Q3 2022 Capital One Financial Corp Earnings Call
The conference will begin shortly to raise your hand during Q&A you can dial star one one.
[music].
Good day and thank you for standing by welcome to the third quarter 2022 capital One financial earnings Conference call.
At this time all participants are in a listen only mode.
After the speaker's presentation, there will be a question and answer session.
I ask a question during the session you'll need to press star one one on your telephone.
Please be advised that today's conference is being recorded.
I would now like to hand, the conference over to your Speaker today, Jeff Norris Senior Vice President Finance. Please go ahead.
Thank you very much lives and welcome everyone to capital one's third quarter 2022 earnings conference call as usual, we are webcasting live over the Internet.
Access to call on the Internet. Please log on to capital one's website at capital one dot com and follow the links from there.
In addition to the press release and financials. We've included a presentation summarizing our third quarter of 2022 results.
With me this evening are Mr. Richard Fairbank.
Capital one's chairman and Chief Executive Officer, and Mr. Andrew Young capital ones Chief Financial Officer.
Andrew we're going to walk you through this presentation.
Access a copy of the presentation and press release. Please go to capital one's website click on investors then click on quarterly earnings release.
Please note that this presentation may contain forward looking statements information regarding capital one's financial performance and any key forward looking statements contained in today's discussion and the materials speak.
Speak only as of the particular date or dates indicated in the materials.
Capital one does not undertake any obligation to update or revise any of this information whether result, whether as a result of new information future events or otherwise.
Numerous factors could cause our actual results to differ materially from those described in forward looking statements.
For more information on these factors. Please see the section titled forward looking information in the earnings release presentation.
And the risk factors section in our annual and quarterly reports.
First of all with the capital one website and filed with the SEC.
Now I'll turn the call over to Andrew.
Thanks, Jeff and good afternoon, everyone.
I'll start on slide three of Tonight's presentation.
In the second quarter capital, one earned $1 7 billion or $4.20 per diluted common share.
On a linked quarter basis.
Period end loans grew 3%.
Average loans grew 5%.
Largely driven by growth across our domestic card and commercial businesses.
In the linked quarter.
Revenue increased 7%.
Largely driven by growth in net interest income.
The loan growth I, just described and NIM expansion both contributed to the increase in net interest income.
I will touch on the NIM more in a moment.
Noninterest expense grew 8% in the quarter.
Driven by an increase in operating expenses.
Higher head count and the associated compensation costs were the single biggest driver of the linked quarter increase.
In addition to compensation expenses.
The collective impact of a number of smaller items also drove up Q3 expenses.
Provision expense in the quarter was one $7 billion.
Driven by net charge offs of $931 million.
And a $734 million allowance build.
Turning to slide four I will cover the changes in our allowance in greater detail.
Yeah.
The total companies $734 million allowance build in the quarter.
Brings our allowance balance up to $12 2 billion as of September 30th.
Our total company coverage ratio.
Increased 14 basis points to 4.02%.
Turning to slide five.
Ill discuss the allowance in coverage across each of our business segments.
As you can see in the graph.
Our allowance coverage ratio increased modestly in each of our segments.
In our domestic card business.
The allowance balance increased $530 million.
Bringing our coverage ratio to six 9%.
The $6 billion of loan growth in the quarter drove the majority of the allowance build.
The impact of continued normalization and a modestly worse corporate economic outlook were partially offset by the release of a portion of our qualitative factors linked to uncertainty in the economy.
In our consumer banking segment.
The allowance balance increased by $61 million.
Driving a nine basis point increase in coverage to two 6%.
The modestly worse corporate economic outlook I just mentioned.
And expectations of credit normalization drove the allowance build.
And finally, the allowance increased by $107 million in our commercial business.
Resulting in a nine basis point increase in coverage to 145%.
A combination of the modestly worsening corporate economic outlook.
An uptick in criticized loans.
And loan growth drove the allowance build.
Turning to page six I'll discuss liquidity.
You can see our preliminary average liquidity coverage ratio during the third quarter was 139% well.
Well above the 100% regulatory requirement.
Total liquidity reserves were roughly flat at about $93 billion.
Our liquidity reserve have largely normalized to pre pandemic levels.
Our securities portfolio declined by about $8 billion, driven by a combination of the decline in market value from rising rates.
And the continued planned run off of the outsized portfolio, we built during the pandemic.
The decrease in our securities portfolio was primarily offset by higher cash and cash equivalents.
Turning to page seven.
Our net interest margin.
Yeah.
Net interest income in the quarter was $7 billion up.
Up 14% from the year ago quarter, and up 7% from last quarter.
Our net interest margin was six 8% in the third quarter.
45 basis points higher than a year ago quarter.
And 26 basis points higher than last quarter.
The 26 basis point linked quarter increase in them.
It was driven roughly equally by three factors.
First.
An extra day to recognize income in the quarter.
Second a continued balance sheet shift towards card.
Way from lower yielding assets.
And third the net benefit of the higher yield of assets relative to higher funding costs.
Turning to slide eight I will end by discussing our capital position.
Our preliminary common equity tier one capital ratio was 12, 2% at the end of the third quarter.
Up about 10 basis points relative to last quarter.
The $1 $7 billion of net income in the quarter was mostly offset by growth in risk weighted assets.
Dividends.
And a little over $300 million in share repurchases.
We continue to estimate that our longer term <unk> CET, one capital need is around 11%.
And with that I will turn the call over to rich rich.
Thanks, Andrew and good evening everyone.
I'll begin on slide 10, with third 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 third quarter of 2021.
Credit card segment results are largely a function of our domestic card results and trends, which are shown on slide 11.
In the third quarter strong year over year growth in every topline metric continued in our domestic card business.
Purchase volume for the third quarter was up 16% year over year and up 47% compared to the third quarter of 2019.
Ending loan balances increased $22 billion or about 22% year over year.
Ending loans grew 5% 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 rates are well below pre pandemic levels and continue to normalize.
The domestic card charge off rate for the quarter was two 2% up 84 basis points year over year.
The 30, plus delinquency rate at quarter end was 297%.
104 basis points above the prior year.
On a linked quarter basis, the charge off rate was down six basis points. The delinquency rate was up 62 basis points from the linked quarter.
Noninterest expense was up 28% from the third quarter of 2021, including an increase in marketing.
Total company marketing expense was $978 million in the quarter our choices in domestic card marketing are the biggest driver of total company marketing trends in.
In our domestic card business, we continue to lean into marketing to drive resilient growth.
We're keeping a close eye on competitor actions and potential marketplace risks, we're seeing the success of our marketing and strong growth in purchase volume new accounts and loans across our domestic card business.
And strong momentum in our decade long focus on heavy spenders continued in the third quarter heavy Spender marketing includes early spend bonus is driven by continued strong account growth and spending as well as investments in franchise enhancements like our travel portal and airport.
Lounges in the third quarter, our marketing continued to drive strong growth in heavy spender accounts and strong engagement and spend behaviors with both new and existing customers.
Our decade long quest to build our heavy spender franchise has brought with it significantly increased levels of marketing, but to the sustained revenue credit.
Resilience.
And capital benefits of this enduring franchise are compelling.
And theyre growing.
Yeah.
Slide 12 shows third quarter results for our consumer banking business.
In the third quarter, we continued to pull back on growth in auto in response to competitive pricing dynamics.
Auto lenders appear to have reflected rising interest rates and their marginal pricing decisions.
But others have not.
They have gained market share and pressured industry margins, we chose to pull back on auto originations, which declined 28% year over year and 20% from the linked quarter.
Driven by the decline in originations consumer banking loan growth is slower than previous quarters third quarter, ending loans grew 5% to the year ago quarter on a linked quarter basis, ending loans were essentially flat.
Third quarter ending deposits in the consumer bank were up 2% year over year consumer banking deposits were flat compared to the sequential quarter.
Sumer banking revenue.
Was up 7% year over year as growth in auto loans was partially offset by the year over year decline in auto margins and the effects of our decision to completely eliminate overdraft fees.
Noninterest expense was up 13% compared to the third quarter of 2021, driven by continuing investments in the digital capabilities of our auto and retail banking businesses and the increased marketing for our digital National Bank.
The auto charge off rate and delinquency rate continued to normalize in the third quarter the charge off rate for the third quarter was one point.
Oh, 5% up 87 basis points year over year.
The 30, plus delinquency rate was 485% up 120 basis points year over year on a linked quarter basis. The charge off rate was up 44 basis points and the 30, plus delinquency rate was up 38 basis points.
Slide 13 shows third third quarter results for our commercial banking business.
Third quarter, ending loan balances were up 2% from the sequential quarter driven by growth in selected industry specialties.
Average loans were up 7% in the quarter.
Ending deposits were up 6% from the second quarter average deposits were down 2% in the quarter.
Third quarter revenue was up 12% from the linked quarter noninterest expense was also up 12%.
Commercial banking credit remains strong in the third quarter, the commercial banking annualized charge off rate was five basis points.
Criticized performing loan rate was 597%.
And the criticized nonperforming loan rate was 0.57%.
In closing, we continued to drive strong growth in card revenue purchase volume and loans in the third quarter.
Loan growth in our consumer banking business was slower compared to previous quarters as we pulled back on auto originations and our commercial banking business posted another growth.
Another quarter of strong revenue growth.
Credit results remain strong across our businesses charge off rates and delinquency rates are below pre pandemic levels and credit continues to normalize.
We typically see an increase in operating expense over the second half of the year.
Any year this year the timing of some of our investment opportunities drove a larger than usual third quarter increase in operating expense.
Which was up 11% from the second quarter.
We expect that this year's linked quarter increase in fourth quarter operating expense will be smaller than the approximately 7% linked quarter increase we've seen on average over the last five years.
Turning to operating efficiency ratio.
Relative to full year 2021, we.
We expect annual operating efficiency ratio to be roughly flat in 2022 and modestly down in 2023.
As usual, our operating expense and efficiency expectations exclude any potential adjusting items.
<unk> way up we're in a strong position to deliver compelling long term shareholder value as modern digital technology continues to transform banking, we continue to see opportunities to lean into marketing and resilient asset growth that can deliver sustained revenue annuities our growth opportunities.
Our enhanced by our digital transformation.
We continue to closely monitor and assess competitive dynamics and economic uncertainty.
Powered by our modern day digital technology, we're continuously improving our proprietary underwriting marketing and product capabilities.
And we're managing capital prudently to put ourselves in a position to thrive in a broad range of possible economic scenarios.
And now we'll be happy to answer your question Jeff.
Thank you rich, we'll now start the Q&A session I remember as a courtesy to other investors and analysts who may wish to ask a question. Please limit yourself to one question plus a single follow up.
If you have additional follow up questions. After the Q&A session Investor Relations team will be available after the call.
Liz please start the Q&A.
As a reminder, if you'd like to ask a question at this time. Please press star one one on your telephone.
Our first question comes from the line of Kevin Barker with Piper Sandler Your line is now open.
Good afternoon, Thanks for taking my questions.
I appreciate the comments around credit and how we are still in a normalization.
Back to pre pandemic levels, particularly in some key asset classes, but at what point do you say that the year over year growth rate and delinquency rates too fast.
Relative to what you would expect.
For a typical normalization.
Yes, Kevin so thank you for your question.
Let me just pull up and just comment on.
Normalization.
Yeah.
First of all the context of where we are because consumer credit remains strong as you can see from the metrics.
And.
Our domestic card losses in the third quarter were about half of free to pandemic levels and.
Our delinquencies are and we bought it and said this.
Unmistakably normalizing, but right now they remain about 20% below pre pandemic level.
There is not a a certain point where we.
We don't look out there and say if it if the rate of growth of our billing.
Delinquencies exceeds a certain number then we will pull back but let me comment first of all that we've said for a long time, Kevin and I know you know this that.
Normalization is bound to happen it would be shocking if it didn't happen and we've been talking for a bunch of quarters now, saying. It started started you needed a magnifying glass to see it and we talked about that and now of course, you can see it.
In the numbers and it's definitely normalizing.
What.
Yes.
The rate at which it's normalizing.
Is frankly more gradual than we generally expected, but we didn't we didn't really have a roadmap to know exactly.
What pace it would normalize we just to believes so strongly that it would.
No.
What we do with it.
Rather than say Theres, a certain number that would lead us to make a certain decision.
We of course look at this.
With what's happening with every segment and micro segment of our business and how its performing we look we look for starters at the back book and that is normalizing.
As you know.
As well frankly.
Like everything you hear more gradually than then.
Expected, but still the back book is clearly normalizing as well.
We then look for other.
Patterns of normalization.
And here are some of the patterns that we see Kevin it's more pronounced in the front book of new originations.
Then in the existing back book and by the way it would be that would be shocking if it werent the case, because 100% of the time in our history.
Books normalized faster during periods of change and we.
No.
So that but we confirm again that front books are normalizing faster. It also seems that normalization is more pronounced.
At the lower end of the market.
And of course, those are the populations that improve that improve more and more quickly earlier in the pandemic.
Uh huh.
Lower income consumers.
<unk> may also be feeling more pressure from inflation. So these trends shouldnt be surprising.
But.
At the at kind of a high level. What we see is is you know.
Normal and it is.
And.
Basically the way we're leaning into the marketplace is very consistent with what we've been saying for a bunch of quarters now but.
But what we do at the.
Micro level at the segment level in the subsegment level is look at the various metrics both on the back book and on the front book too.
Two.
C.
What the patterns are and we're comfortable with what we see in terms of.
Front book vintage curves as a general point.
And across a vast majority of all of the segments that we operate in we have.
Around the.
The round the edges, we've done a little bit of dialing back in particular.
Pockets, where our metrics are normalizing a little bit faster, we also sort of pull up and say what are the kinds of what are the risks that we would expect to see at a time like this with orthogonal.
Look through our book and.
We brainstorm on what are the risk we could see we go hunt for them and in a couple of places we have we have seen.
Effects that caused a little bit of trimming around the edges, but the.
The collective amount of trimming in the card business.
Is.
Pretty small relative to the overall scale of our growth.
As you know the.
In the auto business, we are we have pulled back.
At the very same time, we are leaning into the card business were pulling back in the auto business, but maybe I'll save that for another question.
Okay, and then just a follow up I mean is there anything I appreciate it.
But look at the granular side of the business and then what do you see within your book.
On a very micro level, but from a macro level is there anything that you would look at that would make you.
Pulled back that may not be apparent at the micro level.
Particularly I think you've made some.
In your prepared remarks about changes in the corporate outlook in particular, thank you.
Sorry, the changes in the corporate can you repeat that last part changes in corporate outlook.
I believe in your prepared remarks, you said there was <unk>.
And the corporate outlook that may have affected.
Part of your allowance.
Was there anything in particular that stood out that may cause you to pull back when you when you think about the macroeconomic outlook.
Well.
We of course, if the whole time, we're doing the micro examination of one segment at a time.
We are looking at the macro trends, it's really striking the level of inflation and as I've often said.
No.
We collectively everybody on this call.
None of us.
<unk>.
Nobody across the business World is really lived something like this since the.
The early eighties, so where.
We're especially looking for effects that might be.
Different this time, Kevin with respect to inflation and how that can play out but.
So we're always on the lookout, but net net impression I would want to leave here.
Is very much the same impression that.
I've left with you the last many quarters here.
Next question please.
Our next question comes from Ryan Nash with Goldman Sachs. Your line is now open.
Hey, good evening everyone.
Right right.
So maybe just to start on the cost and efficiency side rich. So it's good to hear that youll be back on the efficiency improvement journey next year. So I guess just.
Two part question you talked about Opex ramping less in the fourth quarter, but just given the level of marketing spend and how the spend has shifted under the hood in terms of moving up market should we expect to see less than historical seasonality on the marketing side and then second just.
Can you help us with the magnitude of the efficiency improvement into next year and what is actually driving the improvement is about pulling back on hiring or something else. Thanks.
So I don't think we're here to declare.
A.
I wanted to make.
Make a comment about about marketing seasonality.
It is not as that's not as much of a physics kind of thing as as certain things like <unk>.
Credit and delinquencies seasonality with consumers.
I think.
So I'm not here to declare.
Changes in the pattern of seasonality in marketing the big driver of our marketing.
Is the opportunities that we see as well as the investment in building businesses like our.
Heavy spender business and our National Bank.
With respect to the drivers of <unk>.
Operating efficiency improvement.
Just kind of pulling up on the journey that you mentioned.
We've been focused about this and talking with investors about operating efficiency for years.
And we've achieved a 440 basis point improvement from 2013 through 2021.
Even as we have invested in a comprehensive transformation of our technology over that same period of time.
And we know that investing in technology modernization and driving for efficiency improvements are on a shared path.
Technology investment helps our revenue growth and helps drive productivity improvements.
And beneath the surface of the high level of investment has been significant productivity gains from modernizing our tech stack, eliminating legacy vendor costs driving customers to digital and driving more automation in the company and.
And at the same time of course, we have continued to lean into.
This technology journey and the opportunities that it generates.
The.
So it's a very shared path.
And and.
I think that.
Our guidance for modest improvement in 2023 is a reflection of continued traction in growth.
And operating productivity, while also continuing to invest in future opportunities.
Got it I guess as a follow up question, maybe one for Andrew Andrew you laid out the details of some of the drivers as it pertains to the net interest margin fully understand that there's a seasonal component to it in <unk>, but can you maybe just talk about the positioning of the balance sheet from a rate perspective do you think that you can continue to see.
The margin drift higher and maybe just talk about some of the drivers as you look out over the course of the next couple of quarters during the rising rate cycle. Thanks.
Sure Ryan.
Recall, it's probably helpful to start with a little bit of history here.
Youll recall, our NIM was compressed.
During the pandemic are largely driven by a balance sheet that was skewed much more towards cash and securities than than card loans.
And as we progressed over the course of the pandemic you saw that begin to normalize and so just by way of evidence a year ago, our NIM was.
635, I'd said in my prepared remarks, and at that point card was closer to 27%.
Think of our interest earning assets in cash and securities was something like 33.
<unk> now shifted to be just over 30% in cash and securities are down to 27, so I share that to say.
We're now operating much closer to our pre pandemic balance sheet mix and our NIM is is roughly in a similar spot to where it was before the pandemic.
Your question then about rate risk you can see in our Q.
Our rate risk disclosures, we're really only slightly asset sensitive at this point and keep in mind, that's relative to forwards. So the 150 basis point projected moves over the next couple of months.
We're already sort of embedded in that neutral baseline and so as I think about the future and there's a number of things that can impact NIM, you know not to mentioned seasonality, but the the credit impacts on revenue.
<unk> pressure on loan margins and deposit pricing.
But as we sit here today I think a lot of the things that we pointed to in the past in terms of balance sheet mix at least have largely run their course. So hopefully this gives you some sense of the primary forces at play with them.
Next question please.
Our next question comes from Betsy <unk> with Morgan Stanley . Your line is now open.
Hi, good evening.
Hey, Betsy.
Okay just to follow up on that the follow up question. So now that you're back to the pre pandemic mix of liquidity and loans.
How should we think about where the balance sheet traject from here.
In terms of funding mix and funding stack.
And maybe you could speak a little bit to your thoughts on the buyback because I noticed this quarter. It was down a bit you know $313 million down a bit from the prior two quarters, which averaged about $2 billion. So.
Help us understand how youre going to be.
Funding the loan growth and what kind of mix, we should be expecting should liquidity go down even more than what it was pre pandemic.
Okay, I'll I'll take I think what I heard is the first two questions there Betsy in NIM and funding and then I'll turn it over to rich to talk about buyback.
So on the NIM side and the.
The asset portion of that I, just want to clarify what will drive it from here I do think if you look back historically cash and securities were roughly 25% of our balance sheet, we're a little bit above that but given our needs for liquidity.
And how we use the investment portfolio I would think that something in that 25% range of the size of the balance sheet is a reasonable assumption for that then on the loan side. It really becomes a matter of just marketplace dynamics, what we see as opportunities for growth.
So whether card is growing up more quickly than say auto where commercial its percentage of the rest of the balance sheet.
It could drift up but I don't want to give any indication of how we think that's playing out and there is certainly not a target that we have in terms of the P&L the asset side of the balance sheet.
On the funding side.
We aim to have a diversified mix of funding that's largely skewed to retail deposits.
Again, historically has been something I think around 70% of our overall all funding.
And we have commercial deposits and brokered Cds, and then securitization and wholesale funding.
Sources of wholesale funding and so again I would say if you look back to pre pandemic levels over history compared to where we are today, we're kind of back in a relatively similar place there. So.
I think I heard in your question not just mix, but how do we fund growth from here in making marginal decisions for funding incremental loan growth.
We're going to weigh a variety of factors are.
Customers appetite for different deposit products, and our ability to build customer relationships with them. The economics of different funding instruments. The duration of funding our liquidity needs. So we're going to throw all of that into our decision making process to figure out how to.
Fund, but I also think it's important to think about those funding choices at the margin.
It's not just about the liability side, we also have asset growth choices at the margin too. So we're just going to look at the total integrated economics of both sides of the balance sheet too to make those choices.
And I'll hand, it over to rich to talk about buybacks.
Thanks, Andrew.
Betsy we.
So with the question with respect to why did you slow down your share repurchase pace this quarter.
So we repurchased roughly $300 million of shares during the third quarter.
About a year and a half ago, we had a CET one in the high <unk>.
Since then we've been repurchasing shares and our CET one ratio has come down into the low <unk>.
And the pace of our repurchases is of course, driven by a number of factors, including our actual and forecasted capital.
Our earnings of course growth.
Economic conditions market dynamics.
And at this point there.
<unk>, some pretty sizable error bars around some of these factors, particularly growth and economic uncertainty and so it's not lost on us at times like this it's prudent risk management to be conservative with our capital actions.
And this is a very dynamic process and under the new Seb rules, we're able to maintain flexibility in our capital decisions.
Next question please.
Our next question comes from.
Sanjay <unk> with <unk>. Your line is now open.
Thanks, Rick.
Rich you mentioned youre, keeping an eye on your competitors I'm just wondering if you could just drill down a little bit on that given you.
<unk> had a lot of fintech in this space growing and obviously, it's a very unpredictable next 12 to 18 months. So maybe you can just talk about domestic card and auto as well because you mentioned a number of different variables there. Thanks.
Well Sanjay did you want me to talk about.
Competition.
And in those spaces or is it competition driven question.
I guess competition, but also how it might have an impact on credit as we look forward because you've had some new players underwriting as well.
Right so.
The.
Let's talk about competition in the card business and then I'll talk about it in the auto business, but generally in the card business comp.
Competition continues to be.
No.
Hi, but largely stable and rational over the past.
A few quarters now here I'm really talking about the major the.
The banking industry that the classic competitive set.
Within the card business.
But.
We certainly have seen marketing levels that that have returned.
Two really beyond pre pandemic levels. So we certainly have an eye on that.
On the rewards competition side theirs.
Here there are there new things that people come out with but there's generally a stability in that space.
Space.
On Apr's in the card business have generally.
The issuers are generally adjusted headline rates along with the change in the prime rate. So there is a kind of a stability in the margins.
There.
And.
So again, we see a pretty.
Stable competitive environment in the major.
Among major card players a thing that we've mentioned a number of times is concerned about the fintech and their impact on a business like the card business less so by the Fintech actually running around.
Issuing credit cards, but more by the impact.
Some other credit products like.
<unk> installment loans buy now pay later loans and others that.
Can affect the portfolio of borrowing that.
Our customers' current and prospective customers.
Might have.
No.
We were pretty concerned and we've talked about it a number of times about the rapidly growing extent of Fintech credit extension compounded by the fact, no one can measure the size of it because many of these folks like many of the buy now pay later players for example, not reporting to the credit bureaus and the other thing.
That caught our eye of course, all along the way here is.
Virtually every fintech that enters lending enters in the lower side of the market Theres virtually no one that enters right at the heavy spender side of the market. They just don't have the scale.
Those thin margin businesses and so the the fintech excesses to the extent that they're there.
We're logically Andy and inferential leap from what we'd see would be.
More in the lower end of the market and that of course is something we watch pretty carefully to the best extent that we can see it.
Now.
The what.
One thing that that just intuitively is a helpful thing to the cause here is that fin techs have generally struggled they've they seem to have dialed back at quite a bit. So there may be less pressure in that particular space, but.
Another thing to keep our eye out for here is it's not just the.
The amount of volume of marketing or the intensity of competition is the underwriting choices that folks make another thing that.
Sanjay that we have had.
Our ion is basically FICO drift and.
You can absolutely see out there the reduction in the size of the.
Subprime population now we can all ask ourselves is that really just great news that the size of subprime America has declined or.
How how much is that a.
A shorter term impact from all of the stimulus the forbearance, the spending pullbacks and things that happened during the pandemic. So we ourselves.
Do our best to try to normalize for those effects in our underwriting.
And.
So.
Where I would.
Pull up.
As to say I think the competitive risks that exist and that we have seen out there are more in the lower end of the marketplace.
Even with credit cards themselves. If you look at the data there has been the highest.
Theres been more growth in the.
The lower end of the market in terms of just credit card customers than than anywhere else. So all of this is.
Something we're watching incredibly carefully.
And.
To the earlier question that was asked about how do we do underwriting we of course.
Do everything we can to look at every segment in the.
The to look for.
Any changes that we're seeing ultimately in our own performance, we've trimmed around the edges in a few places, but overall so far it looks pretty good but partly how we do this we don't just run around and just.
Let the numbers do the talking we do a combination of using actually.
Machine learning monitoring based methodologies to look for.
Early signs of.
Things being off of expectation within our portfolio.
And then at the same time.
Broad strategic logic on what would you expect to happen from this competitive environment from this credit environment from this inflationary environment.
That's that's a window into that side of the business on the auto side of the business the competition.
No.
Our issue with the competition is really not an underwriting issue at this point.
The general risks that we talked about just a couple of minutes ago exist in that space as well.
On the credit side, but.
The elephant in the room is the.
Really the pricing.
Of auto loans at this point by a number of players and while that is not directly a credit concern it lowers the.
It lowers the margin in the business it lowers the buffer of resilience and so on and we manage.
Very carefully to trying to keep a maximum amount of resilience in downturns and.
Lower margins lead us to.
Pull back.
On the least resilient parts of the business.
Great next question please.
Yeah.
Our next question comes from Moshe Orenbuch with Credit Suisse. Your line is now open.
Thanks.
Rich you had an earlier question about.
Kind of the change in delinquency rates and I'm, just I'm wondering whether if you think that this cycle there will be a different any sort of different relationship.
Major businesses, you know in card and auto between the loss rate of delinquency rate.
Better or worse.
As we go through that.
The next 18 months or so of credit normalization.
Well Moshe.
As usual, it's a very insightful question, let me.
Let me just comment a little bit on.
Just a little bit of a calibration of how we think about credit in the card and auto businesses.
The.
The first point would be.
It's normalizing in both in both places.
But overall credit has been strong in both our card and our auto business.
But there are three effects.
Better driving faster normalization of auto losses than a card losses.
And the first is that normalization tends to be more pronounced in the front book of new originations, that's a universal thing that applies across our consumer businesses.
But because the front book in auto the front book replaces the portfolio much more quickly.
Then in card overall portfolio losses should normalize more quickly in the auto business.
The second.
Is that recovery rates are much higher in auto than in card.
Now recoveries tend to be lagged relative to.
Charge offs.
But so some of the exceptionally strong performance, we saw in auto, including the quarter, where we actually had negative charge offs.
That was.
Boosted by higher recoveries from earlier charge offs.
Now that we've seen low charge offs for an extended period in auto.
The raw material for future recoveries is coming down even if the recovery rate stays strong.
And this will have a bigger impact in auto than in card, but it will be in effect in both businesses and it's not something that I think gets a lot of airtime.
Out there, but recoveries or definition Ali about what's happening with a if you. If you will the back book of recoveries and in both of our businesses. The back book, which has been the byproduct of the great news over the last few years in terms of credit the back book Theres, just less to work with but its especially.
In effect in auto and finally.
Auto vehicle values are now normalizing, which is a headwind relative to a year ago and contributes to the pace of credit normalization in that business and given where.
Used car prices have been going to sort of record levels over the past year.
The general direction of that is much more likely to be down rather than up so that also contributes to a difference between those two businesses.
Got it thanks.
Follow up it's good to see the guidance or some form of expectation of improving efficiency ratio, but.
As you know.
As I look at it it seems like your balance sheet is still.
Asset sensitive and so you know to.
To the extent that revenue growth is impacted and positively impacted by margin expansion I mean wouldn't one really naturally expect to see that efficiency ratio because that doesn't really come with a lot of attention to costs.
Just wondering how to think about that.
What's the right way to think about that spend you know kind of like for like spending versus revenue growth.
Yes.
No. So let me take the first part of that and then I'll hand, it over to rich in terms of asset sensitivity you can see last quarter's Q and I would expect it'll be a fairly similar number this quarter.
And up 100 basis point shock.
Last quarter was a 70.
The basis point impact to 12 months, NII, which is something like.
Like a couple of hundred million dollars of NII and again, that's a shock relative to forwards.
No.
I just want to clarify that when you talk about us being asset sensitive we've already baked into our baseline the anticipated call. It 150 basis points of additional fed moves over the next couple of quarters. So achieving what I just described suggest the shock beyond that.
But I think you should walk around with at this point, we are we're pretty neutral from a from an asset sensitivity. So I just wanted to clarify that before rich provides the broader answer.
Yes.
Moshe the I've, often said and you and I have gosh, we've been working together for.
Two or three decades, now Moshe and.
I've often said that.
I know, we do a calculation that says this is on the things that we can measure. This is the impact of a rise in rates.
Often say it can look good on paper to have a rise in rates, but I for three decades have been rooting against.
Rising rates because of the sort of unquantifiable other aspects on the business now of course, no. One out here is rooting for the kind of inflation that we're seeing in the kind of risk there, but I just wanted to flag that.
While the math talks about certain benefits that come just just a couple kind of obvious, but I think important things that effect.
Many of our metrics in the business. One is the conversation that we just had about the auto business.
I think it is.
Most.
Most businesses in the World most industries struggle when the cost of goods sold goes up struggled to get that to make its way into pricing and.
The auto business is a classic example of this and particularly since unlike if you are.
Selling groceries at the store, it's pretty clear, what's the cost of goods sold and therefore, how you might want to price those groceries.
In this business with the complexity that comes from how the any particular.
<unk> lender calculates their funds transfer pricing and really effectively what is their margin.
That can put pressures in the business and what we're seeing in auto the compression in margins the growth opportunity that we're losing right now.
That that can sort of swamp the math of Andrews.
Interest rate calculations, and then of course I think the biggest the biggest issue is.
Is the impact of rising rates on.
On.
On the economy and on potentially credit outcomes and back to our.
Our friend the operating efficiency ratio.
Credit credit.
Impacts make their way into the operating efficiency ratio of course.
True.
Well through the growth through.
How much growth, we can get and also things like the.
Fee and finance charge reserve impacts.
So.
I'm not so that's.
That's why I think in many ways the kind of progress that we are.
Continue to hope to achieve over the years and operating efficiency ratio might be more in spite of rather than <unk>.
Because of.
Higher rates.
Next question please.
Our next question comes from Erin <unk> with Citi. Your line is now open.
Thanks, I was hoping you could talk a little bit about the.
The card acquisitions that youre, having today, you're a full spectrum lender, but you're I guess.
I would characterize I guess newer in the heavy spend section section with <unk> card are you are you acquiring more of that segment and then.
Also.
Have you been pulling back at all in May.
Maybe a revolver or non prime segment.
Recently.
Yeah.
No.
The we have talked a lot about the traction that we're getting at the top of the market in the pursuit of heavy spenders and I wouldn't call us relatively new player in that business.
We're one of the actually.
Pretty significant players in this space, but but but.
Certainly not the biggest even close but I.
I think that the.
The bigger point there is that we continue to see more traction there and whenever.
You see metrics about growth in purchase volume.
We don't share metrics about.
What kind of growth rate, we're getting at each spender level in the marketplace, but the higher this vendor level the higher that even faster growth rate, we've been getting so that's a manifestation of.
Yes.
Of the success, we're getting and it's a it is both the byproduct of the investment we're making but also leads us to continue to lean in to those investments.
But for all you hear are enthusiastic.
Comments about the top of the market I don't want to leave an impression that we are therefore less enthusiasm, Louisiana take about the opportunity elsewhere, we continue to.
ROE across the credit spectrum.
Have.
Several decades of experience in the lower end of the market and.
And one of the real benefits of our <unk>.
Tech transformation has been allowing us to build a lot more sophistication more data more machine learning and other things into the credit underwriting.
<unk> and that allows us to.
Be stronger and have more growth opportunities and better credit quality in the at the lower end of the market.
So the.
The story than that impression I want to leave with you is one of a very.
Continued.
Success across the.
The spectrum there are.
There are places however that we for a long period of time have been.
Cautious about and frankly doing our best to minimize and one of those is high balance revolvers.
So.
High balance revolvers, which just.
What what the term we that term to us just to.
Clarify that concept is.
Not necessarily what are the balances that any revolver any customer might have with us but it is collectively.
Their total bureau balances and we have been very cautious about booking customers.
For years, now and even more so after the great recession booking customers with a high level of.
Balanced revolver balances across there that consumers portfolio it tends to be.
A.
To not go there.
Tie one hand behind our back a little bit in terms of growth because the growing high balance revolvers as a great.
Good way to grow.
And it's also tends to be quite profitable business, but that is a segment that we.
Have been concerned about the resilience in downturns and so we've tended to for years now.
Try to deemphasize that I say deemphasize and no one can fully get out of a segment like that because the.
We can't control, whether our own customers turn into high balance revolvers, but what we can control is whether they enter as high balance revolvers. So that's a little window into maybe where we are.
Go a little more lightly.
Thank you.
Next question please.
Our next question comes from Don Vendetti with Wells Fargo. Your line is now open.
Hi, Richard.
Little bit on the move to the public cloud that's been a bit for you know a lot on that are you still feeling like its improving your new product development rollout.
Okay.
Yes.
Dan we feel great about.
Our move to the public cloud.
A central part of our.
Yeah.
Technology transformation, probably the most salient part of it but certainly not the only part but.
You know this this transformation.
Has involved.
A.
Transformation in terms of the tech talent within the company, bringing lots of.
Thousands of engineers in house, bringing more of the tech.
Investment inside the company as oppose to reliance on vendors as so many of them industry wide who are.
Old school legacy vendors and quite expensive is that at that.
It's involving evolve transforming how we build software it's involved going to the cloud it's involved transforming our.
Data.
Ecosystem, it's involved modernizing.
All of the applications on which the company has built.
So there is there's been a lot to this journey and.
We're a decade into it.
The the benefits.
Our.
All around us.
And art.
It really starts in many ways with benefits in the tech business itself, where our technology teams are moving faster getting products to market.
Sooner.
And.
Our software engineers.
Or just.
Way more.
Modern tech stack to work with and automated software delivery methods and.
And can also to your cloud point benefit by the tremendous not just well the tremendous and continuing inner.
Innovations that are happening on the cloud.
Our customer experiences to continue to get.
More and more.
Just better and better and some of the.
And we noticed it in net promoter scores and occasional awards that capital one wins.
The new products, we've been able to innovate things like.
Capital, one shopping virtual cards dealer navigator.
Instant issuance many things have been very benefited there I mentioned earlier the ability to get some transformational improvements on underwriting fraud management and a lot of things behind the scenes that leverage the power of big data and machine learning.
In real time that has been very beneficial.
Transformation also is.
Changing how we work inside.
Capital one are new marketing platforms.
Our part of the reason that we're investing more of these days in marketing is is.
Really the power of mass customized.
Machine learning driven.
Marketing.
So that's been a good thing.
And.
It's also as I mentioned earlier had a bunch of benefits in terms of enhancing productivity of the business and the final thing I would say there.
One is that the tech transformation is.
Really helping us get more of the thing we needed to start with to make it happen and that was talent.
The biggest elephant in the room for corporate America.
Who.
Sit on legacy Tech stacks is you need lots and lots of very modern best in class Tech talent in order to drive that transformation in a world where these scarcity.
The tightest and most competitive labor market Ive seen in the history of building capital one is the the.
The competition for really modern tech talent.
The transformation requires.
So much of that talent and one of our rewards is now as we.
Get on the other side of the Canyon and really have a tech stack built like the.
Very modern tech companies the ability to attract talent.
Is is accelerating and thats part of a virtuous.
Cycle that.
That is why we did it is why we went on this journey and it's something that we see to this very day and it's also why we continue to invest.
More in the opportunities that we see.
Next question please.
Our next question comes from Rick Shane with Jpmorgan. Your line is now open.
Hey, guys. Its friction I think guy's got called on.
Andrew quick question for you when we look at the AR.
Reserve rate on the domestic card portfolio ticked up.
Lightly.
The build was a function of portfolio growth.
Context is.
Year over year, the single biggest increase in delinquencies.
That we've seen.
I'm curious when you think about the factor setting the allowance going forward have you incorporated the trick.
Just three of how fast delinquencies are increasing or is it a function of where delinquencies are now and an economic outlook.
We capture that sort of rate of change.
Sure Rick.
Well, let me just start by talking about the inputs to the allowance I just think it's important to sort of ground on the mechanics, the entirety of the mechanics, not just the piece that you called out.
So the first factor of course is just the size of the balance sheet.
The second is really aligned to what you were just talking about but it's kind of a combination of factors in that is really our outlook for future losses net of recoveries against that balance sheet. So that starts from a place of looking at.
What is in the delinquency buckets today, which gives us a really good view of how the next say six months or so of losses are going to play out.
And then after that period, we have an assumption of continued normalization from those.
So it was unusually strong levels and then beyond that horizon as I think you know under Cecil Theres, just an assumption of a gradual revision to historical averages.
And then the third point is we apply qualitative factors against all of those expectations to account for uncertainties around.
Economic downsides and inflation related risks.
So when.
When we think about the allowance going forward, yes, I mean, today's allowance of course does incorporate in what is in the delinquency buckets today and what that implies.
But as we go forward the allowance is really going to primarily be determined by just the growth in the balance sheet and we saw that impact the allowance this quarter, but then secondly every quarter. We continue to normalize we're gonna be replacing lower loss Khan.
<unk> of the current quarter with higher loss content of future quarters.
<unk> again will be informed by how the delinquencies are playing through each successive quarter. So.
There's a number of other modest considerations, but that's really the two big forces at play.
And hopefully that gets to the kind of the nature of your question.
It does and I guess, what I'm really trying to understand is that.
If we.
Follow the path that you expect in terms of normalization and what's embedded in the reserves today.
And economic outlook doesn't change because again I realize that's something you can't control. If you follow the expected path will does that mean the allowance.
Static or do you follow along that path I think that's what I'm really trying to get to.
Well youre going to follow along that path. Because then when we get to a quarter from now we're going to apply all of those same factors to the allowance.
At a quarter from now and the change in the allowance is just going to be the quantum of allowance we have today compared to the quantum of allowance that we would have doing those exact same things a quarter from now.
Next question please.
Our next question comes from Bill car cash with Wolfe Research. Your line is now open.
Thank you good evening, Richard Andrew following up on that last question what level of unemployment would you say is implicit in your allowance and marrying some of the micro with the macro from the earlier discussion how does capital one's view the risk that some of the credit normalization trends that youre seeing currently will ultimately be accompanied by some.
Agree a degradation to the extent that the fed proceeds through the hiking cycle.
Why don't I take the first one.
Admit I'm not quite sure I, followed the second so I'll see if rich followed that.
Otherwise, we'll come back to you for clarification, but in terms of unemployment I'm not going to provide specific metrics or economic assumptions I will say, though bill we are generally consumers of.
Mike.
Industry forecasts as opposed to developing our own. So I think you could look at general consensus expectations for all of the key economic variables and assume that that kind of roughly approximates what underlies our.
Our economic views on those variables.
And I'm looking at rich to see if you followed the second part of your question.
Bill I think your your question was.
I'm going to put it in different words, just to see if I'm, saying the same thing.
Okay, We've got normalization going on right now with an economy that.
You know in some ways, certainly employment wise and some metrics you know.
Not in a terrible place.
<unk>.
You have normalization when normalization meats.
<unk>, a significant economic worsening coming out of that.
Or maybe catalyzed by the fed going through there they're tightening right now how do we feel about that.
It was that.
Yes.
Yes, I'm going to start doing earnings calls, but just asking the questions and answers.
[laughter].
So but.
Look that that is a great question and I think none of this should just be mathematical about normalization now I've talked about how the root word and normalization is normal because what is abnormal is that credit ever got to this one.
Once in a lifetime place it did during the pandemic so as I've said in the in.
<unk> normal times this thing.
Should.
Normalized so the way so.
No.
We we look at that and say unexpected.
That should continue and then.
We look at the economy and the way that we would always look at that as we've done many times, we've been looking down the gun barrel of.
Potentially.
Hi, Lee uncertain, and maybe likely a worse economy.
It's certainly hard to be in the prediction business.
But what we do is.
We.
The zip.
The.
Yeah.
Just a couple of big things that we do as an approach first of all we underwrite to an assumption of worsening we try to make it. So if things go bad it's not a surprise that.
It would be really bad banking too.
It would be underwriting to.
Good scenarios and I know, everyone tries to be conservative, but I'm, just saying with.
Over three decades in building this company at the heart of it is underwriting that looks in the rearview mirror of how programs are doing and overlaying a worsening assumption on that because that is.
It could happen and we need to be resilient to that so you'll often hear capital one talking about the word resilient resilient.
Without without a crystal ball about what's going to happen over time, the critical thing is what.
What is the resilience of the loans that we're booking and we spend a lot of time for example in the card business just looking at the.
The ratio of.
Revenue margin too.
Two the charge off rates and stressing that and all kinds of things. So we underwrite to worsening that's a very important thing.
Secondly, it is the.
The.
Management of credit decisions at the micro <unk>.
Level, so that we're looking.
Looking for the earliest indications of where problems can occur and like I said earlier, that's both where there is theirs.
Let me just give you a little bit of window into that.
We of course have our.
Way that we look at how all of our businesses are doing in all of our vintages are doing.
We leverage machine learning, though to also look for.
Aberrations and anomalies that happened faster than they would show up with a report.
And maybe coming from sources that would not be our standard set of variables by which otherwise our models would look at the business and so.
Real time.
Machine learning driven monitoring is really important in any environment, but but we.
It's really important in an environment like this because we're looking for because we expect the anomalies to happen we expect some of our segments.
To be stressed in the even the current environment and certainly as things get worse and so we're on the lookout and we add machine learning to help us.
Then as I mentioned earlier, sorry to be repetitive, but.
But then but it's not just letting the machines and the models do the work is standing back and saying.
Gathering people around and saying, let's think of all the things that could go wrong. What do you think could go wrong.
And what where would weaknesses appear and then based on that intuition, we go hunting for them.
And as and.
All of the different approaches have have been bearing fruit lately.
On a more modest basis in the in the card business.
Little bit bigger basis in the auto business and I would expect as the environment gets.
If it gets a whole lot worse from here.
We're going to.
There's going to be a lot of active trimming all over the place and.
And so it's a combination of literally the most micro.
Analytical approaches.
<unk> the.
Most intuitive.
And big picture.
Judgmental approach to managing risk.
Next question please.
Our next question comes from Mihir Bhatia with Bank of America. Your line is now open.
Hi, Thank you. Thank you.
She called on me, but I wanted to ask about the <unk>.
I appreciate your comments earlier about Youre enthusiastic about.
All of Scott lending social spectrum, but just given the recent focus on the higher spend in the.
More <unk> type customers I was wondering if you think that growing that portion a little bit maybe that portion has been growing at an outsized rate how is that growth off that subsegment potentially change that.
Card portfolio's performance through the cycle in a downturn.
Okay.
That is a great question in fact, let me pull up for a second before I answer your question.
We have we have very gradually across the business paralleling the quiet the move to the top of the market all of across all across our business we have been.
Leaning harder into the spenders side of the business.
And just.
Continuing to be most attracted to customers who are.
Are there to spend.
Patterns would be more consistent with the spending side of the business even as there.
There's a bunch of revolving so across our business. There has been a very gradual but purposeful migration for years toward the spender side. So I put that down there and then and then.
And the second thing is the.
Yeah.
Avoidance of high balance revolvers, and then thirdly, the thing you're pointing to the.
Yeah.
Importantly, increasing mix of heavy spenders.
In our business.
The impact I think when the downturn comes.
These things that we've been leaning to leaning into and things we've been avoiding them.
Should be all.
All other things equal beneficial to the performance of the business in terms of the credit losses themselves.
The.
The payment rates that we experienced there.
During the business.
And.
Part of why we have leaned into spenders more is just because all the evidence that we have seen is is that tends to just be pound for pound more resilient growth group. So.
While it is not a controlled experiment.
I think the net effect of these changes.
We will be beneficial to the credit results.
And.
I think <unk>.
Hence the resilience of the business that we have booked.
Thank you and then just if I could ask just about the tech investments that you've been making can you talk about just how does how do they improve your ability to flex our expenses as the competitive all macro environment changes.
<unk>.
Yeah.
Ironically.
I think today.
They may be.
Make things a little less flexible to two.
Hum.
Expense side, let me explain that an increasing part of our cost structure as a company is our.
You know is our.
Is the tech business that we have built it's got a lot of fixed cost to it and you.
So.
That that is not I wouldn't want to set an expectation that our sort of our tech stack and our tech company that we've built.
<unk> is a more variable cost business, because if anything it might be a little more fixed cost business.
Now.
There within that choices on what we invest in and the timing of those always create flexibility and in stressful times, they're certainly on the investment side within tech can be more flexibility flexible ability there.
But the tech investment, though pulling way up is tremendously enhanced capital one's overall flexibility our ability to turn quickly.
In in the marketplace to make credit choices. If you look back to the win we all win when the world went into vertical.
Free fall of of uncertainty in the pandemic.
Just look back at how quickly capital one turned with respect to some of the pullbacks, we did that.
That would not have been possible in the more legacy world that we lived in before.
The ability to respond quickly the ability to create.
Changes in.
You know the offerings to consumers the ability to create a.
We have flexibility in offering flexibility in forbearance.
New ways to adapt to the marketplace.
Everything about capital one and the speed of change.
[noise] of manage change is dramatically different.
Before we also and this is probably the most important recession resilience point is the monitoring point I made earlier to have put in place.
A much more comprehensive real time monitoring capability with a root cause analysis, that's much more comprehensive than what we could have done before.
Will allow us to be.
We informed earlier on about things that are happening and I do want to say I've been asked by a number of investors.
Rich, we know you well enough to know how cautious you are about the economy and about downturns in the end.
The.
Utmost.
Respect for.
What how risk can play out in these businesses.
Why are you leaning into the marketing opportunity and one of the reasons that we're doing that.
Is this just substantially improved measurement monitoring and speed of response.
And the level of segmentation and micro segmented patient by which we can do that.
It gives us.
Allows the sort of paradoxical thing to lean in more.
Then we otherwise might have been able to do.
Next question please.
Our final question. This evening comes from Dominic Gabriel with Oppenheimer. Your line is now open.
Hey can you hear me.
From Oppenheimer.
Yes.
Okay sorry.
I guess so.
Is there any reason rich why.
You would expect the payment hierarchy, among consumer products in which they choose to pay a default, let's say in times.
Severe stress surety reason why.
Youre seeing that would change that hierarchy. This cycle around from previous cycles, and then I just have a follow up thank you.
Dominate that's a great question I can only sort of speculate here, but.
The.
The most striking thing about the global financial crisis, and great recession that upfront payment hierarchy point of view.
Is what we saw with people literally walking away from their mortgages and what was really high on the payment hierarchy was auto loans.
And you know we.
And that may be kind of a more universal resilience point on the auto side, because people still have to drive to work and.
You know.
So that that's probably more of a of a.
Sustaining insight.
I think that.
The.
We got to look at student loans, and think about where that I think we've already observed that's pretty low in the payment hierarchy and trends these days and for forgiveness and various things there would probably.
Ensure that it's on the lower end.
Another one that I would probably just speculate would to add to the hierarchy. This year is this time around.
As fintech.
And I think.
The fin techs, who don't report to the credit bureaus.
May have enjoyed there.
Still some opportunity to grow.
But.
That's probably not lost on the consumers and so I think.
One of the reasons, we've really leaned harder into having.
<unk> spending be the anchor.
Part of a consumer credit card relationship.
Is that it's not only a healthier place to be from the consumer point of view, but.
I think counting on that credit card and making sure that you've got that in a downturn.
That helps from a payment hierarchy point of view.
Okay, Great and then just when you just think of if I just want to go back to the tech investment and spend and how you think about it over the cycle and perhaps even some of the peers that you that you talked to at conferences.
How do you as a as one of the country's largest banks think about the investment that you put on and what do you find does have what type of economic factors as the NIM is that NII growth changes in the credit growth changes that can have you put the brakes on the edges.
Year over year growth and tech investments spend that thank you so much.
Well.
Thank you Dominique these are all great questions.
You know we.
We.
Okay.
In case, you haven't noticed.
I have a pretty.
Deep conviction about the benefits of these tech investments and.
That's not just how I feel that's how all of us collectively feel here at capital one.
And.
The benefits of that tech investment or so.
Comprehensive all the company we can inside this company, we can see them everywhere and they do so and enhance how we work the ability to manage risk the ability to serve customers the ability to create new products the ability to grow.
And so we.
Do and because we see such benefits.
We are.
Our continuing to lean into tech investments and as I mentioned earlier, there is sort of under the surface quite a bit of productivity gain coming from the tech investment, but on the other hand at the same time, we're leaning in pretty hard into tech investments such that.
It's.
The effects are not that dramatic in fact over.
Close to a decade, there has been a more gradual kind of improvement in operating efficiency.
We.
Theres always the opportunity if times get really tough to pull back on tech investments, but we are not viewing.
Viewing these like luxury investments and just.
What to do on a rainy on a sunny day because they are.
Very materially.
Transforming the opportunities of this company and the ability to manage risk and the ability to weather the very downturn that might motivate that reduction in investment.
Well. Thank you everyone for joining us on the conference call sheets team will be.
Capital one remember the Investor relations team will be here. This evening to answer further questions you may have.
Good evening everyone.
This concludes today's conference call. Thank you for participating you may now disconnect.
The conference will begin shortly to raise your hand during Q&A you can dial one one.
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