Q1 2022 Capital One Financial Corp Earnings Call

Good day, ladies and gentlemen, and welcome to the capital one first quarter 2022 earnings conference call. All lines have been placed on mute to prevent any background noise. After the speakers' remarks, there will be a question and answer period. If you would like to ask a question. During this time simply press. The Starkey then the number one on your telephone keypad.

You'd 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 Keith and welcome everybody to capital one's first quarter 2022 earnings conference call.

Usual, we are webcasting live over the Internet 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.

In addition to the press release and financials. We've included a presentation summarizing our first quarter 2022 results.

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 we're going to walk you through this presentation.

To 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 forward looking statements infill.

Information regarding capital one's financial performance and any other 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.

Risk factors could cause our actual results to differ materially from those described in forward looking statements and for more information on those factors. Please see the section titled forward looking information in the earnings release presentation and the risk factors section in our annual and quarterly reports accessible at the capital one website and filed with the SEC.

Now I will turn the call over to Mr. Yet Andrew.

Thanks, Jeff and good afternoon, everyone.

I'll start on slide three of Tonight's presentation.

In the first quarter capital, one earned $2 4 billion or $5.62 per diluted common share.

The results include one notable item a $192 million gain from the sale of two card partnership loan portfolio in the quarter.

Period end loans held for investment grew 1% on a linked quarter basis and average loans grew 3%.

Revenue in the linked quarter increased 1%.

Noninterest expense decreased 3% in the quarter driven by declines in both marketing and operating expenses.

Provision expense in the quarter was $677 million.

As net charge offs of 767 million were partially offset by an allowance release.

Turning to slide four I will cover the changes in our allowance in greater detail.

Okay.

For the total company, we released $119 million of allowance in the first quarter.

And the total allowance balance now stands at $11 3 billion.

We continue to hold an elevated amount of qualitative factors to account for a number of uncertainties.

Our total company coverage ratio is now 4%.

Turning to slide five I'll discuss the allowance coverage of each of our segments.

As you can see in the graph.

Our allowance coverage ratio was largely flat across each of our business segments.

In our total card segment, the allowance balance declined $65 million driven by our international card businesses.

In our domestic card business the allowance balance remained flat at $8 billion.

With the slight decline in ending loans, the flat allowance balance in domestic card resulted in a slight increase in the coverage ratio to 7.38%.

In our consumer banking segment, the allowance balance declined by $16 million, which when coupled with loan growth resulted in a 10 basis point decline in coverage to 2.37%.

And in commercial the $41 million decline in allowance balance was driven by portfolio credit improvement.

The decline in coverage ratio was driven by both the allowance release as well as growth.

Turning to page six I'll now discuss liquidity.

Yeah.

You can see our preliminary average liquidity coverage ratio during the first quarter was 140%.

The LCR remains stable and continues to be well above the 100% regulatory requirement.

The investment portfolio ended the quarter at $89 billion.

Declining by about $6 billion on a linked quarter basis.

Rising rates drove our market value decline of $4 3 billion.

With the remaining decline due to our continued efforts to reduce our investment portfolio from the elevated levels during the pandemic.

Turning to page seven I will cover our net interest margin.

Our first quarter net interest margin was 6.49%.

50 basis points higher than a year ago quarter, and 11 basis points lower than Q4.

Relative to a year ago. The increase in NIM is largely driven by a balance sheet shift as we deployed excess cash to loans.

The linked quarter decrease in NIM was driven by having two fewer days in the first quarter.

Normalizing for day count effect higher yields in both our card business and in our investment portfolio were roughly offset by the impact of hedges on the balance sheet and lower auto yields.

Outside of quarterly day count the NIM from here will largely be a function of the changes in our balance sheet mix.

Interest rates.

And the impact of competition on loan yields and deposit betas.

Turning to slide eight I will end by discussing our capital position.

Our common equity tier one capital ratio was 12, 7% at the end of the first quarter down.

Down 40 basis points from the prior quarter.

Net income in the quarter was more than offset by share repurchases.

Impact of the seasonal transition.

And higher risk weighted assets.

Recall that the phase in of the seasonal transition relief began on January one.

We recognized 25% of our $2 4 billion dollar total after tax phasing them out in the first quarter.

Also in the quarter, we repurchased $2 $4 billion of common stock as part of the $5 billion share authorization that our board approved in January .

Earlier. This month in addition to approving our CCAR 2022 submission and our capital plan. Our board of Directors also approved the authorization of up to an additional $5 billion of common stock repurchases that we will be available beginning in the third quarter of this year.

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

With that I will turn the call over to rich rich.

[laughter].

Thank you Andrew and.

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

Year over year growth in purchase volume and loans, coupled with strong revenue margin drove an increase in revenue compared the first quarter of 2021.

Credit card segment results are largely a function of our domestic card results in trends, which are shown on slide 11.

Okay.

Our domestic card business posted strong year over year growth in every topline metric in the first quarter as we continued our long standing strategic focus.

On winning with heavy spenders and building a franchise across the business.

Purchase volume for the first quarter was up 26% year over year and up 47% compared to the first quarter of 2019.

The rebound in loan growth accelerated with ending loan balances up $16.9 billion or about 19% year over year and.

Ending loans were down just 1% from the sequential quarter better than the typical seasonal decline of around 7% and.

Revenue was up 20% year over year, driven by the growth in purchase volume and loans as well as strong revenue margin.

Domestic card revenue margin for the first quarter was 18.3%.

Revenue margin continued to benefit from spend velocity, which is the purchase volume and net interchange growth outpacing loan growth.

And velocity is driven by the traction we're getting with heavy spenders.

Arjun also include the gain from the card partnership portfolio sale in the quarter.

Credit results remain strikingly strong the domestic card charge off rate for the quarter was $2 one 2%.

A 42 basis point improvement year over year.

The 30, plus delinquency rate at quarter end was 2.32% eight basis points above the prior year.

Gradual credit normalization continued in the first quarter on a linked quarter basis. The charge off rate was up 63 basis points and the delinquency rate was up 10 basis points.

Noninterest expense was up 33% from the first quarter of 2021 driven by an increase in marketing.

Total company marketing expense was $918 million in the quarter.

Our choices in domestic card marketing are the biggest but of course not the only driver of total company marketing trend.

We continue to see opportunities to book domestic card accounts and loans that can generate resilient and attractive return and we continue to lean into marketing to drive growth and build our domestic card franchise consumer.

Balance sheets and labor markets are strong and in our own portfolio credit results continue to be well below pre pandemic levels and there are normalizing gradually.

We're keeping a close eye on competitor actions and potential marketplace risks and as always we're underwriting to worsening scenarios, even as we lean into marketing.

Our domestic card marketing.

Is evolving and increasing as our decade long focus on heavy spenders continues to gain traction.

We increased marketing to grow the heavy spender franchise and drive the successful launch of venture ex growth.

Growth in new accounts and robust customer spending drove an increase in early spend bonuses, which show up in our marketing expense.

And part of our marketing is focused on strengthening our heavy spender franchise.

With investments in our new travel portal and airport lounges.

And looking across the whole company or digital transformation is generating new business opportunities like capital one shopping in our card business and auto navigator in our auto business and modern technology infrastructure and capabilities are driving our digital first national direct banking strategy and.

Tumor banking.

We're marketing to continue to propel these growing digital businesses.

Our marketing is paying off across these opportunities we posted very strong growth in domestic card purchase volume new accounts and loans, we're gaining share in building a long term franchise with heavy spenders and away from the card business, we're growing auto originations and deepening dealer relationships with auto navigate.

And our national direct banking business is winning with customers and driving growth.

Speaking of our auto and retail banking businesses, let's move to slide 12, which shows that strong loan growth in our consumer banking business continued in the first quarter.

Driven by auto first quarter, ending loans increased 14% year over year in the consumer banking business.

Average loans also grew 14%.

First quarter auto originations were up 33% year over year.

On a linked quarter basis auto originations were up 20%, our digital capabilities and deep dealer relationships strategy continued to drive year over year growth in our auto business, we continue to closely monitor competitive and credit dynamics.

In the auto marketplace first.

First quarter ending deposits in the consumer bank were up.

$4 $4 billion or 2% year over year average deposits were also up 2%.

Year over year.

Consumer banking revenue grew 2% from the prior year quarter, driven by growth in auto loans, partially offset by declining auto loan yields and the early effect of our decision to completely eliminate overdraft fees.

Year over year decrease in auto loan yields was driven by a mix shift toward prime lungs, and our focus on booking higher quality loans within credit segment.

Across the auto lending industry the pace of price increases has not kept up with the pace of rising interest rates the.

The decline in loan yields coupled with coupled with the pace of pricing changes.

Has compressed margins in our auto business.

First quarter provision for credit losses swung from a net benefit of $126 million in the first quarter of 2021 to a net expense of $130 million the allowance for credit losses in our auto business was flat in the quarter compared to an allowance release in the year ago quarter.

The auto charge off rate and delinquency rate are gradually normalizing and remained strong and well below pre pandemic levels. The charge off rate for the first quarter was 0.66% up 19 basis points year over year.

The 30 plus delinquency rate.

Was $3 eight 5% up 73 basis points year over year.

On a linked quarter basis, the charge off rate was up eight basis points and the 30, plus delinquency rate was down 47 basis points.

Yeah.

Slide 13 shows first quarter results for our commercial banking business, which delivered strong growth in loans deposits and revenue in the quarter.

First quarter, ending loan balances were up 17% year over year, driven by growth in selected industry specialties and increasing utilization.

Average loans were up 15%.

Ending deposits grew 9% from the first year excuse me from the first quarter of 2021 as middle market and government customers continued to hold elevated levels of liquidity quarterly average deposits increased 12% year over year.

First quarter revenue was up 16% from the prior year quarter noninterest expense was also up 16% <unk>.

Commercial credit performance remained strong in the first quarter, the commercial banking annualized charge off rate was six basis points.

[laughter] sized performing loan rate.

Was five 7% and the criticized nonperforming loan rate was 0.8%.

In closing, we continued to drive strong growth in domestic card revenue purchase volume and loans in the first quarter. We also posted strong auto and commercial growth credit is gradually normalizing and remains strikingly strong across our businesses and we continued to return capital to our share.

Our holders pulling.

Pulling way up we are well positioned to capitalize on the accelerating digital revolution in banking, our modern technology stack is powering our performance and our growth opportunity and it's the engine of enduring value creation over the long term.

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

Thanks Rich.

Let's 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.

If you have any questions following the Q&A.

Esther relations team will be available after the call Keith Please start the Q&A.

Thank you, ladies and gentlemen, if you'd like to ask a question. Please signaled by pressing star one on your telephone keypad, if you're using a speaker phone. Please make sure. Your mute function is turned off to let your signal to reach our equipment.

Again, Please press star one to ask a question, we'll pause just a moment to give everyone an opportunity to signal for questions.

We will take our first question from Sanjay <unk> of Carney with K BW. Please go ahead.

Thanks.

See the Investor sentiment has turned quite cautious on the consumer but it seems like rich do you think credit's doing coming clearly credits doing quite well in your loan book and you guys are leaning into growth maybe you could just give us some perspective on some of the macro headwinds that consumers face again sorry.

How you see it progressing through the portfolio as the year progresses.

Okay, Hey, Sanjay.

Yeah. So, let's just talk about the health of the consumer.

I think the U S consumer continues to be strong.

While the savings rate has reverted back to pre pandemic levels. The accumulative impact of savings over the last two years is still a significant positive.

We see this in higher bank account balances and higher household net worth.

And it is true across the income spectrum.

Now of course, the bulk of government stimulus is now behind us and most industry forbearance programs are winding down.

But I think we will see some sustained benefits from consumer deleveraging through the pandemic.

Debt servicing burdens are lower than they've been in decades supported both by deleveraging and by low interest rates.

On the other side, the consumer balance sheet labor market demand remained strong.

So in our own portfolio Sanjay.

We see continuing strength in roll rates cure rates and recovery rates and even as we see signs of normalization or credit metrics remains strikingly strong by any historical standard.

There are emerging headwinds as well for example high price inflation.

Inflation has the potential to erode the excess savings consumers accumulated through the pandemic, especially if price increases continue to run ahead of wage growth.

And also higher interest rates would push that servicing burdens backup.

But you know.

If we pull up on the whole I'd say consumers are in good shape coming out of the pandemic relative to most historical benchmarks.

In fact, you know that the.

You know I've just learned over the years.

<unk>.

You know I've got a lot of confidence in.

You know, how what consumers learn from downturns in scares that they have and the choices that they made make and I think we're just seeing very rational behavior by consumers I worry more about you know markets and how competitors operate in lending practices and things like that we can save that for another question.

We still feel good about the consumer and look it is a natural thing it would be an unnatural thing for credit.

To stay where it is and so normalization the root word and normalization is normal.

And theres quite a journey to really sort of an equilibrium a place.

For.

Credit performance and one of the reasons that were you know.

Still leaning pretty hard into our growth opportunities is.

Our confidence in the consumer and our read of the marketplace.

At this time.

Okay great.

Follow up question on some of the regulatory scrutiny, we're seeing.

There's been some chatter on card loan fees and overdraft fees, the latter of which I think you guys have gotten in front of.

Maybe you could just talk a little bit about.

The card loan the card fees.

Chatter out there from some of the regulators and how it might affect your business. Thanks.

Yeah, well it's Sanjay.

We as a company have been very focused on.

You know.

Minimizing fees just in general for our consumers obviously, the overdraft announcement was pretty dramatic case.

Case in point, there, but even in the card business when you look.

We really.

Really what capital one has is in a P. R.

And a late fee and in some cases, a cash advance the both of those fees are really to discourage.

Certain behaviors that we don't think you know are in the interest of the consumer.

So.

Yes. So our strategy has been to you know have pricing be upfront and have it.

It would be clear and very simple now late fees or something that.

We have continue to have late fees because we.

You know wouldn't want our loved ones.

You know ending up paying you.

You know.

Laid on their bill so just late fee I think it's one of the natural.

Fees that probably makes sense to have on our product.

The fed has created a safe harbor with respect to late fees, maybe the industry will that.

That will be revisited and obviously, we will watch that.

As we.

Continue our.

Our business.

Next question please.

We will take our next question from Rick Shane with J P. Morgan. Please go ahead.

Thanks for taking my question can we just talk a little bit more about the partnership portfolio sale.

How to think about that from an asset perspective, and the impact on the P&L in terms of revenue and any associated decline in expenses associated with that sale.

Yes, Rick it's a it's Andrew I mean, we disclosed the the overall gains between the two portfolios of $192 million are the two portfolios combined you saw probably last year.

When they got Mark held for sale were roughly $4 billion, but below the surface. There, we're not going to get into specifically the run rate of revenue or the the expenses associated with that in part because we're growing the rest of the portfolio and you're going to see partnership businesses come come in and out over time.

Yeah.

Okay.

Thank you.

Next question please.

We'll take our next question from Bill <unk> with Wolfe Research. Please go ahead.

Thank you good afternoon, Richard Andrew.

You have a unique insight into consumers at both ends of the credit spectrum could you parse out for us a little bit more detail just following up on <unk> question.

Specifically yet.

What kinds of credit normalization trends youre seeing at both the high end and the low end of the credit spectrum. If you could sort of juxtapose those for us and maybe call out any differences and then perhaps any possibility of that inflationary pressures could lead to a bit faster normalization at any at all.

Laurent.

Yeah.

Yeah, Hey, Bill.

So.

You know that.

We have for quite a long time, saying, we should all expect normalization in terms of what we see in normalization.

It is.

It's pretty early and pretty modest in fact, if anything I guess, we would we're sort of struck by the.

How moderate the pace is but we shouldnt necessarily count on that but it is certainly striking so far what we're seeing in normalization is really across the credit spectrum.

And across the income spectrum.

You know it does seem that normalization is a bit more pronounced at the lower end of the market.

If you sort of measure either in terms of income or credit.

Score.

Those are also populations that improved more and more quickly earlier in the pandemic. So.

That's.

Think we're seeing you know.

And we would you know.

This is an across the board kind of returned toward normal overtime with respect to inflation.

We worry a lot about inflation.

Inflation and.

That is.

Something that especially.

If inflation.

You know as we've seen.

In in you know what it costs to live as faster than wage inflation. These can put pressures and sometimes can put pressures are more on the in the.

You know.

More main Street America, and so it's something that we worry quite a bit about and I think that it would be very natural for these.

These inflation pressures to put more pressure on consumers.

Thank you Richard it's really helpful. If I may as a related follow up maybe could you discuss the extent to which positive credit migration.

Fueled by pandemic stimulus that perhaps may have led you to.

The increased line sizes, and then now that the extent to which we can sort of see a reversal in that and perhaps to credit.

Credit Normalizes would you expect negative credit migration.

Ultimately lead to a reversal of those loan sizes or is that not how it worked.

Yeah, you know the.

Over the years, we have.

<unk> worked hard to originate accounts and we've said, it's kind of a coiled spring of.

Of growth opportunity and we uncoiled spring.

Gradually based on.

Customer performance and also the marketplace and so we have as part of the growth that you see.

While it's being powered by you know very strong originations.

And.

And some return to them.

You know the spending spending in card usage by the back book we also.

Have been selectively increasing credit lines nothing dramatic, but it's it's consistent with my earlier comments about the consumer end and again with great demonstration by the performance of our customers we have been.

Selectively increasing credit lines and you know.

I think.

I don't see anything that would change our lean in that direction again is selective and it assumes a worsening environment. It assumes normalization and all of those things. So I don't think we'd be setup to be surprised there and and I you know don't.

Don.

See I don't have any conversations about trying to reverse.

That direction.

Next question please.

Thank you. Our next question from John <unk> with Evercore ISI. Please go ahead.

Good evening.

On the regarding the credit.

On the reserve front I know you had released an incremental $119 million of you indicated that you do have additional qualitative reserves.

Side I know your reserve ratio right now is the near your day, one seasonal level, how should we think about the.

The potential for incremental reserve releases from here or do you think that we stabilize at this level of the reserve ratio or do you think theres incremental room to release.

Well John when you quote the this is Andrew by the way when you quote the reserve level and keep in mind that they're pretty significantly different reserve levels by asset class.

So the total company level of courses is influenced by that mix. So.

Suggests we decompose it a bit but by each of them because auto was a little bit below.

It was Oh I see.

So day, one and that's largely a function of the elevated used car prices our mix in prime. So we're seeing loss rates that are are much below I think 66 basis points was the number this quarter.

And so all else equal you would expect that our coverage ratio there would be well below what it what it was in adoption and yet it's only a little bit below and that's sort of the qualitative factors there.

But the largest factor to the total company.

Our reserve will clearly be card.

And that's one where I think it's always helpful to just start with a reminder of how that allowance is constructed.

Because answering your question is really dependent on a number of assumptions were quite frankly, your guess could be as good as mine and so with card and the first thing that goes into the allowance is just the expectation of future losses and recoveries.

And you can see within our delinquency buckets in the near term, but beyond that we assume that there is a relatively swift.

Normalization of losses from those unusually strong levels historically strong.

The second is the size of the balance sheet, which you saw this quarter. It is growing at a quite healthy pace when you normalized quarter over quarter for seasonal effects and certainly up 19% I think the number is in Q1 for for card relative to a year ago and then.

The third input is that level of qualitative factors.

And that's really just to account for a variety of risks related to <unk>.

Inflation and various things that are impacting that and just uncertainty in the more macro economy.

And so the future allowance is really going to be.

Determined by how all of those effects net out the one thing that I will just remind you is what we call the quarter swap effect and that is as credit begins to normalize we will be replacing a currently low last quarter with a slightly higher last quarter. So that's another thing that will create pressure.

All else equal.

But you know with favorable credit trends continue and the factors driving those qualitative reserves subside, we could see the allowance be down to flat, but if normalization plays out and we're growing at a significant clip I wouldn't anticipate.

State that we will see our allowance release in fact, I can see allowance builds so it's really just a function of all of those factors sorry for the long winded.

A technical answer there, but I just think all of those factors are really important for you to understand because the range of outcomes on the allowances is quite large.

Got it Okay. Andrew Thank you and then my follow up question is just around consumer.

Consumer spend behavior in volumes.

Behavior or you see any shifts in.

Spending on discretionary towards shifting towards non discretionary.

And.

And then secondly are you.

On the volume side do you forecast a slowdown in card spend volume overall as the fed hikes and aimed at slowing the economy.

Yeah.

Thanks, John .

I have not.

Looked recently at discretionary versus non discretionary so.

I want to.

Speculate on that.

You know I will tell you were saying that is <unk>.

Certainly.

Striking.

Is what's happening with tea and <unk> spend.

These days you know just by way of comparison P&A spend was up.

90% compared to the first quarter of 2021 and of course that was a very depressed quarter, but.

Up around 20% from.

First quarter 2019 levels so.

You know there's a lot of you know I think people sort of just bursting out.

Wanting to.

Free themselves from some of what they've been through in the pandemic, we certainly see strength there, but I think your question about.

As as really inflation hits and.

We see them.

Just a lot of downstream effects that can him can happen from that that certainly could impact our card spend but I would say a lot of the traction that we have in card spend is coming from Maher.

You know are really spender focused business and frankly heavy spender.

Focus business and I think that.

Aye.

I'm not sure that.

A change in inflation is going to have necessarily that much impact on the propensity of the heavy spenders with spend.

Next question please.

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

Hey, good evening everyone.

Hey, Ryan.

Hey, Ryan.

Andrew.

So maybe just to start off rich you referenced the competitive landscape out there in card and auto a few times I think you said larger upfront bonuses in Europe closely watching some of the competitive dynamics can you maybe just talk about what youre seeing out there and I think historically, it's been unusual for you to be growing this fast when the rest of the market is also.

So I'm just wondering can you maybe just talk about on the card side, what are you seeing banks versus Nonbanks and anything you're seeing on the on the auto side would be helpful. At this point.

Okay Ryan.

I do have a smile at your comment because often we observed well.

While others Zag and.

You and I in fact, I have chatted about that and the reason sometimes behind it because and it's not it's not just an accident that that sometimes has been our pattern because.

Of what we're reading is the competitive marketplace and that that has impact on the opportunity and on credit performance and selection dynamics at a lot of things. So your question is a great one.

But you know.

I think a lot of companies out there see the strength of the consumer.

There you know sort of feeling the consumer sort of roaring back with respect to more normal activities and I think people are leaning into to.

Do you take advantage of.

Of that and you know certainly we are but we.

Yeah, Let me talk a little bit just about the competition.

In the card business.

We certainly.

No that there is elevated marketing all the you know all the companies are pretty much coming out and showing more marketing talking about more in marketing so.

You know that that is happening and we have a careful eye to see what that does to the opportunity that we're experiencing.

But I'll kind of kind of come back to our opportunity there, but certainly marketing levels are are elevated.

Competition in the reward space is.

He is probably a notch more intense than pre pandemic levels, but it's pretty stable in recent quarters and not what I would call irrational certainly.

They're incredibly.

Good players at the top of the market and there's there's a lot of competition there but that.

That hasn't really altered our view of the opportunity.

Either a P ours generally been stable.

Turning to the Fintech for a second.

You know obviously, we've seen a lot of buy now pay later activity.

I think that we should note that the syntax who are in the lending business have been lending in the greatest rearview mirror of credit.

Industry credit performance that you could ever imagine.

And businesses like installment lending base business is sometimes.

You know are pretty sensitive.

In that environment. So.

I, but we continue to see them.

Quite a bit of activity.

On Centex as.

As well, but you know on the card side before I turn to auto.

We have an eye on the competition I think generally though the competition while intense is not unreasonable we have not seen.

The.

Big changes in People's underwriting policy, the kind of things that.

We haven't seen dramatic changes in pricing. So I think it's more I would label it at the intense level that we would expect at a time like this but I'm not.

Not unreasonable and not something that would cause us to.

Move off our pretty strong lean into the growth opportunity.

So in the auto business, let me just talk a little bit.

About this the competition in the auto business continues to remain intense.

It's showing up across the board from credit unions, Big banks, and small independent lenders and it's playing out across all credit segments and you just did a kind of double click into that for a second you know credit unions.

That had been a wash with deposits they they've been gaining significant share consistent.

With what we've observed.

During prior cycles, and especially as interest rates are.

Go up a little bit.

And.

You know lets talk in fact about rising interest rates.

I think it's almost always the case in business that win in a sense a cost of goods sold rises there typically is a lag and how that makes its way into consumer pricing.

Got it.

As I mentioned in the earlier comments.

We have not seen.

Ah the marketplace, the auto marketplace, yet respond in terms of pricing relative to <unk>.

What's actually happening to interest rates. So there is some compression there.

I think.

Typically what we've seen in the past as competitors respond with differing speeds to interest rate increases.

So.

Sometimes it players like credit unions tend to and maybe they have different FTP methodologies or whatever it tend to be sort of the slowest to respond.

But you.

You know we.

So we'll have to keep an eye on that but I think that.

We are really.

I'm excited about our opportunity in the auto business the technology.

Our products that we have out there are really cutting edge and getting a huge amount of traction.

Our.

I was just very careful on the pricing out there and also just.

Whether.

There is an over exuberance relative to the number of planets aligned in the auto.

Lending business, particularly what sort of happened to used car values and is in effect that's still there.

Just keep an eye on whether that industry can remain.

As rational as it's been in the last couple of years.

Maybe as a quick follow up.

Just sticking with things that are unusual Andrew you guys are continuing to aggressively return capital I think you have two different $5 billion asset out there, which again is unusual for you guys. I was wondering can you maybe just talk a little bit about the timing of the utilization of those and how do you think about uses of capital as youre getting closer to the 11% <unk> target. Thank you.

Yeah and recall that in January we did not have an active program at the time, So our board authorized a $5 billion and capital levels were even higher than they are today at that point and so earlier this month in conjunction with the.

Approval of the capital plan in our CCAR submission they authorized an additional $5 billion, which coincides with the capital plan and therefore would be available at the start of the third quarter, but in terms of the pace of that activity.

Feels a little bit different than it did when we were at 14, 5% over a year ago to your point like asymptotic LIBOR sort of heading towards 11, and so the pace of repurchases as you know as always going to be dependent on our primary use of capital for <unk>.

Loan growth and then and then the dividends, but beyond that we're going to keep a really close eye on just the level of capital and earnings and growth in end market dynamics.

Take advantage of the fact that we're able to operate under the SCB framework and maintain that flexibility. So nothing specific in terms of the timeline there, but just wanted to be clear about the.

Approvals, when we announced it a few weeks ago.

Next question please.

Take our next question from Betsy <unk> with Morgan Stanley . Please go ahead.

Hi, good evening.

Hey, good evening Betsy.

I guess, just switching gears, a little bit I wanted to ask a little bit about what youre seeing with regard to payment rates and is there any.

Differentiation amongst the customer base as to how that's been.

Trajectory.

So betsy.

We continue to see elevated payment rates across our customer base.

And while you know.

Lately, it's been sort of flattening out if you will I mean payment rates are just.

Well above pre pandemic levels and while not a perfect proxy you can see these trends in our trust metrics, where the payment rate in March remained close to 50.

50%.

Yeah.

One of the more recent drivers of higher repayment rates is really the flip side of amazingly strong credit.

And healthy consumer balance sheets.

And we certainly expect.

Our consumer credit to gradually normalize.

Even though it's kind of been happening a little slower than than one might otherwise expect.

And.

I certainly believe payment rates will remain sort of.

The flip side of really strong credit so over time, the normalization of credit.

No.

Flaws I believe leads to some no realization of higher payment of normal excuse me of payment rate.

But I think theres another.

Phenomenon happening sort of on little cat feet.

Behind our payment rate number is and that is.

That you know.

No.

Each year, we're gaining more and more attraction with heavy spenders also you may remember for years, we talked about gosh. This goes all the way back to the great recession capital one's systematic avoidance of high balance revolvers.

Which leaves a lot of revenue.

And earnings on the table during the good times, but there is a move for the sake of resilience, but I think.

There's sort of a systematic ah.

Affects of avoiding.

Avoiding high balance revolvers and the systematic.

The effect of more and more traction with heavy spenders also has created.

Somewhat of a.

Sort of more sustainable change in our payment rate as well, but certainly probably the biggest factor of the moment is.

The rate at which.

Consumers are.

Being.

So.

Credit worthy and.

Putting so much of their.

Into payments.

Got it and then just as a follow up on.

The marketing piece I know, we spoke about it a little bit earlier in the call, but as we're thinking through the opportunities that we have.

Do you feel like there is an opportunity to lean into marketing.

Q by Q by Q to a greater degree so we should build off of <unk>.

Such that our marketing is higher year on year, our full year full year I'm trying.

What I'm getting from the conversation earlier, but I just want to make sure. It's.

The right takeaway.

Okay.

Well, yes.

Let me just why don't I do this Betsy let me just pull up and.

Sort of talk about marketing overall, and then we can kind of come back to the quarter that we just had.

There are a few things driving our marketing levels higher these days.

First of all the opportunities that we see.

We're seeing attractive growth opportunities across our businesses.

And we're leaning hard into them, while the opportunities are there.

In our card business.

We have continued to expand our products and the marketing channels that we're originating in.

And these opportunities are significantly enhanced by our technology transformation.

As.

Enabled us to leverage more data.

Access more channels.

Leverage machine learning models and.

Enable.

<unk> solutions.

So we're seeing significant traction in originations across our business.

And I want to note that.

So much of.

Our card business overall and our growth.

As in our branded card franchise.

As opposed to co brand and private label partnerships and by the way we also like those.

Businesses, but for capital one that's a relatively smaller proportion of our business.

And in branded cards, we enjoy the full economics of the business and.

And we own the customer franchise.

So while the industry doesn't track data on this I think.

Our share growth in branded cards.

Is particularly noteworthy.

And branded card is of course is the word implies it's.

It's about our brands.

And we continue to invest in the company's brand and in the flagship product.

And some of the strength that you see in our revenue margin comes from having so much branded card where.

Where we own all of the economics.

But the flip side of that is that the marketing and the brand building are entirely on us and that all shows up in our marketing numbers.

But you know that's an absolute centerpiece of building a highly valuable franchise.

A second important driver of our growing marketing spend.

Is the continued traction we're getting in our.

More than decade long journey.

To drive more and more up market.

With a focus on heavy spenders.

So we launched our venture card way back in 2010 and that was the beginning of that strategic push for heavy spenders.

But it hasnt just been about flagship cards, it's been about working backwards from what it takes to win with heavy spenders.

And that's about great.

Great products.

With heavy reward content.

About grade servicing.

[noise] about customer experiences tailored for heavy spender lifestyles.

And of course, an exceptional digital experience so.

No.

For years, we've been on this journey and every year, we've had growing traction.

And while our whole franchise of spenders has grown nicely.

We've grown even faster with heavier spenders.

Yeah.

And with each year of success, we've had the license to stretch a little higher up market and we're continuing to invest to make that possible.

Lately, you've seen our launch of our travel portal, which is you know garnered some rave reviews in the marketplace.

You've seen the launch of airport lounges, which have a special appeal to the top of the market and the frequent travelers.

And last fall, we launched venture Ax, which moved us into the next tier of premium cards.

And that launch has been very successful and we continue to invest.

And the growth of that product.

Yeah.

You can see some of the results from our continued quest for heavy spenders in the tremendous purchase volume growth that we've had over any time period, you pick over the last decade or shorter time periods.

Youll find capital one with you know posting really high and.

You know.

And your top of the league tables, if not at the top of the league tables purchase volume growth and also note that almost all of the.

Heavy spender growth is in our branded cards and that's why you can see such strength in spend velocity and our revenue much.

This journey for the heavy spender has.

You know a different economic mix than some of our traditional card business.

It has higher upfront cost.

Brand building.

Higher upfront costs of marketing and promotions.

And of course investment in high end experience.

But the long term value of the heavy spender franchise is tremendous with.

Hi spend levels strong margins.

Very low losses low attrition.

And a lift to our brand and really the rest of our franchise.

So you know the spender franchise is already making its mark on many line items of our financial performance and that's continuing.

Long term benefit of these investments.

Yeah.

I just want to mention a third factor.

Contributing to the higher marketing.

Is some of the traction that we're getting with our new digital offerings, including auto navigator capital one's shopping.

And our National Bank and.

Just to comment on the National Bank, which unlike you know.

Capital one unlike other banks, who are driving growth through bank acquisitions. We are focused on continuing to build our bank organically, which of course does take marketing investment.

So that was just taking a chance to share with you what is behind the pretty high levels of marketing that you're seeing and the great opportunities that we see for our franchise and to grow it.

Now due in part to the current marketplace environment, and importantly, capitalizing on our strategic quest.

Those quest being.

Our building of the modern tech stack and the continued move up market.

This has you know these things are contributing to.

Two driving higher marketing levels. These days.

So that is.

That's sort of a pulling up sort of a narrative on why it is that we're leaning hard into marketing and.

It's a combination of sort of the opportunity at the moment.

As well as.

Capitalizing on the journey that's been many years.

In the making.

Typically we are.

I have a seasonal dip in marketing levels.

This year.

You know.

An important contributor to our marketing was things related to the for example, the launch of bench adventure cards early.

Early spend bonuses and things like that so.

Things are not.

It's not quite as strong and a seasonal effect this year as it as it has been in other years, we're not specifically, giving guidance on the rest of the year, but I just wanted to share with you why it is that we're leaning into marketing, what's driving that and.

I am as you can probably tell from the answer I'm really enthused about our opportunities in.

<unk>.

Our though.

Leaning in to take advantage of them and a lot of that about marketing.

Next question please.

We'll take our next question from Moshe Orenbuch.

With credit Suisse. Please go ahead.

Great. Thanks, Rich just wondering.

What would it take to see both.

You talked about some of the potential pressures, particularly for the lower end consumer in terms of inflation.

And other sorts of things what would it take to actually start to see you pulled back both at the lower end consumer and for the the higher spenders like what sort of what would be the warning signs.

Yeah.

Moshe with respect to.

The lower end consumers.

It's less about.

And that's it.

And we don't have to you know.

Do very much imagining to envision.

Environments that are more difficult than this one where the consumers in a in a in a.

More challenged place where the competitors are you now have.

You know gone a whole notch more aggressive.

And.

What.

What I think is more our pattern in that case.

Is too.

Particularly use the credit line lever.

To manage the risks as opposed to just a big dial back say in an origination machine. So we just.

We just more cautious online try to continue to build the franchise.

You know maybe not as aggressively as some times, but again, we have over our.

30, 30 years Moshe in and building sort of.

Main Street franchise.

Really.

Do a lot of the regulating and things are on the line side.

Well on heavy spenders.

We.

Continue to.

Find so much traction.

What I've, often said about the quest for heavy spenders. Unlike a lot of things that I've seen.

In.

Our business journey. This is not a thing that.

Is very well suited to a blitz here a pullback uplifts in a pull back now that doesn't mean, we wouldn't be dialing the knobs up and down on certain things like marketing or choices or product or whatever but.

This is Anna.

There's a reason that not very many players are really really successful at the top of the market. This is about really.

Building a franchise at that end of the market that's not just.

Taking regular consumer product products and addressing them up with more rewards or fancy advertising and the that's why I mentioned this journey that were like in the 12th year of the journey, where we declared we're going to just keep moving up market.

One can't do it overnight.

Something you have to earn along the way, but all of our metrics continue to show traction and success traction on brand metrics as well.

And you know pretty much all the customer metrics, you've seen what's happening on purchase volumes.

You know when we when we track the things that we have booked over the years, we sort of love. The annuities were booking so that to me is.

Something that.

We're going to keep pursuing as we have for a long time.

But what.

We will that the things that we will throttle along the way are certain.

Marketing choices certain product choices.

But.

That one.

I currently shared wanted to share this.

A little bit more about this today that that's that's.

That's the journey that capital one has been on as part of our central part of our strategy and card for.

For a lot of years.

Great, Thanks, Rich and maybe as a follow up could.

Could you talk a little bit about where you see the industry and capital one in terms of the project deposit price competition as we're now starting to see.

And deposit betas as when they were starting to see interest rates moving up.

Okay.

Sure Moshe it's Andrew.

And recognizing that retail deposits are 85% of our portfolio our focus on on that and over the last gosh six ish years, we had the the falling rate cycle over the last couple where betas, we're right around 50% and then.

Then last rising cycle.

Which was from the late 2015, I think to early <unk>.

2019, our cumulative beta was was right around 40% and so betas are generally slowed a rise over the first couple of hikes, but keep in mind that last rising rate cycle, we had eight hikes over three and a half.

Years I believe it was whereas in this cycle, we could see four hikes that each equal 25 basis points.

Get up to 250 or 275 as forward suggest quite quickly. So I could make a case that that industry betas will be higher or lower than that history.

On the lower side there is elevated.

It balances across the industry.

Loan to deposit ratios are quite low industry nims or are low and we're moving off a zero floor.

But the flip side is the larger and quicker rate hikes.

Possibility of some more aggressive pricing by our institutions that are more reliant on on those funds to our deposits to fund loan growth.

Institutional surge deposit run off so just wanted to give you a flavor of I think there's a lot that we're going to learn over the course of the next few months, but as we look at all and have a point estimate.

That kind of runs through all of our assumptions and our point estimate at this point is that it's going to largely be in line with that rising.

Last rising cycle of something like 40 basis points. It starts off a little slower and picks up but again that starts off slower might be a particularly condensed.

Then timeframe relative to what we saw in that last cycle.

Next question please.

We will take our next question from Don Vendetti with Wells Fargo. Please go ahead.

Quick question on the outlook for the adjusted efficiency ratio from Q1 levels and then rich.

Commercial card issuing can you talk about that business.

And I noticed you've been marketing a no limit small business card, which has been sort of tough for banks to rollout.

Okay, Don Thank you.

Yeah.

Yeah, we've been focused on improving our operating efficiency ratio for years and.

The pandemic also accelerated.

Technology race.

And raised the stakes for all players across many industries and certainly in banking and I think for every player. The clock is ticking on their tech readiness and companies are waking up to the investment imperative.

And.

We've talked about the investment flowing into Syntaxes break breathtaking.

The arms race for Tech talent is fierce as that I have seen it.

Any time in my career and in any job family.

There's a there's an urgency and responding.

To the marketplace, but I do want to also say that the fast moving marketplaces also the creator of our opportunity and I think capital one's uniquely positioned to take advantage of that opportunity and that's.

Why we're investing now.

So.

Really is this is very similar message to what I said last quarter, but what I've been saying for a long time, we're still very focused on the opportunity to drive operate you know operating efficiency improvement over the longer term.

The engine that powers it is revenue growth and digital productivity gains.

But the timing of efficiency improvement needs to incorporate.

The imperatives of the current marketplace.

So.

But delivering positive operating leverage over time continues to be you know an incredibly important north star to us and frankly, one of the most important payoffs of our technology journey and an important element of how we deliver long term value.

So.

I think yeah.

You have sort of seen.

You can see some of the the effects of what I'm talking about in the.

The first quarter.

Operating efficiency.

And.

When you adjust for gains from portfolio sales in the quarter. So.

You know I think it's very similar conversation to what I was saying last time, we can see some of the.

Evidence of that in the quarterly numbers, but the current pressure doesn't change at all our belief in the longer term opportunity to drive.

Operating efficiency improvement.

Oh.

Yeah.

John what was your question on commercial.

Oh, sorry, sorry question, we wanted to Richard your outlook on commercial I know as you rollout a node limit small business card, which has been tough for banks to do I didn't know if maybe you were using the public cloud.

I just wanted to see your thoughts on that.

Yeah. So.

When you're talking about commercial you are talking about here.

Business card business credit card.

You may have seen the ads on TV that talk about no preset spending limit that's a that's a more.

More complicated way to just say in a sense not a credit limit that that gets hard wired. This is something that is.

Dynamically.

There there there isn't a credit line per se. This is dynamic transaction underwriting.

In real time.

It's a very hard thing to build and it's taken us years.

To get there and it's absolutely a.

One of the many many benefits of the tech transformation, we've done in the journey to the cloud and the building of modern.

Modern applications and modern platforms and so.

I've always said too.

Investors will often ask.

Where can I see whereas I wanted I want to reach out and touch the benefit of your tech transformation and all the money. We've spent on that and I've said look there's not going to be any one thing.

That you point out and say Oh, my gosh that I now see everything this is about this journey.

Is a journey that.

You know what.

When we when years ago, when we kind of said someday, we'd like to do.

This thing over here some day, we'd like to do that we'd also like to have.

Much better efficiency, we'd like to.

Better risk management would like to do lots of things and a striking thing was all the things that.

We wanted to do usually in life.

They are.

You have to pick some and it's all about tradeoffs, what I'm struck by in this journey as a shared path.

To all the things that years ago, we set out to do and that path relates to.

Building modern technology across the company.

And for the bottom of the tech stack up and that is what we've done.

And then over time, you as investors will see manifestations of that you'll see.

Wow that auto navigator product capital one build that can underwrite.

Every car in America.

And.

For any of our consumer in a fraction of a second that's striking and then wanted to seize wow, So you're actually having no preset spending limit that's.

That's striking.

We didn't do the journey for the sake of any one of those but you know I think on an increasing basis investors will see <unk>.

Examples of things that are that stand on the shoulders of the.

The years of investment we've made in technology and things that also by themselves like this card thing. We're talking about is itself within that journey that that took a bunch of years.

But.

It's all about working backwards from our wins with customers and that's why we're doing that.

Next question please.

Our final question. This evening will come from John Hecht with Jefferies. Please go ahead.

Thanks, very much guys for fitting in my question.

Richard you talked a lot about credit and the strength of your customer base.

Aside from that we are seeing call. It some of the more modern or emerging platforms. We're observing some delinquency drift there and in fact, we're even seeing some reactions in the capital markets. Some securitization deals are getting canceled or renegotiated as they go.

I'm wondering what do you ascribe that to and are there any reverberating effects from that type of.

<unk> met or migration into your business over time.

So John as I, often say.

With a with a smile.

Capital one was one of the original Fintech, where fintech before fin techs, where a word.

But if you think about what we did is we built.

Lending company.

This started with cards, but.

Similarly building a broad based financial institution.

One thing that enabled.

That journey to happen.

Is the advent of the capital markets and we were able to ride the very meteoric growth capital one in the nineties.

Based on securitization and things.

And so we were very grateful for that but at the same time.

And then did probably one of the most.

Things that I think most shocked our investors.

I guess it didn't shock him because he spent a lot of years talking about it before we did it but a striking thing when we chose to transform our company to a.

You know a traditional bank balance sheet.

Because we wanted to create much greater resilience in our funding. So the reason I mentioned that is you know as we were in the old days and as a fintech that are built on <unk>.

Securitization.

Have an opportunity to grow quickly, but they also.

Have a.

You know it just an inherent structural challenge with resilience so for all of them they need to have their investors need to.

Keep a careful eye on that I wanted to talk just a little bit about you.

You mentioned some of the lending.

And some of the uptick.

So first of all we shouldn't be surprised to see upticks in delinquencies just for.

You know for companies in general, whether their banks or or some of the fin techs.

Typically companies that have.

A less of a history.

Of of consumer credit data are probably more challenged with respect to how to read this rearview mirror I mean for example, let's just say.

That you created a fintech in the last couple of years.

How would one look in the rearview mirror and determine.

Where resilience is and where it isn't since in general pretty much everybody did well so.

That's.

That's.

One of the challenge any new company has is is building a deep enough credit history to do that so I'll say that that's that's just a challenge they bring to the table, it's not not their fault.

It just it's a structural thing the other thing.

That always happens with normalization.

As normalization tends to happen faster.

On front book spend back books.

And so.

Part of what you may be seeing on Fintech.

Is if they're high growth and tax just the proportion that their front book represents as a.

As a percentage of the whole is quite different and it would be surprising if they didnt normalize faster given that typically upfront books normalized.

Faster than back books, and a lot of us have.

Season back books with.

Years of experience with them and that that's also.

Very helpful.

In normalization journey so.

As one that.

It was an original fintech.

Have great fascination with deferred tax a lot of respect for a lot of things, they're doing but I also know that.

There are some structural things that theyre going to have to confront that.

No.

They and their investors will have to.

Keep in Ireland.

Perfect I appreciate the color there.

Well, thank you for joining us on our conference call today and thank you for your continuing interest in capital one and remember the Investor Relations team will be here. After the after the call to answer any further questions you may have thank.

Thanks for joining us and have a great evening.

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

Yes.

Yeah.

[music].

[music].

[music].

Good day, ladies and gentlemen, and welcome to the capital one first quarter 2022 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.

You'd 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 Keith and welcome everybody to capital one's first quarter 2022 earnings conference call.

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.

In addition to the press release and financials. We've included a presentation summarizing our first quarter 2022 results.

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 we're going to walk you through this presentation.

To 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 forward looking statements information regarding capital one's financial performance and any other forward looking statements contained in today's discussion and the materials speak.

Speak only as of the particular date or dates indicated in the materials.

One does not undertake any obligation to update or revise any of this information whether as a result of new information future events or otherwise.

Numerous factors could cause our actual results to differ materially from those described in forward looking statements and.

For more information on those factors. Please see the section titled forward looking information in the earnings release presentation, and the risk factors section in our annual and quarterly reports accessible at the capital one website and filed with the SEC.

Now I'll turn the call over to Mr. Andrew.

Thanks, Jeff and good afternoon, everyone.

I'll start on slide three of Tonight's presentation.

In the first quarter capital, one earned $2 4 billion or $5 62 per diluted common share.

The results include one notable item a $192 million gain from the sale of two card partnership loan portfolios in the quarter.

Period end loans held for investment grew 1% on a linked quarter basis and average loans grew 3%.

Revenue in the linked quarter increased 1%.

Noninterest expense decreased 3% in the quarter driven by declines in both marketing and operating expenses.

Provision expense in the quarter was $677 million.

As net charge offs of $767 million were partially offset by an allowance release.

Turning to slide four I will cover the changes in our allowance in greater detail.

Okay.

For the total company, we released $119 million of allowance in the first quarter.

And the total allowance balance now stands at 11 3 billion.

We continue to hold an elevated amount of qualitative factors to account for a number of uncertainties.

Our total company coverage ratio is now 4%.

Turning to slide five I'll discuss the allowance coverage of each of our segments.

As you can see in the graph.

Our allowance coverage ratio was largely flat across each of our business segments.

And our total card segment, the allowance balance declined $65 million driven by our international card businesses.

In our domestic card business the allowance balance remained flat at $8 billion.

With the slight decline in ending loans, the flat allowance balance in domestic card resulted in a slight increase in the coverage ratio 273, 8%.

In our consumer banking segment, the allowance balance declined by $16 million, which when coupled with loan growth resulted in a 10 basis point decline in coverage to 237%.

And in commercial the $41 million decline in allowance balance was driven by portfolio credit improvement.

The decline in coverage ratio was driven by both the allowance release as well as growth.

Turning to page six I'll now discuss liquidity.

You can see our preliminary average liquidity coverage ratio during the first quarter was 140%.

The LCR remains stable and continues to be well above the 100% regulatory requirement.

The investment portfolio ended the quarter at $89 billion.

Declining by about $6 billion on a linked quarter basis.

Rising rates drove our market value decline of $4 3 billion.

With the remaining decline due to our continued efforts to reduce our investment portfolio from the elevated levels during the pandemic.

Turning to page seven I will cover our net interest margin.

Our first quarter net interest margin was 6.49%.

50 basis points higher than the year ago quarter, and 11 basis points lower than Q4.

Relative to a year ago, the increase in NIM is largely driven by a balance sheet shift.

We deployed excess cash to loans.

The linked quarter decrease in NIM was driven by having two fewer days in the first quarter.

Normalizing for day count effect higher yields in both our card business and in our investment portfolio.

Were roughly offset by the impacts of hedges on the balance sheet and lower auto yields.

Outside of quarterly day count the NIM from here will largely be a function of the changes in our balance sheet mix.

Interest rates and the impacts of competition on loan yields and deposit betas.

Turning to slide eight I will end by discussing our capital position.

Our common equity tier one capital ratio was 12, 7% at the end of the first quarter down.

Down 40 basis points from the prior quarter.

Net income in the quarter was more than offset by share repurchases the impact of the seasonal transition.

And higher risk weighted assets.

Recall that the phase in of seasonal transition relief began on January one.

We recognized 25% of our $2 $4 billion total after tax phasing them out in the first quarter.

Also in the quarter, we repurchased $2 4 billion of common stock as part of the $5 billion share authorization that our board approved in January .

Earlier. This month in addition to approving our CCAR 2022 submission and our capital plan.

Our board of Directors also approved the authorization of up to an additional $5 billion of common stock repurchases that we will be available beginning in the third quarter of this year.

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

With that I will turn the call over to rich rich.

Okay.

Thank you Andrew and.

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

Year over year growth in purchase volume and loans, coupled with strong revenue margin drove an increase in revenue compared the first quarter of 2021.

<unk> segment results are largely a function of our domestic card results in trends, which are shown on slide 11.

Okay.

Our domestic card business posted strong year over year growth in every topline metric in the first quarter as we continued our longstanding strategic focus.

Winning with heavy spenders and building a franchise across the business.

Purchase volume for the first quarter was up 26% year over year and up 47% compared to the first quarter of 2019.

The rebound in loan growth accelerated with ending loan balances up $16.9 billion or about 19% year over year.

Ending loans were down just 1% from the sequential quarter better than the typical seasonal decline of around 7%.

And revenue was up 20% year over year, driven by the growth in purchase volume and loans as well as strong revenue margin.

Domestic card revenue margin for the first quarter was 18, 3%.

Revenue margin continued to benefit from spend velocity, which is the.

Purchase volume and net interchange growth outpacing loan growth spend.

Spend velocity is driven by the traction we're getting with heavy spenders.

Margin also includes a gain from a card partnership portfolio sale in the quarter.

Credit results remain strikingly strong the domestic card charge off rate for the quarter was $2, one 2%, a 42 basis point improvement year over year.

The 30, plus delinquency rate at quarter end was 232% eight basis points above the prior year.

Gradual credit normalization continued in the first quarter on a linked quarter basis. The charge off rate was up 63 basis points and the delinquency rate was up 10 basis points.

Noninterest expense was up 33% from the first quarter of 2021, driven by an increase in marketing.

Total company marketing expense was $918 million in the quarter.

Our choices in domestic card marketing are the biggest but of course not the only driver of total company marketing trend.

We continue to see opportunities to book domestic card accounts and loans that can generate resilient and attractive return and we continue to lean into marketing to drive growth and build our domestic card franchise.

Consumer balance sheets, and labor markets are strong and in our own portfolio credit results continue to be well below pre pandemic levels and there are normalizing gradually.

We're keeping a close eye on competitor actions and potential marketplace risks and as always we're underwriting to worsening scenarios, even as we lean into marketing.

Our domestic card marketing.

Is evolving and increasing as our decade long focus on heavy spenders continues to gain traction.

We increased marketing to grow the heavy spender franchise and drive the successful launch of venture ex growth.

Growth in new accounts and robust customer spending drove an increase in early spend bonuses, which show up in our marketing expense.

And part of our marketing is focused on strengthening our heavy spender franchise.

With investments in our new travel portal and airport lounges.

And looking across the whole company or digital transformation is generating new business opportunities like capital one shopping in our card business and auto navigator in our auto business and modern technology infrastructure and capabilities are driving our digital first national direct banking strategy in.

Whom or banking.

We're marketing to continue to propel these growing digital businesses.

Our marketing is paying off across these opportunities we posted very strong growth in domestic card purchase volume new accounts and loans, we're gaining share in building a long term franchise with heavy spenders and away from the card business, we're growing auto originations and deepening dealer relationships with auto navigate.

And our national direct banking business is winning with customers and driving growth.

Speaking of our auto and retail banking businesses, let's move to slide 12, which shows that strong loan growth in our consumer banking business continued in the first quarter.

Riven by auto first quarter, ending loans increased 14% year over year in the consumer banking business.

Average loans also grew 14%.

First quarter auto originations were up 33% year over year.

On a linked quarter basis auto originations were up 20%, our digital capabilities and deep dealer relationships strategy continued to drive year over year growth in our auto business. We continue to closely monitor competitive and credit dynamics in the auto marketplace.

First quarter ending deposits in the consumer bank were up.

$4 $4 billion or 2% year over year average deposits were also up 2%.

Year over year.

Consumer banking revenue grew 2% from the prior year quarter, driven by growth in auto loans, partially offset by declining auto loan yields and the early effect of our decision to completely eliminate overdraft fees.

Year over year decrease in auto loan yields was driven by a mix shift toward prime loans, and our focus on booking higher quality loans within credit segment.

Across the auto lending industry the pace of price increases has not kept up with the pace of rising interest rates the decline in loan yields coupled with coupled with the pace of pricing changes has.

Has compressed margins in our auto business.

First quarter provision for credit losses swung from a net benefit of $126 million in the first quarter of 2021 to a net expense of $130 million the allowance for credit losses in our auto business was flat in the quarter compared to an allowance release in the year ago quarter.

The auto charge off rate and delinquency rate are gradually normalizing and remained strong and well below pre pandemic levels. The charge off rate for the first quarter was 0.66% up 19 basis points year over year.

The 30 plus delinquency rate.

It was $3 eight 5% up 73 basis points year over year.

On a linked quarter basis, the charge off rate was up eight basis points and the 30, plus delinquency rate was down 47 basis points.

Yeah.

Slide 13 shows first quarter results for our commercial banking business, which delivered strong growth in loans deposits and revenue in the quarter.

First quarter, ending loan balances were up 17% year over year, driven by growth in selected industry specialties and increasing utilization.

Average loans were up 15%.

Ending deposits grew 9% from the first year excuse me from the first quarter of 2021 as middle market and government customers continued to hold elevated levels of liquidity quarterly average deposits increased 12% year over year.

First quarter revenue was up 16% from the prior year quarter noninterest expense was also up 16%.

Commercial credit performance remained strong in the first quarter, the commercial banking annualized charge off rate was six basis points.

Criticized performing loan rate.

Was five 7% and the criticized nonperforming loan rate was 0.8%.

In closing, we continued to drive strong growth in domestic card revenue purchase volume and loans in the first quarter. We also posted strong auto and commercial growth.

<unk> is gradually normalizing and remains strikingly strong across our businesses and we continued to return capital to our shareholders pulling.

Pulling way up we are well positioned to capitalize on the accelerating digital revolution in banking, our modern technology stack is powering our performance and our growth opportunity and it's the engine of enduring value creation over the long term.

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

Thanks Rich.

Let's start the Q&A session.

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

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We will take our first question from Sanjay <unk> Kearney with K VW. Please go ahead.

Thanks, So obviously the investor sentiment has turned quite cautious on the consumer but it seems like rich you think credit's doing coming clearly credits doing quite well in your loan book and you guys are leaning into growth maybe you could just give us some perspectives on some of the macro headwinds that consumers face again sorry.

Sort of how you see it progressing through the portfolio as the year progresses.

Yes.

Okay, Hey, Sanjay.

Yes, so, let's just talk about the health of the consumer.

I think the U S consumer continues to be strong.

While the savings rate has reverted back to pre pandemic levels the cumulative impact of savings over the last two years is still a significant positive.

We see this in higher bank account balances and higher household net worth.

And it is true across the income spectrum.

Now of course, the bulk of government stimulus is now behind us and most industry forbearance programs are winding down.

But I think we will see some sustained benefits from consumer deleveraging through the pandemic.

Debt servicing burdens are lower than they've been in decades supported both by deleveraging and by low interest rates.

On the other side, the consumer balance sheet labor market demand remained strong.

So in our own portfolio Sanjay.

We see continuing strength in roll rates cure rates and recovery rates and even as we see signs of normalization or credit metrics remains strikingly strong by any historical standard.

There are emerging headwinds as well for example high price inflation.

Inflation has the potential to erode the excess savings consumers accumulated through the pandemic, especially if price increases continue to run ahead of wage growth.

And also higher interest rates would push that servicing burdens backup.

But you know.

If we pull up on the whole I'd say consumers are in good shape coming out of the pandemic relative to most historical benchmarks.

In fact, you know that.

The.

I've just learned over the years.

That.

I've got a lot of confidence in.

How what consumers learn from downturns in scares that they have and the choices that they made make and I think we're just seeing very rational behavior by consumers.

We're in more about you know markets and how competitors operate in lending practices and things like that we can save that for another question, but we still feel good about the consumer and look it is a natural I think it would be an unnatural thing for credit.

To stay where it is and.

And so normalization the root word and normalization is normal.

And theres quite a journey to really sort of an equilibrium.

<unk>.

For credit.

Credit performance and you know one of the reasons that were.

There's still leaning pretty hard into our growth opportunities is.

Our confidence in the consumer and our read of the marketplace.

At this time.

Okay great.

Follow up question on some of the regulatory scrutiny we are seeing.

There's been some chatter on card loan fees and overdraft fees, the latter of which I think you guys have gotten in front of you.

Maybe you could just talk a little bit about.

The card loan fees card fees.

Chatter out there from some of the regulators and how it might affect your business. Thanks.

Yeah, well it's Sanjay.

We as a company have been very focused on.

You know.

Minimizing fees just in general for our consumers obviously, the overdrafts announcement was pretty dramatic case.

Case in point, there, but even in the card business when you look.

We.

Really what capital one has is an APR.

And a late fee and in some cases, a cash advance the both of those fees are really to discourage.

Certain behaviors that we don't think.

In the interest of the consumer.

So.

Yes. So our strategy has been to you know have pricing be upfront and have it.

It would be clear and very simple now late fees or something that.

We have continued to have late fees because we.

You know wouldn't want our loved ones.

You know.

Ending up paying.

No.

Laid on their bill so just late fee I think it's one of the natural.

Fees that probably makes sense to have on a product.

The fed has created a safe harbor with respect to late fees, maybe the industry will.

That will be revisited and obviously, we will watch that.

As we.

Continue our.

Our business.

Next question please.

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

Thanks for taking my question can we just talk a little bit more about the partnership portfolio sale.

How to think about that from an asset perspective, and the impact on the P&L in terms of revenue and any associated decline in expenses associated with that sale.

Yes, Rick it's it's Andrew I mean, we disclosed the.

Overall gains between the two portfolios of $192 million.

The two portfolios combined you saw probably last year.

When they got Mark held for sale were roughly $4 billion.

But below the surface there, we're not going to get into specifically the the run rate of revenue or the expenses associated with that in part because we're growing the rest of the portfolio and youre going to see partnership businesses come come in and out over time.

Okay.

Thank you.

Next question please.

We will take our next question from Bill <unk> with Wolfe Research. Please go ahead.

Thank you good afternoon, Richard Andrew.

You have a unique insight into consumers at both ends of the credit spectrum could you parse out for us and a little bit more detail just following up on <unk> question.

Specifically yet.

What kinds of credit normalization trends youre seeing at both the high end and the low end of the credit spectrum. If you could sort of juxtapose those for us and maybe call out any differences and then perhaps any possibility of that inflationary pressures could lead to a bit faster normalization at any at all.

Laurent.

Yeah.

Yeah, Hey, Bill.

So.

You know that.

We have for quite a long time, saying, we should all expect normalization in terms of what we see in normalization.

Aye.

It is.

It's you know pretty early and pretty modest in fact, if anything I guess, we would we're sort of struck by the.

You know how moderate the pace is but we shouldnt necessarily count on that but it is certainly striking so far what we're seeing in normalization is really across the credit spectrum.

And across the income spectrum.

You know it does seem that normalization is a bit more pronounced at the lower end of the market.

If you sort of measure either in terms of income or credit score.

But those are also populations that improved more and more quickly earlier in the pandemic. So.

So I think we're seeing you know.

And we would you know.

Expect this isn't an across the board kind of returned toward normal.

Over time.

With respect to inflation.

We worry a lot about inflation and.

And that.

That is.

Something that especially.

If inflation.

As we've seen.

In in you know what it costs to live as faster than wage inflation. These can put pressures and sometimes can put pressures are more on the in the you know.

More main Street America, and so it's something that you know.

Are we worried quite a bit about and I think that it would be very natural for us.

These inflation pressures to put more pressure on consumers.

Okay.

Thank you Richard should really help looks like.

To follow up maybe could you discuss the extent to which positive credit migration.

Fueled by pandemic stimulus that perhaps may have led you to.

The increased line sizes, and then now the extent to which we can sort of see a reversal in that and perhaps too.

Credit Normalizes would you expect negative credit migration.

Ultimately lead to a reversal of those all sizes or is that not how it worked.

Yeah, you know the.

Over the years, we have.

It worked hard to originate accounts and we've said, it's kind of a coiled spring.

Of growth opportunity and we uncoiled spring.

Gradually based on you know.

Customer performance and also the marketplace and so we have as part of the growth that you see in.

While it's being powered by a very strong originations.

And.

You know in some return to.

<unk>.

You know spending spending in card usage by the back book.

We also.

Have been selectively increasing credit lines nothing dramatic, but it's it's consistent with my earlier comments about the consumer end and again with great demonstration by the performance of our customers, we have been selectively increasing credit lines.

And you know.

I think.

I don't see anything that would change.

Our lean in that direction again, it's selective and it assumes a worsening environment. It assumes normalization all of those things. So I don't think we'd be set up to be surprised there and and I don't.

Don.

See I don't have any conversations about trying to reverse.

That direction.

Next question please.

Thank you. Our next question from John <unk> with Evercore ISI. Please go ahead.

Good evening.

On the regarding the credit.

On the reserve front I know you had.

Released an incremental 119 million indicated that you do have additional qualitative reserves aside I know your reserve ratio right now is the near your day, one seasonal level, how should we think about the.

The potential for incremental reserve releases from here or do you think that we stabilize at this level of the reserve ratio or do you think theres incremental room to release.

Well John when you quote the this is Andrew by the way when you quote the reserve level and keep in mind that they're pretty significantly different reserve levels by asset class and so the total company level of courses is influenced by that mix. So you know.

I would suggest we decompose it a bit but by each of them.

Auto was a little bit below.

Where it was.

Seasonal day, one and that's largely a function of the.

Elevated used car prices our mix in prime.

We're seeing loss rates that are much below I think 66 basis points was the number this quarter.

And so all else equal you would expect that our coverage ratio there would be well below what it was.

It was an adoption and yet it's only a little bit below and thats sort of the qualitative factors there.

But the largest factor to the total company.

Reserve will clearly be card.

And that's one where I think it's always helpful to just start with a reminder of how that allowance is constructed.

Because answering your question is really dependent on a number of assumptions were quite frankly, your guess could it could be as good as mine and so with card and the first thing that goes into the allowance is just the expectation of future losses and recoveries.

And you can see within our delinquency buckets in the near term, but beyond that we assume that there is a relatively swift.

Normalization of losses from those unusually strong levels historically strong.

The second is the size of the balance sheet, which you saw this quarter and is growing at a quite healthy pace when you normalized quarter over quarter for seasonal effects and certainly up 19% I think the number is in Q1 for for card relative to a year ago and then.

Third input is that level of qualitative factors.

And that's really just to account for a variety of risks related to <unk>.

Inflation and various things that are impacting that and just uncertainty in the more macro economy.

And so the future allowance is really going to be.

Determined by how all of those effects net out the one thing that I will just remind you is what we call the quarter swap effect and that is as credit begins to normalize we will be replacing a currently low last quarter with a slightly higher last quarter. So that's another thing that will create pressure.

All else equal.

If favorable credit trends continue and the factors driving those qualitative reserves subside, we could see the allowance be down to flat, but if normalization plays out and we're growing at a significant clip I wouldn't anticipate.

Fate that we'll see allowance release in fact, I can see allowance builds so it's really just a function of all of those factors sorry for the long winded.

A technical answer there, but I just think all of those factors are really important for you to understand because the range of outcomes on the allowances is quite large.

Got it Okay. Andrew Thank you and then my follow up question is just around.

Consumer spend behavior in volumes.

On behavior or you see any shifts in.

Spending on discretionary towards shifting towards non discretionary.

And.

And then secondly are you.

On the volume side do you forecast a slowdown in card spend volume overall as the fed hikes in aims at slowing the economy.

Thanks, John .

I have not.

Looked recently at discretionary versus non discretionary so.

I don't want to.

Speculate on that.

You know I will tell you one thing that is <unk>.

Certainly.

Striking.

Is what's happening with tea and <unk> spend.

These days just by way of comparison P&A spend was up.

90% compared to the first quarter of 2021 of course that was a very depressed quarter, but.

Up around 20% from.

First quarter 2019 levels so.

You know there's a lot of you know I think with people sort of just bursting out.

Wanting to.

Free themselves from some of what they've been through the pandemic, we certainly see strength there, but I think your question about.

You know as as really inflation hits and.

We see them.

Just a lot of downstream of Frac effects that can him can happen from that that certainly could impact.

Card spend but I wouldn't say a lot of the traction that we have in card spend is coming from our.

You know are really spender focused business and frankly heavy spender.

Focus business and I think that.

Aye.

I'm not sure that.

Change in inflation is going to have necessarily that much impact on the propensity of the heavy spenders who spent.

Next question please.

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

Hey, good evening everyone.

Hey, Ryan.

Hey, Ryan.

Rich Andrew.

So maybe just to start off rich you referenced the competitive landscape out there in card and auto a few times I think you said larger upfront bonuses in Europe closely watching some of the competitive dynamics can you maybe just talk about you know what.

What youre seeing out there and I think historically, it's been unusual for you to be growing this fast when the rest of the market is also growing so I'm. Just wondering can you maybe just talk about on the card side, what are you seeing banks versus nonbanks.

What youre seeing on the on the auto side would be helpful. At this point.

Yeah.

Okay Ryan.

I do have a smile at your comment because often we observed 12.

Zig, while others Zag and.

You and I in fact, I have chatted about that and the reason sometimes behind it because it.

And it's not it's not just an accident that that sometimes has been our pattern because.

Part of what we're reading is that competitive marketplace and that that has impact on the opportunity and on credit performance and selection dynamics at a lot of things. So your question is a great one.

But.

I think a lot of companies out there see the strength of the consumer.

Are there sort of feeling the consumer sort of roaring back with respect to more normal activities and I think people are leaning into.

To take advantage of.

Of that and.

Certainly we are but we.

Let me talk a little bit just about the competition.

In the card business.

We certainly.

No that there is elevated marketing all the all of the companies are pretty much coming out and showing more marketing talking about more marketing so.

You know that that is happening and we have a careful eye to see what that does to the opportunity that we're experiencing.

But I'll kind of it kind of come back to our opportunity there, but certainly marketing levels are are elevated.

Competition in the reward space is.

He is probably a notch more intense than pre pandemic levels, but it's pretty stable in recent quarters and not what I would call irrational certainly.

No.

Incredibly.

Good players at the top of the market and there's there's a lot of competition there but that.

That hasn't really altered our view of the opportunity.

Either apr's generally been stable.

<unk>.

Turning to the Fintech for a second.

You know obviously, we've seen a lot of buy now pay later activity.

I think that we should note that the syntax who are in the lending business have been lending in the greatest.

Rear view mirror of credit.

Industry credit performance that you could ever imagine.

And businesses like installment lending base businesses sometimes.

<unk> are pretty sensitive.

In that environment. So.

No.

But we continue to see them.

You know quite a bit of activity.

On Fintech.

As well, but you know on the card side before I turn to auto.

All we have an eye on the competition I think generally though the competition while intense is not unreasonable we have not seen.

The.

Big changes in People's underwriting policy, the kind of things that.

We haven't seen dramatic changes in pricing. So I think it's more I would label it at the intense level that we would expect at a time like this but.

Not unreasonable and not something that would cause us to move.

Move off our pretty strong lean into the growth opportunity.

So in the auto business, let me just talk a little bit.

About this the competition in the auto business continues to remain intense.

It's showing up across the board from credit unions, Big banks, and small independent lenders and it's playing out across all credit segments and you just did kind of double click into that for a second you know credit unions.

That had been a wash with deposits they they've been gaining significant share consistent.

With what we've observed.

During prior cycles, and especially as interest rates are.

Go up a little bit.

And.

You know lets talk in fact about rising interest rates.

I think it's almost always the case in business that win in a sense a cost of goods sold rises there typically is a lag and how that makes its way into consumer pricing.

Got it.

As I mentioned in the earlier comments.

We have not seen.

The marketplace the auto marketplace, yet respond in terms of pricing relative to <unk>.

What's actually happening to interest rates. So there is some compression there.

I think you know.

Typically what we've seen in the past as competitors respond with differing speeds to interest rate increases.

So.

Sometimes players like credit unions tend to and maybe they have different FTP methodologies or whatever it tend to be sort of the slowest to respond.

But you know we.

So we'll have to keep an eye on that but I think that.

We are really.

Excited about our opportunity in the auto business the technology.

Products that we have out there are really cutting edge and getting a huge amount of traction.

Our.

I as just very careful on the pricing out there and also just.

Weather.

There is an over exuberance relative to the number of planets that aligned in the auto.

Lending business, particularly what sort of happened to used car values and is an effect that is still there.

Just keep an eye on whether that industry can remain.

As rational as it's been in the last couple of years.

Maybe as a quick follow up sticking.

Sticking with things that are unusual Andrew you guys are continuing to aggressively return capital I think you have two different $5 billion asset out there, which again is unusual for you guys. I was wondering can you maybe just talk a little bit about the timing of the utilization of those and how do you think about use of capital as youre getting closer to the 11% CET one target. Thank you.

Yeah and recall that in January we did not have an active program at the time, So our board authorized a $5 billion and capital levels were even higher than they are today at that point and so earlier this month in conjunction with the.

Approval of the capital plan in our CCAR submission.

They authorized an additional $5 billion, which coincides with the capital plan and therefore would be available at the start of the third quarter, but in terms of the pace of that activity.

Feels a little bit different than it did when we were at 14, 5% over a year ago to your point like asymptotically, we're sort of heading towards 11, and so the pace of repurchases is as always going to be dependent on our primary use of capital for <unk>.

Loan growth and then and then the dividends, but beyond that we're going to keep a really close eye on just the level of capital and earnings and growth in end market dynamics and take advantage of the fact that we're able to operate under the SCB framework and maintain that flexibility. So nothing specific in terms.

The timeline, there, but just wanted to be clear about the approve.

Approvals, when we announced it a few weeks ago.

Next question please.

Our next question from Betsy <unk> with Morgan Stanley . Please go ahead.

Hi, good evening.

Hey, good evening Betsy.

I guess, just switching gears, a little bit I wanted to ask a little bit about what youre seeing with regard to payment rates and is there any differ.

Differentiation amongst the customer base as to how that's been.

Trajectory.

So betsy.

We continue to see elevated payment rates across our customer base.

And while.

Lately, it's been sort of flattening out if you will I mean payment rates are just.

Well above pre pandemic levels and while not a perfect proxy you can see these trends in our trust metrics, whereas.

The payment rate in March remained close to 50.

50%.

Yeah.

One of the more recent drivers of higher payment rates is really the flip side of amazingly strong credit.

And healthy consumer balance sheets.

And we certainly expect.

Our consumer credit to gradually.

Normalized.

Even though it's kind of been happening a little slower than than one might otherwise expect.

And.

I certainly believe payment rates will remain sort of.

The flip side, a really strong credit so over time, the normalization of credit.

No.

Plus I believe leads to some no realization of higher payment of normal.

Excuse me of payment rates.

But I think theres another.

Phenomenon happening sort of on little cat feet.

Behind our payment rate numbers and that is.

That.

No.

Each year, we're gaining more and more attraction with heavy spenders also you may remember for years, we talked about gosh. This goes all the way back to the great recession capital one's systematic avoidance of high balance revolvers.

Which leaves a lot of revenue.

And earnings on the table during the good times, but there is a move for the sake of resilience, but I think.

Sort of a systematic ah.

Effects of avoiding.

Avoiding high balance revolvers and the systematic.

The effect of more and more traction with heavy spenders also has created.

Somewhat of a.

Sort of more sustainable change in our payment rate as well, but certainly probably the biggest factor of the moment is.

The rate at which.

You know consumers are.

Being.

So.

Creditworthy and.

Putting so much of their hum.

Money into payments.

Got it and then just as a follow up on.

The marketing piece I know, we spoke about it a little bit earlier in the call, but as we're thinking through the opportunities that we have.

Do you feel like there is an opportunity to lean into marketing kind of Cuba, Cuba Q to a greater degree so we should build off of <unk>.

Such that our marketing is higher year on year full year full year I'm trying.

What I'm getting from the conversation earlier, but I just want to make sure. It's.

The right takeaway.

Yeah.

Well yeah.

Let me just why don't I do this Betsy let me just pull up and.

Sort of talk about marketing overall, and then we can kind of come back to the quarter that we just had.

There are a few things driving our marketing levels higher these days.

First of all the opportunities that we see.

We're seeing attractive growth opportunities across our businesses.

And we're leaning hard into them, while the opportunities are there.

In our card business.

We have continued to expand our products and the marketing channels that we're originating in.

And these opportunities are significantly enhanced by our technology transformation.

As enabled us to leverage more data.

Access more channels.

Leverage machine learning models and <unk>.

Enable customized solutions.

So we're seeing significant traction in originations across our business.

And I want to note that.

So much of.

Our card business overall, and our growth is in our branded card franchise.

As opposed to co brand and private label partnerships and by the way we also like those.

Businesses, but for capital one that's a relatively smaller proportion of our business.

Yeah.

And in branded cards, we enjoy the full economics of the business.

And we own the customer franchise.

So while the industry doesn't track data on this.

Think.

Our share growth in branded cards.

Is particularly noteworthy.

And branded card is of course as the word implies.

It's about our brands and.

And we continue to invest in the company's brand and in the flagship product.

And some of the strength that you see in our revenue margin comes from having so much branded card where.

Where we own all of the economics.

But the flip side of that is that the marketing and the brand building are entirely on us and that all shows up in our marketing numbers.

But you know that's an absolute centerpiece of building a highly valuable franchise.

A second important driver of our growing marketing spend.

Is the continued traction we're getting in our.

More than decade long journey.

To drive more and more up market.

With a focus on heavy spenders.

So we launched our venture card way back in 2010 and that was the beginning of that strategic push for heavy spenders.

But it hasnt just been about flagship cards, it's been about working backwards from what it takes to win with heavy spenders.

And that's about great.

Great products.

With heavy reward content.

About grade servicing.

About customer experiences tailored for heavy spender lifestyles.

And of course, an exceptional digital experience.

No.

For years, we've been on this journey and every year, we've had growing traction.

And while our whole franchise of spenders has grown nicely.

We have grown even faster with heavier spenders.

Yeah.

And with each year of success, we've had the license to stretch a little higher up market and we're continuing to invest to make that possible.

Lately, you've seen our launch of our travel portal, which is you know garnered some rave reviews in the marketplace.

You've seen the launch of airport lounges, which have a special appeal to the top of the market and the frequent travelers.

And last fall, we launched venture X, which moved us into the next tier of premium cards.

And that launch has been very successful and we continue to invest.

And the growth of that product.

You can see some of the results from our continued quest for heavy spenders in the tremendous purchase volume growth that we've had over any time period, you pick over the last decade or shorter time periods.

Youll find capital one with posting really high and.

You know.

And your top of the league tables, if not at the top of the league tables purchase volume growth and also note that almost all of the.

Heavy spender growth is in our branded cards and that's why you can see such strength in spend velocity and our revenue March.

This journey for the heavy spender has.

You know a different economic mix than some of our traditional card business.

It has higher upfront cost.

Brand building.

Higher upfront costs of marketing and promotions.

And of course investment in high end experience.

But the long term value of the heavy spender franchise is tremendous with.

Hi spend levels strong margins.

Very low losses.

Low attrition.

And a lift to our brand and really the rest of our franchise.

So you know the spender franchise is already making its mark on many line items of our financial performance and that's a continuing.

Long term benefit of these investments.

Yeah.

I just want to mention a third factor.

Contributing to the higher marketing.

Is some of the traction that we're getting with our new digital offerings, including auto navigator capital one shopping.

And our National Bank and.

Just to comment on the National Bank, which unlike you know.

Capital one unlike other banks, who are driving growth through bank acquisitions. We are focused on continuing to build our bank organically, which of course does take marketing investment.

So that was just taking a chance to share with you what is behind the pretty high levels of marketing that you're seeing and the great opportunities that we see for our franchise and to grow it.

Now due in part to the current marketplace environment, and importantly, capitalizing on our strategic question.

Those quest being <unk>.

Our building of the modern tech stack and the continued move up market.

This has you know these things are contributing to.

Two driving higher marketing levels. These days.

So that is.

Sort of a pulling up sort of a narrative on why it is that we're leaning hard into marketing and.

It's a combination of sort of the opportunity at the moment.

As well as.

Capitalizing on the journey that's been many years.

In the making.

Typically we are.

Have a seasonal dip in marketing levels.

This year.

You know.

An important contributor to our marketing was things related to the for example, the launch of bench adventure cards early.

No.

Early spend bonuses and things like that so.

Things are not.

It's not quite as strong of a seasonal effect. This year as it is it has been in other years, we're not specifically, giving guidance on the rest of the year, but I just wanted to share with you why it is that we're leaning into marketing, what's driving that and.

I am as you can probably tell from the answer I'm really enthused about our opportunities and and.

<unk>.

Our though.

Leaning into take advantage of them and a lot of that about marketing.

Next question please.

We will take our next question from Moshe Orenbuch with Credit Suisse. Please go ahead.

Great. Thanks, Rich just wondering.

What would it take to see both kind of you talked about some of the potential pressures, particularly for the lower end consumer in terms of inflation.

And other sorts of things what would it take to actually start to see a pullback both at the lower end consumer and for the the higher spenders like what sort of what would be the warning signs.

Yeah.

Moshe with respect to.

The lower end consumers.

It's less about.

Okay.

Imagine we don't have to you know.

Do very much imagination to envision.

Environment's better more difficult than this one where the consumers.

In a more challenged place where the competitors are.

Have you know gone a whole notch more aggressive.

And.

What.

What I think is more our pattern in that case.

Is too.

Particularly use the credit line lever.

To manage the risks as opposed to just a big dial back say in an origination machine. So we just.

We just more cautious on lines try to continue to build the franchise.

You know maybe not as aggressively as some times, but again, we have over our.

30, 30 years Moshe in and building sort of.

Main Street franchise.

Really.

Do a lot of the regulating and things are on the line side.

Well on heavy spenders.

We.

Yeah.

Continue to.

Find so much traction.

What I've, often said about the quest for heavy spenders. Unlike a lot of things that I've seen.

In.

Our business journey. This is not a thing that.

Is very well suited to a blitz here a pullback uplifts in a pull back now that doesn't mean, we wouldn't be dialing the knobs up and down on certain things like marketing or choices or product or whatever but.

This is and I think there's a reason that not very many players are really really successful at the top of the market. This is about really.

Building a franchise at that end of the market that's not just.

Taking regular consumer product products and addressing them up with more rewards or fancy advertising and the that's why I mentioned this journey that were like in the 12th year of the journey, where we declared we're going to just keep moving up market.

One can't do it overnight.

Something you have to earn along the way, but all of our metrics continue to show traction and success traction on brand metrics as well.

You know pretty much all the customer metrics, you've seen what's happening on purchase volumes.

You know when we when we track the things that we have booked over the years, we sort of love. The annuities were booking so that to me is.

Something that.

We're going to keep pursuing as we have for a long time.

But what.

We will that the things that we will throttle along the way are certain.

Marketing choices certain product choices.

But.

That one.

I personally shared wanted to share this.

A little bit more about this today that that's that's.

That's a journey that capital one's been on as part of our central part of our strategy and card for.

For a lot of years.

Great, Thanks, Rich and maybe as a follow up could.

Could you talk a little bit about where you see the industry and capital one in terms of the profit deposit price competition as we're now starting to see.

And deposit betas, which we're now starting to see interest rates moving up.

Yeah.

Sure Moshe it's Andrew.

And recognizing that retail deposits are 85% of our portfolio our focus on on that and over the last cash six years, we had the the falling rate cycle over the last couple where betas, we're right around 50% and then.

The last rising cycle.

Which was from the late 2015, I think to early 2019, our cumulative beta was was right around 40%.

So betas are generally slow to rise over the first couple of hikes, but keep in mind is that last rising rate cycle. We had eight hikes over three and a half years I believe it was whereas in this cycle.

Could see four hikes that each equal 25 basis points and get up to 250 or 275 as forward suggest quite quickly.

So I could make a case that that industry betas will be higher or lower than that history.

On the lower side there is elevated.

It balances across the industry.

Loan to deposit ratios are quite low industry nims or are low and we're moving off a zero floor.

But the flip side is the larger and quicker rate hikes.

The possibility of some more aggressive pricing by our institutions that are more reliant on on those funds to our deposits to fund loan growth in institutional surge deposit run off. So just wanted to give you a flavor of I think there's a lot that we're.

We're going to learn over the course of the next few months, but as we look at all and have a point estimate.

That kind of runs through all of our assumptions and our point estimate at this point is that a.

It's going to largely be in line with that rising.

The last rising cycle of something like 40 basis points. It starts off a little slower and picks up but again that starts off slower might be a particularly condensed a condensed time frame relative to what we saw in that last cycle.

Next question please.

We will take our next question from Don Vendetti with Wells Fargo. Please go ahead.

Quick question on the outlook for the adjusted efficiency ratio from Q1 levels and then rich.

On commercial card issuing can you talk about that business.

And I noticed you've been marketing a no limit small business card, which has been tough for Baxter rollout.

Okay Don.

In Q.

Yeah, we've been focused on improving our operating efficiency ratio for years.

And.

The pandemic also accelerated.

Technology race.

And raised the stakes for all players across many industries and certainly in banking and I think for every player. The clock is ticking on their tech readiness and companies are waking up to the investment imperatives.

And you.

We've talked about the investment flowing into Syntaxes break breathtaking.

The arms race for Tech talent is fierce as that I have seen it.

Any time in my career and in any job family.

So there's a there's an urgency and responding.

To the marketplace, but I do want to also say that the fast moving marketplaces also the creator of our opportunity and I think capital one's uniquely positioned to take advantage of that opportunity in that.

Why we're investing now.

So.

Really is this is very similar message to what I said last quarter, but what I've been saying for a long time, we're still very focused on the opportunity to drive operate you know operating.

Operating efficiency improvement over the longer term.

The engine that powers it is revenue growth and digital productivity gains.

But the timing of efficiency improvement needs to incorporate.

The imperatives of the current marketplace.

So.

But delivering positive operating leverage over time continues to be an incredibly important north star to us and frankly, one of the most important payoffs of our technology journey and are an important element of how we deliver long term value.

So.

I think.

You have sort of seen.

You can see some of the the effects of what I'm talking about in the.

First quarter.

Operating efficiency.

And.

When you adjust for gains from portfolio sales in the quarter. So.

You know I think it's very similar conversation to what I was saying last time, we can see some of the.

Evidence of that in the quarterly numbers, but the current pressure doesn't change at all our belief in the longer term opportunity to drive.

Operating efficiency improvement.

Oh.

Yeah.

John what was your question on commercial.

Oh, sorry, sorry question, we wanted to get rich your outlook on commercial I know as you rollout a node limit small business card, which has been tough for banks to do I didn't know if maybe youre using the public cloud.

Just wanted to see your thoughts on that.

Yeah. So.

When you're talking about yes, commercial you're talking about here.

Business card.

This credit card.

You may have seen the ads on TV that talk about no preset spending limit.

The more complicated way to just say in a sense not a credit limit that that gets hard wired. This is something that is.

Dynamically.

There there isn't a credit line per se. This is dynamic transaction underwriting.

In real time.

It's a very hard thing to build and it's taken us years.

To get there and it's absolutely a.

One of the many many benefits of the tech transformation, we've done in the journey to the cloud and the building of modern.

Modern applications and modern platforms and so.

I've always said too.

Investors will often ask.

Where can I see whereas I wanted I want to reach out and touch the benefit of your tech transformation and all the money. We've spent on that and I've said look there is not going to be any one thing.

That you point out and say Oh, my gosh that I now see everything this is about this journey.

Is a journey that.

You know what.

When when we when years ago, when we kind of said someday, we'd like to do.

This thing over here some day, we'd like to do that we'd also like to have.

Much better efficiency, we'd like to better risk management would like to do lots of things and a striking thing was all the things that.

We wanted to do usually in lives.

They are.

You have to pick some and it's all about tradeoffs, what I'm struck by in this journey as a shared path.

To all of the things that years ago, we set out to do and that path relates to.

Building modern technology across the company.

And from the bottom of the tech stack up and that is what we've done.

And then over time, you as investors will see manifestations of that.

Wow that auto navigator product capital one built that can underwrite.

Every car in America.

Yeah.

For any consumer in a fraction of a second that's striking and then one sees wow, so you're actually having no preset spending limit that's.

That is striking.

We didn't do the journey for the sake of any one of those but I think on an increasing basis investors will see <unk>.

Examples of the things that are that stand on the shoulders of the.

The years of investment we've made in technology and things that also by themselves like this card thing. We're talking about is itself within that journey that that took a bunch of years.

But.

It's all about working backwards from our wins with customers and that's why we're doing that.

Next question please.

Our final question. This evening will come from John Hecht with Jefferies. Please go ahead.

Thanks, very much guys for fitting in my question.

Richard you talked a lot about credit and the strength of your customer base.

Aside from that we are seeing call. It some of the more modern or emerging platforms. We're observing some delinquency drift there and in fact, we're even seeing some reactions in the capital markets.

Securitization deals are getting cancelled or renegotiated as they go.

I'm wondering what do you ascribe that to and are there any reverberating effects from that type of <unk>.

<unk> met or migration into your business over time.

So John as I, often say.

With a smile.

Capital one was one of the original Fintech.

Or a fintech before fin techs, where a word.

But if you think about what we did is we built a.

A lending company.

It started with cards, but ultimately building a broad based financial institution.

One thing that enabled.

That journey to happen.

Is the advent of the capital markets and we were able to ride the very meteoric growth capital one in the nineties.

Based on securitization and things.

And so we were very grateful for that but at the same time.

Then did probably one of the most.

Things that I think most shocked our investors.

I guess, the shocking because you're spending a lot of years talking about it before we did it but a striking thing when we chose to transform our company to a.

You know a traditional bank balance sheet.

Because we wanted to create much greater resilience in our funding. So the reason I mentioned that is you know as we were in the old days and as a fintech that are built on.

Securitization.

We have an opportunity to grow quickly, but they also.

Have a.

And just an inherent structural challenge with resilience so for all of them they need to and their investors need to.

Keep a careful eye on that I wanted to talk just a little bit about you.

You mentioned some of the lending.

And some of the uptick.

So first of all we shouldn't be surprised to see upticks in delinquencies just for.

You know for companies in general, whether their banks or or some of the fintech.

Typically companies that have you know.

A less of a history.

Of of consumer credit data are probably more challenged with respect to how to read this rearview mirror I mean for example, let's just say that.

You created a fintech in the last couple of years how.

How would one look in the rearview mirror and determine.

Resilience is and where it isn't since in general pretty much everybody did well so.

That's.

That's.

One of the challenge any new company has is is building a deep enough credit history to do that so I'll say that that's that's just a challenge they bring to the table, it's not not their fault.

It just it's a structural thing the other thing.

That always happens with normalization.

As normalization tends to happen faster.

On front book spend back books.

And so.

Part of what you may be seeing on Fintech.

Is there a high growth and tax just the proportion that their front book represents as a.

As a percentage of the whole is quite different and it would be surprising if they didnt normalize faster given that typically upfront books normalized.

Faster than back books, and a lot of us have.

Season back books with you know.

Years of experience with them and that that's also.

Very helpful.

In a normalization journey so.

As one that was.

It was an original fintech.

Great fascination with deferred tax a lot of respect for a lot of things, they're doing but I also know that.

There are some structural things that theyre going to have to confront that.

No.

They and their investors will have to.

Keep in Ireland.

Perfect I appreciate the color there.

Well, thank you for joining us on the conference call today and thank you for your continuing interest in capital one remember.

Mr Relations team will be here after the after the call to answer any further questions you may have thanks.

Thanks for joining us have a great evening.

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