technology are enabling us to reduce legacy tech costs and legacy vendor costs.
So again, even as we invest more in modern tech, where really powered by some of the benefits of reducing legacy pet costs.
Digital productivity gains are powering speed to market and revenue generation.
You know and with all these growing opportunities, we're enjoying the virtuous cycle of attracting more and better tech talent, which in turns accelerate which in turn accelerates our progress.
Yeah.
So you know even sort of beyond your your list four which is a great list of our technology transformation is changing the trajectory of capital, one and driving growth improving efficiency strengthening risk management.
Enhancing the brand.
And improving our status as a leading destination for great talent.
And so we like very much the position that we're in here as I've said, you know time frames are compressing in the industry and we want to make sure that we capitalize on those opportunities. Thanks for your question Rick.
Thanks.
Yeah.
We will take our next question is from Bill Crochet with Wolfe Research. Please go ahead.
Thank you.
Good evening Rich I wanted to ask specifically about your spending transact. Your business are you seeing evidence of the larger banks demonstrate demonstrating a willingness to go under water on credit card rewards with the hope of driving engagement and winning business in other areas like wealth management and mortgage.
And if so how do you see those dynamics playing out across the industry in general and capital one in particular.
So the.
The competition in rewards is certainly very intense.
We see it in the marketing levels are from everybody stepping up for more of that.
The product structures and the overall rewards levels continue to be.
You know a fairly aggressive.
And you can see our banks out there refreshing products in the market recently with enhanced rewards.
And you know not only in the cashback space, but also tier two.
To your point at the very top of the market.
Including with the high fee.
Rewards card.
So.
Hi.
I have not.
Look I think we all live on pretty thin.
Our margins are in.
You know.
Yeah.
And transaction margins in this business really because what's happening and it is great for consumers.
The leading banks have.
Past.
You know so many benefits on to consumers.
But what what I.
I would be surprised if our biggest competitors.
At the top of the market are you know, losing money on every transaction and trying to make it up with volume elsewhere in their franchise. There may be selected examples of that but I think.
What's the what's the leading players and you know this is certainly what we've been doing at capital one have invested for years.
In brand.
And digital capabilities customer experience.
The servicing side of things. The you know the card always works side of things.
To wear.
One doesn't have to compete solely on the basis of rewards important though that is I think really for the top players.
This is really at the end of the day about building a franchise a sustainable franchise and I certainly from everything I see feel that that's what we have here at capital one and I think a small number of players are.
Particularly invest or you know years of investing to get that position and I think I think all of us are well served.
By what we have.
Next question please.
We'll take our next question from John <unk> with Evercore. Please go ahead.
Good evening.
Just on the expense side I know you indicated on the marketing side do you expect the sequential.
Sequential quarter increase in the fourth quarter consistent with the.
Historical trends.
Trends.
If you look at it going back you've seen anywhere between a.
Hundreds of 300 million linked quarter increase in the fourth quarter and marketing costs. So just wanted to try to get an idea of maybe help us size that up and then one separate thing on the expense side the efficiency ratio longer term implication of the it investment.
Just wondering if there's any way to think about what that could interpret into in terms of an impact on the ratio on that operating ratio.
John I'll take the first question and then pass it over to rich for the second one.
You know to the fourth quarter, we typically have a seasonal increase just due to volumes in a number of I think you used the term sundry items and Richard talked about the the investments that we're making on the technology side.
And in compensation, so I would think that I'm, not giving any sort of explicit guidance, but.
If you look at history as your guide them, there's a lot in there that kind of would suggest where our where we might be going in the near term.
And you know Richard talked about the investments over time, and how that's going to play into the number of factors across the P&L in terms of revenue growth in fraud and many other things that are are playing down through there. So.
That's how I would think about the the short to medium term and I'll turn it over to rich to answer your second question.
Yeah. So.
Yeah.
John.
You know, we we declared years ago that.
Hum.
As you know.
Uh huh.
Through the tech transformation that we were driving which along the way was going to cost more.
You know to drive that debt over time.
This transformation and.
The.
Extra growth that we could get in the marketplace.
Could that that.
You know that would put us in a good position to.
Drive operating efficiency over the longer term and that that would be an important part of the investor.
Value proposition for capital one.
And.
We.
You know, we we've already.
Seen some significant improvements in operating efficiency I talked about the.
The pressures that come from rising Tac labor costs, and the imperative to invest.
But.
While again there.
The rising labor costs sort of.
By themselves don't really generate a lot of value they they they they they cost money.
Money.
The.
The things we're talking about here.
Leaning into investment opportunities.
Or are the very things that.
A part of our original strategic philosophy about driving operating efficiency, that's the way that we drive more growth over time.
The way that we drive more digital productivity gains will.
We will be to continue leaning into our tech transformation and the investment.
At the top of the tech stack for the in the growth opportunities that can help.
Power that so you know we're still all in on.
The quest the efficiency ratio quest and the kinds of destinations.
We have talked about.
You know, we we need to incorporate.
The investment imperative.
That we have along the way.
Thanks, and then on the credit front on delinquency trends just wanted to see if you can talk a little bit about if you're seeing any changes in.
The lower FICO bands in terms of delinquency trends, we've been seeing that a couple of other players that they're seeing some pressure on the loan the lower FICO and non prime areas are you seeing anything there or any evidence of upside pressure that would not be otherwise seasonally evident. Thanks.
Yeah, John I think that most of what we see are tends to be more in the in the range of normal.
But you know I would be the first two.
Argue that.
You know.
Subprime customers have certainly.
Had a number of benefits.
Uh huh.
In the marketplace that that over time will.
And are going away. So it would be a natural thing no normalization as a very natural thing across the board. It would certainly be a natural thing there. We watch all of these trends carefully what we've seen.
In both card and auto would really be in the category of <unk>.
Seasonal than normal, but I wouldn't I wouldn't draw any.
Big extrapolation from that just more of an observation of what we see at this point.
Next question please.
We'll take our next question from Sanjay Sucker, Ronnie with K B W. Please go ahead.
Thanks I.
I guess I have one big picture question for rich.
Obviously, a big topic in the Fintech World is embedded banking and how big Tech companies it might be the central hub for consumers rather than what currently might be the bank App I know, you're making sizable investments to compete but do you think there's an inevitability that behavior shift towards.
These aggregators.
So sanjay.
That is a really great question and.
One that.
For many many years we have.
Ben you know we've put a.
We have put your strategic question, you know kind of front and center in our own thinking for years. So.
Ever since you could watch of course in China and the incredible.
The way that you know inside tech apps one's whole life, including financial life gets embedded in there. That's the most extreme example of the front end of banking really.
You know being taken over by <unk>.
Tech company.
And you know the risk of course as one looks at the marketplace to your point.
You know is the front end of banking being taken over by tech companies and banks being the utilities.
Quietly behind the scenes of that.
And.
You know that that.
That has been on a central in our radar screen from you know for many years.
And we have seen.
And I think that.
There continues to be momentum in in in both camps.
So in terms of the the tech companies being the front end of banking, we see increasing traction in aggregation.
And many many types of aggregation not just people.
Coming to go get a budgeting app kind of thing, we see that one off aggregate.
Our aggregation for particular things.
And a whole variety of things in consumers' lives, but.
Between the incredible scale that tech companies have in terms of customers the incredible engagement they have and now the increasing traction.
That you know that that is something that all of us need to really be staring at.
And I think there is in a sense kind of a great race going on between that model and the model of.
A bank being the go to place not only for the backend of banking, but really for the front end of banking, where one can manage ones.
Financial life.
Through the.
Technology Ah Ah Ah.
Our customers bank and that's been a primary objective of ours for a long time.
And then and one of the probably 20 reasons that we've worked so hard to transform our technology, because we want to have shoulders to stand on that or the same shoulders as the leading tech companies have.
So that we can build software and have the kind of Uh huh capability and speed to market and so on that comes from being a modern tech company.
And while I have we have seen a lot of traction at capital one and I think some of the other leading banks have seen a lot of traction too.
Looking at the growth of our.
Not only how many mobile.
Customers that we have both online and mobile customers the growth rate of that but.
But also the frequency of visits and the increasing number of things that we can do for our customers and you know the old the old world of banking.
Was a reactive one customer would walk into a branch.
And say I have a particular need and then the banker would figure this out.
The opportunity that comes in.
New World of technology.
Is where were proactive banking is as as important as reactive banking now not proactive banking in the sense of spamming ones customers with lots of cross sell out.
Offers but really banking where we.
We are.
Watching their customers' money when the customer isn't.
And providing leverage right in the flow of the customers' financial life.
To provide them the information that they need and the guidance that they need and if you notice some of the T. B as we did probably six to 12 months ago.
We're all about some of the real time.
Alerts that were you know.
Helping people with things that they really they had no idea we're going on with respect to their money. So I think that.
The great race that you talk about is on.
It's one of the reasons, we feel a real imperative to invest.
But we like our position and I really like actually our chances to not just build some features and have a bunch of customers, but actually to be at the center of our customers' financial lives and to be able to really build a growing franchise.
Where capital one is right there.
Where the eyeballs are.
And.
And where.
Our customers.
Mindshare is.
Thank you.
Just one quick follow up for Andrew.
On the NIM.
Obviously, you saw a nice increase in your you mentioned a number of different items, but as we look ahead. It would seem with the loan growth and the Remixing theres, probably tailwind for the NIM to the upside or how should we think about that U S cards specifically.
Okay.
Yeah.
So Sanjay Youre touching on really the primary driver. So if you're looking just at card versus the corporate side I mean, there's kind of four factors I would call out that drove it in the quarter in card yield specifically.
Rich talked about are the credits kind of benefits that are flowing through in in suppression saw it tick up of delinquencies in the third quarter in line with seasonal trends, but that AIDS late fees.
You tend to have a fourth and a third thing of seasonally higher.
Revolve rate and then day count.
In the quarter are kind of the drivers of card yield so when when I think about how those play out you can figure out which things are kind of seasonal to the quarter versus which things are driven by more macro economic factors versus what is sort of underlying trends.
I'll pull up though and just gave a corporate view of NIM because that you touched on some of the the other dimensions that are really playing for through more corporately, which is the.
The reduction of cash.
At the total company level and having that be replaced by card growth.
And then those factors coupled with the higher yield in card that I. Just described is really what what benefited this quarter. So as we look ahead. You know continued normalization of of cash continued growth in revolving card balances.
Those are the things that would be tailwind to to NIM, but movements in the other direction things like get a sustained higher than the normal payment rates are or reduction in card yield would be headwinds. So we'll just have to see how those things sort of net against one another.
Next question please.
We'll take our next question from John Hecht with Jefferies. Please go ahead.
Thanks.
Thanks, very much guys Sanjay actually just asked my NIM question. So I have a question maybe diving deeper into the growth opportunities.
Are you seeing is there better arbitrage or better competitive opportunities and revolver versus transact or or is it sub prime versus prime it and maybe answer that both card and auto.
Okay John.
I I don't see a particular.
Segments that really stands out.
A strategic thing that we've been.
Really leaning into for a number of years at capital one.
Is.
A continued migration.
Towards the trans actors side of the business not not running away from the other one, but but but differentially really investing and enhancing that and of course when you see all the purchase volume growth and other things you can see.
The benefit there, but what we've also found is.
That the.
The real emphasis on the transacting side of the business even for revolvers ends up being something that not only generates more transactions, but it helps drive a healthier.
You know prime and even subprime book, So that quest is very alive and well at capital one we see growth opportunities really across the board.
There is pretty intense competition across the board, but I think we see growth opportunities and a relatively rational marketplace.
In card across the board.
The auto business.
Auto.
There's two things I would say about auto first of all.
There's like four or five planets aligned in the auto business that I don't think in our lifetimes theyre going to align again.
That have led to.
Some of the you know extreme.
Performance that's happened in the auto business in terms of the growth the growth.
The revenues.
The.
The credit side of the business is.
It's Ben.
It's been a very strong thing given the strength, we have been particularly had a cautious eye looking at competitive.
Pre.
Pressures in that business and I've always said that the auto business is more subject to.
Competitive pressure disrupting the business than the card business because the card business as one on one us with a customer or a prospect the auto business again has the dealer in the middle of the.
Of the.
As a whole.
Exchange and the dealer is driving an auction.
And so we.
We continue to be.
You know very carefully monitoring the competitive effects.
We are seeing a growing competition in the auto business, it's showing up across the board from big banks credit unions.
And smaller independent lenders.
And we're seeing it play out across all credit segments.
It's showing up in pricing.
Underwriting and loan terms.
And.
Many lenders have expanded beyond their pre pandemic credit box.
And as the competitive environment continues to evolve we remain focused on the disciplined execution of our strategy.
And our core philosophy of maintaining high resilience and taking what the market gives us remained unchanged.
And our underwriting we made conservative assumptions and assume rapid normalization of vehicle values to more.
Sustainable levels.
So there's kind of two competing things going on in the auto business that sort of that drives the results that you see.
One is growing competition, which is very understandable because all every audit player has posted really strong returns and wants to get more of that.
There are some signs that we raise an eyebrow to make sure that that we see them.
Sound underwriting out there in the marketplace, but we also have.
Our opportunity is differentially being also powered by our tech.
Capabilities that we have in the auto business things like auto navigator things like our relationship with the dealers and the their reliance on our technology to help them underwrite better.
And sell cars are more.
Rapid Lee and effectively.
So.
The net the net of those two forces has led us to post another really solid quarter and we're leaning in in the auto business, but.
We should all understand when we should be cautious about where the marketplace will go and also understand that.
The planet alignment.
At some point those planets wont be as aligned as they happen.
Next question please.
Yeah.
Alright last question. This evening is from Kevin Barker with Piper Sandler. Please go ahead.
Good evening, Thanks for taking my questions just a follow up on some of the competitive dynamics that you speak about especially for Fintech I mean have you considered.
Possibly more radical change whether it's.
Wiring.
Fintech in order to accelerate your growth or your competitive.
Our position in the market or potentially.
Trying to develop more radical efficiencies within capital one in order to.
Spend to address the competitive environment within Fintech.
Sorry, I was on mute there sorry for the silence.
Kevin for the good question there as we.
As we have said on a number of occasions.
The banking industry by the way scale matters.
A lot and by the way however, important scale was years ago and by the way as someone that started.
[noise] capital, one three decades ago, and I've always worshiped on the Alterra scale and it's been a tough journey because we didn't have the scale for most of their time in one there's always reminded of.
How more scale would help.
Banks most of the banking industry is at.
I think focusing a lot on buying other banks too.
Build a very important scale.
At capital one we are not.
Looking at bank acquisitions.
We are.
Building a national.
By the way we did.
Four bank acquisitions in our past that were very important in and putting us in a good position.
[noise] threshold scale in the banking industry, but where we're we are focused on the banking side.
Is in building a national digital bank.
And that's really going to be an organic quest.
And no company has ever really.
Built one organically but.
We like where we are and we like our chances.
Our acquisition focus.
He is looking at technology companies and Fintech.
And.
I mentioned both of those we have done an acquisition of technology companies, where.
They have some of the tech capabilities that we're building and since we share a similar tech stack that's been a compatible thing to do and an accelerant.
And then of course.
We are looking at.
At Pentax and capital one has done a number of those acquisitions in.
In the past as well.
We it's not lost on us the breathtaking valuations that these companies command and so we are you know.
I Wanna be a patient investor, but we're real students of the fintech marketplace, because we can learn so much from them were inspired by some of the things they come.
Come up with and things that they do and and we partner.
With some of them take stakes in some of them and sometimes do acquisitions I think capital one is in an ideal position as an acquirer of a thin.
Fintech because.
Of the Tech stack that we have and you know pretty much every every fintech out there every modern fintech out there is on the cloud.
I think that the you know they're on the cloud the tech talent. They have is like very similar to our own culturally.
The whole thing the emphasis on data and analytics that is behind a number of the Fintech has been a focus of our company since its founding days.
So.
I think that.
We have some natural advantages on the acquiring side. So for years, we've we've looked at Fintech and occasionally.
Made acquisitions and we certainly are pleased with the ones we have made.
[noise] well.
That concludes our earnings call for this evening. Thank you for joining us on the conference call today and thank you for your continuing interest in capital one.
Remember the Investor Relations team will be here. This evening to answer any further questions you may have.
Have a great night.
Ladies and gentlemen. This concludes today's conference. We appreciate your participation you may now disconnect.
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