Q2 2023 Capital One Financial Corp Earnings Call

Speaker 1: Good day and thank you for standing by. Welcome to Capital One Q2 2023 earnings call. At this time all participants are in a listen only mode. After the speaker's presentation there will be a question answer session. To ask a question during this session you will need to press star 11 on your telephone.

Speaker 1: You will then hear an automated message advising your hand is raised. To withdraw your question, please press star 1-1 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.

Speaker 2: Thanks very much, Amy, and welcome, everybody, to Capital One's second 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 at capitalone.com and follow the links from there.

Speaker 2: In addition to the press release and the financials, we have included a presentation summarizing our second quarter 2023 results.

Speaker 2: With me today are Mr. Richard Fairbank, Capital One's Chairman and Chief Executive Officer, and Mr. Andrew Young, Capital One's Chief Financial Officer.

Speaker 2: Rich and Andrew will walk you through the presentation.

Speaker 2: To access a copy of the presentation and the press release, please go to Capital One's website, click on investors, and click on quarterly earnings release.

Speaker 2: Please note that this presentation may contain forward-looking statements.

Speaker 2: Information regarding Capital One's financial performance and any forward-looking statements contained in today's discussion in the materials.

Speaker 2: Speak only as of the particular date or dates indicated in the materials.

Speaker 2: 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.

Speaker 2: Numerous factors could cause our actual results to differ materially from those described in forward-looking statements.

Speaker 2: 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 accessible at the Capital One website and filed with the SEC.

Speaker 2: With that, I'll turn the call over to Mr. Young. Andrew?

Speaker 3: Thanks, Jeff, and good afternoon, everyone. I'll start on slide three of tonight's presentation.

Speaker 3: In the second quarter, Capital One earned $1.4 billion, or $3.52 per diluted common share.

Speaker 3: Pre-provision earnings of $4.2 billion were up 7% compared to the first quarter and 16% compared to the year ago quarter.

Speaker 3: both period end and average loans held for investment.

Speaker 3: increased 1% relative to the prior quarter, driven by growth in our domestic card business.

Speaker 3: Period end deposits declined 2% in the quarter, largely driven by tax-related outflows.

Speaker 3: Our percentage of FDIC insured deposits grew 1% to end the quarter at 79% of total deposits.

Speaker 3: We have provided additional details on deposit trends on slide 18 in the appendix.

Speaker 3: Revenue in the linked quarter increased 1% driven by non-interest income.

Speaker 3: Non-interest expense decreased 3% in the quarter.

Speaker 3: driven by declines in both operating and marketing expenses.

Speaker 3: Provision expense was $2.5 billion.

Speaker 3: with $2.2 billion of net charge offs.

Speaker 3: and an allowance build of $318 million.

Speaker 3: Turning to slide four, I will cover the changes in our allowance in greater detail.

Speaker 3: The $318 million increase in allowance brings our total company allowance balance.

Speaker 3: up to $14.6 billion as of June 30th.

Speaker 3: The total company coverage ratio is now 4.7%.

Speaker 3: I'll cover the drivers of the changes in allowance and coverage ratio by segment on slide 5.

Speaker 3: In our domestic card business, the allowance balance increased by $544 million.

Speaker 3: increasing our coverage ratio by 12 basis points to 7.78%.

Speaker 3: Three factors impacted the allowance in the quarter.

Speaker 3: The predominant factor was growth as ending domestic card loans grew about $5 billion in the quarter.

Speaker 3: The second factor was the impact of removing the relatively lower loss content from the second quarter of 2023.

Speaker 3: and replacing it with higher forecasted loss content for the second quarter of 2024 as part of our 12 month reasonable and supportable period.

Speaker 3: These two factors were partially offset by an improvement in our economic outlook.

Speaker 3: which still assumes worsening from today's level.

Speaker 3: but less so than our outlook a quarter ago.

Speaker 3: In our consumer banking segment, the allowance balance declined by $20 million.

Speaker 3: mostly driven by the decline in loans.

Speaker 3: The coverage ratio was essentially flat at 2.83%.

Speaker 3: And finally, in our commercial banking business.

Speaker 3: the allowance decreased by $218 million.

Speaker 3: In the quarter, we moved approximately $900 million of loans from our commercial office portfolio to help for sale as we pursue the potential sale of a portion of the portfolio to reduce future risk.

Speaker 3: With that move, we recognized charge-offs that were already largely reflected in our allowance, which was the primary factor driving this quarter's decrease.

Speaker 3: The decrease in allowance from moving these loans to HFS was partially offset by a build for our remaining commercial office portfolio.

Speaker 3: We have provided additional details on our commercial office portfolio in the appendix of tonight's presentation.

Speaker 3: The coverage ratio in the commercial business decreased by 20 basis points and now stands at 1.62%.

Speaker 3: Turning to page six, I'll now discuss liquidity.

Speaker 3: You can see our preliminary average liquidity coverage ratio during the second quarter was 150%.

Speaker 3: up from 148% last quarter and 144% a year ago.

Speaker 3: Total liquidity reserves in the quarter decreased by about $9 billion to $118 billion.

Speaker 3: driven by modest declines in both cash and the investment portfolio.

Speaker 3: Our cash position ended the quarter at $42 billion, down about $5 billion from the prior quarter.

Speaker 3: We are also disclosing our net stable funding ratio for the first time this quarter. The preliminary average quarterly NSFR for both the first and second quarters was 134%.

Speaker 3: well above the 100% regulatory minimum. Turning to page 7, I'll cover our net interest margin.

Speaker 3: Our second quarter net interest margin was 6.48%.

Speaker 3: Twelve basis points lower than last quarter.

Speaker 3: and six bases points lower than a year ago quarter.

Speaker 3: The quarter-over-quarter decline in NIM was driven by deposit and wholesale funding costs increasing more than asset yields. That impact was partially offset by a continued mix shift towards card loans and one additional day in the quarter.

Speaker 3: Turning to slide 8, I will end by discussing our capital position.

Speaker 3: Our common equity tier one capital ratio ended the quarter at 12.7%.

Speaker 3: approximately 20 basis points higher than the prior quarter.

Speaker 3: Net income in the quarter was partially offset by changes in risk weighted assets.

Speaker 3: common and preferred dividends, and the $150 million of share repurchases we completed in the quarter.

Speaker 3: At the end of the second quarter, the unrealized losses in AOCI from our AFS investment portfolio were $7.6 billion.

Speaker 3: If we were to include the full impact of these unrealized losses in our regulatory capital...

Speaker 3: our CET1 ratio would have ended the quarter at 10.4%. During the quarter, the Federal Reserve released the results of their stress test. Our preliminary stress capital buffer requirement, which will be effective on October 1st of this year, is 4.8%.

Speaker 3: resulting in a total Fed capital requirement of 9.3%.

Speaker 3: We continue to estimate that our longer term CET1 capital need is around 11%. With that, I will turn the call over to Rich. Rich? Thank you, Andrew, and good evening, everyone. The domestic card business posted another...

quarter of strong year-over-year top-line growth.

Purchase volume for the second quarter was up 7% from the second quarter of last year.

Ending loan balances increased $21 billion, or about 18% year over year.

second-quarter revenue was also up 18% year-over-year driven by the growth in purchase volume and loans.

Revenue margin declined 40 basis points from the prior year quarter and remained strong at 17.76%.

The decline was driven by two factors. First, loans grew faster than purchase volume and net interchange revenue in the quarter.

This dynamic is a tailwind to revenue dollars, but a headwind to revenue margin. And second, charge-offs increased, so we reversed more finance charge and fee revenue.

These factors were partially offset by an increase in the revolve rate.

The domestic card charge off rate for the quarter was up 212 basis points year over year to 4.38%.

The 30 plus delinquency rate at quarter end increased 139 basis points from the prior year to 3.74%.

and is now above its June 2019 level. The charge-off rate hasn't quite caught up yet, but based on what we see in our delinquencies, we expect the monthly charge-off rate will reach 2019 levels in the third quarter. Non-interest expense was up 8% from the second quarter of 2020.

lower in the first half of the year and higher in the second half. In 2022, that pattern was less pronounced.

In 2023, our marketing is following a more typical historical pattern. Our choices in domestic card are the biggest driver of total company marketing and we continue to see attractive growth opportunities in our domestic card business. Our opportunities are enhanced by our technology transformation.

We continue to lean into marketing to drive resilient growth and enhance our domestic card franchise. And as always, we're keeping a close eye on competitor actions and potential marketplace risks.

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

and strong momentum in our decade-long focus on building a franchise with heavy spenders at the top of the marketplace continues.

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

In the second quarter, auto originations declined 31% year over year.

Driven by the decline in auto originations, consumer banking ending loans decreased about $4.3 billion, or 5% year over year. On a linked quarter basis, ending loans were down 1%.

We posted another quarter of strong year-over-year retail deposit growth. Second quarter ending deposits in the consumer bank were up about $30 billion or 12% year-over-year.

Compared to the sequential quarter, ending deposits were down about 2%, largely as a result of typical seasonal tax outflows. Average deposits were up 12% year over year and up 2% from the sequential quarter.

Powered by our modern technology and leading digital capabilities, our digital-first national direct banking strategy continues to deliver strong results.

Consumer banking revenue was up 8% year over year driven by deposit growth.

Non-interest expense was down about 4% compared to the second quarter of 2022, driven by the timing of marketing to support our National Digital Bank.

The auto charge off rate for the quarter was 1.40%, up 79 basis points year over year. The 30 plus delinquency rate was 5.38%, up 91 basis points year over year. Compared to the length quarter, the charge off rate was down 13 basis points.

2%.

Average loans were down 1%. The decline is largely the result of choices we made earlier in the year to tighten credit as well as the movement of loans to held for sale that Andrew discussed.

Ending deposits were down 4% from the linked quarter. Average deposits declined 5%. We saw normal outflows throughout the second quarter as clients used their cash for payroll, tax payments, and other business as usual disbursements. Consistent with the general trend we've seen for several quarters.

We also continued to manage down selected less attractive commercial deposit balances. Second quarter revenue was up 3% from the linked quarter while non-interest expense was down about 9% from the linked quarter.

Second quarter commercial credit trends were largely driven by the commercial office portfolio, inclusive of the movement of loans to help for sale. The commercial banking annualized charge-off rate increased to 1.62% in the second quarter. The criticized performing loan rate was 6.73%.

card revenue purchase volume and loans in the second quarter. We continue to lean into marketing to drive resilient domestic card growth that can deliver sustained revenue annuities and build our franchise and to drive growth in our National Digital Bank.

And 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, 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 put themselves in an advantaged position to win as banking goes digital. Our modern technology capabilities are generating an expanding set of opportunities across our business. We are driving improvements in underwriting.

modeling, and marketing as we increasingly leverage machine learning at scale. And our tech engine drives growth, efficiency 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 questions. Jeff? Thank you, Rich. We'll now start the Q&A session, and 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 follow-up questions after the Q&A session, the investor relations team will be available after the call.

As a reminder, to ask a question, please press star 11 on your telephone and wait for your name to be announced. To withdraw your question, please press star 11 again. Please stand by while we compile the Q&A roster.

Our first question comes from Ryan Nash with Goldman Sachs. Your line is open.

Hey, good evening, Rich. Good evening, Andrew.

Rich, good evening, Andrew.

Maybe to start on the margin, Andrew, where we saw some pressure, can you maybe just talk about how to think about the margin from here? You talked about card loans growing faster, which is a tailwind, but there's obviously rising deposit costs has been a headwind. So when you put it all together, what do you see the trajectory of the margin shaking out and embedded it within that?

out last quarter and you see playing out in the marketplace at this point. There's just a number of factors that are that are impacting beta between, you know, product mix and the competitive dynamics on on pricing. Just how quickly the Fed has moved over the last five quarters.

all of this happening under the backdrop of QT. And so we put that on top of our view for deposits, all of the needs that we have, our desire to grow customer relationships and the like. And so,

You know, those forces coupled with the fact that at this point in the cycle, deposit pricing just tends to lag yields. And so you've seen our betas continue to rise over the last few quarters. I talked about the last cycle, us being in the low 40s.

And a quarter ago, I said you should expect us to kind of move up from where we were. We are now in the 52 percent range. I wouldn't be surprised if there continues to be upward pressure on beta from here, given all of the factors that I just described. So why don't I then start on your question about NIM with headwinds.

Rich touched in his talking points around card margin. So revenue suppression would be another headwind all else equal. But we do see at least a few tailwinds, one being the level of revolve rate in card. In the second quarter, it tends to be seasonally lower. And the second quarter, it tends to be seasonally lower.

is on a longer term basis, the current run rate has been lower over the last couple of years. So both of those factors could be driving card margin up. I also think that when you look at our cash position, cash is likely to remain elevated relative to pre-pandemic levels.

You know, this quarter we saw ending cash come down. Average cash was largely flat since we had built up cash over the course of the first quarter. But I think you should expect that cash will remain elevated relative to pre-pandemic.

But over time, it probably will come down at least modestly from here. And then the last thing is in the back half of the year, we'll have an extra day in the quarter. So as we move into Q3, that'll be a definitive tailwind. So those are what I would enumerate as the primary forces at play. And so, you know, one of the big ones that's going to.

year and you know given all the growth that has come onto the books the past 24 months, can you give us a sense for how to think about you know how far past 2024 level 2019 levels we could be going on losses and maybe Andrew tie in what this all can mean for the allowance over time. Thanks. Okay thanks Ryan. So just to

put some numbers behind your comment. So, the domestic card delinquencies in the second quarter were about...

10% higher than the same quarter of 2019. Our charge-offs are still a bit below their 2019 levels, but based on what we see in our delinquencies, we think they'll get back there in the next few months. As high as the current double Hill c

When you interpret our credit metrics, there are a couple of things to keep in mind. There is one effect that is increasing our loss rate that is probably more pronounced for Capital One, at least for a time, which is related to our recovery. So, in all cases, pass charge offs

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 for most others because we tend to have meaningfully higher recovery rates than the industry average. And because we tend to work our own recoveries, they tend to come in over time, not all at once, which happens in a dead sale.

Also, you know, we...

I have to remember that the credit performance we saw over the past three years was unprecedented.

So we believe there's some catching up that happens on the other side of that, especially for consumers who might otherwise have charged off over the past three years.

So, you know, we call this sort of the deferred charge-off effect. It's something that really can't be measured. We won't even be able to measure it in hindsight how big this effect is, but it's intuitively sort of the reverse of the effect we saw in the global financial crisis, which is sort

in many ways just pulled forward charge offs for lots of folks that were in a vulnerable position. And then what we saw in the aftermath of that for those that had weathered that, we just saw, you know, strikingly low charge offs. So I think really what

That's the dynamic we see going on in our business. We continue to feel very good about the credit performance. We're not giving guidance on, you know, predicting the level, but we continue to lean into our growth opportunities because the metrics we see are very solid.

And then with respect to the allowance, Ryan, I know I've talked a lot about the mechanics and recent calls, so I'll spare all of you the tutorial. But the 1st thing with respect to the allowance will obviously be allowing for future growth is an obvious.

banks they tend to you know when they look at the credit environment when they see credit that is.

They tend to, when they look at the credit environment, when they see credit that is

worsening in a particular sector, they tend to pull back on originations, which makes a lot of sense. We often see one more notch on the continuum, which is to look at the assets that we have and look from time to time at, in fact, selling those. We have over the...

last few years we have actually unloaded something like this is this is I'm

Well, something like $6 billion of

of loans. That's not an official. Andrew is the one who gives the precise numbers. What I'm saying is several billion dollars of sort of exiting that we have done. Now in this particular case, we look at the market and see a lot of sustained stress in that market and feel.

For some of our business, we have our foot on the brake, and for other parts of the company, our foot is on the gas. But where I would leave you, the net impression I would leave you, it is really on the card side that we are really leaning in the hardest.

We, for some of our business, we have our foot on the brake, and for other parts of the company, our foot is on the gas. But where I would leave you, the net impression I would leave you, it is really on the card side that we're really leaning in the hardest. Thank you so much.

Next question, please. Our next question comes from.

My here, Badia with Bank of America. Your line is open.

Good afternoon and thank you for taking my questions. I wanted to start with expenses. They did come in a little bit better than I think what we were expecting. They were down quarter over quarter. You mentioned you talked a little bit about returning the normal in your...

prepared remarks. I was just wondering if you could expand on that a little bit. Was there a decision like to slow down on growth investments, pullback? Like I guess what what change just you know in terms of the expenses or the cadence of expenses through the year? Typically, Mihir, I'll take that one if you're talking just Q1.

necessarily a fundamental shift in any trajectory.

Okay, and then maybe just going back to the NIM conversation, I think you talked about some of the puts and takes in the near term, but I was curious just about, you know, company-wide name or. Okay, and then maybe just going back to the NIM conversation, I think you talked about

Compared to historical, it wasn't atypical for Capital One's name to be closer to 7% high sixes. Do you expect you'll get back there or something fundamentally change in the business, whether it's the growth in the high balance transactions or something else where you wouldn't get back there? Change of

Well, I don't think there's anything fundamentally different in the business here. I think there's a lot of question around what happens to consumer behavior. We talked about revolve rate and card and other things, and then also on the funding side.

partially dependent on what the Fed ends up doing over an extended period of time, where rates eventually settle out. I mean, I think those are all factors that could ultimately impact where the final resting place is for NIM, but there's nothing that is really fundamentally different across our book from where it was years ago.

Next question, please. Our next question comes from Betsy Grasek with Morgan Stanley . Your line is open.

Next question, please. Our next question comes from Betsy Grasek with Morgan Stanley . Your line is open. Hey, good afternoon.

Hey Betsy. Hey Betsy. So I know what you mentioned marketing following the typical seasonality this year and so expecting it to ramp up in the back half, which makes a lot of sense. And I'm just wondering when you think about where you want to spend those dollars, is it more on. New account acquisition, spring, outstanding line utilization.

Is travel a relatively easier one to pull at this stage? And I guess what I'm just wondering is, is there an opportunity to even get more return for your marketing dollars now versus maybe what you've had over the past couple of quarters given the...

you know, the need for people to borrow perhaps more than they had to a year ago. So just those are some of the questions that I have. Thanks. Thanks, Betsy. Let me talk about the marketing. Yes, thanks for commenting about the seasonality. I mean every year is different in terms of the quarterly patterns.

But, you know, we pointed out this year is, seems like a more normal year with the back half, with the more common back half, higher back half than we've had in some of the anomalous times during the pandemic.

You know, we pointed out this year is, seems like a more normal year with the back half, with the more common back half, higher back half than we've had in some of the anomalous times during the pandemic. After a while intosystems, in terms of the situation there aschiefs, thenI was very remaining present over here on social media these days. While we didn't REALLY discuss information about the pandemic.

We pointed out this year is, seems like a more normal year with the back half, with the more common back half, higher back half than we've had in some of the anomalous times during the pandemic. So the

The marketing was flat compared, in this quarter was flat compared to the prior quarter and down 12% year over year. But I wouldn't draw really strong conclusions from that. Because as I already talked about, we're leaning into the marketing just from a timing point of view of

our business particularly in the card business. We've continued to expand our products and our marketing channels. We're seeing very good traction.

These opportunities are significantly enhanced by our technology transformation that enabled us to leverage more data, access more channels, leverage machine learning models, and provide customized solutions that continues to just generate very good.

performance and we're leaning in to capitalize on that. So it's sort of category one is just the good opportunities that we see. The second thing that's behind our marketing levels is something we've been talking about for a long time.

which is our ongoing focus on heavy spenders. And it was really back in 2010 that we declared a strategic push for heavy spenders. And we knew in looking at the business that that's not a thing that we can go lean in one year, pull back another year. This is a whole.

part of the marketplace, which is about commitment. It's about building exceptional experiences, great products, and the brand.

So, starting really with the venture launch way back in 2010, we've been leaning in hard there. But of course, it hasn't just been about flagship cards. It's been about working backwards from what it takes to win with heavy spenders and investing across really the digital experience, the service.

growth, the purchase volume, but another strong manifestation of this is the rate of growth.

year after year has been higher at the higher end than the average, so we continue to get increased traction going up and up in the pursuit of heavy spenders.

Now, you know, of course, heavy spenders have much higher upfront costs of marketing, of promotions, of brand building, and hence it's a big factor in why the marketing levels at Capital One, if you compare back to, you know, many years ago, they're sort of...

structurally higher, but that's in pursuit of this really, I think, company transforming benefits that we're getting there. A third factor driving our marketing levels, Betsy, is our continuing investment in building our national retail bank.

As you know, we have only a modest presence in terms of physical distribution. So to get there, we lean heavily on our modern technology and a compelling digital experience and along with that, a sustained investment in marketing.

So, that's a bit about what's behind our marketing levels that you're seeing and the opportunities we see. And if we really look across those three sort of buckets, just the growth opportunities we see, the opportunities in building the heavy spender franchise, and then the building of the national bank.

being sort of the one bank that's building a full service bank without trying to do it via a branch on every corner. All of this marketing is the engine behind this and we continue to lean into it and be very pleased with the performance.

And the growth rate expectations should be following similar patterns to, you know, the pre-COVID environment. You know, we're not going to, well, let me comment for a second. Well, let me first say we're not really giving a growth outlook.

The thing I really want to say about marketing is marketing drives the origination of accounts. The real growth of our card business comes really from balance growth and also from purchase volume growth of course. But those are not one for one things. But what."

What we have been focused on since the founding of the company is building a company that has an organic growth engine focused on originations and leveraging the technology and analytical capabilities that we built.

And so our, when you see our leaning in hard to marketing, think about that is, you know, the engine that's driving new accounts. And over time, those accounts really are to your point, even though the timing is not one for one, those accounts are really the

the foundation for the continued outstandings and revenue growth of the company.

Next question, please.

Our next question comes from Sanjay with KABW. Your line is open.

Thank you. Andrew, I hate to do this, but I want to go back to the allowance coverage trends going forward. If we zoom into that complex calculation of removing previous and adding future quarters of net charge-offs, in your current forecast, do you have losses sort of rising through the end of next year? And maybe you could just touch on the new macro baseline and what the unemployment rate assumption is.

Yeah, so the baseline assumption in our outlook focusing. I imagine you're looking mostly for unemployment rate, so we have it increasing from the 3, 6 it is today to. For 3 at the end of this year, and then moving higher in the 4s, but staying in the 4s through 2024.

That compares to our assumption last quarter of, I believe it was 5-1. But remember that our models tend to use the change in unemployment rates or the rate of job creation, which we're forecasting to come down to nearly zero, rather than the level of unemployment. And so it's not just about...

Those factors too in our allowance were also considering. Downside scenarios that are much more severe than than that baseline. So when you take that into account to your 1st question around, what are we assuming? I'm not going to. Give specific forecast rich listed out kind of the factors that we believe will create.

upward pressure on our loss rates in the near term at least. And so we did assume that there's higher losses in the second quarter of next year than the quarter that we just left sort of mechanically as I described this quarter's allowance but where that goes from here is just...

as opposed to the allowance that is going to move quarter to quarter based on assumptions, you know, looking many quarters into the future.

Okay, Rich, I asked this question to one of your competitors earlier, but can you just pinpoint what's exactly attractive about the growth you're seeing in card today versus in the past, you know, that they are also growing at a pretty rapid rate. And obviously you guys have been very successful at growing this business over time, but you know, the market remains competitive. You talked about the credit normalization. There's obviously potential for economic challenges. I'm just trying to think through the risks.

Sanjay, there certainly are things to be worried about.

You know, the economy is unusual and has aspects of a lot of strength and a lot of concern. The credit normalization, we all see it. I'm going to make the worry case just slightly here for a second, the credit normalization.

you know, has we, you know, credit is still at very attractive levels, but it still has an upward slope to it and nobody

Well, we certainly don't feel in a position to predict exactly where that settles out, and so we'll have to keep that very much front and center. The market is very competitive, absolutely.

You know, at a time like this, we, so, well, on the strong side, I start with the health of the consumer. So let's just

Think about this, because the US consumer is a real source of relative strength in this uncertain economy. The labor market has proven strikingly resilient over the past year. And, you know, there are signs of cooling, but so far they're playing out gradually without...

falling for a while, you know, and we've talked a lot about consumers and their excess savings that they built up through the pandemic. And you know, they still have some excess savings, although that buffer is shrinking. And for many consumers, I think it's been fully consumed by higher prices.

The big negative, back to negatives, the big negative out there has been inflation, and real wages have been pushed down since really over the last couple of years.

You know, consumer confidence, that's been pretty shaky. But on the whole, I'd say consumers are in reasonably good shape. So, then we also believe when the, we have believed for quite a while, you remember in our conversations, even as the losses are rising these days,

You know, because we do believe that the deferred charge off phenomenon is something that is very natural to occur. You know, we're not alarmed by where losses are going.

Then we look at our own metrics and, you know, obviously we've talked about delinquencies, we've talked about charge-offs. We also look at payment rates and revolve rates. And I just want to make a comment about payment rates. I'm struck by the strength in payment rates.

You know, throughout the course of the pandemic, payment rates increased not only for us, but across the industry. And more recently, very naturally, payment rates have drifted down from pandemic highs. But and you can see in our trust metrics, the pretty whopping payment rates that are still there.

I guess what I'm struck by is that payment rates not only overall for Capital One, which could definitely has a mixed shift toward heavy spenders as potentially driving that, but even when we look by segment, we're struck by the...

continuing relative strength in payment rates, so that's a good guy and probably the biggest factor that we look at.

in payment rates, so that's a good guy, and probably the biggest factor that we look at.

is the recent originations that the

the vintage curve performance and the overall level of risk that we're seeing so far in our new originations is consistent with certainly consistent with our expectations, but also on a comparative basis when we look at the earliest delinquencies on our newest monthly vintages of origi-

You remember we've talked about this.

There's two ways this can happen. One is the sort of unmanaged and the other is the managed way. My favorite way is when vintage performance, you know, with the same credit policies as several years ago, when that is on top of the old things, the old...

That's actually not the case on what we call a like-for-like basis. The, you know, recent originations are, have worse credit than they had years ago. Again, not surprising at all to us. We all along the way have been managing

reactively and proactively around the edges where we either see or would expect maybe performance to be, you know, not as good. And so we have trimmed around the edges in our originations. And so on a net basis, it is

sort of just happens to be that originations these days are on top of where they were several years ago. So pulling way up and based on for me you know more than three decades of experience of doing this in the card business.

the opportunities that we see and enhanced by a lot of technology innovations and things like that. We see it as a good time to keep leaning in. We have a very watchful eye on all those negatives that you and I talked about.

But on a calibration basis, I would, you know, I like the opportunity. Just want to say one more thing, which you are right. A lot of times we have leaned in when others are pulling back. As a general observation, most of the industry is leaning in. That gets our attention. It's not as sustainable when, often when that's the case. So we're going to watch it carefully. But that gave you a little window into how

I know it was sort of flat down last quarter. Do you think that we'll continue to see moderation?

So, let's pull up, first of all, our domestic card purchase volume was up 7% year over year.

But that's, to your question, Don, that's really powered by the growth in our customer base. When you look at spend per customer –

This has moderated and is now generally flat from a year ago.

And the moderation in spending appears to be broad-based. We've observed it across income bands and card segments. We've also seen it across both discretionary and non-discretionary categories. By the way, it's not surprising at all that this would sort of level out. The consumer pulled way back in the pandemic, just an unprecedented amount of pullback.

and now and sort of has come roaring back on the other side. But I think for the individual customer, things are sort of settling out. And so I think when we ask what would we wish for? I think this is a sensible, like so often I always say this, the most sensible constituency in all of the marketplace tends to yet again.

be the consumer. But overall, we think that spend moderation is a sign of irrational and healthy behavior on the part of the consumer, and then we match it with the payment rates, and those are, look, those are normalizing somewhat. The revolve rates are normalizing somewhat, but both the payment rate and the revolve rates.

on a segment by segment basis are still not, they're not at the pre-pandemic levels yet, which indicates an underlying strength, at least on average, even when maybe at the margin, you're seeing some of these deferred charge-offs that are driving up credit losses.

Our next question comes from Aaron with city. Your line is open. Aaron, are you there? Aaron, are you there?

Our last question comes from Dominic Gabriel with Oppenheimer. Your line is open. Hey, great, thanks so much for taking my questions.

You know, Rich, I'm just thinking about turns in the credit cycle. What are some of the mistakes that you think card issuers make and even lenders in general? And where do you look for the weakness in the overall space of lending to give you caution when you start to see that turns in the credit cycle.

And I have some follow up. Thank you. So, yeah, you know, it's, I really appreciate the question Dominic, because

I've often said we're not in a position, I wouldn't have any of you put any more stock or stake, I guess you investors put stock in, but I wouldn't put any particular stake in our ability to predict the economy.

The credit cycle and the economy are not the same thing. They're correlated, but you know, I think that the credit cycle is the thing that we really focus a lot on because I think a lot of elements of it are pretty predictable. Obviously it is.

influenced by and influences the economy. So let's sort of pull way up. We were in this extraordinary period no one's ever seen before in terms of the credit quality.

saying be careful what you wish for because with every passing month

that this cycle is abnormally good, we will pay the price later on the other side of that causally because what, and so if you get into the behavior, and it really links not so much at all to the behavior of consumers, it's really about kind of to your question, what happens to lenders.

you know, providers of credit in this part of the cycle, especially in an extreme thing.

And we saw alarming things happening during the most extremely extreme periods during the pandemic. The most striking one to me was the absolute surge in FinTech lending. How much of it there was, who knows, because most of them aren't reporting to the credit bureau. So it's just a matter of.

felt with every month that that supply keeps coming there you know as I said earlier there's a price to be paid.

Then we look at the context of overlay on top of that, the

to your question about the common mistakes, what the fintechs almost by definition were doing, because I'm not sure what else they would do, is they were leveraging technology, building models in a lot of cases, but the rear view mirror that they were looking into the data set their models had.

were the greatest credit economy in the history of lending. So, you know, that's a dangerous kind of data set for the models. It was exacerbated by credit scores that had drifted.

dramatically more a lot of subprime customers moving into prime just by

sort of the way scoring works and what was happening as a result of the savings rates going up for consumers.

So, with FinTechs particularly, but for all the players in the business, the danger of the rearview mirror, the danger of the misreading the credit.

risk of customers because they were artificially, their scores would be artificially good. By the way, in our case, we pretty much just intervened in our own modeling and created a way to assume worse than the data says. We also, in our case, put heavy reliance on

data and modeling from way back in the last few decades that allows us to sort of get past that. So that is primarily the over exuberance of lenders in the environment of a combination of a great rearview mirror and frankly,

Obviously the fintech lending has gone way, most of it has retreated significantly. I am struck by my earlier comment as we watch very carefully the credit card industry. I think the major players seem to be pretty rational about the credit choice.

landing here than might otherwise have been there. Those are some of the thoughts that we have. Those are things to keep an eye on. One other thing that I just sort of seize a moment here on things that are...

on our mind because I always try to, my goal here is to always, you know, give you a window into how we're thinking and what net impression do I want folks to come away with. As we look at opportunities and, you know, a thing that's very much on our mind.

is the CFPB efforts on late fees. And I just want to just comment on that because that, you know, it's a very important thing that's going on. The CFPB is a very important thing that's going on.

late fee proposal effectively reduces late fees by approximately 75%. And CFPB is going after the fee that we believe is the most important fee in the consumer credit business.

Late fees provide a direct and clear incentive for customers to pay on time and avoid becoming delinquent and damaging their credit records.

And a small late fee may not have that deterrent effect. Late fees are also a way that issuers can partially price for risk and this enables...

greater access for consumers, greater access to credit, and a lower cost of credit on average. A reduction in late fees is almost certain to reduce credit access to certain parts of the population.

And the CFPB proposal is of course not yet finalized and it could be subject to delays or changes due to litigation. But we have to plan for the potential of this becoming law early next year. And Capital One has pursued a strategy of offering.

very simple credit card products with limited fees and complexity. And ironically, the late fee has been an important part of our product structure because of the reasons that I cited earlier.

If the proposed rule is implemented, there will be a significant impact to our revenue, gradually resolving over time.

And there are ways to mitigate the impact, but as a practical matter, those solutions will take several years to work their way through the portfolio. So as we pull up, and I share with you how we're thinking of the business, we really like the opportunities in the card marketplace.

We, for all the reasons that I've talked about, but we, you know, we also need to really stare at this proposal that may become the rule of the land. And, you know, I just wanted to share with you how we're thinking about that. And...

for all the reasons that I've talked about, but we, you know, we also need to really stare at this proposal that may become the rule of the land and, you know, I just wanted to share with you how we're thinking about that and the

And that's an important focus of Capital One. And our solutions to that will be very focused on finding solutions that are consistent with maintaining a winning customer franchise. And that's a thing that takes time to work its way in. Do you have another question, Dominic, you wanted to ask? Yeah, thanks so much, Rich. I can't agree with you more on the late fee comments as well, especially access to credit makes perfect sense. This one is not as interesting. I guess I was just looking for some help on the model. You know, when you look at professional fees,

or professional service expense. It was down pretty big year over year while the salaries were maybe a little elevated versus seasonality. I was wondering if you brought some of those folks in house or how to think about the professional services given that is some of the debt collection piece, I believe. And then was there a gain in the other non-interest income from the sole portfolio? Any help there would be great. And thanks for everything on the comments.

Sure, so I think you've got it right in terms of looking at salaries and benefits and professional services in conjunction with one another. You know, as we were making substantial investments in technology, we were supplementing that with some third party resources. We brought that down as we've been able to.

you know, use our brand, our recruiting brand to bring incredible talent into the organization. And so it's really looking in some ways at those two lines in conjunction with one another to get a sense for the kind of underlying overall labor trend. And then in other non-interest income, no, it's well, it's not specifically a sale, one of the biggest things in that creates some quarterly education.

call today and thank you for your continuing interest in Capital One. The investor relations team will be here this evening to answer further questions you may have. Have a good night everybody. This concludes today's conference call. Thank you for participating. You may now disconnect.

and thank you for your continuing interest in Capital One. The investor relations team will be here this evening to answer further questions you may have. Have a good night, everybody. This concludes today's conference call. Thank you for participating. You may now disconnect.

Thanks for watching!

You.

The F.