Q1 2023 Capital One Financial Corporation Earnings Call

April 27, 2023

Good day, and thank you for standing by and welcome to first quarter 2023 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 to ask a question. During this session you will need to press star one one on your telephone you will then hear an automated message advise your hand is raised to withdraw your question. Please press star one again, please be advised that todays call.

<unk> is being recorded I would now like to hand, the conference over to your Speaker today, Jeff Norris Senior Vice President of Finance. Please go ahead.

Thanks, very much Amy and welcome everybody to capital one's first quarter 2023 earnings conference call as usual, we are webcasting live over the Internet.

Access the call on the Internet. Please log on to capital one's website capital one dot com and follow the links from there.

In addition to the press release and financials. We've included a presentation summarizing our first quarter 2023 results.

With me. This evening are Mr. Richard Fairbank capital one's chairman and Chief Executive Officer.

Mr. Andrew Young capital ones, Chief Financial Officer.

Richard Andrew will walk you through this presentation.

To access a copy of the presentation and the press release. Please go to capital one's website click on investors then click on quarterly earnings release.

Please note that this presentation may contain forward looking statements.

Information regarding capital one's financial performance and any forward looking statements contained in today's discussion and the materials.

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

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

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

For more information on 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 that are accessible at the capital on website and filed with the SEC.

With that 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 first quarter capital, one earned $960 million or $2 31 per diluted common share.

Pre provision earnings of $4 billion were flat to the fourth quarter and.

And up 3% relative to the fourth quarter net of adjustments.

Period end loans held for investment declined 1%.

And average loans were flat.

Total deposits grew throughout the quarter.

Increasing 4% on average.

And 5% on an ending basis.

The increase in deposits was driven by strong retail deposit inflows.

Which was slightly offset by a decline in our commercial deposits.

Our strong retail deposit growth drove our percentage of FDIC insured deposits up 2% to end the quarter at 78% of total deposits.

We have provided additional details on deposit trends on slide 18 in the appendix.

Revenue in the linked quarter decreased 2%, primarily driven by lower noninterest income.

While net interest income was largely flat.

Noninterest expense decreased 3% in the quarter.

Driven by a decline in marketing from the seasonally higher fourth quarter.

Operating expenses were up about 2% on a GAAP basis, and roughly flat net of the fourth quarter adjusting items.

Provision expense was $2 8 billion.

Driven by net charge offs of $1 7 billion and an allowance build of.

$1 1 billion.

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

The $1 $1 billion increase in allowance brings our total company allowance balance up to $14 3 billion.

As of March 31.

The total company coverage ratio is now 464% up.

Up 40 basis points from the prior quarter.

And our allowance our assumptions for our key economic variables remained similar to those of last quarter.

We continue to assume economic worsening from today's levels on most measures.

I'll cover the drivers of the changes in allowance and coverage ratio by segment on slide five.

In our domestic card business, the allowance balance increased by $867 million.

Increasing our coverage ratio by 69 basis points to 766%.

Our build in the quarter was primarily driven by three factors.

The first factor is the impact of underlying growth in the quarter.

Replaced seasonal balances from the fourth quarter for which we held minimal allowance.

The second factor is the impact of removing the relatively lower loss content from the first quarter of 2023, and replacing it with higher forecasted loss content for the first quarter of 2024.

Recall that our allowance methodology uses a 12 month reasonable and supportable forecast period before it begins to revert to our historical loss average with additional consideration of qualitative factors.

And finally, the third factor in our allowance build was the impact of acquiring the bj's portfolio in the quarter.

In our consumer banking segment, the allowance balance declined by $32 million, mostly driven by the decline in loans.

The coverage ratio increased by two basis points.

And now stands at 2.82%.

And finally in our commercial banking business, the allowance increased by $245 million.

The coverage ratio increased by 28 basis points and now stands at 182%.

The allowance increase was driven by a $262 million reserve build related to our $3 6 billion dollar commercial office portfolio.

The coverage on the commercial office portfolio increased about 770 basis points and now stands at 13, 9%.

We have provided additional details on this portfolio on slide 17 of the presentation.

Turning to page six I'll now discuss liquidity.

You can see our preliminary average liquidity coverage ratio during the first quarter was 148%.

Up from 143% last quarter, and 140% a year ago.

Total liquidity reserves in the quarter increased by $20 billion to 127 billion.

Primarily driven by increased levels of cash.

Our cash position ended the quarter at $47 billion up 16 billion from the prior quarter.

This increase in our cash position was primarily driven by the strong consumer deposit growth I referenced earlier.

We expect average cash balances in the near term to be elevated relative to pre pandemic levels.

In addition to the higher cash the market value of our <unk> Securities portfolio grew $5 billion to 82 billion at the end of the quarter.

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

Our first quarter net interest margin was six 6%.

24 basis points lower than last quarter.

And 11 basis points higher than the year ago quarter.

The 24 basis points quarter over quarter decline in NIM was driven by two factors.

First <unk>.

15 basis points of the decline was a result of having two fewer days in the quarter.

And second the mix impact of the elevated cash balances that I previously described pressured NIM by approximately 11 basis points.

Outside of these two effects higher asset yields roughly offset higher funding costs.

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

Yeah.

Our common equity tier one capital ratio ended the quarter at 12, 5% flat to the prior quarter.

Net income in the quarter and lower risk weighted assets were offset by common and preferred dividends.

The $150 million of share repurchase we completed in the quarter.

And a 17 basis point impact from the phasing of the seasonal transition.

At the end of the first quarter.

The unrealized losses in a OCI from our Hff's investment portfolio were $6 $7 billion.

If we were to include the impact of these unrealized losses in our regulatory capital.

Our CET one ratio would have ended the quarter at 10, 5%.

And we continue to estimate that our longer term CET, one capital need is around 11%.

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

Thanks, Andrew and good evening, everyone I'll begin on slide 10, with first quarter results and our credit card business year.

Year over year growth in loans and purchase volume drove an increase in revenue compared to the prior year quarter credit card segment results are largely a function of our domestic card results and trends, which are shown on slide 11.

In the first quarter strong year over year growth in every topline metric continued in our domestic card business purchase volume for the first quarter was up 10% from the first quarter of 2022.

Ending loan balances increased $23 billion or about 21% year over year.

And revenue was up 17% year over year, driven by the growth in purchase volume and loans.

Revenue margin declined 58 basis points from the prior year quarter and remains strong at 17, 7% revenue margin continues to benefit from growth in the high margin segments of our card business in the first quarter that benefit was more than offset by two factor.

<unk> first loans are currently growing at a faster rate than purchase volume and net interchange revenue that dynamic as a tailwind to revenue dollars, but a headwind to revenue and margin.

And second as charge offs increase we're reversing more finance charge and fee revenue.

Both the charge off rate and the delinquency rate continued to normalize the domestic card charge off rate for the quarter was up 192 basis points year over year to 4.04%.

30, plus delinquency rate at quarter end increased 134 basis points from the prior year to 366% and is now essentially at its March 2019 level.

The charge off rate.

Hasnt caught up yet, but based on what we see in our delinquencies. We think the monthly charge off rate will get back to 2019 levels around the middle of this year.

Noninterest expense was up 11% from the first quarter of 2022, driven by higher operating expense, partially offset by a modest year over year decline in marketing.

Total company marketing expense was $897 million in the first quarter our choices in domestic card marketing are the biggest driver of total company marketing.

First quarter marketing was down about 2% from the year ago quarter and down about 20% from the fourth quarter of 2022 as the first quarter is typically the seasonal low point for domestic card marketing.

We continue to see attractive growth opportunities in our domestic card business our opportunities are enhanced by our technology transformation.

And we're leaning into marketing to drive resilient growth as always 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 domestic card new accounts purchase volume and loans across our card business and strong momentum in our decade long focus on heavy spenders at the top of the marketplace continues.

Slide 12 shows first quarter results for our consumer banking business in the first quarter auto originations declined 47% year over year and 6% from the linked quarter.

Driven by the decline in auto originations consumer banking, ending loans decreased $2 $2 billion or 3% year over year on a linked quarter basis, ending loans were down 2%.

We posted another quarter of strong retail deposit growth first quarter ending deposits in the consumer bank were up almost $33 billion or 13% year over year and up 8% compared to the sequential quarter average deposits were up 9% year over year.

Year and up 6% from the sequential quarter powered by our modern technology and leading digital capabilities. Our digital first national direct banking strategy continues to get good traction.

Consumer banking revenue was up 12% year over year, driven by deposit growth noninterest expense was up 4% compared to the first quarter of 2022.

The auto charge off rate for the quarter was 153% up 87 basis points year over year. The 30, plus delinquency rate was 5.0% up 115 basis points year over year.

Compared to the linked quarter the charge off rate was down 13 basis points and the 30, plus delinquency rate was down 62 basis points the linked quarter trends were consistent with expected seasonal patterns.

Slide 13 shows first quarter results for our commercial banking business compared to the linked quarter first quarter ending loan balances were down 1% and average loans were down 2%.

The decline is the result of choices, we made earlier in the year to tighten credit as well as higher customer pay downs in the quarter.

Ending deposits were down 6% from the linked quarter average deposits declined 7%.

Two factors drove the decline we saw a normal outflows throughout the first quarter as clients use their cash for payroll tax payments and other business as usual disbursements and consistent with the general trend we've seen for several quarters. We also continued to manage down selected less attract.

<unk> commercial deposit balances.

First quarter revenue was up 10% from the linked quarter recall that revenue in the prior quarter was unusually low driven by a company neutral move and internal funds transfer pricing.

Excluding this prior quarter impact first quarter commercial revenue would have been down 10% driven by a decline in noninterest income from our capital markets and agency businesses.

Noninterest expense was down 5% from the linked quarter the commercial banking annualized charge off rate was nine basis points criticized loan balances increased primarily in our commercial real estate business.

The criticized performing loan rate increased 60 basis points from the linked quarter to 731% and the criticized nonperforming loan rate was up five basis points from the linked quarter to 0.79%.

In closing once again, we delivered strong growth in domestic card revenue purchase volume and loans in the first quarter. We continue to see opportunities for resilient domestic card growth that can deliver sustained revenue annuities and we continue to lean into marketing and as always.

We're closely monitoring and assessing competitive dynamics and economic uncertainty.

In our consumer banking business loans declined modestly and consumer deposits grew in the quarter, our national digital first consumer banking strategy continued to grow and gain traction and we're leaning into marketing to grow our consumer deposit franchise.

In our commercial bank, ending loans and deposits were down compared to the linked quarter, reflecting our cautious stance in the commercial banking marketplace. Our commercial bank continues to focus on winning through deep industry specialization.

And across our businesses credit trends continued to normalize in the quarter and we reached or were approaching pre pandemic levels at quarter end.

We continue to expect that the full year 2023 annual operating efficiency ratio net of adjustments will be roughly flat to modestly down compared to 2022.

And our balance sheet demonstrated its strength through the recent period of turmoil in the banking industry in the first quarter, we built additional balance sheet strength as we increased the allowance for credit losses grew retail deposits and maintained or increased strong levels of capital and liquidity.

Pulling way up the future of everything in banking.

Is digital and with each passing quarter banking is accelerating toward its inevitable destination capital. One is at the vanguard of a very small number of players who are investing to build and leverage a modern technology infrastructure from the bottom of the tech stack up to truly transform technology and put themselves in it.

Vantage positioned to win as banking goes digital our modern technology capabilities are generating an expanding set of opportunities across our businesses. We are driving improvements in underwriting modeling and marketing as we increasingly leverage machine learning at scale, we are transforming the customer experience in banking.

And our tech engine drives growth.

<unk> improvement and enduring value creation over the long term.

Our investments to transform our technology and drive resilient growth put us in a strong position to deliver compelling long term shareholder value.

And 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 remember as a courtesy to other investors and analysts who may wish to ask a question. Please limit yourself to a single question plus a single follow up.

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

Amy please start the Q&A.

As a reminder to ask a question. Please press star one one on your telephone and wait for your name to be announced to withdraw. Your question. Please press star one again, please standby, while we compile the Q&A roster.

And our first question is from Kevin Barker with Piper Sandler Your line is open.

Good afternoon, and thanks for taking my questions just wanted to follow up on the reserve build within the card portfolio.

And the slide presentation worsening credit trends in domestic credit cards.

But it seems like your prepared remarks.

This is more of a normalization than anything else and you continue to grow.

What gives you confidence that.

This reserve build in the.

Fairly rapid increase in delinquency and net charge offs.

Is truly a normalization as opposed to signs of further deterioration that's likely to occur. Thank you.

[laughter].

Kevin.

Thanks for your question there Yeah, let me just.

Talk about this look I think as we as things get back to where they were pre pandemic at some point the word normalization will need to retire that because things get.

Pretty normal.

So, let's just talk just a little bit about.

You know, what we're seeing and.

Whats inherent in how we are.

In our outlook.

At this point many of our credit metrics have returned to their pre pandemic levels, others have not yet, but they're they're headed there.

And we have.

Particularly pointed out it's probably the best single metric to look at as delinquencies and.

Delinquencies in the first quarter, we're at 366%, which is essentially back to 2009.

2019 levels excuse me.

Now our charge offs haven't caught up yet but.

Based on.

What we see in our delinquencies, we think they'll get back to 2019 levels around the middle of the years.

The year excuse me and.

Our credit metrics tend to move what I've seen just over the many years, probably a quarter or two ahead of the industry in both directions. We saw that in the global financial crisis, and we saw it again in the pandemic and we're probably seeing it again here. So first of all just relative.

Two our outlook and how we think about in terms of forecasting.

Our our losses going forward.

There is.

There is a one effect that's more of a capital one <unk>.

Fact, it's an effect that exists for everyone I think it's more pronounced for capital one relative to.

Our loss rates, which is related to recovery. So let me just pause and explain that one for a minute.

Past charge offs are of course, the raw material for future recoveries and we just lived through three years of very low charge offs. So our recoveries will be unusually low in the short to medium term.

This is a larger headwind for us than most others, because we tend to have meaningfully higher recovery rates than the industry average.

And because we tend to work.

You know most of our most of our recoveries, we tend to work them on our own as opposed to selling them. So the recoveries come in over time and not all at once.

As would be the case in a debt sale.

So that said just to capital one effect that we've been talking about for a while and that is.

Inherent in sort of the math of how.

Our charge offs are working and will work over time.

The other effect is the economy and we are assuming.

A material worsening of label labor markets with the unemployment rate rising from today's very low levels to above 5% by the end of 2023. We are also assuming adverse effect.

From inflation and some further worsening of consumer profiles from the sort of the flip side of their extraordinary.

Outperformance in the earlier.

Period during the pandemic.

So.

That's just a comment about.

How we you know create outlooks, we continue to feel very good about the business.

Leaning into our growth opportunities.

Our originations are coming in are consistently solid.

And we.

We like the opportunities we see out there we underwrite we always have under underwritten for.

Worsening scenario, so as the economy.

It was sort of asked credit performance normalizes, which we've expected for a long period of time.

We are.

We are just continuing right.

On the path, we have been on for quite some time every every quarter, we trim a little bit around the edges, where we see or where we anticipate and effect where customers might be a little bit more vulnerable were also struck by.

The continued expansion of opportunities that are very resilient and we're leaning into those so.

We this business is built to.

Anticipate.

You know volatility and losses and higher loss rates and.

<unk>.

What we're doing is consistent with things that we have expected and we continue to really.

Feel good about the opportunities.

Okay and then in the past you made comments that the new growth flow rates relatively normal.

And a lot of your newer business do you continue to see that.

Then also in the near term.

Are you still seeing the type of traction from your marketing spend.

I guess in the first quarter as you did in 2022.

Yeah. So.

On.

Your question about flow rates.

Let me let me just.

Why don't I, just seize the moment, a little bit and just talk about a bunch of our credit metrics and are and where they are.

So we've talked about delinquencies we've talked about.

Losses are.

Our individual flow rates.

Have normalized and if we look at very early entry flow rates in a couple of delinquency buckets and some cases theyre just a tick higher than they were.

In the.

Way back in 2019 levels, but.

Things are basically.

Back.

Our payment rates have payment rates are a striking thing because you saw just the electrifying. It. So if you look at the trust data the electrifying.

Increase the whole industry's flow rates increased pretty dramatically dramatically capital one's increase the most and that was a striking in fact, driven really by two different things. One is the flip side of the or a manifestation of the extraordinary credit.

Performance of the consumer where they just we're in such.

Good position they just were paying.

The card off it at high levels.

And it was also a manifestation of the continuing mix shift towards the top of the market and the traction we're getting in heavy spenders.

No.

Payment rates have declined from the very high levels theyre not even close to.

Where they were originally but because of these two effects, if we separate them out and sort of look segment by segment.

See that payment rates.

Our declining in every segment, but not <unk>.

Not yet back to.

Where they were pre pandemic, so that's something to keep.

And I on there.

The.

Our revolve rate is roughly flat to last year and remains below pre pandemic.

<unk> levels.

But I think again there is a there's a growth in transacting balances effect. There. So so we'll have to sort of adjust for that.

And then a very important one is new originations, let's talk about that.

So we see early performance that is consistent.

With our expectations the earliest delinquencies.

We of course look very carefully at the early delinquencies on our most recent vintages that would be some months ago, because they have to have a few months a week, where we can start reading them, but the earliest delinquencies on our newest monthly vintages of origination.

Consistent with pre pandemic.

Originations as.

As we compare one.

Segment at a time on current originations versus several years ago.

And then vintage over vintage months over months for recent vintages, we're seeing pretty stable risk levels.

No.

You know we feel very good about that one thing that I I've commented on.

Overtime is we have continued to.

In anticipation of market changes trim, a little bit around the edges. So that are the fact that our originations are performing on top of sort of where they were several years ago.

Is also the result of some active anticipatory.

Management and so probably.

It offset some underlying worsening that's happened.

In the marketplace. So.

If you if we pull up on on that.

Set of metrics.

Our.

We continue to feel.

A very good about the choices, we're making as I said before.

The.

You know this is this is.

Put us in a position to continue to lean into the marketing.

We are in our originations anticipate worsening as just a matter of underwriting anyway and.

So we're leaning into the marketing even as we continue to trim a little bit around the edges here or there.

And.

So and.

In some ways that our message here is just very very similar with the feel of how this has been for really quite a few quarters now.

Next question please.

One moment please.

Next question comes from Betsy <unk> with Morgan Stanley . Your line is open.

Hi, good evening.

Hey, Betsy.

So just want to make sure I understand on the reserve ratio I know you were already spoke a lot about it. So I just want to make sure I understand you could just say, yes or no.

Is it fair to assume that the reserve ratio should go up every quarter.

Where the macro stays you know in the current situation that we've got right now because the book that's rolling on.

Is worse quality and then the book that's rolling off is that is that fair.

I don't want to limit myself to a yes or no. That's the framing of your question. The short answer is no.

And I will spare you from the allowance tutorial answer that I provided a quarter ago, but.

Really the mechanics are we have assumed for the losses are reserved for the losses that based on the current balances that were on the books at the end of the quarter, what we assume we will experience over the next 12 months.

And so if you're just replacing loan for loan with similar characteristics you wouldn't otherwise have a build.

Okay, I'm getting if I'm interpreting the nature of your question.

Correctly, Okay and then the follow up question is just on a slightly different topic, which has to do with the expense ratio. I know you mentioned that youre looking for the operating efficiency to be flat to down this year on a year on year basis.

Just wondering how to square that with what you mentioned on the marketing side, where it sounds like you.

See a lot of opportunities in card and you are planning on leaning into more.

On the marketing side, so just wanted to square those two things up.

Well Betsy let me just clarify and then I'll turn it over to rich when our guidance for efficiency relates to operating expenses. It is not a total efficiency point and so it would exclude whatever choices, we make in marketing from from that calculation, but I'll turn it to rich.

To respond to the broader question, yes, well I was going to say the same thing so.

Our guidance is with respect to operating efficiency ratio to be flat.

To modestly down relative to 2022, and we continue to put a lot of energy into that of course.

The total efficiency ratio includes also the marketing side of the business as we've talked about that's not part of our specific guidance. Our marketing choices are very dependent on the opportunity that we see and Betsy are you in most of the people on this call have known capital one for a long time and when we see opportunities we really.

Lean in on them and.

So.

We can talk about marketing maybe on another question, but.

That's the.

Efficiency point there.

Next question please.

Our next question.

It comes from the line of.

Moshe Orenbuch with credit Suisse. Your line is open.

Great.

Good evening.

Chris You had mentioned that you expected the card charge offs to kind of reach 2019 levels by the once a year.

You also talked a little bit about assuming higher unemployment over time I guess.

No.

What's the what.

What should we think about is the trajectory which.

Which is 2019, a stopping point or as you know.

If your.

If you were expected unemployment levels are reached we would expect to see those losses go up even.

You've been out here.

Okay.

So.

Moshe just with respect to unemployment rates.

The I want to make a comment on that.

All companies, including capital one tried to look into.

Limited historical data and is the thing I often call trying to model onto Hamzah. The camel, because it's only been a small number of times in the history of the card business.

That various.

Economic metrics have gone up and gone down so limited to the the camel hump point.

We all do our best to try to.

Look at the drivers of that.

And the correlations with respect to credit losses.

A striking thing all along in our journey has been the.

Sort of parallel movement of unemployment rates and.

Credit losses, so the.

It turns out from a modeling point of view.

You know we.

While often in the standard way people talk about things to focus on the level of unemployment and many of our models actually the rate of change is what matters. Most most.

There is a.

Measure like monthly job creation or is the change to the unemployment rate. So an increase in the unemployment rate from the threes to the fives is pretty material worsening, but that's more of a window into the.

Well, we would be cautious about.

Even though historically.

Card losses, almost strikingly to the number of average industry card losses, they've been pretty close to the unemployment rate over those two hubs.

Campbell in the past.

But.

You know I think that.

I think we lean a little harder into the effects that happened when unemployment rate changes and therefore that just happens to be a bigger element in our own models I do want to just make a couple of other.

Points just.

Intuitive points about.

The economy. So we start with a consumer that has been a very strong place we know that in the consumer excess savings on averages of course you know.

<unk>.

Winding down, but it's still there but of course credit losses play out at the margin not just.

On average but.

Just a couple of effects that none.

None of US will know till you know sort of after the fact, but one of the two I'm going to talk about we'll never know, but just wanted to comment on those because those affect our outlook of where credit losses can be one one of course is inflation.

And we.

None of us really have historical data.

In the card business to understand or predict the effects of significant increases in levels of inflation, but we are expecting inflation to impact consumer credit by compressing real incomes.

And as kind of a separate effect from an unemployment effect and you know we.

<unk>.

Since we haven't seen sustained it sustained inflation for more than 40 years, we can't really model this effect directly but we.

Make informed assumptions in our outlook to sort of account for this effect. So for example.

A way to think about this is if there is a decline in real incomes that happens with this we can look at our Uh huh.

Our history and our our cross sectional evaluation of how people do as a function of different income levels and we you know and then we can sort of extrapolate from those credit effects and proxy how something like inflation can.

Have an effect there so it's sort of using proxies, but.

It matches off to an intuitive assumption that high.

High levels of inflation are going to be.

Challenging for people.

And finally, the other effect is as I intuitively think about.

You know the marketplace.

Over all the years.

My journey in this we've tended to see that periods of abnormally good credit are followed by periods of worst credit and vice versa.

And the credit performance, we saw over the past three years was unprecedented so there's.

What maybe we could call a catching up effect that happens on the other side of that.

You know for consumers, who might otherwise have charged off over the past three years and sort of the reverse of this effect happened in the global financial crisis, where charge offs were accelerated and then it was kind of followed by a period of strikingly benign credit. This is an effect.

<unk> believe we can't measure it.

We won't even in hindsight would be able to measure it but I just think it is.

It's part of the intuition that we bring into the business. So when we pull kind of way up on things.

We share with you the credit metrics that.

You know that that we see and pretty much what you see is all that we see so now we're all in the business of saying where does this go from here.

The Ah <unk>.

<unk> with you some intuitive views that would lead to a higher charge off levels.

Over time.

And when we look at those when we look at our card how we underwrite in card we both can.

Believe effects like this.

R R.

Joe will happen over time and also how strong the opportunity in card.

<unk> continues to be so that's just a little window into how we think about that and then you know that's sort of you know me talking but then of course, Andrew latest whole process relative to an end.

Our head of credit a whole process relative to the allowance build but.

Anyway, those are some thoughts about.

Credit and how are the kind of factors that may play out over time.

Great. Thanks.

Thanks, Rich, maybe just switching gears a little bit you mentioned.

The capital ratio and then the capital ratio.

Ci were excluded.

Included.

When you think about capital return over the next year, which one of those or are you using as your base.

Yeah.

[laughter].

Yes, Moshe it's Andrew.

We look at a number of things as we are considering our our capital actions and so I've been saying for a couple of quarters now we've seen an increased level of uncertainty in the economic environment.

The wide range is around growth opportunities.

And everything that's happened over the last month and a half has increased that level of uncertainty.

And so we continue to believe that it's prudent to operate above our 11% long term target both until we have more clarity both not only on the economic front, but to the potential regulatory changes that may be coming down the pike, which could very well.

Include treatment of a OCI in capital, but of course, we don't know that yet and so for now we're continuing to operate above that that long term target, but suffice it to say we.

We have substantial capital generation capacity and we regularly evaluate our plans in light of the economic changes in light of regulatory changes, we have the ability to pivot quickly in our deployment and certainly we will do so when we feel like the time is right.

Next question please.

Our next question comes from Richard Shane with Jpmorgan. Your line is open.

Thanks for taking my questions, Hey, Andrew I'd like to talk a little bit about the impact of the surge in deposits.

When we look at the.

Impact it appears that it primarily run through the corporate and other line in terms of where the NIM and active but the other change that I think we see is it looks like the transfer pricing on deposits when down modestly when we think about things going forward should we.

Assume that Theres a continued drag.

So it's a corporate line from the elevated deposits and because the reinvestment rate is lower that the transfer pricing is going to be a little bit lower as well.

Well, Rick let me just clarify first and I'm, assuming you're just looking at the net interest income trends in other which does serve as a clearinghouse for ftes, but.

To talk to you offline in more detail about this but the basic tenants of the FTP processed or theres, an arm's length transaction between corporate other and deposits and so they're getting a prevailing rate which shows up in the revenue of either the consumer banking segment or the.

The commercial banking segment, and so there isn't a subsidy or drag going on there theres just a number of other clearing factors that happened in other.

Understood, but actually we figured out a way over the years to calculate the NII on the transfer deposit through the consumer bank and it looks like they were down and it's been very accurate over a long time.

It looks like the transfer deposit rate was down about eight basis points.

So at.

The consumer bank. So I'm curious it looks like there was a drag in terms of corporate and other and actually the benefit at the bank.

A little bit less attractive from an NII perspective as well.

Hey, Rick it's Jeff.

I don't think we can comment on the calculation that youre doing that we don't.

Fully understand why don't you and I take that offline.

Okay terrific. Thank you guys.

Okay.

Sure.

Great next question please.

Yeah.

Oh, It's next question please.

Our next question comes from Erin <unk> with Citi. Your line is open.

Thanks.

Can you talk a little bit about credit card purchase volumes are quickly inched up a little bit during the quarter.

But from others that they are seeing a slowdown in purchase volume in March and into April what are you seeing within your portfolio.

Are there any differences between different income demographics that you're seeing within your customers.

So Erin yes. Thank you, let's let's just talk about purchase volume.

So.

In Q1, our card purchase volume was up 10% year over year.

And this grows while it's very solid has decreased from the first part of 2022, but I think it's striking to separate out.

Spend per active account and then like the growth in.

Of of.

Accounts and some of the benefits of our recent origination effort. So when we look at spend per active account.

No it was.

Sort of it just.

Really surge from the doldrums of the deep pandemic, then it really surged into the levels. It was a year ago.

We see spend per active account is pretty flat to a year ago.

And.

It is and we can watch it on a I mean typically over the last few months it has been.

Sort of declining.

On on that.

Coming down to basically.

A sort of net result of being flat to a year ago or I think maybe it's actually in the last couple of months a little bit under.

Where it was a year ago, if I remember that the graph that I was looking at now initially it's a funny thing.

So often we see effects.

That start on the lower income lower credit scores side.

And then and then make their way up I mean, that's pretty much the whole way credit has played out.

Both on the improving side in the pandemic and then on the normalizing side, that's happened but on spend.

This this is slowing down happened in lower income segments first but now it's more broad based across.

Income bans and really segments of our card business.

So.

We of course are having very nice growth in accounts and that's continuing to power purchase volume even as the spend.

Sort of levels out now in the spirit of.

What are we rooting for it seems to me to be a pretty rational thing for spent for consumers to sort of level off this pretty strong spend that they have had so I think.

What we see we're pretty pleased.

With and.

And then when we look at things like discretionary and non discretionary spending both of them have slowed significantly over the last.

The year that the growth rates have slowed significantly but the.

The category mix of spend.

You know the more things change the more they stay the same because basically.

Pretty much across all.

The categories things have returned to the breach pandemic level.

Thanks, and just following up I appreciate the commercial office.

Disclosures and you put in your slide deck.

It looks relatively small comparative to.

The overall commercial and overall loan portfolio totaled together, maybe you could just talk a little bit about your commercial real estate.

I know you're required several kind of smaller banks, North Fork and Hibernia and Chevy Chase or are these predominantly.

Portfolios from around those regions or do you also have a national lending businesses deals and larger commercial real estate as well.

Yes, let me start by talking about kind of what is and isn't in the disclosure that we provided because I know there's differences across various organizations as you know that it's a little less than $4 billion and represents about 1%.

Our total loans, but this is our commercial office space. It is excluding as you probably saw in the footnote medical office and REIT and reef Medical office, just has very different characteristics.

And so too does reading reef. So in terms of the commercial office portfolio on our books, it's roughly.

Two thirds concentrated in New York D C and San Francisco.

It is roughly 60% a b C and obviously, 40% class a.

And so it has been accumulated over time, but it also was a business that up until a few years ago. We were we were active in but we haven't had any.

New originations for the past few quarters and will reduce our exposure to this segment over the past.

The past year by a little north of I think it's a it's 10%.

But given right now just the uncertainty that we see with office vacancies being elevated and utilization rates significantly below.

Pre pandemic levels and increasing debt service burdens.

The fact that we're getting.

Getting 100% payment on principal and interest just in light of the continued uncertainty.

That I described just in terms of utilization and other factors, we decided to increase the coverage ratio quite a bit.

This quarter and Thats, what you see in the disclosure in the back.

Next question please.

Our next question comes from Ryan Nash.

With Goldman Sachs. Your line is open.

Hey, good evening everyone.

Hey, Brian .

Maybe I know there's been a lot of questions on credit, but maybe just to follow up on another one rich so.

Maybe just talk about where the credit performance was worse or where it deteriorated and also I'm surprised by the comment that you are reaching.

Normal levels, despite continued elevated payment rates and lower revolve rate. So how do you think about from here balancing growth versus the risk of credit continuing to not only normalized but get worse.

So.

Yes, Ryan I think the.

The best net impression despite that fact, and we may look at all our credit metrics.

The.

Some of them like half of them.

Aren't sort of back to pre pandemic levels and half of them are.

My gut feel is it's a better.

Net impression to view them as back and I, just think the underlying effects of continuing to lean into.

Spenders not only at the very top of the market, but within our segments and just the emphasis that we put on spend and some of the products the marketing the way we manage accounts the kind of.

The people, we raised lines, two et cetera, I, just think theres been a subtle shift a little more towards the spending side. So I think that that might explain why.

A few of these metrics are behind but.

Behind in terms of the.

I think.

I walk around with the perception that things are.

Pretty much.

Uh huh.

At the levels of where they were.

A few years ago.

So.

Now.

We feel.

Very comfortable with respect to the choices that we're making and let's just talk about why that is I've already said, we underwrite to assumed worsening. So let's go back to back win the behavior of the consumer was at.

Levels, we've never seen in the whole history of the company the credit performance was so good.

We just assumed that was an unsustainable we underwrote to.

Much higher levels of losses, so as things normalize that's not.

Really.

It's sort of changing anything at capital one so.

We.

But but at the same time, you see the noise all over the place on the on the horizon. So we obsess civilly.

Look for we not only use all of our modern and machine learning based monitoring tools to identify.

Little pockets that might be gapping out from expected performance or prior performance or.

Anything like that and by the way we have seen that in some some pockets and then we we dialed that back we also hunt around and think about where would most intuitively the vulnerabilities b.

To where the economy is going and we even anticipatory Lee kind of dial.

Dial back around the edges, there, but as I said earlier I'm kind of struck by the number of new opportunities that are originating.

In terms of.

Driven by the Tech.

A transformation of the company new channels, new new new ways to succeed with customers that are for kind of for every dialed back. That's happened we've seemed to have had opportunities open up and so we lean into those in.

So it leads to my sitting in here, saying with respect to the card business.

<unk>.

We feel and I.

And I want you to walk away with that same net impression the same level of optimism about our growth opportunities in our <unk>.

Marketing and and really the opportunity to create value in this part of the where we are in the cycle with card.

B to be very strong now.

Even as that happens just to it's always striking to talk about the fact that the sibling of the card business, which is our auto business has been in a striking pullback mode over the very same period that we've been leaning in here and I, partly point that out just to say that.

We are we.

We don't at the top of the House say, there's just a green light out there. This is all very much.

<unk>.

Part of the business at a time one segment one.

No one business area, but.

That pullback in auto.

Has been a minority of the pull back but still an important part of the pullback has been credit driven in the sense of looking at.

Looking at things in the card business and trying to get ahead of.

Any effects that we think might happen from a from a credit point of view, but the majority of the effects have been margin related as we've talked about with.

The sum of the marketplace not passing through into their pricing.

Higher.

Interest rates and so the.

And so we have dialed back quite a bit in auto, but given that most of that dialed back or certainly the majority of it is.

It was really more margin related and not so much credit related.

We if things change and normalize a little bit more on the pricing side, we might be able to open up more opportunity in auto, but what I'm pleased about is the combination of.

Walking around with them.

A N.

Intuitive model about how the marketplace works and as I as I shared in.

The earlier answer thinking about the ways customers credit can worsen and customers can.

Do.

You know performed not as well as it might appear as.

As we obsess about that that that informs our choices and then by monitoring.

<unk>.

At the margin and incredibly granularly to look for effects.

And then having the technology to move so quickly with respect to the diagnose the identification the diagnosis of what's going on the root causes of it and and and and then taking the action, which is a cycle that is way faster than it used to be before our tech transformation.

All of these contribute to the ability to.

Be able to.

Move with confidence and a changing environment and probably has contributed to why.

The vintage curves sort of keep coming back coming in on top of each other despite despite a changing environment and all of that finally.

Leads to why.

We feel <unk>.

<unk> about.

Sure.

Opportunities to lean into them.

And into growth because every opportunity is limited window and we're the company that when we see those opportunities.

We go after them.

Got it I appreciate the color I'll step back from that.

Thanks, Ryan next question please.

Our next question comes from Bill.

Our catchy with Wolfe Research your line is open.

Thank you good evening, Richard Andrew as a follow up for you Andrew on your allowance commentary just to make sure I have the mechanics right.

If macro conditions do indeed worsen from here as you expect and each new quarter that comes on reflects a worse outlook then each old quarter debt rolls off is it reasonable to expect that your reserve rate would drift higher in future quarters given that dynamic.

It would bill I was responding to what I interpreted to be that these question of just individual vintages being the same similar to what rich just describe that in and of itself. If you have a consistent growth rate wouldnt add to allowance, but if we are updating our assumption.

A quarter from now and our economic view changes that will lie.

Likely change our estimation of the loss content of the portfolio at that time.

Understood.

<unk> helpful.

And then separately rich I wanted to ask you about the.

The CFPB leafy proposal, we know it's less significant for you than it is for others, who are more deeply involved in the partnership business, but as we try to think through how this may play out across the industry can you give any perspective on the extent to which you would expect some merchants to possibly pushed back against efforts by their issue.

Partners to renegotiate economic terms following the proposed reduction in late fees, particularly in cases, where merchants expect their sales to come under pressure.

Okay.

So bill.

Bill I.

I don't really.

Yeah.

I don't really have a.

I don't have a prediction about.

What exactly happens in the partnership.

Business relative to merchant.

Partnership agreements and then something as significant as it changes and late fees comes and therefore, what do the collective.

The merchant and issuer sort of do about that.

I don't really have a prediction on that one.

I just I wouldn't want to let your opening comment go just when you say well, it's obviously much more probably for the people with partnerships than then.

Others.

Because this.

This legislation.

Legislation to come into effect it has a significant impact.

On capital one so.

Now.

There's a there's a lot of miles to go before maybe everything works out, but just to comment on.

This for a second.

First of all with respect to the proposal is not final and we you know the CFPB will get.

Lots of public comments, and we'll have to see how the rule making process.

Lays out.

Late fees play in a very important role in the system because they provide a direct and clear incentive for customers to pay on time and avoid running into delinquency.

And it's also a way that issuers can sort of price for risk and all of this leads to greater access to credit and lower cost of credit on average so.

We certainly have a point of view on this one.

A change in this in a significant change in late fees could affect consumer payment behavior and delinquencies it could affect access to certain parts of the population. So there is kind of a lot at stake but.

What I wanted to say for capital one.

This is.

It's an important revenue.

A source for capital one and we obviously are working on thinking about those impacts what might be.

Mitigating measures and.

So we're early into our thinking about it but I think not only for partnership based companies, but for capital one and maybe some other players as well. This is this is an important.

Development that we're going to all have to.

Take very seriously.

Next question please.

Our next question comes from John Hecht with Jefferies. Your line is open.

Afternoon, guys.

Actually all my questions have been asked and answered but something.

They came up to me and enrich I apologize.

That'd be list, but in the past you've given us some good metaphor is to think about the environment I think during the.

Pandemic and stimulus zone, you talked about a boring through a mountain.

Because of the stimulus, which helped avoid some level of loss content.

We're in this unique world, where we have inflation many of us haven't really.

Lived or at least to analyze the equity markets in a period like this and then we've got a lot of other factors going on as well.

Both good and bad I'm I'm wondering whether it's a metaphor not you.

Stepping back how do you describe the overall environment.

Advancing in certain categories pulling back and others is there is there. Some context you can give us a comparison to our previous time or how you think about it in comparison to previous time.

Well. Thank you John I had forgotten all about.

I know you've been around.

For quite a while.

I love metaphors and sometimes metaphor is I think it can be pretty striking ways to think about things that otherwise are complex to talk about but going back to the boring through the mountain remember we were talking back then each quarter, we'd say well we're.

And what what what could be.

Very whopping losses that come from that.

The tremendous upheaval of the pandemic every quarter, we are boring through the mountain and with the government stimulus and so on if we think back we got all the way through the mountains to the other side.

It was.

Better from a credit point of view than than anything that we can kind of imagine so if.

If I pull up and just say you know.

Where we're at.

Or am I just.

How do I feel about where we are.

When I when I think about the health of the consumer the U S consumer remains a source of relative strength.

In an uncertain economy.

The savings accumulated over the pandemic remain a positive for many consumers.

Debt servicing burdens remain low by historical standards.

The labor market, which is usually the most important economic driver of consumer credit performance remains strikingly strong although we have seen some indications of some softening now.

On the other hand home prices have been falling a little bit inflation I really believe none of us know really the effects of inflation. So we're going to be needing to manage intuitively here, we can't pull out.

Phds to figure this one out but you know.

So we assume the inflation is going to here's an interesting thought on inflation versus unemployment John .

Yeah.

Unemployment affects a small number of people.

Yeah.

Terribly inflation effects all of us.

Somewhat.

And so from a credit point of view I believe the reason unemployment is has been the biggest driver.

Is that.

Because charge offs happened at the tail of the distribution and the tail moves.

When the economy.

Moves so.

What is the effect of all of us, losing a little bit of our purchasing power.

My gut feel is it's just something that is slow and its effect its cumulative it doesn't have the sort of precipitous effects that.

That the unemployment does but but but I still believe.

On little cat feet.

There is another matter for for you John I think it will.

Play out the other one and it's it's almost.

I wanted to go back I don't have a perfect metaphor for it but I do want to say again.

I just I've been around this business long enough to kind of know that.

Extreme effects with respect to credit for a period of time create.

The opposite effect on the other side just.

It does with respect to markets and competition, but thats not even what I'm, what I'm talking about here I just.

I believe in life, let's just say, there's always a certain percentage of consumers that are living on the edge, they're vulnerable and they they don't have much of a buffer to absorb shock. So then.

No.

When the global financial crisis came along it was like a tsunami wave coming in and everyone who was.

You know I feel just so many people that were in a somewhat vulnerable situation got sort of washed over from that.

That it was followed by this period, where we had trouble keeping up with our own forecast of the losses.

We.

We are in a good way in the sense that.

We finally said this is the survivorship effect.

The great recession.

Accelerated so many charge offs that at some point were statistically probably going to happen.

That that we had a survivorship.

Effect going on that anybody who can survive that probably not charging off anytime soon and that's why you sort of had therefore, the reverse of that effect.

And I believe intuitively I have no way to prove it and we will never be able to quantify it but just intuitively thinking about it when you were there we're still vulnerable people all during the the the period of the pandemic so many of them.

Got lifeline.

I think you can queue. It doesn't mean their lives necessarily changed and I think you have sort of the reverse survivorship effect or maybe the.

Sort of.

The.

Catching up effect from very very low losses and this this is something that I believe is a real effect.

And so if I pull up I think the consumer's in a great shape youre going to have sort of on little cat feet.

The inflation effect and the they're catching up effect and then you have a wildcard of quite uncertain economy that creates greater volatility than usual in terms of where things might go but in the context of all of that.

And the opportunities we see Oh, one other thing sorry, it's a long answer to your question, but one of the thing that you may remember my saying back when the credit was just.

Unsustainably, good a couple of years ago.

I remember, saying that.

That.

There will be real consequences in the competitive marketplace. If this abnormal environment continues for too long.

And we.

We really already saw it happen in the period of the extraordinary credit. What you saw is a tremendous inflow of Fintech you saw a huge expansion of credit primarily in this subprime and even below sort of where we play.

<unk> in that space.

We were worried that the underwriting that.

That any of them were doing with its based on data with definition only not have a rear view it would have a rearview mirror that is extremely unreliable. So I think.

When we pulled back this sort of great normalization that is happening even with some cat feed effects that are still probably going to play out as a very healthy thing to happen in terms of credit environment competitive environment in the marketplace over time, so all in all I feel really good.

[noise] about where we are and if you detect optimism in my voice.

Your you're getting the right read there.

Next question please.

One moment please.

Our next question comes from Dominic Gabriel with Oppenheimer. Your line is open.

Hey, thanks, so much for taking my questions.

Almost to piggyback on that last question, a little bit you know there've been a lot of new card issuers and types of cards and payment types like P to P. Debit rewards said now is coming out.

Could you talk about the involved evolving of both debit and credit card space and how you expect the competition offerings could change over time, not just versus let's say discover a synchrony or American express, but other payment types and how capital one is positioned as a payment as payment process.

It says among consumers might change.

Yes.

Yes, well well.

We've seen a lot of innovation over the last number of years.

And I had one tier list one that really was quite a.

Made quite as flash, which is buy now pay later that came into the marketplace.

Let me really sort of start with that one.

When we buy now pay later.

Came out.

I remember it.

<unk>.

Having sort of saying this is kind of ironic because the original and <unk>.

Still extraordinary buy now pay later product is called the credit card. So.

What does this new one that says you can buy now and pay later, but anyway. It was riding on the back of some very.

Very clever technology sort of modern tech stacks and <unk>.

And really good merchant relationships that made quite a quite an impact on there now it was it was hailed as a revolution in payments from everything that we saw early on.

I think it was by the way a very clever payment.

Very clever innovation, but it turned out to be more of a credit access play than necessarily I'm, not saying it isn't a revolution, well I'm, saying that that when we look at who flocked there it was a credit.

From looking at our bank customers and card customers everything else. It was it was a credit access play and.

I think it's running into some challenges with respect to merchant.

Discount rates and some credit challenges and other things and.

But it was certainly quite.

Innovation, if you look at debit cards anyone innovating in the debit card space that has access to the differential.

Interchange that came from the.

The law that created.

<unk> tried to advantaged smaller players versus bigger and networks other than.

Well different choices for different networks and different size players.

Anyone who has the fortune to ride on the back of that I think you know.

That's a promising.

Opportunity.

For them.

And.

So payments the payments space will continue to evolve one other thing about payments that when you look when you look pull way up and say in what areas have fintech or major tech companies had the biggest impact on banking.

It was.

We of course worried that all aspects of banking would get affected.

The biggest I think the biggest single.

Area that has really been impacted is payments itself, which when you think about it that that is.

It's kind of the Holy Grail from Tech companies point of view, because it's where the money is and it's a real time kind of.

Our customer experience activity.

And importantly, it's not heavily regulated.

For what it's worth the other play that I think the tech companies enduring Lee.

Have had.

Had the greatest impact is in the platforms space either payments platforms or other kind of platforms building on modern tech stack. So.

Those are are those are some thoughts in the marketplace, but.

So just a reminder, capital one's got to stay on the forefront of innovation or we can be yesterday's news.

Next question please.

Our next question comes from Sanjay <unk> with <unk>. Your line is open.

Thank you.

I've got some follow up questions for Andrew and so some of the comments.

Maybe just first on the 11 basis points drag from the excess cash does that persist over the course of the year or does that go.

At some point.

Well as I said in my.

Talking points Sanjay I think that is.

Something that we do expect to remain at least elevated compared to pre pandemic level.

Levels.

Yeah, I would that's probably where I would leave that.

Okay, and then secondly, just the comments on.

Capital levels and capital return.

Should we assume like Youre going to maintain.

CET one.

Inclusive of sort of work your way up to that level and then consider any moves with capital return or maybe you could just help us think through.

How we should read into some of your comments there and then at what rate does.

Aoc I accrete over the course of the year, just would love to get some color on that thanks.

Yeah, when I start with the second one first which is.

If you look at our ASF, a OCI about 40% of that will pull to par between now and the end of 'twenty four.

In terms of capital targets I, absolutely would not say, it's a mechanical linkage that we're thinking about our capital targets inclusive of OCI and Theres a lot of uncertainty.

Of regulatory treatment. It is not included in our regulatory ratios at this point I just referenced that that is one thing that we look at in addition to a number of other factors.

Inclusive of just economic uncertainty and our growth opportunities and so for now we've been operating above our target we're going to keep an eye on those things and you know.

As we have more certainty of the future. We are we have a lot of flexibility with how we.

Return capital to shareholders, if that's appropriate.

Next question please.

Okay.

Our final question comes from John <unk> with Evercore ISI. Your line is open.

Good evening.

On the on.

On the net interest margin front wanted to see if you could possibly give us some.

Some color on how you see the margin trajectory here from the from the 660 level just given what you said about cash balances is likely to remain elevated and then maybe how deposit pricing plays into that and how you're thinking about through cycle deposit beta at this point. Thanks.

I will I'll go in reverse order on that one too because the data will feed into to the NIM response, there I'll remind you of my comments from a quarter ago, where I talked about cumulative deposit beta for the overall company could be.

Somewhat higher than the last rate cycle, which was 41% I think a quarter ago, our accumulative beta within the mid thirties.

We sit today, it's 44 mm it is hard to predict how much further deposit betas will increase from here, there's a number of unique factors, especially following.

The events of the last month that make predicting betas, a challenge everything from product mix too.

The market in competitive pricing, if there's a really intense competition for more insured deposits.

And just the sheer magnitude and pace of Fed fund hikes is is unprecedented and what will happens to on the other side when the fed eventually starts lowering rates and all of this is happening in the context of a fed that executing in Q T.

So where we go from here is going to be impacted by a number of factors customers appetite for different deposit products.

Our focus on customer relationships industry competition funding needs.

But I will say given deposit pricing tends to lag asset yield resets I wouldn't be surprised if there's at least some upward pressure on data from where we were in the first quarter.

So as I, then pull that into thinking about NIM over time.

That is likely a potential headwind for us, particularly in the near term given the lag of deposit pricing.

Where wholesale funding costs go could also be a headwind.

And you know as credit continues to normalize we could continue to see revenue suppression.

So those are a few things that will potentially provide a headwind to NIM from where we sit today, but on the other hand theres definitely some tailwind.

Even though my response to <unk> question in the real near term I would think our average cash position will stay elevated relative to pre pandemic levels not necessarily relative to what we saw in the first quarter.

But over a longer period of time that will almost assuredly come back down and eventually be a tailwind for NIM. We also could see a growing percentage of revolving card balances.

In the immediate term and keep in mind, we will have one more day in the second quarter. So.

I know that that's a lot of headwind and tailwind, but just wanted to give you a sense of all of the forces at play there.

No. Thank you that's very helpful. And then just secondly, we've seen some headlines regarding Walmart.

Partnership and I don't know if you can provide a little bit of color there on where that stands maybe can.

Can you confirm that discussions the timing of when you change could be and then lastly, if you can update us on any other upcoming.

Negotiations are maturities of other types of partnerships on that front.

Okay. Thank you John .

So.

We are of course in the middle of litigation, So theres only so much.

I'm going to share in an earnings call about the various legal arguments being made by each side.

But at a high level Walmart has sued us trying to terminate the deal early.

And we deny that they have a contractual right to an early termination.

Walmart points to some service failures that we cured in 2022, and which had no impact on the value of the portfolio.

Now in the meantime, we are committed to meeting our contractual commitments, while we defend ourselves in court and we.

We will keep you updated on the litigation in our periodic SEC.

Tilings.

With respect to timing of any potential impacts.

You know there are a lot of unknowns. There is of course the question of whether Walmart will win their litigation seeking early termination and if so when that will occur we of course deny that they have a right to terminate early.

Then there's the question of how long it will take for Walmart to transfer the portfolio to a new issuer.

We currently expect that the transfer of the Walmart portfolio to a new issuer.

Would occur no earlier than January 2025.

Even if they win their litigation.

So we will keep you updated if our timing expectation changes.

Well that concludes the earnings call for this evening. Thank you for joining US on this conference call and thank you for your interest in capital one.

The IR team will be here later this evening to answer any questions you may have.

Have a good night everybody.

This concludes today's conference call. Thank you for participating you may now disconnect.

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Good day, and thank you for standing by and welcome to first quarter 2023 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 to ask a question. During this session you will need to press star one one.

Your telephone you will then hear an automated message advise your hand is raised to withdraw your question. Please press star. One again, 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 of Finance. Please go ahead.

Thanks, very much Amy and welcome everybody to capital one's first quarter 2023 earnings conference call.

As usual, we are webcasting live over the internet to access the call on the Internet. Please log on to capital one's website capital one dot com and follow the links from there.

In addition to the press release and financials. We've included a presentation summarizing our first quarter 2023 results with you.

Maybe this evening are Mr. Richard Fairbank capital one's chairman and Chief Executive Officer.

And Mr. Andrew Young capital ones, Chief Financial Officer.

Richard Andrew will walk you through this presentation.

To access a copy of the presentation and the press release. Please go to capital one's website click on investors then click on quarterly earnings release.

Please note that this presentation may contain forward looking statements.

Information regarding capital one's financial performance and any forward looking statements contained in today's discussion and the materials.

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

Capital one does not undertake any obligation to update or revise any of this information 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 that are accessible at the capital and website and filed with the SEC.

With that 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 first quarter capital, one earned $960 million or $2.31 per diluted common share.

Pre provision earnings of $4 billion were flat to the fourth quarter.

And up 3% relative to the fourth quarter net of adjustments.

Okay.

Period end loans held for investment declined 1%.

And average loans were flat.

Total deposits grew throughout the quarter.

Increasing 4% on average.

And 5% on an ending basis.

The increase in deposits was driven by strong retail deposit inflows.

Which was slightly offset by a decline in our commercial deposits.

Our strong retail deposit growth drove our percentage of FDIC insured deposits up 2% to end the quarter at 78% of total deposits.

We have provided additional details on deposit trends on slide 18 in the appendix.

<unk> in the linked quarter decreased 2%, primarily driven by lower noninterest income.

While net interest income was largely flat.

Noninterest expense decreased 3% in the quarter.

Driven by a decline in marketing from the seasonally higher fourth quarter.

Operating expenses were up about 2% on a GAAP basis, and roughly flat net of the fourth quarter adjusting items.

Provision expense was $2 8 billion.

Driven by net charge offs of $1 7 billion and an allowance build.

$1 1 billion.

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

The $1 $1 billion increase in allowance brings our total company allowance balance up to $14 3 billion as of March 31.

The total company coverage ratio is now 464%.

Up 40 basis points from the prior quarter.

And our allowance our assumptions for our key economic variables remained similar to those of last quarter.

We continue to assume economic worsening from today's levels on most measures.

I'll cover the drivers of the changes in allowance and coverage ratio by segment on slide five.

In our domestic card business, the allowance balance increased by $867 million.

Increasing our coverage ratio by 69 basis points to 766%.

Our build in the quarter was primarily driven by three factors.

The first factor is the impact of underlying growth in the quarter.

Which replaced seasonal balances from the fourth quarter for which we held minimal allowance.

The second factor is the impact of removing the relatively lower loss content from the first quarter of 2023, and replacing it with higher forecasted loss content for the first quarter of 2024.

And finally, the third factor in our allowance build was the impact of acquiring the bj's portfolio in the quarter.

In our consumer banking segment the.

The allowance balance declined by $32 million.

Mostly driven by the decline in loans.

The coverage ratio increased by two basis points.

And now stands at 2.82%.

And finally in our commercial banking business, the allowance increased by $245 million.

The coverage ratio increased by 28 basis points and now stands at 182%.

The allowance increase was driven by a $262 million reserve build related to our $3 6 billion dollar commercial office portfolio.

The coverage on the commercial office portfolio increased about 770 basis points and now stands at 13, 9%.

We have provided additional details on this portfolio on slide 17 of the presentation.

Turning to page six I'll now discuss liquidity.

You can see our preliminary average liquidity coverage ratio during the first quarter was 148%.

From 143% last quarter, and 140% a year ago.

Total liquidity reserves in the quarter increased by $20 billion to 127 billion.

Primarily driven by increased levels of cash.

Our cash position ended the quarter at $47 billion.

Up $16 billion from the prior quarter.

This increase in our cash position was primarily driven by the strong consumer deposit growth I referenced earlier.

We expect average cash balances in the near term to be elevated relative to pre pandemic levels.

Yeah.

In addition to the higher cash the market value of our <unk> securities portfolio grew $5 billion.

282 billion at the end of the quarter.

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

Our first quarter net interest margin was six 6%.

24 basis points lower than last quarter.

And 11 basis points higher than the year ago quarter.

The 24 basis points quarter over quarter decline in NIM was driven by two factors.

First <unk>.

<unk> 15 basis points of the decline was a result of having two fewer days in the quarter.

And second the mix impact of the elevated cash balances that I previously described pressured NIM by approximately 11 basis points.

Outside of these two effects higher asset yields roughly offset higher funding costs.

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

Yeah.

Our common equity tier one capital ratio ended the quarter at 12, 5% flat to the prior quarter.

Net income in the quarter and lower risk weighted assets were offset by common and preferred dividends.

The $150 million of share repurchase we completed in the quarter.

And a 17 basis point impact from the phasing of the seasonal transition.

At the end of the first quarter.

The unrealized losses in a OCI from our <unk> investment portfolio were $6 $7 billion.

If we were to include the impact of these unrealized losses in our regulatory capital.

Our CET one ratio would have ended the quarter at 10, 5%.

And we continue to estimate that our longer term CET, one capital need is around 11%.

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

Thanks, Andrew and good evening, everyone I'll begin on slide 10, with first quarter results and our credit card business year.

In the first quarter.

<unk> year over year growth in every topline metric continued in our domestic card business purchase volume for the first quarter was up 10% from the first quarter of 2022, ending loan balances increased $23 billion or about 21% year over year.

And revenue was up 17% year over year, driven by the growth in purchase volume and loans.

First loans are currently growing at a faster rate than purchase volume and net interchange revenue that dynamic as a tailwind to revenue dollars, but a headwind to revenue margin.

And second as charge offs increase we're reversing more finance charge and fee revenue.

Yeah.

Both the charge off rate and the delinquency rate continued to normalize the domestic card charge off rate for the quarter was up 192 basis points year over year to 4.04%.

30, plus delinquency rate at quarter end increased 134 basis points from the prior year to 366% and is now essentially at its March 2019 level.

The charge off rate.

Hasn't caught up yet, but based on what we see in our delinquencies. We think the monthly charge off rate will get back to 2019 levels around the middle of this year.

Non interest expense was up 11% from the first quarter of 2022, driven by higher operating expense, partially offset by a modest year over year decline in marketing.

Total company marketing expense was $897 million in the first quarter our choices in domestic card marketing are the biggest driver of total company marketing.

We continue to see attractive growth opportunities in our domestic card business our opportunities are enhanced by our technology transformation.

And we're leaning into marketing to drive resilient growth as always we're keeping a close eye on competitor actions and potential marketplace risks.

Slide 12 shows first quarter results for our consumer banking business in the first quarter auto originations declined 47% year over year and 6% from the linked quarter.

Driven by the decline in auto originations consumer banking, ending loans decreased $2 $2 billion or 3% year over year.

On a linked quarter basis, ending loans were down 2%.

<unk> and up 6% from the sequential quarter powered by our modern technology and leading digital capabilities. Our digital first national direct banking strategy continues to get good traction.

Consumer banking revenue was up 12% year over year, driven by deposit growth non interest expense was up 4% compared to the first quarter of 2022.

The auto charge off rate for the quarter was 153% up 87 basis points year over year. The 30, plus delinquency rate was 5.0% up 115 basis points year over year compared to the linked quarter the charge off rate was down.

<unk> 13 basis points and the 30, plus delinquency rate was down 62 basis points the linked quarter trends were consistent with expected seasonal patterns.

Slide 13 shows first quarter results for our commercial banking business compared to the linked quarter first quarter ending loan balances were down 1% and average loans were down 2%.

The decline is the result of choices, we made earlier in the year to tighten credit as well as higher customer paydowns in the quarter.

Ending deposits were down 6% from the linked quarter average deposits declined 7%.

They've commercial deposit balances.

First quarter revenue was up 10% from the linked quarter recall that revenue in the prior quarter was unusually low driven by a company neutral move and internal funds transfer pricing.

Excluding this prior quarter impact first quarter commercial revenue would have been down 10% driven by a decline in noninterest income from our capital markets and agency businesses.

Non interest expense was down 5% from the linked quarter. The commercial banking annualized charge off rate was nine basis point criticized loan balances increased primarily in our commercial real estate business.

The criticized performing loan rate increased 60 basis points from the linked quarter to 731% and the criticized nonperforming loan rate was up five basis points from the linked quarter to 0.79%.

We're closely monitoring and assessing competitive dynamics and the economic uncertainty.

And across our businesses credit trends continued to normalize in the quarter and we reached or were approaching pre pandemic levels at quarter end.

We continue to expect that the full year 2023 annual operating efficiency ratio net of adjustments will be roughly flat to modestly down compared to 2022.

Pulling way up the future of everything in banking.

And our tech engine drives growth.

<unk> see improvement and enduring value creation over the long term.

Our investments to transform our technology and to drive resilient growth put us in a strong position to deliver compelling long term shareholder value.

And thrive in a broad range of possible economic scenarios and now we'll be happy to answer your question Jeff.

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

Amy please start the Q&A.

And our first question is from Kevin Barker with Piper Sandler Your line is open.

Good afternoon, and thanks for taking my questions I just wanted to follow up on the reserve build within the card portfolio.

And the slide presentation worsening credit trends in domestic credit cards.

But it seems from your prepared remarks.

<unk> said this is more of a normalization than anything else that you continue to grow.

What gives you confidence that.

This reserve build in the quarter.

Really rapid increase in delinquency and net charge offs.

Is truly a normalization as opposed to signs of further deterioration that's likely to occur.

Yes.

[laughter].

Yeah.

Kevin.

Thanks for your question there Yeah, let me just.

Talk about this look I think as we as things get back to where they were pre pandemic at some point.

Word normalization.

We'll need to retire that because things get.

Pretty normal.

So, let's just talk just a little bit about.

You know, what we're seeing and.

What's inherent in how we are.

You know in our outlook. So at this point many of our credit metrics have returned to their pre pandemic levels, others have not yet, but they're they're headed there.

And we have.

We particularly pointed out it's probably the best single metric to look at as delinquencies.

Delinquencies in the first quarter, we're at 366%, which is essentially back to 2009.

2019 levels excuse me now.

Our charge offs haven't caught up yet but.

Based on.

What we see in our delinquencies, we think they'll get back to 2019 levels around the middle of the years.

The year excuse me and.

Two our outlook and how we think about in terms of forecasting.

Our losses going forward.

There is.

There is a one effect that's more of a capital one <unk>.

It's an effect that exists for everyone I think it's more pronounced for capital one relative to.

Our loss rates, which is related to recovery. So let me just pause and explain that one for a minute.

Past charge offs are of course, the raw material for future recoveries and we just lived through three years of very low charge offs.

So our recoveries will be unusually low in the short to medium term. This is a larger headwind for us than most others, because we tend to have meaningfully higher recovery rates than the industry average and because we tend to work.

You know most of our most of our recoveries, we tend to work them on our own as opposed to selling them. So the recoveries come in over time and not all at once as would be the case and a debt sale.

So that's that said just to capital one effect that we've been talking about for a while and that is you know.

Inherent in sort of the math of how our charge offs are working and will work over time.

The other effect is the economy and we are assuming.

Material worsening of label Labor markets with the unemployment rate rising from today's very low levels to above 5% by the end of 2023. We are also assuming adverse effect from.

From inflation and some further worsening of consumer profiles from the sort of the flip side of their extraordinary.

Outperformance in the earlier.

Period during the pandemic.

So.

That's just a comment about.

How we you know create outlooks, we continue to feel very good about the business, we are leaning into our growth opportunities.

Our originations are coming in consistently solid.

And we.

We like the opportunities we see out there we underwrite we always have under underwritten for.

Worsening scenario, so as the economy.

It was sort of asked credit performance normalizes, which we've expected for a long period of time.

We are.

We are just continuing right.

On the path, we have been on for quite some time every every quarter, we trim a little bit around the edges, where we see or where we anticipate an effect where customers might be a little bit more vulnerable were also struck by.

The continued expansion of opportunities that are very resilient and we're leaning into those so.

We are you know this business is built to.

Anticipate.

You know volatility and losses and higher loss rates and.

You know what we're doing is consistent with things that we have expected and we continue to really.

Feel good about the opportunities.

Okay, and then in the past you've made comments that the new growth the flow rates relatively normal.

On a lot of your newer business do you continue to see that and then also in the near term.

Are you still seeing the type of traction from your marketing spend.

I guess in the first quarter as you did in 2022.

Yes so.

On.

Your question about flow rates.

Let me let me just.

Why don't I, just seize the moment, a little bit and just talk about a bunch of our credit metrics and are and where they are.

So we've talked about delinquencies we've talked about.

Losses are indeed.

Our individual flow rates.

Have normalized and in it.

We look at very early entry flow rates in a couple of delinquency buckets and some cases theyre just a tick higher than they were.

In the.

Way back in 2019 levels, but things.

Things are basically.

Back.

Our payment rates have payment rates are a striking thing because you saw just the electrifying. It. So if you look at the trust data the electrifying.

Performance of the consumer where they just we're in such good position. They just were paying.

The card off it at high levels.

And it was also a manifestation of the continuing mix shift towards the top of the market and the traction we're getting in heavy spenders.

So.

Payment rates have declined from the very high levels theyre not even close to.

You know where they were originally but because of these two effects, if we separate them out and sort of look segment by segment.

We see that payment rates.

Our declining in every segment, but not.

Not yet back to.

Where they were pre pandemic, so that's something to keep.

And I on there.

The.

Our revolve rate is roughly flat to last year and remains below pre pandemic.

<unk> levels.

But I think again, there's a there's a growth in transacting balances effect. There. So so we'll have to sort of adjust for that.

And then a very important one is new originations, let's talk about that so.

So we see early performance that is consistent.

With our expectations the earliest delinquencies.

We of course look very carefully at the early delinquencies on our most recent vintages that would be some months ago because they have to have you know a few months a week, where we can start reading them, but the earliest delinquencies on our newest monthly vintages of origination.

Consistent with pre pandemic.

Originations as.

As we compare one segment at a time on current originations versus several years ago.

And then vintage over vintage month over month for recent vintages, we're seeing pretty stable risk levels.

No.

You know we feel very good about that one thing that I've commented on.

Overtime is we have continued to.

In anticipation of market changes trim, a little bit around the edges.

So that are the fact that our originations are performing on top of sort of where they were several years ago.

Is also the result of some active anticipatory.

Management and so probably.

It offset some underlying worsening that's happened.

In the marketplace. So.

If you if we pull up on on that.

<unk> metrics.

Our.

We continue to feel.

A very good about the choices, we're making as I said before.

The.

You know this is this is.

Puts us in a position to continue to lean into the marketing.

In our originations anticipate worsening as just a matter of underwriting anyway, and so we're leaning into the marketing even as we continue to trim a little bit around the edges here or there.

And.

So and.

In some ways that our message here is just very very similar with the feel of how this has been for really quite a few quarters now.

Next question please.

One moment please.

Next question comes from Betsy <unk> with Morgan Stanley . Your line is open.

Hi, good evening.

Hey, Betsy.

So just want to make sure I understand on the reserve ratio I know you were already spoke a lot about it. So I just want to make sure I understand you can just say, yes or no.