Q2 2022 Capital One Financial Corp Earnings Call

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Thank you for standing by your currently on hold for today's capital one second quarter 2022 earnings call. At this time, we are still at many additional participants and expect to be underway. Shortly we do thank you for your patience and please continue to standby.

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Good day, everyone and welcome to the capital one second 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 session. If you would like to ask a question. During this time simply press the star key followed by the <unk>.

One on your telephone keypad, if you would like to withdraw your question. Please.

Press the star key followed by the number too.

Thank you I would now like to turn the call over to MS. Danielle Dietz, managing Vice President of Global Finance. Please go ahead ma'am.

Thank you very much Melinda and welcome everyone to capital one second quarter 2022 earnings conference call as usual, we are webcasting live Tonight over the Internet to access the call. Please log on to capital one's website at capital one got com and follow the links from there.

In addition to the press release and financials. We have included a presentation summarizing our second quarter 2022 it was all.

With me today are Mr. Richard Fairbank capital one's Chairman and Chief Executive Officer, and Mr. Andrew Young capital ones Chief Financial Officer.

Rich and Andrew will 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 forward looking statements contained in today's discussion and the materials speak only as of the particular date or dates indicated in the material.

Capital one does not undertake any obligation to update or revise any of this information 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 look.

And forward looking statement for.

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

Now I'll turn the call over to Andrew.

Thank you Danielle and good afternoon, everyone I'll start on slide three of Tonight's presentation.

In the second quarter capital, one earned $2 billion or $4.96 per diluted common share.

On a linked quarter basis.

And loans held for investment grew 6% and average loans grew 4%.

Driven by growth across all of our segments.

Revenue in the linked quarter increased 1%.

Or 3% after accounting for the $192 million gain on sale recognized in the prior quarter.

Noninterest expense grew 1% in the quarter driven by an increase in marketing, which was partially offset by lower operating expenses.

Provision expense in the quarter was $1 $1 billion drip.

Driven mostly by net charge offs of $845 million and 200 million dollar allowance build.

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

The total company 200 million dollar allowance build in the quarter brings our allowance balance up 2% to $11 5 billion as of June 30.

Our total company coverage ratio decreased 15 basis points to 388%.

The changes in allowance coverage ratio varied by segment, which I'll cover on slide five.

Yeah.

Across all our businesses loan growth and a worsening economic outlook drove upward pressure on allowance.

In our consumer banking segment, the allowance balance increased by $145 million.

The coverage in consumer banking increased 14 basis points to 251%.

In our commercial banking business, the allowance increased by $152 million.

The coverage in commercial banking increased five basis points and now stands at 136%.

In addition to the allowance build there was also a $39 million of provision related to unfunded lending commitments.

In our domestic card business, we released $128 million of allowance despite the effects of the growth and worsening economic outlook I previously mentioned.

We have seen some signs of gradual normalization in our card credit metrics, but so far the pace of that normalization has been slower than what we assumed when we set last quarter's allowance.

The impact of this slower than assumes normalization more than offset the growth and worsening economic outlook, leading to the allowance release.

We continue to carry elevated levels of qualitative reserves for downside risks related to economic uncertainty.

The coverage ratio for domestic card now stands at 682%.

Turning to page six I'll discuss liquidity.

You can see our preliminary average liquidity coverage ratio during the second quarter was 144%.

Well above the 100% regulatory requirement.

Total liquidity reserves declined $17 billion in the quarter.

Our liquidity normalizes towards pre pandemic levels.

Cash and cash equivalents declined about $5 billion and now stands at 22 billion.

We also had a $6 billion decline in our securities portfolio driven by the combination of the Mark from rising interest rates.

And the continued run off of the outsized portfolio built during the pandemic.

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

Yeah.

Net interest income in the quarter was $6 $5 billion up 13% from the year ago quarter and up 2% from the sequential quarter.

Our second quarter net interest margin was 654%.

65 basis points higher than the year ago quarter, and five basis points higher than the prior quarter.

Relative to a year ago. The increase in NIM is largely driven by a balance sheet shift as we continued to deploy excess cash and securities into loan growth.

The linked quarter increase in NIM was driven by an additional day to recognize revenue.

Higher yields on assets in the quarter were offset by higher wholesale funding and deposit costs.

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

The impacts of interest rates beyond forward wholesale funding costs and the impact of competition on loan yields and deposit betas.

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

Okay.

Our common equity tier one capital ratio was 12, 1% at the end of the second quarter.

Down about 60 basis points from the prior quarter.

Net income in the quarter was more than offset by share repurchases and growth in risk weighted assets.

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

In the quarter, the pace of our repurchases slowed to about $2 billion.

The pace of any future repurchases will be driven by a number of factors, including our actual and forecasted capital earnings growth economic conditions and market dynamics.

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

Thank you Andrew and good evening, everyone I'll begin on slide 10, with second quarter results and our credit card business.

Year over year growth in purchase volume and loans, coupled with strong revenue margin.

Drove an increase in revenue compared to the second quarter of 2021.

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

As shown on slide 11.

Our domestic card business posted another quarter of strong year over year growth in every topline.

Purchase volume for the second quarter was up 18% year over year and up 48% compared to the second quarter of 2019.

Ending loan balances increased $19 $7 billion or about 21% year over year.

Ending loans grew 6% from the sequential quarter.

And revenue was up 21% year over year, driven by the growth in purchase volume and loans as well as strong revenue margin.

Strong credit results continued in the quarter, both the charge off rate and the delinquency rate continued to gradually normalize but remain well below pre pandemic levels. The domestic card charge off rate for the quarter was 2.26% a two basis point improvement.

Year over year, the 30, plus delinquency rate at quarter end was 2.35%.

67 basis points above the prior year on a linked quarter basis. The charge off rate was up 14 basis points roughly in line with normal seasonal pattern. The delinquency rate was up three basis points from the linked quarter, which we are.

When we typically see model modest seasonal improvement.

Noninterest expense was up 28% from the second quarter of 2021, driven by an increase in marketing.

Total company marketing expense was about $1 billion in the quarter.

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

The primary non card driver of increased marketing is in our consumer banking business.

Where we're marketing to drive deposit growth and build.

Or franchise in our digital first national banking strategy.

In our domestic card business, we continue to see opportunities to book accounts and loans that can generate resilient at attractive returns and we continue to lean into marketing to drive growth and build the franchise across our domestic card businesses.

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

We're seeing the success of our marketing and strong growth in purchase volume new accounts and loans across our domestic card business.

And we continue to gain traction in our decade long focus on heavy spenders.

In the second quarter heavy spending heavy spend or marketing.

Includes increased early spend bonuses driven by strong first quarter account growth and spending as well as investments in franchise enhancements like our travel portal and airport lounges as.

As a result of our marketing we posted strong growth in the heavy spender accounts and strong engagement and spend behaviors with new and existing customers. We're gaining share in building a long term franchise with heavy spenders at the top of the market.

Pulling up our heavy spender franchise has a different economic mix than some of our other card businesses.

It is significantly higher upfront costs of brand building marketing and promotions and investment in high end experiences. However, the long term economics are compelling.

And as our heavy spender franchise has grown significantly in recent years its impact has quietly and gradually changed several domestic card metrics and financial results.

Have you spend your credit losses are low, which lowers overall domestic card loss rate all other things being equal that's.

Naturally high heavy spend their payment behaviors are a key driver of our long term trend of increasing domestic card payment rates and the high payment rates go hand in hand with strong credit performance.

Heavy spender attrition is very low and that's been a factor in our strong domestic card loan growth.

Heavy spenders have a particularly large impact on increasing purchase volume and had been a major driver of strong domestic card purchase volume growth that is generally exceeded loan growth overtime.

This spend velocity has driven increases in net interchange revenue in absolute terms and as a percentage of total revenue.

And these interchange fee revenues revenue annuities are a strong and sustained over a very long term customer relationships.

Our heavy spender franchise generated financial results that are attractive less volatile and very resilient.

As a result, the heavy spender business requires less capital and delivers strong long term returns on capital.

Pulling way up our 10 year quest to build our heavy spender franchise has brought with it significantly increased levels of marketing, but the sustained revenue credit resilience and capital benefits of this enduring franchise are compelling and they're growing.

Slide 12 shows second quarter results for our consumer banking business.

In the second quarter choices, we made in our auto business impacted several consumer banking trends.

We pulled back on growth in auto in response to competitive pricing dynamics.

As you would expect many auto lenders have raised pricing as rising interest rates drove higher marginal funding cost.

But some others have.

Have kept pricing relatively flat.

These competitors have gained market share and pressured industry margin.

We chose to pull back on auto originations, which declined 20% year over year and 12% from the linked quarter.

As we pulled back on originations the year over year growth of ending loans in the consumer banking business decelerated to 9% in the second quarter on a linked quarter basis, ending loans were up 1%.

Second quarter ending deposits in the consumer bank were up 2% year over year aided in part by the transfer of a small portfolio of deposits from our commercial bank consumed.

Consumer banking.

Deposits declined 1% from the sequential quarter.

Consumer banking revenue was essentially flat compared to the prior year quarter as growth in auto loans was offset by the effects of our decision to completely eliminate overdraft fees and the year over year decline in auto margins.

Auto margin compression was primarily driven by the increase in our marginal funding cost.

Resulting from.

Rapid interest rate increases and the aggressive competitor pricing.

I just discussed.

Noninterest expense was up 15% compared to the second quarter of 2021, driven by the increased marketing for our digital National Bank and continuing investments in the digital capabilities of our auto and retail banking businesses.

Second quarter provision for credit losses swung from a net benefit of $306 million in the second quarter of 2021.

Do a net expense of $281 million.

We added to the allowance for credit losses in our auto business in the quarter compared to an allowance release in the year ago quarter.

The auto charge off rate and delinquency rates continue to gradually normalize, but we remain well below pre pandemic levels. The charge off rate for the second quarter was 0.61% up 73 basis points from the unsustainably low in fact negative quarterly charge offs.

A year ago.

The 30, plus delinquency rate was 4.47% up 121 basis points year over year on a linked quarter basis. The charge off rate was down five basis points and the 30, plus delinquency rate was up 62 basis points.

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

Second quarter, ending loan balances were up 9% from the sequential quarter.

Average loans increased 5%.

Growth in selected industry specialties drove our growth.

Ending deposits were down 14% from the first quarter and down 10% year over year driven in part by the transfer of a small portfolio of deposits to a retail bags that I mentioned, a few moments ago as well as rate driven runoffs as some customers withdrew deposits in search of higher returns in the <unk>.

Quarter deposit balances were also impacted by seasonal outflows.

Second quarter revenue was up 3% from the linked quarter and 26% from the prior year quarter.

Non interest expense was down modestly from the linked quarter and up 16% year over year.

Provision for credit losses increased $214 million from the first quarter, largely driven by a build in the allowance for credit losses.

Commercial banking credit remained strong in the second quarter, the commercial banking annualized charge off rate was 14 basis points. The criticized performing loan rate was five 3% and the criticized nonperforming loan rate was 0.7%.

In closing we continued to drive good growth in card revenue purchase volume and loans in the second quarter consumer banking loan growth continued, albeit at a slower pace and our commercial banking business posted strong growth in loans and revenue.

Credit results remain strong across our businesses with charge off rates and delinquency rates well below pre pandemic levels, even as credit continues to gradually normalize.

And we continued to return capital to our shareholders.

For more than three decades, we have hardwired resilience into every underwriting and growth choice, we make in good times and bad and we have steadfastly focused on building an enduring franchise.

Sticking to these core tenants, we've demonstrated resilience through several cycles, we've been in a strong position to seize opportunities as markets evolve and as cycles played out and we've delivered significant value over the long term.

And we're living by these same core tenants today we.

We continue to see opportunities to lean into marketing and resilient asset growth that can deliver sustained revenue annuities long after the normalization trends and cyclical credit pressures play out.

We're confident in the choices, we're making.

As we continue to closely monitor and assess competitive dynamics and increasing economic uncertainty.

Our credit results remain strong.

We're staying focused on the most resilient businesses and sub segments and we're continuing to hone the proprietary underwriting and product structures that have driven our resilience through prior cycles. All of these growth and credit risk management choices are enhanced by our technology transformation.

We're managing costs tightly even as we continue to invest in transforming our technology and digital capabilities that are the engine of future growth and efficiency, while the imperatives of marketplace opportunities and risks impact the timing, we remain focused on delivering delivering operating leverage over.

The long term powered by growth and digital productivity gains.

And we're managing capital prudently to put ourselves in a strong position to weather a broad range of possible economic scenarios and to emerge in a strong position to capitalize on opportunities that are often generated as cycles play out.

Pulling way up we believe that our long standing core tenants and the choices. They drive today are putting us in a strong position to continue to deliver resilient and compelling long term shareholder value as the sweeping digital transformation of banking continues.

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

Danielle.

Thanks, Rich we will now start the Q&A session as a courtesy to other investors and analysts who may wish to ask a question. Please limit yourself to one question plus a single follow up question.

If you have any follow up questions. After the Q&A Q&A session on the Investor Relations team will be available after the call.

Linda please start the Q&A session.

Thank you if you would like to ask a question. Please signal by pressing star one on your telephone keypad. If you are using a speaker phone. Please make sure. Your mute function is turned off to allow your signal to reach our equipment.

Once again that is star one to ask a question.

And we'll go first to Ryan Nash of Goldman Sachs.

Hey, good evening everyone.

Good evening Ryan.

Rich.

Maybe just to start off on marketing, which was up again sequentially.

Have we seen the peak impacts of the early bonuses and maybe just more broadly.

Are you guys still leaning in and maybe you can just talk about the decision in the context of where we are in the economy with inflation and maybe are you pulling back in any pockets just given what's going on across the customer base.

Ryan we are.

Yeah.

On the on the early bonuses I mean, that's really tied to you know.

How hard we lean.

Lean into adventure X for example, I mean, we have early spend bonuses.

Pretty much across our rewards business so let.

Let me separate a little bit there. So we have the launch of venture acts and some companies launches or sort of you know a quarter long kind of thing we continue to lean into that you've seen our national advertising continue on that so.

You know the early spend bonuses continue as part of that.

And then also there early spend bonuses at a you know a.

Stable rate for.

For the some of our other rewards products as well.

You know with respect to the economy.

We you know.

It's not lost on us that there's a lot of noise out there in the economy and we every day, we talk about this.

And you.

You know there's.

There's always uncertainty, there's probably I think more uncertainty.

At the moment and probably on average and that's not lost on us.

We.

So we don't make a top of the house decision that says we're going to spend this much on marketing because these decisions are.

Gary.

You know decisions at the margin you know based on models and and.

Estimated loss rage, and putting resilience factors in there in response rates in a lot of things.

There has been some trimming around the edges.

In card quite a bit more so in auto by the way as I talked about just a few minutes ago, but staying with card for a minute. There there has been some trimming around the edges, but but generally you know the kind of core or Todd.

Target segments that we've been going after we are continuing.

Continuing to feel good about and lean into.

So.

I think your net impression should be that while we have a very watchful eye on the economy and obsessed about it every day.

Our underwriting decisions.

Underwrite systematically at capital one we underwrite to a worsening scenario.

And so we feel good about our originations and.

But one thing about our tech transformation that has really been good also is it allows us to move and adapt much more quickly.

You know in most companies and frankly in some of our past years, when we decided to turn it sometimes took quite a bit.

Quite a bit of time to move the whole machine, we've been able to create a much more adaptive and responsive.

You know infrastructure at capital one and so that's also helpful in a time of uncertainty but.

Net net we feel good about the opportunities and we're leaning into them.

Okay.

Next question please.

Thank you next we'll hear from Kevin Barker of Piper Sandler.

Thank you very much.

Could you further discuss some of the things that youre seeing on the auto sector, just given where it's been throughout 2021, where we saw really good performance and then now it just seems like.

The combination of rising delinquency rates unresponsive yields and just.

Some softening in used car prices are really impacted can you just give us an outlook of what your expectations are and how capital wanted to react through this year and especially in a recessionary environment in 2023. Thank you.

Rich I think you need to on mute yourself.

Sorry, sorry.

Kevin Thank you.

<unk>.

Yeah.

The auto business is one that I mean, we're still.

We still see significant opportunity in the auto business, but of course, what we always share with investors is how we're feeling you know.

At the moment and at the margin so the.

The.

The biggest at the moment the thing that that we wanted to share with you is how the competitive environment feels.

And.

You know, we we've been saying for some time that the low charge offs. We worry that you know too long of a period of low charge offs and too long of a period of.

In many ways Unsustainably high.

Used car prices can dull the senses of players in the auto industry and caused a weakening and underwriting we haven't really.

Seen that that's not the primary story that we see we certainly are on the lookout for that is the story has really been more a hijacked if you will hold by that what's happened with inflation and a significant increase.

And.

You know four four.

You know in four companies and in in you know cost of funds and most auto players and certainly are the money center in particular.

Have.

You know moved up their pricing.

Very consistently and responsibly to the increases.

And you know the.

Underlying them.

Cost of funds in the economy.

And what is striking is that some.

Some competition has not there are a few large there are a few large players whose.

Whose movement is in pricing as well behind that and then you have the credit unions, who have I think a very different kind of business model in a different way to calculate what their funding costs is the credit unions have.

<unk> really not not moved at all in terms of their pricing and they've had actually a very significant increase in market share.

So.

We.

You know we.

We continue to be very dedicated to the auto business. We have relationships with dealers were not this is not like a huge pull back but what we're doing at the margin.

Is with the tighter margins that now at least temporarily exist in the business for us that has led us to trim around the edges. That's I think the biggest story that we would say in auto.

The other thing is used car.

Pricing, let's talk just a little bit about that.

That Kevin.

Clinical values remains strikingly high and obviously well above pre pandemic levels.

And supply constraints remain the biggest factors supporting high vehicle values.

And.

Everything that we see suggests vehicle production will remain constrained in the near term.

And even when production normalizes I think it will take time for dealers to rebuild their inventories so probably the nearer term outlook.

You know it is pretty good with respect to used car values, but if I pull up you know a concern that I've often voiced is.

You know that from an underwriting point of view, what what really matters is not the absolute level of car <unk>.

<unk> values, but the.

Relative value of collateral values versus the underwriting assumptions that a lender made.

So we assume significant declines in collateral values in our underwriting, but you know we we we have a watchful eye on an industry that for quite some time now.

It has been.

Hopefully not getting used to.

The used car prices better at relatively that are at record levels versus anything we've seen in the past.

So.

I think the auto opportunity continues to be a cigna.

Significant one for capital, one, but particularly driven by.

Pricing, which which may by the way you know ameliorate for certainly everyone except the the.

The credit unions in a relatively short period of time, but until then we will continue to.

Be pretty tight around the edges and we wanted to share that with you.

Okay.

Yeah.

Okay.

Okay, great. Thank you.

Yeah.

Next we'll hear from Bill car cash of Wolfe research.

Thank you good evening Rich capital one has long been known for its rich information based analytics. How are you thinking about the risk that the strength, we're seeing in the consumer and labor markets is in and of itself inflationary and could lead to start to have to do more and since the impact of fed hikes tends to be lagged.

Tends to continue to increase well after peak fed funds, maybe can you talk a little bit about how this dynamic feeds into costs underwriting and reserving models.

Okay. So.

Well, thanks, let's just kind of pull up and talk about.

Inflation.

We haven't seen is sustained inflation in the U S in many decades, but.

It's been running above 5% for over a year now and it reached.

Nine 1% in June and producer prices are increasing.

Even faster.

And of course, the fed has started raising rates and response in the market.

<unk> expects further increases.

So what I wanted to do is is maybe.

List some of the potential impacts to our business.

Sustained in place and installation and it's mostly negative.

So if the economy suffers as a result of efforts. This low inflation, we will certainly feel that and the biggest way that we would feel that would be in.

Consumer credit losses.

Yeah.

Consumers also we're already starting to feel the impact of price inflation.

Impact outpacing wage growth.

Yeah.

Also in our lending business.

Higher cost of funds could put pressure on our margins, especially if lenders don't adjust pricing in response, and we're already seeing that in the auto business.

By the way in the card business just as a comparison.

I've been struck by generally the risk.

Responsiveness of the pricing and the card business to be responsive Lee adaptive too.

Our interest rates I mean, it's a variable rate product, but also just in terms of the offered rate by competitors.

That seems to have moved much more dynamically than what we've seen selectively and auto.

You know then you know other things about the impact of interest rate increases, let me think we've got the.

You know you can sometimes see lower demand for credit products.

Just because headline pricing.

<unk> are higher even even its a real pricing isn't.

Hum.

And.

You know and in our in our underwriting, but well let me just say one thing and you you put your finger on it.

Striking thing right now is how low the unemployment rate is.

And.

We have certainly seen an hour.

Modeling of credit over over all the decades, we've been doing this at capital one.

From a macroeconomic point of view the biggest direct driver of credit losses is unemployment.

And.

So we start in a in a very strong position now but to your point.

You know there is irony in the strength of this position and it could contribute to it.

Some of the effects you identified.

I do want to also just while we're on the subject of inflation, though just highlight a few favorable effects of inflation as well.

Existing debt levels will decrease in real terms in a period of sustained inflation high.

Hi vehicle values, which support auto credit may be more sustainable in a high inflation environment.

But in total I think the effects.

Definitely in the negative direction. So you know it's a it's a tough thing to model collectively all of these things, but what we do is we.

We start with sort of a general theory of how this stuff works.

We.

Try to incorporate it into the the the.

Decision, making that we do and then like a hawk, we look for these various effects to happen.

And are prepared to be.

Be responsive and in fact, just the one last thing I want to say is I've always felt that.

It's very hard to predict economic cycles, I don't think capital one is in a better position than anyone else to predict economic cycles, sometimes you've seen his way and in predicting credit.

It goes which can be correlated but not the same thing as that but the most important thing that what I take away from years of doing this is.

It is very hard to predict these cycles. The key thing is to underwrite to.

A resist resilience level to make it very successfully through.

Cycles, and that's been a cornerstone of our strategy actually since their founding day of capital one.

That's super helpful. Rich. Thank you for taking my question I'll, let others jump in thanks.

Yeah.

Great next question please.

Our next question comes from Rick Shane with J P. Morgan.

Thanks to everybody for taking my question.

Rich when I sort of piece together everything that I'm hearing in looking at the numbers.

Yeah.

If we particularly focus on the growth and the reserve movements at the consumer lending business, the credit card business and the commercial lending business.

Kind of feels like you are diverging and your outlook in terms of the credit card business outperforming the.

The other businesses likely from our perspective is that because of competitive pressures or is there something.

Your line that Youre seeing that would cause that divergence.

So.

Rick I don't know if we explicitly.

Run around with a.

I wouldn't say our view is that.

Historic as you say, it but I I think that we.

We certainly feel the most bullish about the card business, let's talk about why for a second first of all just as a business and with the with the business model capital one has with the resilience shown.

Through several downturns now.

And the power of leveraging data and analytics and mass customization to that business I think that.

You know we feel.

Particularly high level of resilience in that business and that has been demonstrated in the past and if anything I think that the technology transformation and some of the continued choices. We've made like dialing back from high balance revolvers, and other things has and and as I said, the the whole heavy spend.

Or a push I think but capital one and actually an even stronger position from a resiliency point of view.

Also in terms of what we.

I see going on with the <unk>.

In the business there is.

Normalization, but but it is really quite gradual by the way the normalization is gradual.

Cros.

You know across all of our businesses.

But.

The but I want to point out just a bit of a math point.

In auto for example.

Auto is normalizing gradually so is card.

But.

And the front book with respect to auto and and card which are both.

Normalizing faster than the back book are by the way I've seen that universally whenever theres normalization, one always sees it more in the front book than it is seasoned back books.

But.

If you think about auto has an average life of like two years and credit card.

Last much longer than that.

And so.

As there is front book normalization.

The replacement speed in the portfolio in auto is much faster than in card. So even for the same amount of normalization in those two businesses in say the front book Youre going to get a <unk>.

Just mathematically faster normalization in order so it is our expectation.

It it would be surprising to us if that weren't the case.

More just because of the math of.

Replacement of a you know more rapidly turning over our portfolio.

We certainly card is the business. We're most bullish about is someone that we're leaning hardest into and you'll notice. Our story here. We're not our story is not a universal one that says.

You know I know, there's a lot of uncertainty out there, but we feel great about growth. So we're leaning into it everywhere you can see an example of what you've seen over the years of how capital one works.

Everything is choices that is made at the margin locally I mean.

And in various businesses and the fact that in auto we're pulling back pretty significantly as we've talked about while leaning pretty hard in the card in certain parts of commercial.

As a window into.

That very phenomenon.

Yeah.

Rich thank you very much.

Thank you.

Rick.

Did you have a follow up question.

Okay. We'll go to the next no I placed Melinda.

Yeah.

Thank you next we'll hear from Sanjay suck Ronnie from K B W.

Thanks.

A question for Andrew.

Could you just talk about how you see the NIM progressing from here, obviously the rate outlook.

Just more rates than last quarter, maybe you can just talk about how youre seeing deposit betas progression and sort of how that plays through the NIM.

Sure Sanjay why don't I start with beta and just give a little bit of detail there and then feather it into the broader NIM.

Question, you asked and so when you look at our deposits.

Roughly 15% or a combination of commercial and brokered which have higher betas, but really the 800 pound gorilla is the something.

Something like 85%.

Of the deposits that are in retail so I'll focus, mostly there and I think looking back.

On history as a guide is a bit of a challenge in this cycle. So we've already seen 150 bps move in the first six months.

We're expecting another 200 or so over the next six and in the last rising cycle.

Took three and a half years to just get to 200 and in that first year. We moved 50 in total versus the $3 50, we might see this year.

And so I share that that context to say that you know faster and larger set of moves coupled with.

Quantitative tightening and the possibility of some competitors being a bit more aggressive to fund their loan growth all will play into how competitors behave in the overall level of deposits and so if I look at the last rising cycle, we were at something like 40.

And the last falling cycle, we were around 50.

But you know given the factors that I described a moment ago and it's hard to really pinpoint exactly what's going to transpire.

<unk> ahead, but I would think our cumulative data could be you know around or slightly above the last rising cycle.

And so in line with what you've seen historically beta moves.

<unk> slowly in the beginning to the first set of hikes.

And so this quarter you saw that we were high single digits.

But the planned rate hikes for the second half of the year likely going to pressure that beta up.

And so when I take that and factor it into our NIM.

You know outside obviously of the quarterly day count affects the tailwind to our NIM.

<unk> going to be the asset mix moving towards higher yielding assets like card and what we saw in this quarter by the way ending card loans grew faster than average.

So what you know the more that card is growing relative to other asset classes and the cash and investment portfolio and then just the broader asset yield increases from the higher interest rates. Those are things that are going to be tailwind. The headwinds are going to be the deposit costs not only from there.

Rising deposit betas that I, just described but also wholesale funding costs to the extent that we do more of that and depending on credit spreads in the marketplace.

But there isn't one dominant force in those factors from where we stand today. So I think they're all going to be pushing against one another and we're gonna see where where that nets out in the coming quarters.

Okay.

Just a follow up question for rich.

Obviously, there's been a massive dislocation in the Fintech space from a valuation standpoint, I'm curious if you think that presents opportunities for M&A for capital one.

Thanks.

Yeah.

Thanks Sanjay.

Capital one.

We've said for.

A number of years that unlike most banks were not on a quest to go by other banks.

And build our national banking franchise that way so.

And that really where we would do acquisitions it would really be of.

Either basically of tech companies themselves that bring a tech capability or our syntax that bring a.

Attack based capability right in our business.

Sweet spot.

We.

They have.

For that reason plus our great interest in learning from fin Techs, we have been you know very keen observers of that marketplace.

You know, we haven't seen much in the way of acquisitions from capital one.

Because of the breathtaking pricing that fin techs have had.

But certainly to your point as the pricing has crashed in that marketplace. We continue to watch.

Watch the market carefully and you know our strategy remains the same that we believe the capital one is.

Out of an ideal buyer for them for Fintech.

Because.

We have a modern tech stack and we built a company that feels very much like a tech company and I think you know us.

It's very well suited to acquire and assimilate and provide opportunity to the talent that comes in a tech acquisition. So that's sort of the principle behind it.

So we continue to look in the marketplace and.

You know that that's the primary acquisition interest in capital one has which is kind of different from I think most.

Banking institutions.

Yeah.

Great.

Question. Please.

Thank you next we'll hear from Don <unk> of Wells Fargo.

Hi, Richard I was wondering if you could.

Maybe talk about where you see more downside surprise risk on the credit spectrum.

It was at the lower end consumer or is it the affluent have you spend or.

I guess on the low end.

Can consumers really whether the strong inflation, particularly with unemployment softens a little bit.

Yeah.

Yeah.

So done.

Thank you for the you know lets talk to they start by just talking about the consumer.

Certainly.

I'm certainly struck by.

Starting point.

Of where the consumer is because the U S consumer remains quite healthy.

We see sustained improvements in consumer balance sheets coming out of the pandemic.

Let's see debt servicing burden has remained near multi decade lows.

The savings rate has dipped below pre pandemic levels over the past few months, but acute.

Accumulative savings over the last two years.

It remains a significant positive still for consumers on average.

We see higher bank account balances and higher household net worth across the income spectrum.

Okay.

Labor market demand remains exceptionally strong.

With record numbers of job openings and solid wage growth.

And in our own portfolio, we see continuing strength in our delinquency roll rates and recovery rates.

Despite signs of credit normalization, our credit metrics remain strikingly strong by any.

Standard.

Any historical standard so that that is the context that we see but to your point the big headwinds for consumers are price inflation and higher interest rates.

And inflation could erode the excess savings consumers accumulated through the pandemic, especially if price get increases continue to run ahead of wage growth.

Higher interest rates could push up debt servicing burdens. Although this effect is muted by the fact that most existing household debt is at fixed rate mortgages and auto loans. So I'm struck by the strong starting point for consumers.

As we look into the potential of the headwinds of our of inflation and more economic trouble and I would.

Contrast, this of course to the to the great recession or the global financial crisis.

Which where the consumer was in a much weaker position going into that.

Now.

The.

The strength of the consumer is pretty much across the board across the you know.

From the top of the market.

Into.

Into subprime and.

So I think the one thing that was striking is how sort of universal it is.

Okay.

But it is also the case that normalization is a bit more pronounced in subprime then it is higher than the market.

But these.

And these populations, though also improved more and more quickly earlier in the pandemic. So I think these trends.

Shouldn't be surprising.

So you know I think certainly.

Now now FICO score and income are not the same thing, but a lot of times people tend to you know.

The state saved them in the same breath hour.

Our subprime business is definition of late about people with FICO scores below a certain level.

But.

I think that.

You know the consumers starts in a strong place then we should probably expect normalization to be a little faster on the lower end.

And.

You know interestingly, if you switch to kind of income, which you know.

It was a different cut than than FICO certainly.

And income.

I'm struck by the fact that consumers.

The wage growth for the lower income consumers is there kind of the one category that lower income consumers, where their wage growth has been keeping up with it.

Inflation, but that.

I don't necessarily continue but that's also a position of strength, but pulling way up.

I think we see normalization a little faster in subprime.

I think in fact, we.

Already can see very modestly that effect.

But of course in our underwriting and the whole business model of capital one.

That's also where we have built in.

Kind of the biggest buffers of resilience. So we feel good about that part of the marketplace. We feel good really across the credit spectrum and continue to lean in to our marketing opportunity.

Got it thank.

Thank you.

Yeah.

Right next question please.

Our next question comes from Moshe Orenbuch with credit Suisse.

Great. Thanks, Rich you had mentioned that that.

But you saw good kind of increases in prices for new accounts across the spectrum, but at the same time, I guess rewards and upfront bonuses have also been very high as you could just talk about how youre seeing the kind of competitive environment, particularly for the.

The higher end consumer where youre spending a lot of that effort.

Okay.

Yeah, so competition.

In the rewards space is.

I'd say more intense than pre pandemic.

A bit more intense than pre pandemic levels, but largely unchanged in recent quarters.

So early spend bonuses in points offers were slightly more aggressive than in the first quarter and we continue to see certain offers come in and out of market.

Cash early spend bonuses are higher now than pre pandemic.

But it's been relatively stable at these elevated levels.

Basically mid.

Last year.

And then if we look at the baseline rewards earn rates, particularly in the cash back space.

They overall were probably more aggressive in the middle of 2021 as new products were being introduced but had been relatively calm.

Now we feel.

Great about our flagship products, we continue to be very pleased by consumers' response and engagement with them. We're very pleased with the launch of our adventure ex card.

I think if I pull way up Moshe one of the things that I I I.

So deeply believe and have experienced is that winning in the heavy spenders space.

I think it requires good products, but you can't win with good products.

Got it.

It takes a.

A lot more than that and you know the customer experience, it's specifically the digital experience.

The brand.

The a lot of experiential things that are that are sort of way beyond the product.

Or are part of the whole package and what we have said this is why we've been saying for years now that winning at the top of the market is not an in and out thing. It is a matter of choosing as a few players have done capital one being one of them that you know, that's that's where we're going and we're going to continue to lean into that.

And I have been struck by the sustainable.

Sustainable.

<unk> that we've been generating and.

And and also the marketplace, while very intense hasnt tipped over to being unreasonable or a rational so it's very competitive.

But I continue to.

Really like our opportunity in that space.

Yeah.

Maybe just as a follow up.

The yields for the last four quarters in your card business has been pretty flat.

The yields on the loans are up a little bit this quarter I guess with the rate increases that you talked about but what is it really going to take to get that should be a higher number as it is it are you can see more revolving from some of your high end consumers.

What is it going to.

You know to get that.

The level of revenue growth and Oh.

And profitability.

Against.

Hey, Moshe it's Andrew I mean, I think if you put the card yield in the context of our longer term history looking a year a year ago, it's up 100 basis points.

And that's really been a shift to a higher mix of assets in our branded book.

Which is both growth of existing customers and the success. We're seeing in the originations are that that rich talked about and as we sit here today and looking over the last few quarters. We're also seeing a modest uptick in fees from the very low levels.

Last year, and so driven by the delinquencies that are have ticked up very gradually year over year, but I think having a.

Our yield at these levels.

Is.

That has has sustained but to your point of how can we we drive it up I think we're seeing an.

And impact from rate changes that that's been a bit of a tailwind on the yield side, but clearly that comes with a funding cost that ultimately will probably leave margin much closer to flat.

Thank you very much.

Next question please.

Our next question comes from Aaron's again as intra city.

Sorry, I was muted.

Thanks for the question I just wanted to follow up on that last point.

You're talking about the benefits of some of these super Prime Spenders and I guess one of the aspects.

I guess less challenging or less beneficial is that.

Youre, not really revolving or they don't tend to revolve nearly as much because of that spend velocity, so high and they pay down each month.

Do you think about that customer base growing over time would that just have a natural kind of downward pressure on on your domestic card yields.

Well it depends a bit on the degree to which there are revolving versus just pure transacting, but they're.

They're they're transacting, there, bringing a quite a bit of of interchange and relatively low outstandings overtime, so that very well could could prove to be a net positive and not create the downward pressure that you just described and not to mentioned the fab.

That in doing so it creates less of a capital need and so it ended up being over time at least.

A pretty capital efficient business, which is one of the reasons why we've been on this decade long journey to build that franchise.

Okay got it and then just on the deposit side. Your you had a modest decline kind of seasonal I'm, assuming that had to do with taxes.

You haven't really.

To your benefit I guess, it's not been a leader in terms of pricing on the online side.

Are you seeing kind of quarter to date.

An increase in deposits or do you expect that to be.

A little bit slower growth as we see the rate.

Rate hikes in Greece.

Well I'm not going to comment specifically on what we're seeing so far this quarter.

Let's take a step back and think about the industry context, and then talk a little bit about our strategy there.

As you look at the industry you brought up at least in retail the tax outflow phenomenon that happened in the second quarter, and we certainly felt a little bit of that.

But where industry deposit balances go from here you know first thing is at least history, whether it repeats itself, but wood.

Indicate that the rate of deposit growth drops in rising rate environment and in this particular cycle. The fed fund rates as I mentioned to Sanjay as question or both the larger and faster than previous ones and the fed's shrinking its balance sheet.

So who.

Who knows.

My guess is as good as yours, but I think we could see a scenario where the industry wide deposits are flattish to down in the near term and so what we choose to do there is really trying to optimize our balance sheet.

Across a number of different dynamics of liquidity and funding in tenor and pricing.

And so we feel like we're.

In a great position to compete in that industry backdrop with the.

Simple straightforward competitive products that have a a great user experience, but where our deposits. Ultimately go from here in the context of that industry will be a function of our deposit needs and competitive dynamics.

Aaron Let me just.

And that.

You know this is.

Wanted to underscore the strategy and capital one has had for years now which is.

We are building a national bank through.

Not by just you know acquiring.

Branches on every corner across the United States.

Nor by just having a national digital bank, but really building a in a sense full service digital bank.

That can provide.

Almost everything that you can get in a N a.

Local branch to provide it.

Nationally excuse me digitally.

And <unk>.

That is part of our strategy to build primary banking relationships.

Our digital first and digitally originated and it's all part of a larger strategy to build a consumer banking franchise.

That is not about.

Just yeah.

You know.

The highest rate paid but really about.

High quality products, a great customer experience and a full service set of capabilities, where people can really move their full banking relationship and then also have savings deposits there.

And you know and one of the one of my comments that I made about our marketing.

Level, which everybody notices are high is one thing we've continued to invest in over time as capital one as it.

As a company that doesn't have branches on every corner and we've got branches on some corners.

But.

A greater proportion of our expenditures are on the marketing side or on the brand building side and to some extent on the tech side as well.

But it is very much a in service of.

Building a franchise of.

Our brand and our franchise that.

It enables us to dynamically grow our deposits at a very appropriate blended pricing and build long term loyal banking relationships and we're very pleased with the success we've had in that but we continue to invest there.

Much in that.

Okay.

Next question please.

Moving on to Betsy <unk> of Morgan Stanley .

Hi, good evening.

Thank you Betsy.

Andrew I just wanted to double.

Double click on the comments that you are making around the high transaction high trans actors, having lower capital intensity and Thats a function of them just being higher credit quality.

Shorter duration on the book is that basically what it's about or is there something more there.

No. It's really just the loss content of that that book Betsy.

Yeah, Okay, and then when you were going through the Jack on.

The capital Slide.

I think you mentioned, 11% as your CET one target.

And so given that there is.

Such demand for <unk>.

Spend and borrow right now.

Should we take your comments to mean that.

Its unlikely that youll be doing buybacks in the near future while this high loan.

Our loan growth.

[noise] period is upon us.

Well just to repeat a little bit Betsy of you know what I shared in my prepared remarks, there's just a number of factors.

To consider you know just aren't forecasted level of capital and earnings and growth, but we need to put those things.

In the context with a particular eye to the Arab bars around those estimates and so what I was mostly trying to highlight is if you look back a year ago. We were at 14, 5% CET one that's down to 12, one this quarter.

<unk> and <unk>.

So we're getting much closer to that 11% level.

And at a time when there are a number of uncertainties given the economic environment and the growth opportunities are.

Those error bars, just start to matter more and so we slowed down a bit in the second quarter, but as always is the case managing capital both conservatively and efficiently is top of mind for us and so looking ahead, we're just going to dynamically adjust.

Our pace in the context of those evolving factors.

Right. Okay. Thank you.

Next question please.

Our next question comes from Dominic Gabriel of Oppenheimer.

Hey, Thanks, so much for taking my question.

I was wondering if you could provide us with a breakdown of your <unk>.

And remind us of your domestic card spending by retail category as a percent of total spend within domestic card, so grocery or community or gas whenever whenever you could provide would be excellent I would just think that as you're targeting the higher spenders has probably had an effect on that in the mix.

Over the last 10 years has that changed any color you can provide would be great. Thanks.

Hey, Hey, rich anytime you, sorry, sorry, sorry.

I have in.

Front of me I don't think it's the exact thing you're asking but I have in front of me so.

Growth rates.

In fact, they're seeing growth since versus 2019 of a bunch of categories that I find pretty fascinating but.

This is not this is in our own mix as well, but you know these things in fact.

Yes, but.

Gas, 90% now by the way.

This is <unk>.

This includes grows by capital one overall, there's been significant growth.

Our whole business, so, but just some relative comparisons.

Travel.

26%, although travel is second the gas if I look at year over year growth.

Only gas as a category has grown more so gas is up 54% year over year.

The travel is up 42%.

Year over year those are swamping most of the other categories there.

But.

Travel was way the laggard during the downturn and it's been you know.

Like I said other than then.

That then energy it has been the one that is really catching up quickly.

Yeah.

So.

What's what's striking is just how much these things vary across categories as the consumer.

Reacts to the environment.

Covid or energy costs and also.

You know it'll be interesting to see how much the consumer migrates to weather.

Two.

Between discretionary and non discretionary categories, we'll keep a close eye on.

On that one.

As things get a little tighter in the marketplace.

Great and then maybe just as a follow up.

Given just to take some of the conversation one step further around deposits and funding.

Given the amount of card growth that you're seeing in and building out this franchise, but the slowing deposit growth is it reasonable to assume that.

As a as.

As a management team you would really look to focus on growing this business first regardless of perhaps the funding cost trade off between deposits and non deposit funding because really you're just gaining more customers within your card franchise and you would make that trade. Thanks, so much.

Yeah, So first pulling up.

Loss on us that that our assets are growing rapidly right now all banks are growing more slowly in deposits.

So.

We.

You know I I think that I mean, this is a natural thing that happens at this part of the cycle.

So that's why I made my earlier comments about being very pleased that we have already been leaning into.

Having a deposit franchise and being in a position.

Two.

You know build primary banking relationships.

To grow savings accounts to have the brand as a company that will.

You know have.

You know attractive savings rates, but not to have to go generate all our business off of.

You know the bank rate tables kind of.

Marketplace, so, but with respect to the economics.

I think the card margins or such.

That.

That.

You know.

It is hard to imagine.

That we wouldn't continue to make the trade that.

Even if even if we have to pay more for deposits, we would would not turn down the growth opportunity. So long as the deposits are available and they're there.

It's going to be a good trade to continue growing that card business as far out as we can see.

Because of the.

Particularly robust economics that come with our card franchise.

But just just to finish finish off at that point I'm, sorry, but we but we also like being in a position as a national bank with National brand for digital banking that we're in a position to.

Gather the deposits we need in order to fund that kind of growth opportunity that we have at a time when.

It's going to get harder to grow deposits at this part of the cycle.

Yes.

Great well. Thank you everyone for joining us on this conference call today and thank you for your interest in capital one.

The Investor Relations team will be here. This evening to answer your questions. If you have any and have a great evening.

Thanks, everybody.

Right.

And that does conclude today's conference. We do thank you for your participation you may now disconnect.

Yes.

Yeah.

[music].

[music].

[music].

Good day, everyone and welcome to the capital one second 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 session.

If you would like to ask a question. During this time simply press the star key followed by the digit one on your telephone keypad. If you would like to withdraw your question. Please press the star key followed by the number too.

Thank you I would now like to turn the call over to MS. Danielle Dietz, managing Vice President of Global Finance. Please go ahead ma'am.

Thank you very much Melinda and welcome everyone to capital one second quarter 2022 earnings conference call as usual, we are webcasting live Tonight over the Internet to access the call. Please log on to capital one's website at capital one got com and follow the links from there.

In addition to the press release and financial we have included a presentation summarizing our second quarter 2022 results.

With me today are Mr. Richard Fairbank capital one's Chairman and Chief Executive Officer, and Mr. Andrew Young capital ones Chief Financial Officer.

Rich and Andrew will walk you through this presentation to.

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 forward looking statements contained in today's discussion and the materials speak only as of the particular date or dates indicated in the material.

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

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

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

Now I'll turn the call over to Andrew.

Thank you Danielle and good afternoon, everyone I'll start on slide three of Tonight's presentation.

In the second quarter capital, one earned $2 billion or $4.96 per diluted common share.

On a linked quarter basis.

And loans held for investment grew 6% and average loans grew 4%.

Driven by growth across all of our segments.

Revenue in the linked quarter increased 1%.

Or 3% after accounting for the $192 million gain on sale recognized in the prior quarter.

Noninterest expense grew 1% in the quarter driven by an increase in marketing, which was partially offset by lower operating expenses.

Provision expense in the quarter was $1 $1 billion drip.

Driven mostly by net charge offs of $845 million and a 200 million dollar allowance build.

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

The total company's 200 million dollar allowance build in the quarter brings our allowance balance up 2% to $11 5 billion as of June 30th.

Our total company coverage ratio decreased 15 basis points to 388%.

The changes in allowance coverage ratio varied by segment, which I'll cover on slide five.

Yeah.

Across all our businesses loan growth and a worsening economic outlook drove upward pressure on allowance.

In our consumer banking segment, the allowance balance increased by $145 million.

The coverage in consumer banking increased 14 basis points to 251%.

Yes.

In our commercial banking business, the allowance increased by $152 million.

The coverage in commercial banking increased five basis points and now stands at 136%.

In addition to the allowance build there was also $39 million of provision related to unfunded lending commitments.

In our domestic card business, we released $128 million of allowance despite the effects of the growth and worsening economic outlook I previously mentioned.

We have seen some signs of gradual normalization in our card credit metrics, but so far the pace of that normalization has been slower than what we assumed when we set last quarter's allowance.

The impact of this slower than assumes normalization more than offset the growth and worsening economic outlook, leading to the allowance release.

We continue to carry elevated levels of qualitative reserves for downside risks related to economic uncertainty.

The coverage ratio for domestic card now stands at $6 eight 2%.

Turning to page six I'll discuss liquidity.

You can see our preliminary average liquidity coverage ratio during the second quarter was 144%.

Well above the 100% regulatory requirement.

Total liquidity reserves declined $17 billion in the quarter.

Our liquidity normalizes towards pre pandemic levels.

Cash and cash equivalents declined about $5 billion and now stands at 22 billion.

We also had a $6 billion decline in our securities portfolio driven by the combination of the Mark from rising interest rates.

And the continued run off of the outsized portfolio built during the pandemic.

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

Net interest income in the quarter was $6 $5 billion up 13% from the year ago quarter and up 2% from the sequential quarter.

Our second quarter net interest margin was 654%.

65 basis points higher than the year ago quarter, and five basis points higher than the prior quarter.

Relative to a year ago. The increase in NIM is largely driven by a balance sheet shift as we continued to deploy excess cash and securities into loan growth.

The linked quarter increase in NIM was driven by an additional day to recognize revenue.

Higher yields on assets in the quarter were offset by higher wholesale funding and deposit costs.

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

The impact of interest rates beyond forward wholesale funding costs and the impact of competition on loan yields and deposit betas.

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

Okay.

Our common equity tier one capital ratio was 12, 1% at the end of the second quarter.

Down about 60 basis points from the prior quarter.

Net income in the quarter was more than offset by share repurchases and growth in risk weighted assets.

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

In the quarter, the pace of our repurchases slowed to about $2 billion.

The pace of any future repurchases will be driven by a number of factors, including our actual and forecasted capital earnings growth economic conditions and market dynamics.

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

Thank you Andrew and good evening, everyone I'll begin on slide 10, with second quarter results and our credit card business.

Year over year growth in purchase volume and loans, coupled with strong revenue margin.

Drove an increase in revenue compared to the second quarter of 2021.

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

As shown on slide 11.

Our domestic card business posted another quarter of strong year over year growth in every top line metrics purchase volume for the second quarter was up 18% year over year and up 48% compared to the second quarter of 2019.

Ending loan balances increased $19 $7 billion or about 21% year over year.

Ending loans grew 6% from the sequential quarter.

And revenue was up 21% year over year, driven by the growth in purchase volume and loans as well as strong revenue margin.

Strong credit results continued in the quarter, both the charge off rate and the delinquency rate continued to gradually normalize but remain well below pre pandemic levels. The domestic card charge off rate for the quarter was $2 two 6% a two basis point improvement.

Year over year, the 30, plus delinquency rate at quarter end was 2.35% fixed.

67 basis points above the prior year on a linked quarter basis. The charge off rate was up 14 basis points roughly in line with normal seasonal patterns. The delinquency rate was up three basis points from the linked quarter, which we are.

When we typically see model modest seasonal improvement.

Noninterest expense was up 28% from the second quarter of 2021.

Given by an increase in marketing.

Total company marketing expense was about $1 billion in the quarter.

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

The primary non card driver of increased marketing is in our consumer banking business, where we're marketing to drive deposit growth and build customer franchise and our digital first national banking strategy.

In our domestic card business, we continue to see opportunities to book accounts alone that can generate resilient and attractive returns and we continue to lean into marketing to drive growth and build the franchise across our domestic card businesses.

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

We're seeing the success of our marketing and strong growth in purchase volume new accounts and loans across our domestic card business.

And we continue to gain traction in our decade long focus on heavy spenders.

In the second quarter heavy spending heavy spend or marketing.

Includes increased early spend bonuses driven by strong first quarter account growth and spending as well as investments in franchise enhancements like our travel portal and airport lounges.

As a result of our marketing we posted strong growth in the heavy spender accounts and strong engagement and spend behaviors with new and existing customers. We're gaining share in building a long term franchise with heavy spenders at the top of the market.

Pulling up our heavy spender franchise has a different economic mix than some of our other card businesses.

It has significantly higher upfront costs of brand building marketing and promotions and investments in high end experiences. However, the long term economics are compelling and as our heavy spender franchise has grown significantly in recent years its impact has quietly and.

Gradually changed several domestic card metrics and financial results.

Have you spend your credit losses are low, which lowers overall domestic card loss rate all other things being equal.

Naturally high heavy spender payment behaviors are a key driver of our long term trend of increasing domestic card payment rate and the high payment rates go hand in hand with strong credit performance.

Heavy spender attrition is very low and that's been a factor in our strong domestic card loan growth.

Heavy spenders have a particularly large impact on increasing purchase volume and have been a major driver of strong domestic card purchase volume growth that is generally exceeded loan growth overtime.

This spend velocity has driven increases in net interchange revenue in absolute terms and as a percentage of total revenue.

And these interchange fee revenues revenue annuities are a strong and sustained over a very long term customer relationships.

Our heavy spender franchise generated financial results that are attractive less volatile and very resilient.

As a result, the heavy spender business requires less capital and delivers strong long term returns on capital.

Anyway, or 10 year quest to build our heavy spender franchise has brought with it significantly increased levels of marketing, but the sustained revenue credit resilience and capital benefits of this enduring franchise are compelling and they're growing.

Slide 12 shows second quarter results for our consumer banking business.

In the second quarter choices, we made in our auto business impacted several consumer banking trends.

We pulled back on growth in auto in response to competitive pricing dynamics.

As you would expect many auto lenders have raised pricing as rising interest rates drove higher marginal funding cost.

But some others.

Have kept pricing relatively flat.

These competitors have gained market share and pressure in the industry margin.

We chose to pull back on auto originations, which declined 20% year over year and 12% from the linked quarter.

As we pulled back on originations the year over year growth of ending loans in the consumer banking business decelerated to 9% in the second quarter on a linked quarter basis, ending loans were up 1%.

Second quarter ending deposits in the consumer bank were up 2% year over year aided in part by the transfer of a small portfolio of deposits from our commercial bank consumed.

Consumer banking.

Deposits declined 1% from the sequential quarter.

Consumer banking revenue was essentially flat compared to the prior year quarter as growth in auto loans was offset by the effects of our decision to completely eliminate overdraft fees and the year over year decline in auto margins auto margin compression was primarily driven by the increase.

And our marginal funding cost.

Resulting from rapid interest rate increases and the aggressive competitor pricing.

With that I just discussed.

Noninterest expense was up 15% compared to the second quarter of 2021, driven by the increased marketing for our digital National Bank and continuing investments in the digital capabilities of our auto and retail banking businesses.

Second quarter provision for credit losses swung from a net benefit of $306 million in the second quarter of 2021.

Two a net expense of $281 million.

We added to the allowance for credit losses in our auto business in the quarter compared to an allowance release in the year ago quarter.

The auto charge off rate and delinquency rates continue to gradually normalize, but we remain well below pre pandemic levels. The charge off rate for the second quarter was 0.61% up 73 basis points from the unsustainably low in fact negative quarterly charge offs.

A year ago.

The 30, plus delinquency rate was 4.47% up 121 basis points year over year on a linked quarter basis. The charge off rate was down five basis points and the 30, plus delinquency rate was up 62 basis points.

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

Second quarter, ending loan balances were up 9% from the sequential quarter.

Average loans increased 5%.

Growth in selected industry specialties drove our growth.

Ending deposits were down 14% from the first quarter and down 10% year over year driven in part by the transfer of a small portfolio of deposits to a retail bags that I mentioned, a few moments ago as well as rate driven runoffs at some customers withdrew deposits in search of higher returns in the set.

Quarter deposit balances were also impacted by seasonal outflows.

Second quarter revenue was up 3% from the linked quarter and 26% from the prior year quarter.

Noninterest expense was down modestly from the linked quarter and up 16% year over year.

Provision for credit losses increased $214 million from the first quarter, largely driven by a build in the allowance for credit losses.

Commercial banking credit remained strong in the second quarter, the commercial banking annualized charge off rate was 14 basis points. The criticized performing loan rate was five 3% and the criticized nonperforming loan rate was 0.7%.

In closing we continued to drive good growth in card revenue purchase volume and loans in the second quarter consumer banking loan growth continued, albeit at a slower pace and our commercial banking business posted strong growth in loans and revenue.

Credit results remain strong across our businesses with charge off rates and delinquency rates well below pre pandemic levels, even as credit continues to gradually normalize.

And we continued to return capital to our shareholders.

For more than three decades, we have hardwired resilience into every underwriting and growth choice, we make in good times and bad and we have steadfastly focused on building an enduring franchise.

Sticking to these core tenants, we've demonstrated resilience through several cycles, we've been in a strong position to seize opportunities as market evolved and as cycles played out and we've delivered significant value over the long term.

And we're living by these same core tenants today we.

We continue to see opportunities to lean into marketing and resilient asset growth that can deliver sustained revenue annuities long after the normalization trends and cyclical credit pressures play out.

We're confident in the choices, we're making.

As we continue to closely monitor and assess competitive dynamics and increasing economic uncertainty.

Our credit results remain strong.

We're staying focused on the most resilient businesses and sub segments and we're continuing to hone the proprietary underwriting and product structures that have driven our resilience through prior cycles. All of these growth and credit risk management choices are enhanced by our technology transformation.

We're managing costs tightly even as we continue to invest in transforming our technology and digital capabilities that are the engine of future growth and efficiency, while the imperatives of marketplace opportunities and risks impact the timing, we remain focused on delivery delivering operating leverage over.

The long term powered by growth and digital productivity gains.

And we're managing capital prudently to put ourselves in a strong position to weather a broad range of possible economic scenarios and to emerge in a strong position to capitalize on opportunities that are often generated as cycles play out.

Pulling way up we believe that our long standing core tenants and the choices. They drive today are putting us in a strong position to continue to deliver resilient and compelling long term shareholder value as the sweeping digital transformation of banking continues.

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

Danielle.

Thanks, Brett we will now start the Q&A session as a courtesy to other investors and analysts who may wish to ask a question. Please limit yourself to one question plus a single follow up question.

If you have any follow up questions. After the Q&A Q&A session on the Investor Relations team will be available after the call.

Linda please start the Q&A session.

Thank you if you would like to ask a question. Please signal by pressing star one on your telephone keypad. If you are using a speaker phone. Please make sure. Your mute function is turned off to allow your signal to reach our equipment.

Once again that is star one to ask a question.

And we will go first to Ryan Nash of Goldman Sachs.

Yeah.

Hey, good evening everyone.

Good evening Ryan.

Rich.

Maybe just to start off on marketing, which was up again sequentially.

Have we seen the peak impacts of the early bonuses and maybe just more broadly.

Are you guys still leaning in and maybe you can just talk about the decision in the context of where we are in the economy with inflation and maybe are you pulling back in any pockets just given what's going on across the customer base.

Ryan we are.

On the on the early bonuses I mean, that's really tied to you know.

How hard we lean.

Lean into adventure X for example, I mean, we have early spend bonuses.

Pretty much across our rewards business so let.

Let me separate a little bit so we have the launch of venture acts and some companies launches or sort of you know a quarter long kind of thing we continue to lean into that you've seen our national advertising continue on that so.

You know the early spend bonuses continue as part of that and.

And then also there early spend bonuses at a as you know is.

Stable rate for.

For the some of our other rewards products as well.

You know with respect to the economy.

We.

It's not lost on us that there is a lot of noise out there in the economy and we every day, we talk about this.

And you.

You know there's.

There's always uncertainty, there's probably I think more uncertainty.

At the moment and probably on average and that's not lost on us.

We.

So we don't make a top of the house decision that says we're going to spend this much on marketing because these decisions are.

Very.

You know decisions at the margin you know based on models and and.

Estimated loss rates and putting resilience factors in there in response rates in a lot of things.

There has been some trimming around the edges.

In card quite a bit more so in auto by the way as I talked about just a few minutes ago, but staying with card for a minute. There there has been some trimming around the edges, but but generally you know the kind of core <unk>.

Target.

Segments that we've been going after we are.

<unk> to feel good about and lean into.

So.

I think your net impression should be that while we have a very watchful eye on the economy and obsessed about it every day.

Our underwriting decisions underwrite systematically at capital one we underwrite to.

Worsening scenario and so we feel good about our originations and.

You know, but one thing about our tech transformation that has really been good also is it allows us to move and adapt much more quickly.

And most companies and frankly in some of our past years, when we decided to turn it sometimes took quite a bit.

Quite a bit of time to move the whole machine, we've been able to create a much more adaptive and responsive.

No infrastructure at capital one and so that's also helpful in a time of uncertainty but.

Net net we feel good about the opportunities and we're leaning into them.

Yeah.

Next question please.

Thank you next we'll hear from Kevin Barker of Piper Sandler.

Thank you very much.

Could you further discuss some of the things that you are seeing on the auto sector, just given where it's been throughout 2021, where we saw really good performance and then now it just seems like.

The combination of rising delinquency rates on responsive yields and just.

Some softening in used car prices are really impacted can you just give us an outlook of what your expectations are.

And how capital wanted to react through this year and potentially in a recessionary environment in 2023. Thank you.

Rich I think you need to on mute yourself.

Oh, sorry, sorry.

Kevin Thank you.

The.

The auto business is one that I mean, we're still.

We still see significant opportunity in the auto business, but of course, what we always share with investors is how we're feeling at.

At the moment and at the margin so the.

The.

The biggest at the moment the thing that that we wanted to share with you is how the competitive environment feels.

And.

You know, we we've been saying for some time that the low charge offs. We worry that you know too long of a period of low charge offs and too long of a period of.

In many ways Unsustainably high.

Used car prices can do.

All the senses of players in the auto industry and caused a weakening and underwriting we haven't really.

Seen that that's not the primary story that we see we certainly are on the lookout for that is the story has really been more a hijacked if you will hold by that what's happened with inflation and the significant increase in AR.

Four four.

Okay.

No in four companies and and in cost of funds.

And most auto players and certainly the money center in particular.

Have.

You know moved up their pricing.

Very consistently and responsibly to the increases.

And you know the.

Underlying.

Cost of funds in the economy.

And what is striking is that.

Some competition has not there are a few large there.

Large players.

Whose movement is in pricing as well behind that and then you have the credit unions, who have I think a very different kind of business model in a different way to calculate what their funding costs is the credit unions have.

Really not not moved at all in terms of their pricing and they've had actually a very significant increase in market share.

So.

We.

We.

We continue to be very dedicated to the auto business. We have relationships with dealers were not this is not like a huge pull back but what we're doing at the margin.

Is with the tighter.

Tighter margins that now at least temporarily exist in the business for us that has led us to trim around the edges. That's I think the biggest.

Story that we would say in auto.

The other thing is used car pricing, let's talk just a little bit about.

That Kevin.

Vehicle values remains strikingly high and obviously well above pre pandemic levels.

And supply constraints remain the biggest factor supporting high vehicle values.

Okay.

And <unk>.

Everything that we see suggests vehicle production will remain constrained in the near term.

And even when production normalizes I think it will take time for dealers to rebuild their inventories so probably the nearer term outlook.

You know it is pretty good with respect to used car values, but if I pull up.

Concern that I've often voiced is.

You know that from an underwriting point of view, what what really matters is not the absolute level of car <unk>.

Lateral values, but the.

Relative value of collateral values versus the underwriting assumptions that a lender made.

So we assume significant declines in collateral values in our underwriting but.

You know, we we we have a watchful eye on an industry that for quite some time now as it has been.

Hopefully not getting used to.

The used car prices better at relatively are at record levels versus anything we've seen in the past so.

Thanks.

The auto opportunity continues to be.

Significant one for capital, one, but particularly driven by.

Pricing, which which made by the way ameliorate for certainly everyone except the.

The credit unions in a relatively short period of time, but until then we will continue to.

Be pretty tight around the edges and we wanted to share that with you.

Okay.

Okay.

Okay alright, thank you.

Yeah.

Next we'll hear from Bill car cash of Wolfe research.

Thank you good evening Rich capital one has long been known for rich Rich information based analytics. How are you thinking about the risk that the strength, we're seeing in the consumer and labor markets is in and of itself inflationary and could lead us to have to do more and since the impact of fed hikes tends to be lagged.

<unk> tends to continue to increase well after peak fed funds, maybe can you talk a little bit about how this dynamic feeds into costs underwriting and reserving models.

Okay. So.

Well, thanks, let's just kind of pull up and talk about.

Inflation.

We haven't seen is sustained inflation in the U S in many decades, but.

It's been running above 5% for over a year now and it reached.

Nine 1% in June and producer prices are increasing.

Even faster.

Of course, the fed has started raising rates and response in the market.

It expects further increases.

So what I wanted to do is is maybe a.

List some of the potential impacts to our business.

Sustained in place and installation and it's mostly negatives.

The economy suffers as a result of efforts. This low inflation, we will certainly feel that and the biggest way that we would feel that would be in.

No consumer credit losses.

Consumers also we're already starting to feel the impact of the price inflation.

Impact outpacing wage growth.

Also in our lending business.

Higher cost of funds could put pressure on our margins, especially if lenders don't adjust pricing in response, and we're already seeing that in the auto business.

By the way in the card business just as a comparison.

I've been struck by generally the risk.

Our response isn't us of the pricing and the card business to be responsive Lee adaptive too.

Our interest rates I mean, it's a variable rate product, but also just in terms of the offered rate by competitors.

That seems to have moved much more dynamically than what we've seen selectively and auto.

Yeah.

Then you know other things about the impact of interest rate increases, let me think we've got the.

You know you can sometimes see lower demand for credit products.

Just because headline pricing.

<unk> are higher even even if a real pricing isn't.

Hum.

And.

Okay.

And in our in our underwriting.

Let me just say one thing and you you put your finger on it.

Striking thing right now is how low the unemployment rate is.

And.

We have certainly seen an hour.

Modeling of credit over over all the decades, we've been doing this at capital one.

From a macroeconomic point of view the biggest.

Direct driver of credit losses is unemployment.

And.

So we start in a in a very strong position now but to your point.

You know there is irony in the strength of this position and it could contribute to.

Some of the effects you identified.

I do want to also just while we're on the subject of inflation, though just highlight a few favorable effects of inflation as well.

Existing debt levels will decrease in real terms in a period of sustained inflation.

Hi vehicle values, which support auto credit may be more sustainable in a high inflation environment.

But you know.

In total I think the effect tilton definitely in the negative direction. So.

It's a tough thing to model collectively all of these things, but what we do is.

We start with sort of a general theory of how this stuff works.

We.

We try.

<unk> tried to incorporate it into the <unk>.

The.

Decision, making that we do and then like a hawk, we look for these various effects to happen.

And are prepared to.

Be responsive and in fact, just the one last thing I want to say is I've always felt that it's very hard to predict economic cycles. I don't think capital one is in a better position than anyone else to predict economic cycles, sometimes you've seen his way in predicting credit cycles, which can be correlated but not the same thing as that but.

The most important thing that what I take away from years of doing this is.

It's very hard to predict the cycles of the key thing is to underwrite to.

A reserve resilience level to make it very successfully through.

Cycles, and that's been a cornerstone of our strategy actually since the founding day of capital one.

That's super helpful. Rich. Thank you for taking my question I'll, let others jump in thanks.

Yeah.

Great next question please.

Our next question comes from Rick Shane with J P. Morgan.

Thanks to everybody for taking my question, Hey, rich when I sort of piece together everything that I'm hearing I'm looking at the numbers.

Yeah.

If we particularly focus on the growth and the reserve movements at the consumer lending business, the credit card business and the commercial lending business.

Kind of feels like you are diverging and your outlook in terms of the credit card business outperforming the.

The other businesses likely from our perspective is that because of competitive pressures or is there something.

Your line that Youre seeing that would cause that divergence.

So.

Rick I don't know if we explicitly.

Run around with a.

I wouldn't say our view is that.

Historic as you say, it but I I think that we.

We certainly feel the most bullish about the card business, let's let's talk about why for a second first of all just as a business and with the with the business model capital one has with the resilience shown.

Through several downturns now.

And the power of leveraging data and analytics and mass customization to that business I think that.

You know we feel.

Particularly high level of resilience in that business and that has been demonstrated in the past and if anything I think that can that technology transformation and some of the continued choices. We've made like dialing back from high balance revolvers, and other things has and and as I said, the the whole heavy spend.

Or a push I think put capital one and actually an even stronger position from a resiliency point of view.

Also in terms of what we.

I see going on with the <unk>.

In the business there is.

Normalization, but but it is really quite gradual by the way the normalization is gradual.

Cross.

You know across all of our businesses.

But.

The but I want to point out just a bit of a math point.

In auto for example.

Auto is normalizing gradually so as card.

But.

And the front book with respect to auto and and card which are both.

Normalizing faster than the back book here by the way I've seen that universally whenever theres normalization, one always sees it more in the front books and in season back books.

But.

If you think about auto has an average life of like two years and credit card.

Last much longer than that.

And so.

As there is front book normalization.

The replacement speed in the portfolio in auto is much faster than in card. So even for the same amount of normalization in those two businesses in say the front book Youre going to get.

Just mathematically faster normalization in order so it is our expectation.

It would be surprising to us if that weren't the case.

More just because of the math of.

Replacement of a you know.

More rapidly.

Turning over a portfolio.

So we certainly card is the business. We're most bullish about is someone that we're leaning hardest into and you'll notice. Our story here. We're not our story is not a universal one that says.

You know I know, there's a lot of uncertainty out there, but we feel great grip outgrowth that we're leaning into it everywhere you can see an example of what <unk> seen over the years of how capital one works.

Everything is choices that is made at the margin locally I mean.

In in various businesses and the fact that in auto we're pulling back pretty significantly as we've talked about while leaning pretty hard in the card in certain parts of commercial.

As a window into.

That very phenomenon.

Yeah.

Rich thank you very much.

Thank you.

Right.

Mike did you have a follow up question.

Okay, well go to the next no I placed Melinda.

Yeah.

Thank you next we'll hear from Sanjay suck Ronnie from K B W.

Thanks.

Question for Andrew.

Could you just talk about how you see the NIM progressing from here, obviously the rate outlook.

Just more rates than last quarter, maybe you could just talk about how you are seeing deposit betas progression and sort of how that plays through the NIM.

Sure Sanjay why don't I start with beta and just give a little bit of detail there and then feather it into the broader NIM.

Question, you asked and so.

When you look at our deposits.

Roughly 15% or a combination of commercial and brokered which have higher betas, but really the 800 pound gorilla is something.

Something like 85%.

Of the deposits that are in retail so I'll focus mostly there.

And I think looking back.

On history as a guide is a bit of a challenge in this cycle. So we've already seen 150 bps move in the first six months.

We're expecting another 200 or so over the next six and in the last rising cycle.

Took three and a half years to just get to 200 and in that first year. We moved 50 in total versus the $3 50, we might see this year.

And so I share that context to say that you know faster and larger set of moves coupled with.

Quantitative tightening and the possibility of some competitors being a bit more aggressive to fund their loan growth all will play into how competitors behave in the overall level of deposits.

So if I look at the last rising cycle, we were at something like 40, and the last falling cycle, we were around 50.

But given the factors that I described a moment ago and it's hard to really pinpoint exactly what's going to transpire looking ahead, but I would think our cumulative beta could be you know around.

Around or slightly above the last rising cycle.

And so in line with what you've seen historically data moves pretty slowly in the beginning for the first set of hikes.

And so this quarter you saw that we were high single digits.

But the planned rate hikes for the second half of the year likely going to pressure that data up and.

So when I take that and factor it into our NIM.

Outside obviously of the quarterly day count effects.

The tailwind to our NIM are going to be the asset mix moving towards higher yielding assets like card and what we saw in this quarter by the way ending card loans grew faster than average.

So you know the more.

More of that card is growing relative to other asset classes.

The cash and investment portfolio, and then just a broader asset yield increases from the higher interest rates. Those are things that are gonna be tailwind the headwinds are going to be the deposit costs not only from the rising deposit betas that I just described but also wholesale funding costs to the <unk>.

Stent that we do more of that and depending on credit spreads in the marketplace.

But there isn't one dominant force in those factors from where we stand today. So I think they're all going to be pushing against one another and we're going to see where that nets out in the coming quarters.

Okay.

A follow up question for rich.

Obviously, there's been a massive dislocation in the Fintech space from a valuation standpoint, I'm curious if you think that presents opportunities for M&A for a capital one.

Thanks.

Okay.

Thanks Sanjay.

Capital one.

We've said for.

A number of years that.

Unlike most banks were not on a quest to go by other banks.

And build our national banking franchise that way.

So and that really where we would do acquisitions it would really be of.

Either basically of tech companies themselves that bring a tech capability or.

Syntax that bring a.

Attack based capability right in our business.

Sweet spot so we.

<unk>.

I have.

For that reason plus our great interest in learning from fin techs, we have been.

Very keen observers of that marketplace.

We haven't seen much in the way of acquisitions from capital one.

Because of the breathtaking pricing that fin techs have had.

But certainly to your point as the pricing has crashed in that marketplace. We continue to.

Watch the market carefully and you know our strategy remains the same that we believe the capital one is kind of an ideal buyer for them for fintech because we.

We have a modern tech stack and we built a company that feels very much like a tech company and I think.

Very well suited to acquire and assimilate and provide opportunity to the talent that comes in a tech acquisition. So that's sort of the principle behind it so.

So we continue to look in the marketplace and.

You know that that's the primary acquisition interest in capital one has which is kind of different from I think most banking.

Banking institutions.

Yeah.

Great.

Question. Please.

Thank you next we'll hear from Don <unk> of Wells Fargo.

Hi, Richard I was wondering if you could.

Maybe talk about where you see more downside surprise risk on the credit spectrum.

Is it the lower end consumer or is it the affluent have you spend or.

I guess on the low end.

Can consumers really whether the strong inflation, particularly refund employment softens a little bit.

Yeah.

Yeah.

So done.

Thank you for the let's talk let's start by just talking about the consumer.

Certainly.

I'm certainly struck by.

The starting point.

Of where the consumer is because the U S consumer remains quite healthy.

We see sustained improvements in consumer balance sheets coming out of the pandemic.

Let's see debt servicing burden has remained near like multi decade lows.

The savings rate has dipped below pre pandemic levels over the past few months, but acute.

Accumulative savings over the last two years.

A significant positive still for consumers on average.

We see higher bank account balances and higher household net worth across the income spectrum.

Labor market demand remains exceptionally strong.

With record numbers of job openings and solid wage growth.

And in our own portfolio, we see continuing strength in our delinquency roll rates and recovery rates.

Despite signs of credit normalization, our credit metrics remain strikingly strong by any.

Standard.

Historical standards, so that that is the context that we see but to your point the big headwinds for consumers are price inflation and higher interest rates.

And inflation could erode the excess savings consumers accumulated through the pandemic, especially if price increases continue to run ahead of wage growth.

Higher interest rates could push up debt servicing burdens. Although this effect is muted by the fact that most existing household debt is at fixed rate mortgages and auto loans.

So I'm struck by the strong starting point for consumers.

As we look into the potential of the headwinds of.

Of inflation and more economic trouble and I would.

Contrast, this of course to the to the great recession or the global financial crisis.

Which were the consumer.

Was in a much weaker position going into that.

Now.

The.

The strength of the consumer is pretty much across the board across the.

From the top of the market.

Into.

Into subprime and.

So I think the one thing that was striking is how sort of universal it is.

But it is also the case that normalization is a bit more pronounced in subprime then it is higher than the market.

But these.

And these populations, though also improved more and more quickly earlier in the pandemic. So I think these trends.

Shouldn't be surprising.

So you know I think certainly.

Now now at FICO score and income are not the same thing, but a lot of times people tend to you know.

The state saved them in the same breath hour.

Our subprime business is definition of late about people with FICO scores below a certain level.

But.

I think that.

You know the consumers starts in a strong place then we should probably expect normalization to be a little faster on the lower end.

And.

Interestingly, if you switch to kind of income which.

Is it different cuts and then FICO certainly.

And income.

I'm struck by the fact that consumers.

The wage growth for the lower income consumers is there kind of the one category or the lower income consumers, where their wage growth has been keeping up with it.

Inflation, but that wont necessarily continue but that's also a position of strength, but pulling way up.

I think we could see normalization a little faster in subprime.

I think in fact, we.

Already can see very modestly that effect.

But of course in our underwriting and the whole business model of capital one.

That's also where we have built in.

The biggest buffers of resilience. So we feel good about that part of the marketplace. We feel good really across the credit spectrum and continue to lean in to our marketing opportunity.

Got it thank.

Thank you.

Yeah.

Right next question please.

Our next question comes from Moshe Orenbuch with credit Suisse.

Great. Thanks, Rich you had mentioned that.

You saw good kind of increases in prices for new accounts across the spectrum, but at the same time, I guess rewards and upfront bonuses have also been very high as you could just talk about how youre seeing the kind of competitive environment, particularly for the.

The higher end consumer.

You're spending a lot of that effort.

Okay.

Yeah, so competition.

In the rewards space is.

I'd say more intense than pre pandemic.

A bit more intense than pre pandemic levels, but largely unchanged in recent quarters.

So early spend bonuses in points offers were slightly more aggressive than in the first quarter and we continue to see certain offers come in and out of market.

Cash early spend bonuses are higher now than pre pandemic.

But it's been relatively stable at these elevated levels.

Basically mid.

Last year.

And then if we look at the baseline rewards earn rates, particularly in the cash back space.

They overall were probably more aggressive in the middle of 2021 as new products were being introduced but had been relatively calm.

Now we feel grew.

Great about our flagship products, we continue to be very pleased by consumers' response and engagement with them. We're very pleased with the launch of our venture X.

Card.

I think if I pull way up Moshe one of the things that I I I.

So deeply believe and have experienced is that winning in the heavy spenders space.

I think it requires good products, but you can't win with good products.

It is.

It takes.

A lot more than that and you know the customer experience, it's specifically the digital experience.

The brand.

The.

A lot of experiential things that are that are sort of way beyond the product.

Or are part of the whole package and what we have said this is why we've been saying for years now that winning at the top of the market is not an in and out thing. It is a matter of choosing as a few players have done capital one being one of them that you know, that's that's where we're going and we're going to continue to lean into that.

And I have been struck by the.

Sustainable success that we've been generating and.

Okay.

And and also the marketplace, while very intense hasnt tipped over it to being unreasonable or irrational. So it's very competitive.

But.

Continue to.

Really like our opportunity in that space.

And maybe just as a follow up.

Yields for the last four quarters in your card business has been pretty flat.

The yields on the loans are up a little bit this quarter I guess with the rate increases that you talked about but what is it really going to take to get that to be a higher number as it is it are you can see more revolving from some of your high end consumers.

What is it going to.

To get that.

So the level of revenue growth and and.

And profitability.

<unk>.

Yes.

Hey, Moshe it's Andrew I mean, I think if you put the card yield in the context of our longer term history, looking a year or a year ago.

You know up 100 basis points.

And that's really been a shift to a higher mix of assets in our branded book.

Which is both growth of existing customers and the success.

We're seeing in the origination.

Rich talked about and as we sit here today and looking over the last few quarters. We're also seeing a modest uptick in fees from the very low levels.

Last year, and so driven by the delinquencies that are have ticked up very gradually year over year, but.

Think having a.

Our yield that at these levels.

Is.

That has has sustained but to your point of how can we we drive it up I think we're seeing a and impacts from rate changes that that's been a bit of a tailwind on the yield side, but clearly that comes with a funding cost that ultimately will probably leave margin.

Much closer to flat.

Thank you very much.

Next question please.

Our next question comes from Erin again as intra city.

Sorry, I was muted.

Thanks for thanks for the question I just wanted to follow up on that last point.

Youre talking about the benefits of some of these super Prime Spenders and I guess one of the aspects that's.

I guess less challenging or less beneficial is that.

Youre, not really revolving or they don't tend to revolve nearly as much because of that spend velocity. So high.

Pay down each month.

You think about that customer base growing over time would that just have a natural downward pressure on on your domestic card yields.

Well it depends a bit on the degree to which there are revolving versus just pure transacting, but.

They are transacting, there, bringing a quite a bit of of interchange and relatively low outstandings overtime, so that very well could could prove to be a net positive and not create the downward pressure that you just described and not to mention the fact that.

In doing so it creates less of a capital need and so it ends up being over time at least a pretty capital efficient business, which is one of the reasons why we've been on this decade long journey to build that franchise.

Okay got it and then just on the deposit side. Your you had a modest decline kind of seasonal I'm, assuming that had to do with taxes.

You haven't really to.

To your benefit I guess not been a leader in terms of pricing on the online side.

Are you seeing kind of quarter to date.

An increase in deposits or do you expect that to be.

Hum.

Little bit slower growth as we see the rate.

Rate hikes increase.

Well I'm not going to comment specifically on what we're seeing so far this quarter.

Let's take a step back and think about the industry context, and then talk a little bit about our strategy there.

You look at the industry you brought up at least in retail the tax outflow phenomenon that happened in the second quarter and we certainly felt.

A little bit of that.

But where industry deposit balances go from here you know first thing is at least history, whether it repeats itself, but wood.

Indicate that the rate of deposit growth drops in rising rate environment.

And in this particular cycle the fed fund rates as I mentioned to Sanjay as question.

The larger and faster than previous ones and the fed's shrinking its balance sheet. So.

Who knows.

My guess is as good as yours, but.

I think we could see a scenario where the industry wide deposits are flattish to down in the near term and so what we choose to do there is really trying to optimize our balance sheet.

Across a number of different dynamics of liquidity and funding in tenor and pricing.

And so we feel like we're.

In a great position to compete in that industry backdrop with the.

Simple straightforward competitive products that have a a great user experience, but where our deposits. Ultimately go from here in the context of that industry will be a function of our deposit needs and competitive dynamics.

Aaron Let me just.

And that.

This is Alan.

Want to underscore the strategy and capital one has had for years now which is.

We are building a national bank through.

Not by just.

Acquiring.

Our branches on every corner across the United States.

Nor by just having a national digital bank, but really.

Building a in a sense full service digital bank.

That can provide almost everything that you can get in a N a.

Local branch to provide it.

Nationally excuse me digitally.

And <unk>.

That is part of our strategy to build primary banking relationships.

That our digital first and digitally originated and it's all part of a larger strategy to build a consumer banking franchise.

That is not about.

Just you.

You know.

The highest rate paid but really about.

High quality products, a great customer experience and a full service set of capabilities, where people can really move their full banking relationship and then also have savings deposits there.

And.

And one of the one of my comments that I made about our.

Our marketing.

<unk>, which everybody notices are high is one thing we've continued to invest in over time as capital one as it.

As a company that doesn't have branches on every corner and we've got branches on some corners.

But.

A greater proportion of our expenditures are on the marketing side or on the brand building side and to some extent on the tech side as well.

But it is very much in service of.

Building a franchise of.

Our brand and our franchise that Oh.

Enables us to dynamically grow our deposits at a very appropriate blended pricing and build long term loyal banking relationships and we're very pleased with the success we've had in that but we continue to invest.

Very much in that.

Okay.

Next question please.

Moving on to Betsy <unk> of Morgan Stanley .

Hi, good evening.

Thank you Betsy.

Andrew I just wanted to.

Double click on the comments that you were making around the high transaction high transact or as having lower capital intensity and thats a function of them just being higher credit quality.

Shorter duration on the book is that basically what it is about or is there something more there.

No. It's really just the loss content of that that book Betsy.

Yeah, Okay, and then when you were going through the.

Jack on the.

The capital Slide.

I think you mentioned.

11% is your CET one target.

And so given that there is.

Such demand for <unk>.

Spend and borrow right now.

Should we take your comments to mean that its unlikely that youll be doing buybacks in the near future. While this high.

Our loan growth.

[noise] periods upon us.

Well just to repeat a little bit Betsy if you know what I shared in my prepared remarks, there's just a number of factors to consider just aren't forecasted level of capital and earnings and growth, but we need to put those things.

In the context with a particular eye to the.

The Arab bars around those estimates.

What I was mostly trying to highlight is if you look back a year ago. We were at 14, 5% CET one that's down to 12, one this quarter.

So we're getting much closer to that 11% level.

And at a time when there are a number of uncertainties, given the economic environment and the growth opportunities.

Those error bars, just start to matter more and so we slowed down a bit in the second quarter, but as always is the case managing capital both conservatively and efficiently is top of mind for us and so looking ahead, we're just going to dynamically adjust.

Our pace in the context of those evolving factors.

Right. Okay. Thank you.

Next question please.

Our next question comes from Dominic Gabriel of Oppenheimer.

Hey, Thanks, so much for taking my question.

I was wondering if you could provide us with a breakdown of your.

And remind us of your domestic card spending by retail category as a percent of total spend within domestic card, so grocery or TNT or gas whenever whenever you could provide would be excellent I would just think that as you're targeting the higher spenders has probably had an effect on that mix.

Over the last 10 years has that changed any color you could provide would be great. Thanks.

Hey, Hey, rich anytime you place sorry, sorry, sorry.

I have in front.

Front of me I don't think it's the exact thing you're asking but I have in front of me so.

Growth rates.

In fact, they're seeing growth versus 2019 of a bunch of categories that I find pretty fascinating but.

This is not this isn't our own mix as well, but you know these things in fact.

Yes, but.

Gas, 90% now by the way.

This is <unk>.

This includes.

Growth capital one overall, there's been significant growth of our whole business, so, but just some relative comparison.

Travel.

<unk> 26 per cent, although travel is second the gas if I look at year over year growth.

Only gas as the category.

Has grown more so gas is up 54% year over year.

The travel is up 42%.

Year over year those are swamping most of the other categories there.

Uh huh.

<unk> was way the laggard during the downturn and it's been you know.

Like I said other than than the than.

And then energy it has been the one that is really catching up quickly.

Yeah.

So.

What's what's striking is just how much these things vary across categories as the consumer.

Reacts to the environment.

Covid or energy costs and also.

You know it'll be interesting to see how much the consumer migrates to weather.

Two.

Between discretionary and non discretionary categories, we will keep a close eye on.

On that one.

As things get a little tighter in the marketplace.

Great and then maybe just as a follow up.

Given just to take some of the conversation one step further around deposits and funding.

Given the amount of card growth that youre seeing in and building out this franchise, but the slowing deposit growth is it reasonable to assume that.

As a.

As a management team you would really look to focus on growing this business first regardless of perhaps the funding cost trade off between deposits and non deposit funding because really you're just gaining more customers within your card franchise and you would make that trade. Thanks, so much.

Yeah, So first pulling up.

Not lost on us that.

Our assets are growing rapidly right now all banks are growing more slowly in deposits.

No.

Yeah.

<unk>.

You know I think that I mean, this is a natural thing that happens at this part of the cycle.

And so that's why I made my earlier comments about being very pleased that we have already been leaning into.

Having a deposit franchise and being in a position.

Two.

You know build primary banking relationships.

To grow savings accounts to have the brand as a company that will.

You know have.

Yeah.

<unk> attractive savings rates, but not to have to go generate all our business off of.

You know the bank rate tables kind of.

Our marketplace.

So, but with respect to the economics.

I think the card margins are such that.

That.

You know it's hard to imagine.

That we wouldn't continue to make the trade that.

Even if even if we have to pay more for deposits, we would would not turn down the growth opportunity. So long as the deposits are available in there there is going to be a good trade to continue growing that card business as far out as we can see.

Because of the.

Particularly robust economics that come with our card franchise.

But just just to finish finish off at that point I'm, sorry, but we but we also like being in a position as a national bank with a national brand for digital banking that we're in a position to.

Gather the deposits we need in order to fund that kind of growth opportunity that we have at a time when.

It's going to get harder to grow deposits at this part of the cycle.

Okay.

Great well. Thank you everyone for joining us on this conference call today and thank you for your interest in capital one.

Investor Relations team will be here. This evening to answer your questions. If you have any and have a great evening.

Thanks, everybody Goodnight.

And that does conclude today's conference. We do thank you for your participation you may now disconnect.