Q4 2021 Capital One Financial Corp Earnings Call
[music].
Welcome to the capital one fourth quarter 2021 earnings conference call.
<unk> have been placed on mute to prevent any background noise.
After the speakers remarks, there will be a question and answer period.
If you would like to ask a question. During this time simply press. The Star Key then the number one on your telephone keypad. If you would like to withdraw your question. Please press the star key than the number two.
Thank you I would now like to turn the call over to Mr. Jeff Norris Senior Vice President of Global Finance, Sir you may begin.
Thanks, very much Justin and welcome everyone to capital one's fourth quarter 2021 earnings conference call as usual, we are webcasting live over the Internet.
That's the call on the Internet. Please log on to capital one's website capital one dot com and follow the links from there.
In addition to the press release and financials. We've included a presentation summarizing our fourth quarter 2021 result.
With me. This evening are Mr. Richard Fairbank capital one's Chairman and Chief Executive Officer, and Mr. Andrew Young capital ones Chief Financial Officer.
Richard Andrew I'm going to walk you through the presentation.
A copy of the presentation and the press release. Please go to capital one's website click on investors then click on quarterly earnings release.
Please note that this presentation may contain forward looking statements.
Information regarding capital one's financial performance and any forward looking statements contained in today's discussion and the material speak only as of the particular date or dates indicated in the material.
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 our actual results to differ materially from those described in forward looking statements.
For more information on these factors. Please see the section entitled forward looking information in the earnings release presentation, and the risk factors section in our annual and quarterly report.
First of all with the capital one website and filed with the SEC.
With that I'll turn the call over to Mr. Young Andrew.
Thanks, Jeff and good afternoon, everyone.
I'll start on slide three of Tonight's presentation.
In the fourth quarter capital, one earned 2.4 billion or $5.41 per diluted common share.
For the full year capital one earned $12 4 billion.
Or $26.94 per share.
On an adjusted basis full year earnings per share were $27 11.
Full year ROTC with 28, 4%.
Yeah.
Included in the results for the fourth quarter was an upgrade to a legacy rewards program, which increased our rewards liability and decreased noninterest income by $92 million.
Both period end and average loans held for investment grew 6% on a linked quarter basis.
Ending loans grew 10% in domestic card.
7% in commercial.
And 1% in consumer banking.
Revenue in the linked quarter increased 4% driven by the loan growth I just described.
While total noninterest expense increase.
Increased 12% in the quarter.
Driven by increases in both operating and marketing expenses.
Provision expense in the quarter.
With 381 million.
As net charge offs of $527 million were partially offset by a modest allowance release.
Turning to slide four I will.
I'll cover the changes in our allowance in greater detail.
Yeah.
For the total company, we released $145 million of allowance in the fourth quarter brings.
Bringing the total allowance balance to 11.4 billion.
The total company coverage ratio now stands at 4.12%.
Turning to slide five I'll.
Discuss the allowance of each of our segments in greater detail.
As you can see in the graph.
Our allowance coverage ratio declined in each of our segments.
In domestic card the allowance balance remained flat at $8 billion.
The decline in card coverage was driven by the impact of balanced growth that I highlighted earlier.
In our consumer banking segment.
Continued strength in auto auction values drove a decline in both the allowance balance.
And the coverage ratio.
And in commercial the decline in allowance balance was driven by modest credit improvement in the existing portfolio.
In addition to the allowance decline the coverage ratio was also aided by growth in lower law segment.
Turning to page six I'll now discuss liquidity.
You can see our prime preliminary average liquidity coverage ratio during the fourth quarter was 139%.
The LCR remains stable and continues to be well above the 100% regulatory requirement.
We continue to gradually run off excess liquidity built during the pandemic.
Relative to the prior quarter, ending cash and equivalents were down about $5 billion.
And investment Securities were down about $3 billion as we used our liquidity to fund loan growth and share buybacks.
Turning to page seven I'll cover our net interest margin.
You can see that our fourth quarter net interest margin was six 6%.
25 basis points higher than Q3.
And 55 basis points higher than the year ago quarter.
The linked quarter increase in NIM was largely driven by balance sheet mix.
We had a reduction in cash and securities as.
As well as a higher amount of card loans.
Outside of quarterly day count effect, the NIM from here will largely be a function of the change in card balances.
Cash and securities levels and interest rates.
Turning to slide eight I will end by discussing our capital position.
Our common equity tier one capital ratio was 13, 1% at the end of the fourth quarter.
Down 70 basis points from the prior quarter.
Net income in the quarter was more than offset by share repurchases and growth in risk weighted assets.
We continue to estimate that our CET one capital need is around 11%.
In the fourth quarter, we repurchased $2 $6 billion of common stock, which completed our seven and a half billion dollar board authorization.
Our board of Directors has approved an additional repurchase authorization of up to $5 billion of the company's common stock.
With that I will turn the call over to rich rich.
Thanks, Andrew and good evening, everyone I'll begin on slide 10, with our credit card business.
Accelerating year over year growth in purchase volume and loan coupled.
Coupled with strong revenue margin drove an increase in revenue compared to the fourth quarter of 2020.
Credit card segment results are largely a function of our domestic card results and trends.
Shown on slide 11.
Okay.
As you can see on slide 11, our domestic card business posted strong growth in every topline metric in the fourth quarter.
Purchase volume for the fourth quarter was up 29% year over year and up 30% compared to the fourth quarter of 2019.
The rebound in loan growth accelerated with ending loan balances up $10.2 billion or about 10% year over year.
Ending loans also grew 10% from the sequential quarter ahead of typical seasonal growth of around 4%.
Ending loan growth was the result of the strong growth in purchase volume as well as the traction we're getting with new account origination.
And line increases.
Partially offset by continued high payment rates.
Revenue was up 15% year over year, driven by the growth in purchase volume and loans.
Domestic card revenue margin increased 123 basis points year over year to 18.1%.
Two factors drove most of the increase.
Revenue margin benefited from spend velocity.
Which is purchase volume and net interchange growth outpacing loan growth.
And favorable year over year credit performance enabled us to recognize a higher proportion of finance charges and fees in fourth quarter revenue.
Credit results.
Remains strikingly strong.
The domestic card charge off rate for the quarter was 1.49%.
A 120 basis point improvement year over year.
The 30, plus delinquency rate at quarter end was 2.22%.
20 basis points better than the prior year.
On a linked quarter basis, the charge off rate was up 13 basis points and the delinquency rate was up 29 basis points.
Noninterest expense was up 24% from the fourth quarter of 2020.
The biggest driver of noninterest expense was an increase in marketing.
Total company marketing expense was $999 million in the quarter.
Our choices in domestic card marketing are the biggest driver of total company marketing trends.
We continue to see attractive opportunities to grow our domestic card business and our growth opportunities are enhanced by our technology transformation.
We continue to lean into marketing to drive growth and build our domestic card 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 as we invest to grow and build our franchise.
Moving to slide 12.
Strong loan growth in our consumer banking business continued in the fourth quarter.
Driven by auto fourth quarter, ending loans increased 13% year over year in the consumer banking business.
Average loans also grew 13%.
Fourth quarter auto originations were up 32% year over year.
Our digital capabilities and deep dealer relationships strategy continued to drive year over year growth in our auto business.
In the fourth quarter, we saw a pickup in competitive intensity in the marketplace.
On a linked quarter basis auto originations were down 16%.
Fourth quarter ending deposits in the consumer bank were up $6 $6 billion or 3% year over year.
Average deposits were up 2% year over year.
Consumer banking revenue grew 7% from the prior year quarter, driven by growth in auto loans, partially offset by declining auto loan yields noninterest.
<unk> expense increased 15% year over year.
Fourth quarter provision for credit losses improved by $58 million year over year, driven by an allowance release in our auto business.
The auto charge off rate and delinquency rates remained strong and well below pre pandemic levels.
Linked quarter basis, the charge off rate for the fourth quarter was 0.58%.
Up 40 basis points.
And the 30, plus delinquency rate was 4.32%.
67 basis points.
Slide 13 shows fourth quarter results for our commercial banking business, which delivered strong growth in loans deposits and revenue in the quarter.
Fourth quarter, ending loan balances were up 12% year over year driven by growth in selected industry specialties.
Average loans were up 8%.
Ending deposits grew 13% from the fourth quarter of 2020 as middle market and government customers continued to hold elevated levels of liquidity.
<unk> average deposits also increased 14% year over year.
Fourth quarter revenue was up 19% from the prior year quarter with 29% growth in noninterest income.
Noninterest expense was up 17%.
Commercial credit performance.
<unk> strong.
In the fourth quarter, the commercial banking annualized charge off rate.
Was.
A negative two basis points.
The criticized performing loan rate was six 1% 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.
Growth momentum is evident throughout our fourth quarter results.
In the quarter, we drove strong growth in domestic card revenue purchase volume and loan.
We also posted strong auto and commercial growth.
Credit remains strikingly strong across our business.
And we continued to return capital to our shareholders.
As we enter 2022, we continue to see attractive opportunities to grow our businesses and build our franchise.
We will continue to lean into marketing to capitalize on these opportunities.
And drive growth.
For years, we've talked about how sweeping digital change and modern technology are changing the game in banking.
Last quarter I noted that the stakes are rising faster than ever before.
The investment flowing into Fintech is breathtaking and it's growing.
Okay.
Also many legacy companies are embracing the realization that technology capability, maybe an existential issue for them.
And our increasing technology investment.
The war for Tech talent continues to escalate, which is driving up tech labor costs, even before any head count increase.
All of these developments underscore the significant opportunity for players who have modern technology and who are in a position drive growth.
Capital, one is very well positioned to do that.
We've spent years driving our technology transformation from the bottom of the tech stack up.
We were an original Fintech and we have built modern technology infrastructure and capabilities at scale.
And we're investing to leverage these capabilities to grow and to realize the many benefits of our digital transformation.
We have been on a long journey to drive our operating efficiency ratio down.
We expect that the striking rise in the cost of modern tech talent on top of our growth investment.
Will pressure, our new annual operating efficiency in the near term.
But these pressures do not change our belief in the longer term opportunity to drive operating efficiency improvement.
Powered by revenue growth and digital productivity gains.
Pulling way up.
We're living through an extraordinary time of digital change our modern technology stack is powering our performance and our growth opportunity is 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 question.
Jeff.
Thank you 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 one question plus a single follow up question. If you have follow up questions. After the Q&A Investor Relations team will be available after the call.
Justin Please start the Q&A.
Thank you if you would like to signal with question. Please press star one on your Touchtone telephone if you join US today. He's a speaker phone. Please make sure. Your mute function is turned off to allow your signal to reach our equipment.
Again that is star one if you would like to stick on quick question.
And our first question will come from Washington, warm, but with credit Suisse.
Great. Thanks, Rich I wanted to kind of circle back to the efficiency ratio comment that you since you highlighted I guess.
If I look at the fourth quarter, you know its tough to know how to think about that level of expenses kind of going forward.
It's not generally your practice to give specific guidance, but it would really be helpful.
The fourth quarter relative to the third quarter is not just an efficiency ratio that deteriorated. Its actual P. PNR was down because even though revenues were quite strong.
Increase in expenses.
Which was.
It was more than that in dollars. So is there you know can you talk about are there any gating factors in terms of when you think about expense levels kind of into 2022.
Moshe sorry, I was on mute there.
There are a number of different factors going on in the fourth quarter and maybe Andrew can comment specifically about the fourth quarter.
But.
We my point about efficiency.
Is really and some of the factors that were that I'm talking about in the efficiency ratio certainly.
Manifested themselves in the fourth quarter.
But.
You know our real point is that.
We're on a journey to improve operating efficiency, we've been leaning into this and we're very optimistic.
Optimistic about not only what we've done but what we can continue to do and we're just flagging that.
The you know the tech talent costs.
And the continued investment in the opportunity and that opportunity continues to be towards the top of the tech stack, which are you know.
Translate more into growth opportunities, probably then some years ago when our investment.
It was you know began as of at the bottom of the Tech stack.
These investments.
Are very important and.
Our point is that collectively these things will pressure.
Annual efficiency ratio in the near term, but it's really the same journey and and you know the same drivers.
Of opportunity and efficiency.
Andrew I don't know if you want to make any comments about the fourth quarter.
Specifically.
Sure Yeah, Moshe you are well aware that we seasonally typically have higher expenses in the.
For the quarter, largely driven by the marginal cost of growth beyond that normal seasonal pattern. There were a few things that are reflected in this fourth quarter. The first of which is we saw some revenue driven and other incentive compensation.
We also chose to make some of the investments that rich just described are in the professional services side to help accelerate some of the technology and other project work that Richard Richards referencing that will drive drive future growth.
And so those couple of factors some of which will continue as we head into next year, and we're seeing a little bit of the leading edge of the wage pressures. So I would expect that to accelerate a bit but some of the you know mark related items.
In incentive compensation some of the project work will likely fall off.
Great and maybe just as a follow up just talk specifically about marketing was just just about $1 billion in the quarter.
December was the industry's largest months of mail volume in a decade.
So she is not alone.
No.
The level is fairly high maybe if you could just talk a little bit about how you know how long do you see that and I do know that marketing is also typically high for you in the fourth quarter, but.
Sure.
Particularly low in the first half of 2021, how do we think about it as you go into 2022.
Okay.
Thank you Ron.
Rich Youre on mute again.
Shoot so sorry I I.
Got to get off mute each time sorry.
Moshe.
Yes.
Clear that you know competition is intense and you know you can see from the one you pointed out.
Direct mail is back at pretty high levels.
You can see media advertising increasing throughout 2021 of course earnings calls from card players have indicated an expectation of increasing.
Competition and you know.
Also in the reward space you can see competition is pretty intense.
There. So we have a very careful eye on that.
I would say, though that even as we have a very careful eye on that I am I am struck by how the consumer is in a very good place right now I think theres, some natural growth capacity, there and I'm really struck by the traction that we're getting at capital one we continue to see some really good at.
Origination opportunities.
Really across our businesses and.
We like very much the results that we're seeing and.
The other thing about the competitive intensity at this point it's more in.
In upfront investments, such as marketing and upfront bonuses and at this point, we're not seeing.
Seeing in the competitive environment sort of the sacrifices of margin and resilience and I'm talking particularly in the card business. There. So you know we have.
<unk> through competitive cycles, and we know what to look for but we are really pleased by the results really struck by.
Our opportunity to capitalize on them and that's why we're leaning in and that's also why we're flagging of course, we have our eyes on the very important issue that you mentioned.
Relative to competition.
Next question please.
Thank you. Our next question comes from Betsy <unk> with Morgan Stanley .
Hi, good morning.
Hey, good morning Betsy.
Hi, rich.
Richard I wanted to get a sense from you on the opportunity set that you have in front of you with regard to the loan growth.
And I'm asking the question because I get investor questions on Hey, you know it is this.
Revenue I'm sorry is this loan growth rate, we're seeing right now.
<unk> peak levels this cycle that we could get.
I would rather hear from you as to.
What do you think about the loan growth acceleration that you got in the fourth quarter.
Or is it being driven by in terms of new accounts versus increased line utilization.
Increased offers.
And what's the legs on this as we go into the next year.
Yeah.
Yeah.
Yeah, Betsy yeah, great questions there.
So.
We feel very good about our growth and our growth opportunities that we're seeing right now and.
You know the.
Let me start with purchase volume you know, obviously, our 29% purchase volume growth was was.
Really significant and and we've seen a lot of purchase volume growth across the industry of course, that's not just the capital one effect.
With capital one specifically, we are seeing a lot of traction in our various spender programs, we're optimistic about.
You know that trajectory.
And the loans.
Been talking for quite a while about.
The.
Poor loans are sort of losing out in the growth rate.
Two.
Purchase volume and some of the other things that card issuers don't really disclose like originations of accounts the building of the franchise.
And.
That.
Of course.
Was driven by another kind of elephant in the room, which has been the high payment rate.
And the.
Yes.
So I think for a lot of players the the payment rates have.
Really muted the loan growth that that includes capital one, but I think what's striking what you see Betsy here is.
That we do.
So it's still very high payment rates and you can look in our trust to see some of the electrifying levels, there, but still.
You know even despite that some very nice traction in the quarter on loan growth. So.
What's what's driving that.
In many ways this.
<unk> stands on the shoulders of a number of years of leaning hard into origination growth and having the balances build over time.
Also on credit line increases.
We are.
Leaning into those as well not not like a big dramatic thing, but I think in this environment and seeing the results. We're seeing we are leaning more into the credit.
Credit line opportunity as well so.
Loan growth is still going to be.
A hard one to predict and very affected by the payment rate and parenthetically, we love high payment rates, because I think it's a very healthy customer base, an indication of a healthy consumer and we love what it does for the credit side, but.
I think that you know.
We see the opportunity for loan growth. In addition to the other growth metrics as a.
As as good.
Do you have a follow up Betsy.
Next question, please oh, well I can't say here Oh, you there Betsy.
Can you hear me.
Yes, yes, we can.
Thanks, Jeff.
Just pivoting to sorry about that just pivoting to capital.
I saw the board authorization for $5 billion can you give us a sense as to the timeframe that that's over and.
If there was a view on.
On what drove that decision to do 5 billion as opposed to any other number. Thanks.
Hey, Betsy, it's Andrew I'll take that so we take into account a number of factors to derive the these programs. So as always is the case our pace for this repurchase authorization as well as the pace and amount.
Of future authorizations are driven by a number of factors, including our actual and forecasted levels of capital and earnings and growth as well as market capacity to repurchase shares and it also needs to consider the results from <unk>.
Each unique CCAR cycle, which effectively happens at the midpoint of each year.
So we take all of those factors into account to figure out you know the amount and the pacing of that and so we.
We will dynamically manage that given that we are now under S. E T and we have a great deal more flexibility to execute than we had previously.
Next question please.
Thank you. Our next question will come from Rick Shane with J P. Morgan.
Thanks to everybody for taking my question this afternoon.
Hey, rich when we think about the factors that are contributing to the high payment rate.
We're all aware a lot of the world.
There are a lot of economic factors.
One thing that we've started to wonder about is is there some sort of 80 20 rule on transactions.
Our large transactions idiosyncratic transactions getting scraped off by some of the alternative products and is that changing the.
The composition of the book anyway in terms of payment rates.
Or large transactions getting scraped off.
By some of the alternative.
Yeah.
Players out there.
That's not it's not a thesis that I have explored I think that.
Any questions people are asking about are there kind of on little cat feet.
Effects going on from from the <unk> tax the huge investment in them and their own investment in our very business. I think there are great things to look for one thing I would say about payment rates, though.
Is.
How broadly across the spectrum.
Of our card business that we have seen payment rates.
Sure.
Increase over this period of time it is it's really not.
Not seem too.
Exist.
Or be dominated by a particular segment lets say you know the top of the market or whatever it's been really pretty broad based we also ourselves have had another growth story going on beneath our growth story, which is the continuing.
Gains and growth in the heavy spenders side of the business and so what we see is you know maybe youre affect is going on but what we see if anything is particularly.
Good growth rates over time.
In the heavy spenders side of the business, which I think it's more a manifestation of our investments.
Investments in the kind of products that are that we've been marketing for a number of years and our investment in the comprehensive.
Experience.
To to really win in that.
Part of the market.
Okay very helpful. Thank you rich.
Thank you Rick.
Next question please.
Our next question will come from Bill.
Catchy with Wolfe research.
Thank you good evening.
Rich I wanted to follow up on your team at where your comments are you at all concerned about the normalization of credit outpacing the normalization of payment rates or would you expect those metrics to normalize together.
Well I I think I.
I think two things are kind of driving.
Elevated payment rates right now and.
It's really funny thing payment rates I've been in this business for as you know like three.
Three decades and.
Payment rates are just not something in general that people always talked about we would always watch them and then some years ago, even before the pandemic we started noticing some.
You know some.
Elevation in payment rates, but we are probably more attributed that to the gradual mix change towards spenders in our own portfolio, but.
But if we talk about the two main drivers of elevated elevated payment rates first is payment rates tend to correlate with spend levels.
And you know for obvious reasons when people are spending more and they're not going to be spending for a very long unless they're also paying to keep their open to buy there. So I think that.
Pattern.
Is sort of almost in a way sort of just you know spend and payment math and given how strong our spending has been.
That that is important.
Important factor I think behind that the payment rates.
And then there's the continued impact of healthy consumer balance sheets, and it's unmistakable. The effect is that you know while there are many factors going on just watching what happened.
Across various segments of our business as things like government stimulus came in.
And you know what happened to payment rates, it's pretty clear that.
Consumers when their balance sheets improved really.
Used a bunch of those resources to them to pay down on their credit card and build more open to buy and we have gone back and really studied the relationship between payment rates and credit.
Throughout for the whole.
The history of our company and the relationship is unmistakable. It is also a bit.
Bill to your point, though it is not like one for one and I think that that.
We could certainly expect there could be.
Some divergence is there.
On the topic of normalization just two.
You know I I.
Well when we think about the normalization of payment rates My mind first goes to the normalization of credit.
And.
You know I think these record levels of <unk>.
Low credit losses, you know inevitably have to normalize.
And I think when you pull out a magnifying glass and.
Sort of look at it.
Various metrics and things and the numbers behind the numbers you can see.
The early signs of normalization that are a little bit ahead of our seasonality. For example, that's a very natural thing probably what strikes us in kind of surprises is how modest and moderate those are but we certainly operate with an assumption of.
Of normalization.
I think that.
You know.
So that I would expect the payment rates.
To follow not exactly in lock step, but I think that.
That should follow and so what happens for investors is a little bit of a trade at the moment the financial trade is lower payment rates lower growth of loans and you know a really spectacular credit.
And you know as things normalize I think that gives a boost to the loan growth.
And.
You know, but.
It sort of offsets on the on the credit side of the house.
So the other thing that's going on at capital one because if you look at our trust data now by the way our trust and and I and this is probably true for every player.
The AR securitization trusts is not.
And absolutely representative sample of antibodies our full portfolio.
Leo.
But if you look at payment rates and capital one and probably even in particular have just risen so significantly over this period of time and I haven't looked at it lately, but it wouldn't surprise me if that even rose sort of.
More than <unk> for a number of other competitors and I think that also reflects.
Another capital one specific thing that's going on which is the continued traction.
Of the spending side of the business at capital, one which of course manifest itself in year after year being kind of at the high end of the league tables in terms of purchase volume.
Yeah.
That's super helpful. Rich, if I could squeeze in a related follow up maybe could you expand on that a little bit and discuss your confidence level in the normalization of payment rates and maybe what some of the puts and takes are to the extent that the normalization occurs a bit faster or slower.
Well.
I I again, thank and payment rates I'd just go back to the two drivers. So it is you know one is.
The strong correlation with spend level, so one needs really an outlook for <unk>.
What's going to happen to purchase volume.
In our business and in card businesses, you know purchase purchase volume has an incredible strength to it right now a manifestation of the consumer and some of it by the way is catching up for.
Big Pullbacks are of course during the pandemic, but there's real strength there if that strength continues and that's pretty plausible.
That would you.
You know tend to.
Have an upward boost on the payment rate and then you get to the consumer.
Consumer credit side of the business and I, just believe you know gravity.
Reverse gravity has got to pull these numbers up.
And you know.
We all have to understand that that normalization. The word normal is a really important part of that would be extremely normal it would be expected we are certainly.
Managing the business to expect that but as that happens count me as a betting that payment rates that that that driver of payment rates are going to pull the payment rates down.
Next question please.
And our next question will come from Ryan Nash with Goldman Sachs.
Hey, good evening everyone.
Good evening.
So rich in your prepared remarks, you noted that all these investments that you're making in tech and Tech talent press.
Pressure the efficiency ratio, but I guess, just given a follow up on some of the questions from earlier the revenue backdrop is clearly much better 10% exit run rate loan growth.
I was wondering can you maybe just talk about are you actually you used the phrase pressure I'm wondering are you actually expecting the efficiency ratio to increase and if you are maybe can you just give us some parameters on how long do you expect this to last how much of an increase can we see over an intermediate timeframe and maybe what are some of the things that you and the team are doing to offset some of these pressure.
<unk>.
Yeah.
Okay. Thanks Ryan.
So.
You know we.
We're not giving really explicit operating efficiency ratio guidance, there's so many factors.
Got that.
Go into that and you know them well the what we wanted to point out is the things that we always wanted to share with investors the things that we see going on in our company to make sure that they.
You know that that they understand this and and the first one. This this tech cause I'm struck a lot of companies. Most companies are kind of waving at labor cost and you.
You know I think tech labor costs are an elephant in the room.
And every.
Every tech company I've talked to is this is an absolute elephant in their room and I think it's.
You know when you stand back and think about it that's because.
Every company in the World pretty much. These days says and we really need to drive our tech change.
Change in opportunities as fast as we can.
How long that supply and demand imbalance is going to last we will have to see it is the biggest imbalance I've seen in my three decades.
You know running this.
Building and running this company in a in a labor market.
So you know that.
So that.
That is and you know it it may be that this is.
More of a headwind right now for capital one and our numbers then for some of the banks are just others.
And I want to save that for a second one of the big things we've done in our tech transformation bring.
Our in house.
Engineering talent at scale and a lot of companies do a lot of outsourcing of that and you know but.
So.
We have built a.
Very big.
Engineering team and the related families.
<unk> and <unk>.
We've built a brand and we are a destination for really top tech talent and that's a wonderful thing and it really helps us on the recruiting side, but you know it is.
I just wanted to flag that one because how long that imbalance last I don't know, but it's something that you know to me is very very clear.
The other point is on the.
On the investment side is not and I really want to say, it's not like we're just going along do our tech doing our tech transformation and looking at the market and say Oh My gosh, we have to just massively invest in ways like we werent before that's not really what I'm, saying, what I'm, saying is that you know.
We are continuing to move up the tech stack in terms of where our investments are and that's a wonderful thing because the closer you get to the consumer.
The and the top of the tech stack the more of those opportunities directly can be capitalized in the marketplace. So that's a good thing and we've been investing for a long time. My point is that we are we are still really leaning into this opportunity because.
The.
The opportunity the time frames.
The imperative is real.
You know that.
Already what's driving.
A lot of the growth that you're seeing is the benefit to those things and it is what will drive a lot of the future growth as a company. So back to your question, while we're not giving explicit efficiency ratio guidance.
The use of the word pressure is to explain those too.
The phenomena that are going on that I wanted to share with investors that are real and that you know pressures the efficiency ratio exactly what number would come out in the end depends in the end on a lot of a lot of things in revenue growth and things but.
I just wanted to share that and I made the same comment in the call.
The quarter before.
So if I can and yes go ahead Brian .
Sure. So I'll have a follow up.
No no no I'll go for it.
I was going to say as a follow up to <unk> question on marketing.
I understand the thought that you are leaning in and we're obviously seeing really really good traction on the growth side, but if I think about the competitive intensity, we've heard amex, saying that marketing is going to come down a little discoveries growing J P. Morgan's accelerating.
I think all of US are just looking for some parameters to maybe understand where you are in the in the stage of investment maybe you can just help us understand are we at run rate levels in the back half of the year do you see another step up and just any color that you can provide on how youre thinking about the pace of marketing spend I think would be helpful.
Yeah.
Ryan It is striking that comment everyone, making about this and probably a little bewildering for investors to understand where equilibrium is these days you know our philosophy, Ryan you and I have known each other for a long time.
We don't really start the year by saying you know this is.
Precisely the marketing I mean, we always make a budget, but we don't.
To start the year and say well. This is what everybody has in marketing dollars no matter what.
Sometimes we contract what we put in there sometimes we expanded but it's very focused on what's the nature of the opportunity. We also have a.
Strong belief.
That there are windows of opportunity for growth.
And you know you capitalize on those when you get them or those windows pack.
And so that doesn't also lend itself to the kind of let's let's go and just allocate it the same marketing budget every quarter or two different parts of our business or anything like that so.
What.
What we do at capital one is when we see opportunities, we really lean into them I can't in advance tell you you know quite how far we lean into them because we really look at what's the productivity at the margin for what we are investing.
And we look at marketing efficiency, you know on average if we look at it at the margin we look at it in all of our programs and of course also.
We look at our brand investments and the other things that we're doing to lift the boats.
My message to you here is.
Yeah.
Really two points one.
This is this is a lean in time and we're going to continue to do that to the extent that.
You know that that's that that's the opportunity.
Is there and you can see the fourth quarter was a pretty high level of lean in.
So.
That would be an example of that my other point is.
We are as closely as you watching the competition and the.
The choices, they're making.
And.
Higher levels of competition themselves can manifest in different ways. It can affect the ability to generate response it can affect pricing. It can affect that were the worst thing is when it starts making its way into underwriting practices and starts are affecting the credit side of the business.
But.
Right now if I pull way up on the marketplace.
We've got a strong consumer.
We're kind of everybody sort of roaring out of the the.
The sort of pandemic.
Society necessarily what I'm talking about many of the metrics here.
And.
The marketplace is still generating this opportunity.
Our resilient Lee and we are lean.
Leaning into that.
Next question please.
Thank you. Our next question will come from Sanjay <unk>.
And again.
Go ahead Sir.
Sanjay.
Hey, How's it going.
Maybe just to ask.
Ryan's question, a little bit differently.
I mean should we expect revenue growth to be above average given.
These accelerated investments, you're making maybe you could just give us a sense of what kind of revenue growth you're targeting and what.
Some of the specific products might be that youre rolling out et cetera.
Unique and separate yourself from the peers I'm just thinking about buy now pay later like where where are we with the product rollouts.
Okay.
Okay. So.
So we're not giving specific revenue guidance. We are we are commenting and I'm pleased with the momentum that we have and particularly momentum you saw that.
That picked up in the fourth quarter, and we certainly hope to.
Keep our momentum going there.
We.
So I think on the purchase volume side. There is there's a lot of thrust we're very pleased with the account originations that.
We have.
Been able to generate from the enhanced marketing that we're doing and the.
And the loan growth, which is very important part of the revenue growth.
That one is always the kind of the the hardest wanted to to.
Sort of predict because of it the linkage to the payment rate but.
We.
We do see a good trajectory there, we're not giving specific guidance, but but we.
We like what we see there.
In terms of what is driving the growth.
I I don't think.
Uh huh.
You'll occasionally see capital one on T V with a new product or or whatever.
Were always coming up with new products, so as competition by the way.
Our our surge in growth is not the result of of some new product there that that suddenly driving this this is.
The result of you know many things are.
Coming together, working particularly well right now I think a lot of it is really.
Driven by.
Our opportunities and capabilities and.
Expansion.
And experiences for the customer that stand on the shoulders of our tech transformation.
So.
We're we're hopeful we can continue to.
Drive some strong growth, we're not giving guidance on that but hum.
We are.
And the biggest the biggest I think a question will be how what happens to payments rate payment rates and what that does to long ago.
Maybe just another follow up on expenses I'm, sorry, I'm asking the same questions everyone else's.
But when we think rich you seem to think that the works for a sort of inflationary pressure as transitory is that the only risk in terms of getting back to the sort of that 42% operating efficiency ratio. So.
That sort of passes at some point you guys can get back there or is there something else too.
So we are still driving towards the same destination for operating efficiency improvement but.
But the timing.
It needs to incorporate the imperatives of the current market place and particularly the one we flagged here more recently the striking rise in the cost of modern tech talent.
The.
The investment imperatives of the marketplace and the rising cost of Tech talent will.
Pressure, our operating efficiency ratio in the near term.
As we have discussed.
But modern technology capabilities are the engine that drives revenue growth and digital productivity gains and the investments we're making today.
Are the drivers of the efficiency improvements that we expect.
We expect to continue to get over time.
So we're not in a position to declare the timing.
<unk>.
You know operating efficiency destinations. It's the same journey the same engine powering it.
There's there are some pressures we shared with you in the in the in the nearer term, but it's.
The same journey and delivering positive operating leverage over time continues to be one of the important payoffs of our technology journey and a key element of delivering long term shareholder value.
Next question please.
And our next question will come from Don <unk> with Wells Fargo.
Hi, good evening, I'll shift gears, a little bit, but I do also agree it would be helpful to have some kind of sizing around the expenses just given the environment you have a really good story to tell outside of that.
I guess on auto lending are you signaling that you might moderate a little bit of growth there.
And the auto navigator product, which I think is really benefiting from a public cloud are you getting penetration on that and could you size that.
Yeah.
Yes, Don.
We.
The auto business.
Has.
Really Ben.
You know growing strongly and for.
For starters, that's a that's a very importantly, an industry point.
A lot of.
Factors have aligned to create them.
A lot of demand a lot of demand for used cars high used cars car valuations.
And.
You know certainly been for us and really for the industry are a bit of a.
You know one of our strongest periods.
In history, but if we look.
Beneath that because obviously all of those things normalize over time.
We continue to leverage our leading technology.
Data and underwriting capabilities to identify market opportunities that we think have attractive and resilient brilliant red risks.
<unk> returns.
And by the way a very important part of that is keeping an eye on the.
Very very high used car prices and as we underwrite.
Assuming a significant decline.
In those so we don't count on something that you.
No not going to be long term sustainable whether the industry fully does that you know we'll have to see.
Hum.
Our technology journey, and you mentioned the auto navigator product.
That's a manifestation of some there are a lot of the technology. We've built in the auto business has really helped us not only deepen our relationship with consumers, but also with dealers because auto navigator is a winning product for dealers.
As well as it is for consumers because it's bringing in consumers who've already done a lot of the work to prequalify themselves and.
It's it's the highest quality lead.
Dealer can have so.
We're not giving out.
Data on the that the success of auto navigator, but we believe that it.
It is a powerful product and I've, often said to investors a.
Oh do you want to look at it as an example.
And go kind of.
You now see the <unk>.
Differentiation that capital one is created in a tech based information based machine learning based product.
The auto navigator in the real time.
Underwriting of any car on any lot in America and lessen the second is a manifestation of that.
And that is getting traction, but I do want to say that.
You know there are a lot of changes going on and a lot of interest in the auto industry a number of competitors.
I'm working hard to reinvent how car buying works and I think for capital one and a lot of players who are.
On the frontier if some of those changes I think there is.
You know opportunity for us and.
And I think a lot of some of the success in auto is exactly a manifestation of that let me say one other thing, though with respect to growth in the auto business.
I've always said that the auto business is even more sensitive to the competition.
Then the credit card businesses.
Because of the role that the dealer plays.
Between the consumer and the lender and holding an auction.
And so.
The dealers understandably really tend to drive their business toward.
The lender who is the most flexible on.
Pricing and terms and and.
You know that.
We have seen some of those metrics move.
In the last quarter.
And I think a very.
You know robust auto market, it's a natural thing to expect that competition might overheat.
And.
Pricing and practices could be affected along the way.
So where they are.
I don't want to overstate my point, it's a caution that I put out there, but we are still leaning into our opportunity.
But the.
Bit of the volume decline in the fourth quarter I think was.
The competitive effect of the very thing we're talking about.
Thank you.
Yeah.
Yeah.
Yeah.
So I have a follow up.
No Jeff I'm all set.
Thanks, John next question please.
Our next question will come from John Heck with Jefferies.
Afternoon, guys, thanks very much.
I am interested in maybe talk us through the mechanics of of your net interest margin.
C wanted to hear your thoughts on what maybe each rate hike might do to the margin, but beyond that then there's a lot of other moving factors like youre going to get some suppression of of yield with the evolution of M. P. As youre going to get some late fees to offset that.
And so on and so forth. So maybe can you give us a sense for what you expected.
As all of those factors come to play in the next few months.
Sure John It's Andrew and maybe I'll expand the horizon beyond the next few months because it'll take a while for some of the factors that you just described it to play out, but why don't I start with the rate.
Side of the equation that you brought up.
Our current balance sheet is asset sensitive so as rates move up we will clearly be a tailwind to NII.
At this point, while its moved a fair amount over the last few months, including I think about a 10 basis point retraction over the last week and the 10 year. So it's a volatile number but the market is.
Is currently last time I checked at least expecting around four hikes in 'twenty two.
So that equates to an average fed fund rates, that's about 50 basis points higher for the full year.
And you can get a directional indication of the impact of that in our Q3 disclosures and I think we showed is that relative to forwards. The 50 basis point shock impacts are the next 12 months of NII by 1.9% I believe is the number.
So that's that's just roughly under 500 million so that that's the dollar effective rates.
If you translate the dollar effects into NIM to the other side of your question.
The three big factors that are ultimately going to impact NIM are the three things that I highlighted in my talking points and that is just the quantum of card balances.
Even though some of the factors you described will potentially impact card margin, it's much more about the the card balances to the overall company name.
The other is cash and securities, which you saw we had an investment portfolio that.
At $100 billion at its peak was probably something like $15 billion higher than what.
What is a more normal level.
And in cash levels that were also really high so what you could see cash and securities coming down, which all else equal benefit NIM.
And then finally the rate effect that that I. Just described so really those are the three things that that we're primarily looking at and will ultimately have the biggest effect on NIM on a run rate basis in terms of the next few months. The only thing that I know for sure is a you know there's two fewer days in the firm.
Quarter. So that's roughly a 15 basis point headwind to NIM all else equal, but the other effects are really what's going to drive the NIM over the longer term.
That's great really appreciate that detail I guess, an unrelated follow up as well.
It seems like you guys had put out a lot of products over the past several quarters.
That may be.
Targeting some of the Fintech and Neo banks, you don't have I think you've canceled overdraft protection or moderated that you've got early payment mechanisms you've got.
Direct auto type products, Yes, I guess the question is.
Are you able to quantify.
How come how Hal.
How that impacts your customer base do you are you able to do you get good cross sell does it affect retention rates.
Or generally speaking how do these compete against these new banks that are trying to disrupt the overall system.
Yes, John well you know I.
I love the focus that investors have on thin pegs and let's talk.
But the reasons for that.
First of all I.
I think the investors are voting with their feet to you know just the amount of money that has poured into fintech on the venture capital side, the valuation of fin techs, Although you know the last a little bit it's been a rough for them.
Really.
Speaks to a belief I think in the Investor community.
Banking is going to be transformed and and the syntax are going to be important.
You know drivers of making that happen.
And.
We were an original fintech, so I, maybe I have a soft spot in my heart for fin Techs and also an understanding of the challenges they face as well.
But.
One one thing.
To start with one thing is very clear Fintech start with modern technology everybody starts in the cloud. They don't have all the scale technology, you need they've got to build a lot of things and they but they start in the cloud.
There's also another phenomenon going on and that is that that you know one of the most successful parts of Fintech has been the platform companies building the shoulders for other Fintech to then stand on and build their business. So the ability to enter businesses and move quickly and have modern.
Technology is really striking.
The syntax, we're also unregulated Uh huh.
So theres a whole vector there in terms of.
Some of the things Theyre doing and some of the.
You know the way the ways that they move and operate that that wouldn't be.
Consistent with the banking side of the business, but I I savor all that because.
I believe also as do so many investors, beating a path into this space.
That banking is.
Absolutely.
Now in the process of being transformed and it's kind of striking the.
Industry has taken as long as it has to be has transformed relative to a lot of other industries and I think a big reason for it.
Is the.
The the regulation that has tended to surround the banking space.
Interestingly by far the biggest growth vectors have been sort of in the least regulated side of things.
You know in payments.
And platforms.
And crypto and I think those the the almost on mitigated success of companies in those space are really.
Striking.
But let me now go back to capital one.
And I say this as an original fintech and its impact that really transformed itself into and became one of America's biggest banks.
We are building a essentially a fintech and we have built a fintech at scale.
We don't have some of the benefits that the fin techs have we have a lot of benefits a lot of fintech don't haven't including a gigantic customer base and national brand.
A you know.
Three and a half decades of underwriting experience, an unbelievable amount of data that we've collected.
And the you know.
And and have through our tech transformation built a.
You know a.
Very sophisticated.
It kind of comprehensive way to manage.
Big data.
And machine learning in real time to create opportunities to be at the forefront.
Of how banking is being transformed.
We as a bank face their own unique set of challenges Fintech don't have fintech space a lot of challenge as they have but it's not an accident that you noticed capital one out there with it with a number of products and even a bit of a brand personality consistent with.
You know where fintech Saar, because we're leaning into.
The opportunities some opportunities are the same ones that pentax or some are ones that are where we're creating in places they're not.
But.
When you hear and optimism in my voice and an excitement it relates to.
You know standing on the shoulders of our tech transformation and the scale and market position, we have as a company.
To.
Create opportunities that I think capital one's uniquely positioned to do it.
It's a tough journey.
It requires continued investment, which we talked about and you know.
It's not easy, but I I really like our chances and I think capital one is ideally positioned.
To take advantage.
Of the accelerating transformation in banking.
Next question please.
And our last question will come from John Pam Kearney with Evercore ISI.
Good evening.
Yeah.
Hey, John Hey.
Good evening Credit's good.
Good evening on the credit front just wanted to see if you can give a little bit of color on the increase.
The increase in charge offs and delinquencies and on the <unk>.
Non card consumer businesses I know you mentioned auto just wanted see if you can give a little bit more granularity on the drivers there and then also on the on the reserve side.
There are sizable reserve release, I should looking forward here and as loans begin to strengthen in terms of the balance sheet do you expect ultimately to.
To begin matching works, we're building reserves here in the coming quarters.
Yeah.
Okay, John let me.
Talk about credit Andrew we'll we'll do the reserve question.
So.
The consumer credit just remains strikingly strong.
And all are in all my years I've never seen anything quite like.
What we have been through with consumer credit in the last couple of years and it's still strikingly strong.
We of course have been saying all through this normalization.
Is is bound to happen how fast and.
You know it does and it what trajectory you know we'll have to we'll have to see.
In the fourth quarter, our card losses were up.
On a quarter over quarter basis they were.
Up a 13.
Basis points, which is consistent with normal seasonal trends our card delinquencies increased 29 basis points and that increase.
Is.
A bit more than the normal seasonal trend and I would you know I would pointed that as an indicator of.
No.
More likely than not.
Early signs of some normalization off a very very low.
Base of course.
In the auto business, let's let's talk about credit performance there auto credit performance has been strikingly strong through the pandemic.
Fourth quarter losses were just.
58 basis points, and that's roughly a third of what they were before the pandemic.
You know in addition to all the positives that have supported consumer credit in general like you see in our card business.
Auto has seen exceptionally strong recoveries supported by <unk>.
Our record high vehicle values.
And this was enough to push losses negative earlier in 2021.
And obviously, that's not sustainable, but but but by any measure losses remain.
Exceptionally.
Low.
B.
Quarter over quarter increase in Q4 was largely a normal seasonality.
Our auto vehicle values remain about 50% above pre pandemic levels.
By strong consumer demand and ongoing supply constraints.
So we certainly.
I would expect auto losses to increase from current levels.
Even if the health of the consumer remains strong.
You know, especially because auction prices should normalize over time.
Supply.
Constraints are resolved.
Yeah.
So it's.
It's a it's a an amazing period that we're in.
And we are.
You know trying to lean in and capitalize on the opportunities to grow the business with the strength of the consumer has the capacity to.
Grow their own balance sheet.
We are especially watchful of the natural things that can happen.
The credit at a time like this I'm talking about the industry.
And let me just named to their one one is of course, the natural things like you know.
More aggressive marketing and in the auto business more and more aggressive.
The aggressive practices with the dealers and things like this.
There is also just one other thing we'll all have to keep an eye on and that is.
When you when we think about any of us and we ask ourselves. This question, but I think we're in a stronger position to answer it and then maybe many.
But.
One is doing credit underwriting.
How do you build models what are your model is supposed to be looking at when they look in the rearview mirror and see the best credit in the history of you know these businesses.
And.
So capital one has a very long kind of history of a data on consumers and we very much point, our models to a longer horizon, there, but I do worry, especially for the fin techs, who are building their own companies from scratch.
Exactly what's the rearview mirror and what's the underwriting that the information based underwriting capabilities.
That can be built here so.
Well, we'll just keep an eye out for those effects.
And expect normalization to occur.
And take advantage of the opportunities while they're in front of us.
And then Jonathan.
Yes, Yep Yep, John with respect to the allowance. Unfortunately, I don't have an easy yes, no answer for you around allowance releases. So let me just start by describing the current allowance because they think that backdrop will be helpful. In just painting.
Various pictures of how the coming quarters might unfold in that way you have as much knowledge as we do so when we think about the composition of the allowance you know the first thing is just our expectation of future losses and recoveries and so right now our outlook assumes relatively swift.
Normalization of losses from today's unusually strong levels.
The second factor is just qualitative factors, which we described before and today. These are quantitative factors remain elevated to account for the remaining uncertainties around the pandemic and the economy and this is why our coverage ratios remain.
Hi.
And then the last factor is just the size of the balance sheet.
Successive quarter.
And so keep in mind that under Cecil AR allowance impacts of new growth is pulled forward. So you know it definitely adds to the quantum of allowance that we need as we grow but future allowance movements from where we are today will just be determined by how all of these.
Effects net out.
So what if normalization plays out and we continue to grow at a significant clip we could see allowance builds over the next few quarters.
The other scenario could be and clearly there's many scenarios, but another scenario is.
Verbal credit trends continue the uncertainties that drive the qualitative factors subside and you know growth is a little bit more modest than we would likely see further allowance releases. So I just wanted to give you a window into all of the pieces that go into the calculation.
Who will go through a rigorous process every quarter and we'll see how it ultimately plays out over the year.
Got it okay. Thank you that's very helpful. And then just lastly could you just maybe comment a bit on the commercial loan growth trends Youre seeing I know your commercial segment loans were up double digits year over year. So just wanted a quick bit of color on the drivers there. Thanks.
Yeah.
Yes, John .
Our commercial loan growth.
It was 7% quarter over quarter and 12% year.
Year over year and.
And normalizing for.
And it outpaced industry growth.
Normalizing for.
A P. P. P forgiveness, we're much more in line with the growth of our peers.
While we did see a slight increase in our revolver utilization this quarter our growth was almost entirely driven by originations in our specialty businesses.
We generate strong.
Our risk adjusted.
Returns.
Okay.
And you know.
And of course, just the other thing I would.
Point out of course is our activity in commercial reflects.
The increased economic activity and are quite.
Quite attractive market.
Are quite attractive.
Active lending conditions are you now and in 2021.
So it's been I think a good time for you now.
All commercial lenders. This is in the context of actually a.
A market that still we have a a very cautious eye looking at.
With the tremendous growth of non bank lenders.
Lenders.
And the.
And some of the lending practices that are happening outside the banking industry that make their way into.
Our customers so I think it's a great.
Period at the moment, we continue to be cautious about that.
Opportunity.
In the context of the bigger marketplace.
Thanks, very much John .
Thanks, Rich and thanks, everybody for joining us on Tonight's conference call. Thank you for your continuing interest in capital one.
Investor Relations team will be here to answer any follow ups. You may have later on and have a good evening everybody.
Thank you and that does conclude today's conference. We do thank you for your participation have an excellent night.
Okay.
Okay.
[music].
[music].
[music].