Q3 2023 Capital One Financial Corp Earnings Call

Yeah.

Good day and thank you for standing by welcome to the capital One Q3 2023 earnings 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.

Here, an automated message advising 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 everyone to capital one's third quarter 2013 earnings conference call.

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

In addition to the press release and the financials. We've included a presentation summarizing our third quarter 2000 2023 results.

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

Richard Andrew will walk you through this presentation.

To access a copy of this 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 infill.

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 accessible the capital one website.

And filed with the SEC.

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

Thanks, Jeff and good afternoon, everyone I will start on slide three of Tonight's presentation.

In the third quarter capital, one earned $1 8 billion or $4.45 per diluted common share.

Pre provision earnings of $4 $5 billion.

We're up 7% compared to the second quarter, and 17% compared to the year ago quarter.

Both period end and average loans held for investment increased 1% relative to the prior quarter driven by growth in our domestic card business.

Period end deposits increased 1% in the quarter.

While average deposits were flat.

Our percentage of FDIC insured deposits ended the quarter at 80% of total deposits.

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

Revenue in the linked quarter increased 4% driven by both higher net interest and noninterest income.

Noninterest expense increased 1% in the quarter.

As higher marketing expense was partially offset by lower operating expense.

Provision expense was $2 $3 billion.

With 2 billion of net charge offs and an allowance build of $322 million.

Turning to slide four.

I'll cover the allowance balance in greater detail.

Yeah.

The 322 million dollar increase in allowance brings our total company allowance balance up to $15 billion as of September.

Timber 30th.

The total company coverage ratio is now $4 75 per cent.

Up five basis points from the prior quarter.

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

Yeah.

Relative to last quarter's assumptions underlying the allowance.

Operator: Good day, and thank you for standing by.

Operator: Welcome to CapitalOne Q3 2023 earnings call. At this time, all participants are in a listen only mode. After the speaker's presentation, there will be a question to answer session. To ask a question during the session, you will need to press star one one on your telephone. You will then hear an automated message advising your hand is raised. To withdraw your question, please press star one one again.

The baseline forecast in this quarter for most key economic variables improved.

However, we continue to assume several key economic variables worsen from today's levels.

In our domestic card business, the allowance balance increased by $349 million.

The coverage ratio was largely flat at 7.79%.

Operator: Please be advised that today's conference is being recorded.

The predominant driver of the increased allowance was the growth in loans.

Jeff Norris: I would like to hand the conference over to your speaker today, Jeff Norris, Senior Vice President of Finance. Please go ahead.

The positive impact from the modestly improved economic outlook was largely offset by the impact of replacing the loss content of the third quarter of 2023.

Jeff Norris: Thanks very much, Amy, and welcome everyone to CapitalOne's third quarter 2013 earnings conference call. As usual, we are webcasting live over the internet. To access the call on the internet, please log on to CapitalOne's website at capitalone.com and follow the links from there.

With a 12 month reasonable and supportable period that now includes the third quarter of 2024.

In our consumer banking segment, the allowance balance declined by $136 million.

Jeff Norris: In addition to the press release and the financials, we have included a presentation summarizing our third quarter 2023 results.

The improved economic outlook and a decline in loan balances drove the release.

Jeff Norris: With me this evening, our Mr. Richard Fairbank, CapitalOne's chairman and chief executive officer, and Mr. Andrew Young, CapitalOne's chief financial officer. Richard Andrew will walk you through this presentation. To access a copy of this presentation and the press release, please go to CapitalOne's website, click on investors, then click on quarterly earnings release.

And in our commercial banking business, the allowance increased by $97 million.

The build reflected the impact of rising interest rates and other factors on certain commercial real estate and corporate borrowers, including our commercial office portfolio.

Jeff Norris: Please note that this presentation may contain forward-looking statements, information regarding CapitalOne's financial performance, and any forward-looking statements contained in today's discussion and materials, speak only as of the particular date or dates indicated in the materials. CapitalOne 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.

On slide 17 in the appendix we have included additional details on the office portfolio.

I'll also note that in the third quarter, we completed the sale of approximately $900 million of loans from our commercial office portfolio that were previously marked as held for sale.

The commercial with a coverage ratio in the commercial business increased by 12 basis points and now stands at 1.74%.

Jeff Norris: For more information on these factors, please see the section titled Forward-looking Information in the earnings release presentation and the risk factor section in our annual and quarterly reports, accessible to CapitalOne website and filed with the SEC.

Turning to page six I'll now discuss liquidity.

You can see our preliminary average liquidity coverage ratio during the third quarter was 155%.

Up from 150% last quarter, and 139% a year ago.

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

Andrew Young: Thanks, Jeff, and good afternoon, everyone.

Total liquidity reserves in the quarter were largely flat at $118 billion.

Andrew Young: I will start on slide three of tonight's presentation. In the third quarter, CapitalOne earned $1.8 billion, or $4.45 per diluted common share. Pre-prevision earnings of $4.5 billion were up 7% compared to the second quarter and 17% compared to the year ago quarter. Both period and and average loans held for investment increased 1% relative to the prior quarter driven by growth in our domestic card business. Period and deposits increased 1% in the quarter, while average deposits were flat.

Higher cash balances were offset by a decline in the market value of our investment securities portfolio.

Our cash position ended the quarter at approximately $45 billion up about $3 billion from the prior quarter.

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

Yeah.

Our third quarter net interest margin was 669%.

21 basis points higher than last quarter, and 11 basis points lower than the year ago quarter.

The quarter over quarter increase in NIM was largely driven by higher card yields.

Andrew Young: Our percentage of FDIC-insured deposits ended the quarter at 80% of total deposits. We have provided additional details on deposit trends on slide 18 in the appendix. Revenue in the linked quarter increased 4% driven by both higher net interest and non-interest income. Non-interest expense increased 1% in the quarter, as higher marketing expense was partially offset by lower operating expense. Provision expense was $2.3 billion, with $2 billion of net charge-offs and an allowance build of $322 million.

Continued mix shift towards card loans.

And one additional day in the quarter.

Partially offset by higher rate paid on deposits.

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

Our common equity tier one capital ratio ended the quarter at 13%.

Approximately 30 basis points higher than the prior quarter.

Net income in the quarter was partially offset by an increase in risk weighted assets.

Common and preferred dividends.

And the share repurchases, we completed in the quarter.

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

Thanks, Andrew and good evening everyone.

Andrew Young: Turning to slide four, I'll cover the allowance balance in greater detail. The $322 million increase in allowance brings our total company allowance balance up to $15 billion as of September 30. The total company coverage ratio is now 4.75% up five basis points from the prior quarter. I'll cover the drivers of the changes in allowance and coverage ratio by segment on slide five. Relative to last quarter's assumptions underlying the allowance, the baseline forecast in this quarter for most key economic variables improved.

Slide 10 shows third quarter results in our credit card business credit card segment results are largely a function of our domestic card results and trends, which are shown on slide 11.

The domestic card business posted another strong quarter.

Year over year topline growth.

<unk> volume for the third quarter was up 6% from the third quarter of last year.

Ending loan balances increased $19 billion or about 16% year over year.

Third quarter revenue.

Was up 15% year over year, driven by the growth in purchase volume and loans.

Andrew Young: However, we continue to assume several key economic variables worsened from today's levels. In our domestic card business, the allowance balance increased by $349 million. The coverage ratio was largely flat at 7.79%. The predominant driver of the increased allowance was the growth in loans. The positive impact from the modestly improved economic outlook was largely offset by the impact of replacing the loss content of the third quarter of 2023 with a 12-month reasonable and supportable period that now includes the third quarter of 2024.

Okay.

Revenue margin declined 31 basis points from the prior year quarter and remained strong at 18.24%. 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 the second charge offs increased so we reversed more finance charge and fee revenue.

These factors were partially offset by an increase in revolve rate on a linked quarter basis. The revenue margin increased seasonally by 48 basis points.

Andrew Young: In our consumer banking segment, the allowance balance declined by $136 million. The improved economic outlook and a decline in loan balances drove the release. And in our commercial banking business, the allowance increased by $97 million. The build reflected the impact of rising interest rates and other factors on certain commercial real estate and corporate borrowers, including our commercial office portfolio. On slide 17 in the appendix, we have included additional details on the office portfolio.

Domestic card credit results continue to normalize from the historically strong results. We saw during the pandemic consistent with our expectations the charge off rate for the quarter was up 220 basis points year over year to four 4% the 30 plus delinquency rate at.

At quarter end increased 134 basis points from the prior year to $4 three 1% on a sequential quarter basis, the charge off rate was essentially flat.

And the 30, plus delinquency rate was up 57 basis points, both for monthly delinquency rate and the monthly charge off rate are now modestly above 2019 levels. Our delinquencies are the best leading indicator of domestic card credit performance and the pace of delinquency.

Andrew Young: I'll also note that in the third quarter, we completed the sale of approximately $900 million of loans from our commercial office portfolio that were previously marked as held for sale. The coverage ratio in the commercial business increased by 12 basis points and now stands at 1.74%.

C rate normalization.

Is slowing.

Andrew Young: Turning to page 6, I'll now discuss liquidity. You can see our preliminary average liquidity coverage ratio during the third quarter was 155%. Up from 150% last quarter and 139% a year ago. Total liquidity reserves in the quarter were largely flat at $118 billion.

Noninterest expense was essentially flat compared to the third quarter of 'twenty two.

2022.

Total company marketing expense of $972 million for the quarter was also relatively flat year over year.

Compared to the sequential quarter marketing increased 10%.

Our choices in domestic card 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.

Andrew Young: Partners. Higher cash balances were offset by a decline in the market value of our investment securities portfolio. Our cash position ended the quarter at approximately $45 billion, up about $3 billion from the prior quarter.

And our marketing continues to deliver strong new account growth across the domestic card business. As a result, we are leaning into marketing to drive resilient growth and enhance our domestic card franchise as always we're keeping a close eye on competitor actions and potential marketplace risks.

Andrew Young: Turning to page 7, I'll cover our net interest margin. Our third quarter net interest margin was 6.69%. 21 basis points higher than last quarter, and 11 basis points lower than the year ago quarter. The quarter over quarter increase in them was largely driven by higher card yields, a continued midshift towards card loans, and one additional day in the quarter, partially offset by higher rate paid on deposits.

We expect fourth quarter marketing will be seasonally higher.

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

In the third quarter auto originations declined 10% year over year.

Driven by the decline in auto originations consumer banking ending loans.

Andrew Young: Turning to slide 8, I will end by discussing our capital position. Our common equity tier 1 capital ratio ended the quarter at 13%. Approximately 30 basis points higher than the prior quarter. Net income in the quarter was partially offset by an increase in risk-weighted assets, common and preferred dividends, and the share repurchases we completed in the quarter.

Decreased about $4 $4 billion or five 4% year over year on a linked quarter basis, ending loans were essentially flat.

We posted another strong.

Quarter and year over year retail deposit growth third quarter ending deposits in the consumer bank were up about $34 billion or 13% year over year.

Richard Fairbank: With that, I will turn the call over to Rich. Rich?

Richard Fairbank: Thanks, Andrew, and good evening everyone. Slide 10 shows third quarter results in our credit card business. Credit card segment results are largely a function of our domestic card results and trend, which are shown on slide 11. The domestic card business posted another strong quarter of year-over-year top-line growth. Purchase volume for the third quarter was up 6% from the third quarter of last year, ending loan balances increased $19 billion or about 16% year-over-year.

Compared to the sequential quarter ending deposits were up about 2% average deposits were up 12% year over year and up 1% 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 for the quarter was down about 7% year over year, driven by the higher rate paid on deposits and lower auto loan balances and margins.

Richard Fairbank: And third quarter revenue was up 15% year-over-year driven by the growth in purchase volume and loans. Revenue margin declined 31 basis points from the prior year quarter and remained strong at 18.24%. 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 revolverate. On a link quarter basis, the revenue margin increased seasonally by 48 basis points.

Noninterest expense was down about 6% compared to the third quarter of 2020 to.

Lower operating expenses were partially offset by an increase in marketing to support our national Digital Bank.

The auto charge off rate for the quarter was 177% up 72 basis points year over year. The 30, plus delinquency rate was 5.64% up 79 basis points year over year.

Compared to the linked quarter the charge off rate was up 37 basis points, while the 30 plus delinquency rate was up 26 basis points. Both of these linked quarter increases were better than typical seasonal expectations.

Richard Fairbank: Domestic card credit results continued to normalize from the historically strong results we saw during the pandemic consistent with our expectations. The charge-off rate for the quarter was up 220 basis points year-over-year to 4.4%. The 30-plus delinquency rate at quarter-end increased 134 basis points from the prior year to 4.31%. On a sequential quarter basis, the charge-off rate was essentially flat and the 30-plus delinquency rate was up 57 basis points. Both the monthly delinquency rate and the monthly charge off rate are now modestly above 2019 levels.

Slide 13 shows third quarter results for our commercial banking business compared.

Compared to the linked quarter.

Ending loan balances were essentially flat average loans were down about 2%.

The decline is largely the result of choices, we made earlier in the year to tighten credit.

Both ending deposits and average deposits were down about 2% from the linked quarter consistent with the general trend we've seen for several quarters as we continue to manage down selected less attractive commercial deposit balances.

Third quarter revenue was up 2% from the linked quarter noninterest expense was up about 6%.

Richard Fairbank: Our delinquencies are the best leading indicator of domestic card credit performance and the pace of delinquency rate normalization is slowing. Non-interest expense was essentially flat compared to the third quarter of 2022. Total company marketing expense of $972 million for the quarter was also relatively flat year over year compared to the sequential quarter marketing increased 10%. Our choices in domestic card are the biggest driver of total company marketing. We continue to see attractive growth opportunities in our domestic card business.

The commercial banking annualized charge off rate for the third quarter declined 137 basis points from the second quarter to 0.25% the second quarter charge off rate was elevated by charge offs. We recognize when we moved to portfolio of commercial office loans to held for.

Sale.

We completed the sale of that portfolio in the third quarter Slide 17 of the third quarter 2023 results presentation shows and it shows additional information about the remaining commercial office portfolio, which is less than 1% of our total loans.

The commercial banking criticized performing loan rate was 8.08% up 135 basis points compared to the linked quarter. The criticized nonperforming loan rate was essentially flat at 0.9%.

Richard Fairbank: Our opportunities are enhanced by our technology transformation and our marketing continues to deliver strong new account growth across the domestic card business. As a result, we are leaning into marketing to drive resilient growth and enhance our domestic card franchise. As always, we're keeping a close eye on competitor actions and potential marketplace risks.

In closing we continued to deliver solid results in the third quarter, we posted another quarter of strong topline growth in domestic card revenue purchase volume and loans the pace of domestic card delinquency normalization slowed we grew consumer and.

Richard Fairbank: We expect fourth quarter marketing will be seasonally higher.

Richard Fairbank: Slide 12 shows third quarter results for our consumer banking business. In the third quarter, auto originations declined 10% year over year. Driven by the decline in auto originations, consumer banking ending loans decreased about $4.4 billion or 5.4% year over year. On a linked quarter basis, ending loans were essentially flat.

Total deposits.

And we added liquidity and capital to further strengthen our already strong and resilient balance sheet.

Turning now to operating efficiency, the third quarter operating efficiency ratio was particularly strong operating efficiency ratio can vary from quarter to quarter, driven by the timing of revenue and operating expense.

Richard Fairbank: We posted another strong quarter in year over year retail deposit growth. Third quarter ending deposits in the consumer bank were up about $34 billion or 13% year over year. Compared to the sequential quarter, ending deposits were up about 2%. Average deposits were up 12% year over year and up 1% from the sequential quarter.

We expect 2023 annual operating efficiency ratio net of adjustments will be modestly down compared to 2022.

Pulling way up 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.

Richard Fairbank: Powered by our modern technology and leading digital capabilities, our digital first national direct banking strategy continues to deliver strong results. Consumer banking revenue for the quarter was down about 7% year over year driven by the higher rate paid on deposits and lower auto loan balances and margins. Non-interest expense was down about 6% compared to the third quarter of 2022. Lower operating expenses were partially offset by an increase in marketing to support our national digital bank.

And our tech engine drives growth efficiency improvement and enduring value creation over the long term, we remain well positioned to deliver compelling long term shareholder value and to thrive in a broad range of possible economic scenarios and now we'll be happy to answer your question.

Jeff.

Thanks Rich.

I will 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 one 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 session.

Richard Fairbank: The auto charge off rate for the quarter was 1.77% up 72 basis points year over year. The 30 plus delinquency rate was 5.64% up 79 basis points year over year. Compared to the length quarter, the charge-off rate was up 37 basis points, while the 30 plus delinquency rate was up 26 basis points, both of these length quarter increases were better than typical seasonal expectations.

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.

Please standby will be compile the Q&A roster.

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

Hey, good evening everyone.

Hey, Brian.

So rich you noted several times that delinquency normalization has slowed it looked like September charge off performance was better than we would've expected.

Richard Fairbank: Flight 13 shows third quarter results for our commercial banking business. Compared to the length quarter, ending loan balances were essentially flat. Average loans were down about 2%. The decline is largely the result of choices we made earlier in the year to tighten credit. Both ending deposits and average deposits were down about 2% from the length quarter. Consistent with the general trend we've seen for several quarters, as we continue to manage down selected less attractive commercial deposit balances.

We're hearing from others that pressure is becoming broader not just subprime, but it's also into prime. So can you maybe just talk about what youre seeing within your portfolio. What do you think about the pace of delinquency normalization and do you have any line of sight. When you think losses will inevitably peak. Thank you.

Thanks Ryan.

Sure.

So, let's just pull up on the metrics here.

Our third quarter domestic card charge off rate was essentially flat from the prior quarter up two basis points to 440%.

Richard Fairbank: Third quarter revenue was up 2% from the length quarter. Non-interest expense was up about 6%. The commercial banking annualized charge-off rate for the third quarter declined 137 basis points from the second quarter to 0.25%. The second quarter charge-off rate was elevated by charge-offs we recognized when we moved to portfolio of commercial office loans to held for sale. We completed the sale of that portfolio in the third quarter. Slide 17 of the third quarter 2023 results presentation shows additional information about the remaining commercial office portfolio, which is less than 1% of our total loans. The commercial banking criticized performing loan rate was 8.08% up 135 basis points compared to the length quarter. The criticized non-performing loan rate was essentially flat at 0.9%.

Our 30, plus delinquency rate increased 57 basis points from the prior quarter to 431%.

Both our losses and our delinquencies are modestly above their pre pandemic levels now, let's talk about sort of what's happening at the margin here the.

The trend of normalization in our credit metrics.

Here's to be slowing.

In August and September the month to month movement in our delinquencies was.

Essentially.

In line with normal seasonality for the first time since normalization began.

Okay.

We've also seen some stabilization in new delinquency entries relative to normal seasonal patterns.

So we are hopeful these stabilization trends continue now.

Net charge offs of course are a lagging metric. So they have some months of catching up still to do.

In auto we have seen stabilization even longer.

Richard Fairbank: In closing, we continued to deliver solid results in the third quarter. We posted another quarter of strong top-line growth in domestic card revenue, purchase volume, and loans. The pace of domestic card delinquency normalization slowed. We grew consumer and total deposits. And we added liquidity and capital to further strengthen our already strong and resilient balance sheet.

Our losses are modestly above pre pandemic levels, but.

Moving in line with normal seasonality.

For the past few.

A few quarters.

So back to our card business for a moment, there's another stabilization trend that we see as well.

Which is our recovery rate.

Our recovery rate had been falling for several years because of the low level of charge offs through the pandemic.

Richard Fairbank: Turning now to operating efficiency, the third quarter operating efficiency ratio was particularly strong. Operating efficiency ratio can vary from quarter to quarter driven by the timing of revenue and operating expense. We expect 2023 annual operating efficiency ratio net of adjustments will be modestly down compared to 2022. Pulling way up 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. At our tech engine, drives growth, efficiency improvement, and enduring value creation over the long term. We remain well positioned to deliver compelling long-term shareholder value and to thrive in a broad range of possible economic scenarios.

So we've had less inventory if you will to recover on.

And this was a larger effect for capital. One then for most of our competitors because we tend to have meaningfully higher recovery rates than the industry average.

And because we tend to work our own recoveries.

So they come in over time and not all at once.

Like in a debt sale.

We've now seen the recovery rates stabilize although it remains at unusually low levels.

Now recoveries of course don't impact our delinquencies, but they are a pretty significant factor.

When you're on in our charge offs, and particularly when comparing our charge offs to pre pandemic benchmarks.

Now.

Another capital one specific point here.

Richard Fairbank: And now we'll be happy to answer your questions. Yeah. Thanks, Rich.

Theres another factors sort of driving stabilization, but this is.

Operator: 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 one 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.

It has been going on for a long time, and that's the stability of credit performance and our recent origination vintages.

So.

Looking ahead, the economy is as always a source of uncertainty.

Operator: Aiming, please start the Q&A session. 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-one again. Please stand by when we compile the Q&A roster.

And our outlook, we still expect the unemployment rate to worsen over the coming year.

And as always we remain very focused on resilience in our underwriting.

And making sure that we build resilience a lot of resilience into all of our choice choices.

Ryan Nash: Our first question comes from the line of Ryan Nash with Goldman Sachs. Your line is open. Hey, good evening, everyone. So, Rich, you know, you know, several times that delinquency normalization has slowed. It looked like September Charger performance was better than we would have expected. But we are hearing from others that pressure is becoming broader, not just subprime, but it's also interprime. So if you maybe just talk about what you're seeing within your portfolio, what do you think about the pace of delinquency normalization? And do you have any line of sight when you think losses will inevitably peak? Thank you. Thanks, Ryan.

Maybe rich as my follow up question.

So Andrew you had highlighted.

That the domestic card allowance was relatively stable and I think you gave.

Three different factors, maybe can you just remind us again what is included from a macro perspective in terms of unemployment.

I take what rich said regarding delinquency slowing and obviously charge offs of catch up a little bit do you think we're at the point, where the replacement and the allowance is is going to be less of a tailwind or a headwind going forward and we can now finally have.

The allowance more closely following the allowance build more closely following loan growth. Thank you.

Sure Ryan so to your economic assumption point.

Richard Fairbank: So, let's just pull up on the metrics here. Our third quarter domestic card charge off rate was essentially flat from the prior quarter, up to basis points to 4.40%. Our 30 plus delinquency rate increased 57 basis points from the prior quarter to 4.31%. Both our losses and our delinquencies are modestly above their pre-pandemic levels. Now let's talk about sort of what's happening at the margin here. The trend of normalization in our credit metrics appears to be slowing.

I'll focus on unemployment rate, although recall that a whole lot more is considered a whole bunch more variables, but we are now assuming that the unemployment rate moves into the mid fours by the middle of 'twenty four and basically holds there.

Sure.

Period of time, but it's not just the absolute level of unemployment as we've talked about before it's also the change that influences underlying credit performance.

How that then plays through the allowance, though like a number of factors are going into the allowance calculation is as rich said.

Richard Fairbank: In August and September, the month to month movement in our delinquencies was essentially in line with normal seasonality for the first time since normalization began. We've also seen some stabilization in new delinquency entries relative to normal seasonal patterns. So we are hopeful these stabilization trends continue. Now, charge off, of course, are lagging metrics so they have some months of catching up still to do. In auto, we have seen stabilization even longer.

The projected loss rates are going to be by far the biggest driver and as we've talked about many times delinquencies are the best leading indicator of.

Credit performance, particularly over the next couple of quarters.

And I won't go through the the reasonable and supportable and reversion process elements that.

We've discussed previously, but I will say beyond the credit forecast. It is worth noting that the allowance framework considers a range of outcomes and uncertainties, which are generally wider in periods of either worsening or improving.

Richard Fairbank: Our losses are modestly above pre-pandemic levels, but moving in line with normal seasonality for the past few quarters. So back to our card business for a moment, there's another stabilization trend that we see as well, which is our recovery rate. Our recovery rate had been falling for several years because of the low level of charge-offs through the pandemic. So we've had less inventory, if you will, to recover on. And this was a larger effect for CapitalOne than for most of our competitors because we tend to have meaningfully higher recovery rates than the industry average, and because we tend to work our own recoveries, so they come in over time and not all at once, like in a debt sale.

Moving transitions so at the core of your question you know even in a period, where projected losses in future quarters may be lower than today and might otherwise indicate a release, we could very well see a coverage ratio that remains flat or.

Only modestly declines at least in the near term as we incorporate the related uncertainty into the allowance and so we'll go through our process as we do every year to take all of those factors into account and roll forward the.

The allowance each quarter.

Next question please.

Our next question comes from Mihir Bhatia with Bank of America. Your line is open.

Hi, good afternoon, and thank you for taking my questions.

I was curious.

Richard Fairbank: We've now seen the recovery rates stabilize, although it remains at unusually low levels. Now, recoveries, of course, don't impact our delinquencies, but they are a pretty significant factor in our charge-offs and particularly when comparing our charge-offs to pre-pandemic benchmarks. Now, another CapitalOne specific point here, there's another factor sort of driving stabilization, but this has been going on for a long time, and that's the stability of credit performance in our recent origination ventages.

The health of the consumer and I was curious if you're seeing trends at all diverged.

Between higher cycle FICO scores, whether it's on credit.

<unk> performance or spending.

We go through the recovery.

Okay.

Yes.

May here.

Thank you for your question.

So let's talk about credit.

Credit.

Our performance.

Yeah.

When when credit first started to normalize we called out that this trend was more pronounced at the low end of the market.

Richard Fairbank: So, you know, looking ahead, the economy is, you know, as always, a source of uncertainty. In our outlook, we still expect the unemployment rate to worsen over the coming year. And as always, we remain very focused on resilience in our underwriting and making sure that we build resilience, a lot of resilience into all of our choices.

Whether defined by income or credit score.

And.

And strikingly those were the segments that it improved the most early in the pandemic. So this was not surprising to us.

Later, we observed that normalization was becoming more broad based and in fact for.

Many.

Quarters now right now for several quarters now every segment was basically and normalizing at about the same rate in other words, if you look at for any segment, where its credit metrics.

Andrew Young: Maybe Rich has my follow-up question. So, Andrew, you had highlighted that the domestic card allowance was relatively stable, and I think you gave three different factors. Maybe you just remind us again what is included from a macro perspective in terms of unemployment, and if I take what Rich said regarding delinquency slowing and obviously charge-offs will catch up a little bit, do you think we're at the point where, you know, the replacement and the allowance is going to be less of a tailwind, of a headwind going forward, and we could now finally have the allowance more closely following the allowance billed more closely following the loan growth?

Were relative to like as delinquencies for example relative to.

Pre pandemic.

<unk> segment was kind of on top of each other everything had caught up.

Now we are seeing stabilization come more quickly at the lower end of the market in fact over the last few months our delinquencies in these segments have essentially stabilized on a seasonally adjusted basis.

Andrew Young: Thank you. Sure, Ryan. So, to your economic assumption point, I'll focus on unemployment rate, although recall that a whole lot more is considered a whole bunch more variables, but we are now assuming the unemployment rate moves into the mid-4s by the middle of 24, and basically holds therefore a period of time. But it's not just, you know, the absolute level of unemployment as we talked about before, it's also the change that influences underlying credit performance.

And our.

Market.

Our segments are sort of just.

A little bit behind that.

So now I don't think this is necessarily a description of the marketplace per se. This this is what we see at capital one our performance has been assisted by some of the underwriting changes that we've made over the past couple of years, especially in response to credit to what we.

Anticipated would be the impact of credit scores inflating fintech flooding the market. So as we've been talking about really for a couple of years now we we in our originations.

Andrew Young: How that then plays through the allowance, though, like a number of factors are going into the allowance calculation, as Rich said, you know, the projected loss rates are going to be by far the biggest driver. And as we talked about many times, the linkancies are the best leading indicator of credit performance, particularly over the next couple of quarters. And I won't go through the reasonable and supportable and reversion process elements that we've discussed previously, but I will say beyond the credit forecast, it is worth noting that the allowance framework considers a range of outcomes and uncertainties, which are generally, you know, wider in periods of either worsening or improving transitions.

And overall in our credit policy, we were trimming around the edges for things that we saw or or or risks that we anticipated and this has contributed I think to.

Our strength and the stability and performance. That's now are contributing to what we see here.

In terms of spend.

<unk>.

The spend is basically.

Pretty.

When we look at spend per customer. This has really moderated after the surge of spending coming out of the pandemic. So year over year I'm convinced that overall capital one point year over year.

Andrew Young: So at the core of your question, you know, even in a period where projected losses in future quarters may be lower than today, and, you know, might otherwise indicate a release, we could very well see a coverage ratio that remains flat or only modestly declines, at least in the near term, as we incorporate the related uncertainty into the allowance. And so we'll go through our process as we do every year to take all of those factors into account and roll forward the allowance each quarter.

<unk> growth per customer has been roughly flat for several months.

So the growth in spend that you're seeing in our metrics is really being driven by.

New account origination.

Now with respect to.

The various segments.

Operator: Next question please.

The.

Spend on the at the lower end of the marketplace is certainly probably the most moderated although we it.

It it moderated first we've seen.

Mihir Bhatia: Our next question comes from Mihir Bhatia with Bank of America. Your line is open. Hi, good afternoon and thank you for taking my question. I was curious in terms of the health of the consumer. I was curious if you're seeing trends at all diverge between higher cycle and lower cycles called whether it's on credit, credit performance or spending, you know, as we go through the recovery. Yes, Mihir, thank you for your question.

Spend growth.

Across our segments.

Sort of.

Fairly moderated, but I'd say the biggest effect on the moderating side has been.

In the lower end of the market.

Got it. Thank you that's quite helpful.

And then maybe just starting the NIM very quickly can you just talk about some of the puts and takes on the in the near term.

Particularly on the deposit competition side any thoughts on where deposit betas.

So what are you seeing from a competitive standpoint. Thank you.

Okay.

Richard Fairbank: So let's talk about credit performance. When credit first started to normalize, we called out that this trend was more pronounced at the low end of the market, whether defined by income or credit score. And strikingly, those were the segments that had improved the most early in the pandemic, so this was not surprising to us. Later we observed that normalization was becoming more broad-based. And in fact, for, you know, many quarters now, now for several quarters, now every segment was basically normalizing at about the same rate.

Yeah with respect to beta as we've discussed in previous calls there's.

Really a couple of key factors that are impacting betas. The first is product mix sort of the rotation of customers across products and then the second is competitive pricing and within that I would include the notion of just deposit pricing lags that.

That we've talked about.

And so for us the quarter over quarter beta with that lag effect with something like 160% our accumulative beta now stands at 57.

And so what.

That getting factored into to NIM as we look ahead on that dimension, and particularly assuming if rates do stay higher for longer I wouldn't be surprised if there continues to be some upward pressure on data at least in the near term driven by those factors that I described at the <unk>.

Richard Fairbank: In other words, if you look at for any segment where its credit metrics were relative to like its delinquencies, for example, relative to pre-pandemic, every segment was kind of on top of each other, everything had caught up. Now we are seeing stabilization come more quickly at the lower end of the market. In fact, over the last few months, our delinquencies in these segments have essentially stabilized on a seasonally adjusted basis and our market segments are sort of just a little bit behind that.

And product mix piece.

So beyond that then in the NIM.

We have seen spreads widen a bit here and.

Wholesale funding costs.

Are up a bit and I think rich talked about suppression in card, but depending on the path of credit you know there's the potential at least for increased revenue suppression. So I would lump all of those three things together is as potential headwinds but from it.

Richard Fairbank: Now, I don't think this is necessarily a description of the marketplace per se. This is what we see at Capital One. Our performance has been assisted by some of the underwriting changes that we made over the past couple of years, especially in response to what we anticipated would be the impact of credit scores inflating. Fintechs flooding the market. So as we've been talking about really for a couple of years now, we in our originations and overall in our credit policy, we were trimming around the edges for things that we saw or risks that we anticipated. And this has contributed, I think, to strengthens and stability and performance that's now contributing to what we see here.

Tailwind perspective, and how we can continue to see growth in card and particularly revolving card balances as a percent of the balance sheet. Like you saw this quarter and then the other thing that I would note, even though our cash balances remain elevated.

Relative to historical standards.

We will see it settle out at a lever level, that's higher than pre pandemic, but ultimately lower than where we are today. You know as you look ahead over over multiple quarters. So those are really the primary factors that I would say are at play with respect to NIM.

Next question please.

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

Just touching on the last discussion on net interest margin. The card loan yields expanded I think 89 basis points and that was quite a bit higher than the base <unk> expansion for the quarter. You mentioned higher revolve rates is that part of what Youre seeing there and how does the revolve rates compare.

Mihir Bhatia: In terms of spend. The, the spend is basically pretty, you know, when we look at spend per customer, this is really moderated after the surge of spending coming out of the pandemic. So year over year, I'm committed to an overall capital one point. Year over year, spend growth per customer has been rough. It's roughly flat for several months. So the growth in spend that you're seeing in our metrics is really being driven by new account origination.

Today versus maybe where they were pre pandemic.

Yeah.

Yeah. So part of it is just.

The fed if youre looking at yield as opposed to margin is you get a tailwind just from the the fed rate changes, but the other primary end larger factor than the fed changes is I would say largely seasonality.

Which does we typically see a revolve.

Revolve rates in the third quarter, just naturally be a be higher than they are throughout the year.

Mihir Bhatia: Now, with respect to the various segments, the spend on the lower end of the marketplace is certainly probably the most moderated. Although we it moderated first, we've seen spend growth across our segments, sort of fairly moderated, but I say the biggest effect on the moderating side has been in the lower end of the market. Thank you, that's quite helpful.

And we also tend to see a bit more on the late fee.

Piece there. So there is a seasonality dimension in terms of where we are with revolve rates.

Going forward I'll, let rich talk a little bit about the trends that we're seeing in the portfolio.

Yes, Aaron so.

Overall.

In our domestic card business revolve rates are.

Basically where they were.

So for example, the.

Andrew Young: And then maybe just turning the name very quickly, can you just talk about some of the puts and takes on them in the near term, particularly on the deposit competition side. Any thoughts on where deposit data go? What are you seeing from a competitive standpoint? Thank you. Yeah, with respect to beta, as we've discussed in previous calls, there's really a couple of key factors that are impacting beta. The first is product mix, sort of the rotation of customers across products.

2019, but it's it's very sort of very different within within segments.

The place that the revolve rate is.

Quite a bit higher as in our partnerships business because we have the the Walmart portfolio, we didnt have before the pandemic.

Andrew Young: And then the second is competitive pricing, and within that I would include the notion of just deposit pricing lags that we've talked about. And so, for us, the quarter over quarter beta with that lag effect was something like 160%. Our cumulative beta now stands at 57. And so, you know, that getting factored into them as we look ahead on that dimension, particularly assuming if rates do stay higher for longer, I wouldn't be surprised if there continues to be some upward pressure on beta, at least in the near term driven by those factors that I described that the pricing and product mix piece.

Pretty much everywhere else.

Across our branded book revolve rates are a little bit generally speaking a little a little bit too.

Quite a bit lower than they were before but then that impression I would leave with you. So our branded book overall is.

Is somewhat lower and.

The.

And the partnerships.

I have offset that.

Got it and then on the marketing.

Like it was down just slightly year over year still.

Almost double where it was from a pre pandemic perspective have you have you essentially hit kind of a.

Almost a peak year in terms of marketing dollars.

How do you think the expenses will go from there with respect to them.

Okay well.

Andrew Young: So, beyond that, then, in the NIM, we have seen spreads widen a bit here, and, you know, wholesale funding costs are up a bit. And I think Rich talked about suppression in card, but, you know, depending on the path of credit, you know, there's a potential at least for increased revenue suppression. So, I would lump all of those three things together as potential headwinds, but from a tailwind perspective, you know, we can continue to see growth in card and particularly revolving card balances as a percent of the balance sheet like you saw this quarter.

Erin.

On marketing, so just pulling up.

Total company marketing was up 10% compared to the prior quarter and flat year over year, let's just pull up and talk about the big drivers.

Of our marketing first we continue to really like the opportunities we're seeing in the market.

Including.

Additionally, the opportunities that we get in expanding channels and growing the number of card products. We have the benefit from our technology transformation that that that sort of is is everywhere in what we do as we leverage more data.

Andrew Young: And then the other thing that I would note, even though cash balances remain elevated relative to historical standards, you know, I think we will see it settle out at a level that's higher than pre-pandemic, but ultimately lower than where we are today, you know, as you look ahead over multiple quarters. So, those are really the primary factors that I would say are at play with respect to NIM.

Sure.

Able to you know.

Take advantage of powerful machine learning models create customized.

Better experiences for consumers. So that continues to have a lot of traction and we're leaning into that.

Operator: Next question, please.

We also are very important part of our marketing spend and a thing we're really leaning into is our focus on heavy spenders.

Aaron Cyganovich: Our next question comes from Aaron Cyganovich with City. Your line is open. Yeah, just touching on the last discussion on the interest margin, the card loan yields expanded by the 89 basis points, and that was quite a bit higher than the base rate expansion for the quarter. You mentioned higher revolver rates. Is that part of what you're seeing there, and how do the revolver rates compare? Today versus maybe where they were pre-pandemic?

So when we think about our quest for heavy spenders, It really goes back to 2010.

When we launched our venture card and that was the beginning of a strategic push that we have a continued and accelerated ever since and that involve more than just <unk>.

Putting a an attractive product out there heavy spenders of course.

You know to win with heavy spenders, we need great servicing <unk>.

Aaron Cyganovich: Yeah, so part of it, Aaron is, you know, just the Fed. If you're looking at yield as opposed to margin, you get a tailwind just from the Fed rate changes, but the other primary and larger factor than the Fed changes is, I would say largely seasonality, which does we typically see. Revolver rates in the third quarter just naturally be higher than they are throughout the year, and we also tend to see a bit more on the late fee piece there. So there is a seasonality dimension in terms of, you know, where we are with revolver rates going forward.

<unk> dropping customer experiences of course, great value propositions.

And this.

This takes a significant investment in upfront promotions and marketing and in brand building and this is all about you know my observation all the years of doing this business and watching players who succeed here and those who get less traction it's very much about.

Our sustained investment and the the ultimately the brand that one builds.

So we're continuing to invest in and also in building the properties and experiences to drive heavy spender growth at the top of the market. So these investments include our travel portal.

Richard Fairbank: I'll let Rich talk a little bit about the trends that we're seeing in the portfolio. Yes, Aaron, so overall in our domestic card business revolver rates are basically where they were. So, for example, third quarter, 2023 revolver rates right on top of third quarter, 2019, but it's very different within segments. The place that the revolver rate is quite a bit higher is in our partnerships business because we have the Wal-Mart portfolio.

Access to exclusive properties and experiences.

Airport lounges and capital one shopping.

And our sustained investment at the top of the market has helped drive momentum in.

Overall in our spender business, but we've grown even faster with the heaviest of spenders.

Yeah.

And we very much like this business. In addition to the obvious spend growth. We're enjoying it generated strong revenues has very low losses low attrition and.

Lifts the entire brand of the company.

Yeah.

Richard Fairbank: We didn't have before the pandemic pretty much everywhere else across our branded book revolver rates are a little bit generally speaking, a little bit to quite a bit lower than they were before. But the net impression I would leave with you so our branded book overall is somewhat lower and the, and the partnerships have offset that.

The final factor driving our marketing levels as our investment in continuing to build our national Bank.

And of course, as we have a smaller branch footprint.

Our growth is powered by modern technology, a compelling digital experience.

A you know a cafe presence.

In and.

Heavily traveled traveled.

Locations across the nation and of course, a sustained investment in marketing. So these are the really compelling opportunities that are driving our marketing levels.

Aaron Cyganovich: Got it, and then on the marketing looks like it was down just in a slightly year over year still, you know, almost double where it was from a pre pandemic perspective. Have you essentially hit kind of a, almost a peak here in terms of marketing dollars, and how do you think the expenses will go from there with respect to them? Okay, well, Aaron, on marketing, so just pulling up total company marketing was up 10% compared to the prior quarter and flat year over year.

And we continue to see great traction pretty much across the board and we continue to lean into these opportunities and.

It's an important part of the creation of long term value for our shareholders.

Next question please.

Our next question comes from Rick Shane with J P. Morgan Your line is open.

Thanks for taking my question this afternoon.

To talk a little bit about the depository franchise.

Obviously, there's been a.

Very strong growth this year in the consumer banking franchise, particularly on the deposit side can you just talk a little bit about the competitive landscape.

Aaron Cyganovich: Let's just pull up and talk about the big drivers. First, of our marketing. First, we continue to really like the opportunities we're seeing in the market, including, you know, additional, you know, the opportunities that we get in expanding channels and growing the number of card products we have, the benefit from our technology transformation that sort of is everywhere in what we do as we leverage more data. We're able to, you know, take advantage of powerful machine learning models, create customized better experiences for consumers.

You started rich you talked a little bit about the network the cafes, the less concentrated branch.

Approach, but can you describe what you're seeing sort of broadly in the market and where you think you're gaining share.

Well.

One of the thing.

Thank you Rick one of the core.

Strategic.

Approaches capital one it really defined the founding idea of the company and pretty much all the choices we've made it made sense.

Is to look at the marketplace and the tsunami forces that are driving.

Aaron Cyganovich: So that continues to have a lot of traction and we are leaning into that. We also, a very important part of our marketing spend and a thing we're really leaning into is our focus on heavy spenders. So when we think about our quest for heavy spenders, it really goes back to 2010 when we launched our venture card and that was the beginning of a strategic push that we have continued and accelerated ever since.

Such change in the marketplace and really try to discern with all the noise in these marketplaces, where is it that.

Aaron Cyganovich: And that involved more than just, you know, putting an attractive product out there, heavy spenders, of course, you know, to win with heavy spenders, we need great servicing, jaw dropping customer experiences, of course, great value propositions. And this takes a significant investment in upfront promotions and in marketing and in brand building. And this is all about, you know, my observation all the years of doing this business and watching players who succeed here and those who get less traction.

That that where where is winning are going to be what's what's the future of these things and almost always it's a question of how technology.

Aaron Cyganovich: It's very much about sustained investment and the ultimately the brand that won builds. So we're continuing to invest in also in building the properties and experiences to drive heavy spender growth at the top of the market. So these investments include our travel portal, access to exclusive properties and experiences, airport lounges and capital one shopping. And our sustained investment at the top of the market has helped drive momentum in, you know, overall in our spender business, but we've grown even faster with the heaviest of spenders.

Is driving change.

And so in retail banking, we of course are entered banking weigh back.

In the mid <unk>, driven most importantly by a desire to transform the balance sheet of our company too.

To get away from capital market reliance and get not just a.

Deposit.

Driven balance sheet, but an insured deposit driven balance sheet, hence the quest for.

A consumer deposit.

Franchise now along the way.

As a very important part of our strategy as well we look forward to.

Trying to get at the forefront of where the world was going to go over time with respect to retail banking.

From a heavy reliance on branches and by the way I want to say at the outset I think branches will be an important thing in.

And in the World.

In banking for as far out as we can see but you just can't help but see the evolution from.

The branch.

Branch on the corner to the branch in your hand, and really over time.

Sorry to the bank in your hand to over time the bank in your life, that's very digitally interactive and both reactively and proactively being there where a consumer needs. It on a real time customized basis. So that's.

That's where we have.

Aaron Cyganovich: And, you know, we, we very much like this business in addition to the obvious spend growth we're enjoying it generates strong revenues has very low losses, low attrition and, you know, lift the entire brand of the company.

And that's that's the vision that we've been working backwards from.

In that journey.

First step of course was building a national savings business that was absolutely central to our balance sheet strategy for the company.

Richard Fairbank: The final factor driving our marketing levels is our investment in continuing to build our national bank. And of course, as we have a smaller branch footprint, our growth is powered by modern technology, compelling digital experience, a, you know, cafe presence in, you know, heavily traveled, traveled locations across the nation and of course a sustained investment in marketing. So these are the really compelling opportunities that are driving our marketing levels and we continue to see great traction pretty much across the boards. And we continue to lean into these opportunities and it's an important part of the creation of long term value for our shareholders.

But beyond that.

We have worked very much to build a.

Operator: Next question please.

Not just a national savings business, but a national foot full service bank.

And to do that it's not just a matter of sort of offering a checking accounts, but I think capital one was in an unique position having retail banks in branches in in about 20% of the nation. They have a lot of experience with retail banking. Our view was if we're going to win in Nash.

<unk> banking, we actually have to digitize the entire customer experience and just about everything that you can get in a branch to be able to for customers to get that on a digital basis. So what we've done over the years is build a full service digital National Bank.

Rick Shane: Our next question comes from Rick Shane with JP Morgan. Your line is open. Thanks for taking my question this afternoon.

And.

We.

Then a U.

As we have built this we even less.

Rick Shane: Just like to talk a little bit about the depository franchise. Obviously there's been very strong growth this year in the consumer banking franchise particularly on the deposit side. Can you just talk a little bit about the competitive landscape? You started to, Rich, you talked a little bit about the network, the cafes, the less concentrated branch approach, but can you describe what you're seeing sort of broadly in the market where you think you're gaining share?

Leverage the big customer base, we have the national brand that we have and really added to our marketing and.

Everywhere in our strategy the build out of this national Bank and we're getting a lot of traction.

Nice growth and a lot of traction on the brand side as as consumers.

Realize that capital one even though the brand they don't want branches across the nation really is a full service national Bank.

Rick Shane: Well, you know, one of the, thank you, Rick. One of the core strategic approaches of CapitalOne, it really defined the founding idea of the company and pretty much all the choices we've made sense is to look at the marketplace and the tsunami forces that are driving such change. Change in the marketplace and really try to discern with all the noise in these marketplaces, where is it that, where is winning going to be?

Bank.

So that's our that's been our strategy for years, we continue to it. It is an important thing that we lean into from a marketing point of view, but basically our quest is to build continue to build a national.

Bank without.

Getting there by virtue of just lots and lots of acquisitions of branch based banks.

Thank you rich.

Next question please.

Rick Shane: What's the future of these things and almost always its question of how technology is driving change? And so in retail banking, you know, we, of course, entered banking way back in the middle of driven most importantly by a desire to transform the balance sheet of our company to get away from capital market reliance and get not just a deposit driven balance sheet, but an insured deposit driven balance sheet. And hence the quest for a consumer deposit franchise.

Our next question comes from Don Vendetti with Wells Fargo. Your line is open.

Yes, Richard I was wondering given your good trends in auto delinquencies.

Are you sort of inclined to be leaning a little harder into auto lending or do you need to see something before making that decision.

Okay.

Don Thank you for your question.

It's funny, we have zagged.

While others Zagged.

For so long as long as I can remember in the auto business.

Our strategy isn't just as Sig, while others Zag, it's always too.

Look at this marketplace.

And really objectively see where the opportunities are this is a more volatile business in terms of our growth strategies.

Rick Shane: Now along the way, as a very important part of our strategy as well, we look forward to trying to get at the forefront of where the world was going to go over time with respect to retail banking. From a heavy reliance on branches and by the way, I want to say at the outset, I think branches will be an important thing in, you know, in banking for as far out as we can see, but you just can't help but see the evolution from the branch, you know, the branch on the corner to the branch in your hand.

Then.

The credit card business is because of the role that a dealer plays in the in the business in a sense holding auctions at the dealership such that.

Our growth strategies are particularly sensitive to the credit and underwriting choices that our competitors make because it's sort of amplified in this auction based environment with dealers really quite a contrast from the credit card business to the credit card business, where certainly the competitive choices matter, but it's really.

Rick Shane: And really over time, sorry, to the bank in your hand, to over time, the bank in your life, that's very digitally interactive and both reactively and proactively being there where a consumer needs it on a real time customized basis. So that's where we have, and that's the vision that we've been working backwards from. So in that journey, the first step, of course, was building a national savings business that was absolutely central to our balance sheet strategy for the company.

Still a one on one.

Our business with our customers and prospective customers. That's why you see so much more stability in sort of the the marketing and the marketing sort of and the.

And leaning into the growth that you see on the card side. So.

As you know when you think about the last.

Few years. So we certainly had in the last you know five or six years tremendous growth and traction in the auto business.

Rick Shane: But beyond that, we have worked very much to build a... Not just a national savings business, but a national full service bank. And to do that, it's not just a matter of sort of offering a checking accounts, but I think CapitalOne was in a unique position, having retail banks in branches in about 20% of the nation. I have a lot of experience with retail banking. Our view was, if we're going to win in national banking, we actually have to digitize the entire customer experience and just about everything that you can get in a branch to be able for customers to get that on a digital basis.

And.

We our strategy was so powered.

Powered by our technology that we've invested in the business the data the underwriting capabilities.

And the very deep relationships that we've been building with dealers.

Over the last couple of years, we you know we're concerned at what was happening.

With margins as they were pressured by interest rate increases in 'twenty two 2022 in early 2023, some competitors were slow to adjust there.

Pricing now more recently industry lending margins have largely normalized as interest rates have stabilized and many players including late movers have continued to increase pricing.

Rick Shane: So what we've done over the years is build a full service digital national bank. And we then, you know, as we have built this, we have then, you know, leveraged the big customer base. We have the national brand that we have and really added to our marketing and, you know, everywhere in our strategy, the build out of this national bank. And we're getting a lot of traction, nice growth, and a lot of traction on the brand side as consumers realize that, you know, CapitalOne, even though the branch is across the nation, really is a full service national bank.

The other thing of course was watching very closely the credit side of the business and we just as we did in the card business.

Probably actually more proactively and more significantly in auto we trimmed back around the edges in anticipation of certain worsening and with concerns about score a drift.

In.

With respect to the data.

Fort with from consumers.

So that has and you've seen the data that we're capital one has pulled back quite a bit our our our outstandings.

Have been shrinking a little bit.

Rick Shane: So that's been our strategy for years. We continue to, it's an important thing that we lean into from a marketing point of view, but basically our quest is to build, continue to build a national bank without getting there by virtue of just lots and lots of acquisitions of branch-based banks. Thank you, Rich.

You also have seen the striking credit performance we've had in the stability now that you know is is at least two quarters long in terms of what we're seeing on.

On various credit metrics, so seeing the good metrics and seeing the marketplace, where certainly on.

On the lookout for opportunities, but I'm not here to predict.

An acceleration, but we certainly do like the performance.

Of both our front book and our back book at this point.

Thanks.

Don Fandetti: Next question, please. Our next question comes from Don Fandetti with Wells Fargo. Your line is open. Yes, Rich, I was wondering, you know, given your good trends in auto delinquency, are you sort of inclined to be leaning a little harder into auto lending or do you need to see something before making that decision? Don, thank you for your question. You know, it's funny. We have ZIGG. Well, others are ZIGG for so long, as long as I can remember in the auto business.

Next question please.

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

Thanks.

First question just on the adjusted operating efficiency rate.

It assumes some nice improvements over the last two quarters and I know rich you talked about sort of the year outlook I'm. Just wondering if we could see this type of level or trends sustain itself into next year.

Okay.

Sanjay, where we're not going to be giving out guidance on at this point on where we're operating efficiency goes. We certainly are pleased with the progress that we've made over time and operating efficiency ratio, even as we've continued to.

Don Fandetti: And, you know, our strategy isn't just ZIGG. Well, others are ZIGG. It's always to look at this marketplace and really objectively see where the opportunities are. This is a more volatile business in terms of our growth strategies than the credit card business is, because of the role that a dealer plays in the business in a sense holding auctions at the dealership such that our growth strategies are particularly sensitive to the credit and underwriting choices that our competitors make, because it's sort of amplified in this auction based environment with dealers, really quite a contrast from the credit card business to the credit card business where certainly the competitive choices matter, but it's really still a one on one business with our customers and prospective customers.

Really invest in the business and we.

We're starting to see.

We have these two competing things going on inside capital one both a real investment in technology and also at the same time.

Generating a bunch of benefits and efficiencies from that technology. So.

The net result of these two things it's Ben.

We've been able to really make.

Tremendous strides forward in technology and also get some.

Efficiencies.

Along the way.

Don Fandetti: That's why you see so much more stability in sort of the marketing and the marketing sort of and the and leaning into the growth that you see on the card side. So... As, you know, when you think about the last few years, so, you know, we've certainly had in the last, you know, five or six years, tremendous growth and traction in the auto business. And we, our strategy was so powered by our technology that we've invested in the business, the data, the underwriting capabilities.

I wouldn't put too much reliance on any one quarter you know these numbers kind of bounce around but.

Certainly I mean, you know you probably noticed.

That in our guidance, we we had a guidance of flat to modestly down with respect to our efficiency ratio for.

Full year 2023, and we took the.

The flat part out and.

We're we're now just at modestly down so.

We continue to believe over the long term that.

You know our technology transformation offers a lot of promise for operating efficiencies.

Don Fandetti: And the very deep relationships that we've been building with dealers. Over the last couple of years, we, you know, were concerned at what was happening with margins as they were pressured by interest rate increases in 2022 and early 2023. Some competitors were slow to adjust their pricing. Now more recently industry lending margins have largely normalized as interest rates have stabilized and many players, including late movers, have continued to increase pricing. The other thing, of course, was watching very closely the credit side of the business.

And delivering operating efficiency is an important part of I think the value creation.

Equation for investors I do want to say, though at the same time, we continue to you know.

Really see great opportunities in the business, we continue to still invest in technology to capitalize on even greater opportunities over time and.

That's.

That's the story of.

Our operating efficiency ratio perfect.

Follow up question just on the leaning into growth in card.

Where exactly is that happening I mean, obviously, you've talked about adjusting the risk parameters and that's obviously flowing through in the credit numbers improving is it more on the transaction side that you are leaning into growth or is it balanced across all segments I'm, just curious sort of the implications on a go forward basis. Thank you.

Don Fandetti: And we just as we did in the card business, the probably actually more proactively and more significantly in auto, we trimmed back around the edges in anticipation of certain worsening and with concerns about score drift. In, you know, with respect to the data from consumers. So that has, and you've seen the data that were capital one has pulled back quite a bit, our, our, our outstanding have been shrinking a little bit.

Yes. Thank you.

So are we.

We are finding.

Finding traction across the spec.

Spectrum really so and we're leaning in across the spectrum, one thing I do want to say about.

Gross the Outstandings growth, if we really are.

Think about it.

Just the strength of.

Don Fandetti: But you also have seen the striking credit performance we've had in the stability now that, you know, is at least two quarters long in terms of what we're seeing on various credit metrics. So seeing the good metrics and seeing the marketplace, we're certainly, you know, on the lookout for opportunities, but I'm not here to predict, you know, an acceleration, but we certainly do like the performance of both our front book and our back book at this point. Thanks.

Of our loan growth.

For a while.

The striking loan growth for capital one and the industry was.

We all said well this is just.

Reversing the pullbacks from the pandemic, but.

Don Fandetti: Next question, please.

I think for us and for a lot of players in the industry. You know these low numbers have blown past prior levels.

And.

Let's just reflect a little bit on what has.

Sustained this you know my view is.

Sure well there there's the capital one effect, we continue to have significant new account growth and that obviously powers.

Sanjay Sakhrani: Our next question comes from Sanjay Sakrami with KBW. Your line is open. Thanks. First question is just on the adjusted operating efficiency rate. You know, seems some nice improvements over the last two quarters. And I know Rich, you talked about sort of the year outlook.

Lot of overtime loan growth payment rates are coming down.

Interestingly, they're there they they have come down quite a bit but as a general statement theyre not down to where.

Richard Fairbank: I'm just wondering if we could see this type of level or trends of pain itself into next year. Sanjay, we're not going to be giving out guidance on at this point on where operating efficiency goes. We certainly are pleased with the progress that that we've made over time in operating efficiency ratio, even as we've continued to really invest in the business. And, you know, we're starting to see, you know, we have these two competing things going on inside capital one, both a real investment in technology and also at the same time generating a bunch of benefits and efficiencies from that technology.

Where they were before you know part of that's a mix effect that capital one because we've had a lot of attraction on the spending side, but even.

Within segments.

If I were to generalize you know payment rates.

The payment rates are still.

Higher than they were pre pandemic. So again inside that is partly a capital one effect, but I think also sort of a.

Richard Fairbank: So, you know, the net result of these two things has been as we've been able to really make, you know, tremendous strides forward in technology and also get some efficiencies along the way. I wouldn't, you know, put too much reliance on any one quarter, you know, these numbers kind of bounce around, but certainly, you know, you probably noticed that in our guidance, we had guidance of flat to modestly down with respect to our efficiency ratio for full year 2023, and we took the flat part out and we're, we're now, you know, just at modestly down.

A strength of the consumer effect, however, the payment rates have come down and and that somewhat and that has powered growth and I think likely.

No one's going to be able to prove this but I think there are inflation effects underneath the surface.

You know when things cost more.

As long as you know consumer.

<unk> incomes.

Hey.

Stay up to where inflation is you generally have some natural I think inflation effects that draw.

Drive.

Some of this growth as well so we see a lot of strength there.

Some of those are capital one specific comments I'm, making and several of those are really kind of industry points.

Next question please.

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

Good afternoon.

Richard Fairbank: So, you know, we continue to believe over the long term that, you know, our technology transformation offers a lot of promise for operating efficiencies, and delivering operating efficiency is an important part of, I think, the value creation equation for investors. I do want to say, though, you know, at the same time, we continue to, you know, really see great opportunities in the business.

On the back to the your commentary around the slowing pace of the increase in delinquencies that youre seeing in card and then some of the stabilization that you're citing.

I know you indicated that charge offs I'm sure.

Of course lag that can you give us maybe some way to think about how long that lag could be a two to three quarter type of window that we're looking.

Sanjay Sakhrani: We continue to still invest in technology to capitalize on even greater opportunities over time, and that's, that's the story of our operating efficiency ratio. Perfect.

Hum.

For losses to follow through on that front.

Well I don't I don't want to make a precise prediction on that I want to I want to first of all pull up and say.

When we.

It's the the thing that we tell everybody to look at it.

I would say is what we look at is delinquencies because that.

Richard Fairbank: Then I'll follow a question just on the lenient to growth and card, where exactly is that happening? I mean, obviously, you talked about adjusting the risk parameters, and that's obviously flowing through and the credit numbers improving. Is it more on the transactors side that you're lenient to growth, or is it balanced across all segments on just curious sort of the implications on a go forward basis? Thank you. Yeah, thank you. So, we are finding traction across the spectrum, really, so, and we're leaning in across the spectrum.

That is the you know.

That is the first indicator that's why we.

They have been talking not just quarterly but really even looking at the last couple of months and seeing.

Sorted more stabilization on the credit card side, which is.

Very encouraging.

Delinquencies basically our customers go delinquent and ultimately charge off.

Six months later.

And so.

Richard Fairbank: One thing I do want to say about growth, the outstanding growth, if we really think about just the strength of, of loan growth. You know, for a while, the striking loan growth for capital one and the industry was, you know, we all said, well, this is just, you know, reversing the pullbacks from the pandemic. But, you know, I think for us and for a lot of players in the industry, you know, these loan numbers have blown past prior levels.

There is but sometimes they go faster sometimes they go slower and of course lots of times, they make their payments, but we're talking about.

These things being measured in over a couple of quarters.

The relationship between the delinquencies and charge offs.

Next question please.

Our next question comes from Erica Nacho Ryan.

With UBS your line is open.

Yes.

I hate to re ask this question, but I think a lot of investors I want to make a fine point on this in the fourth quarter.

Richard Fairbank: And, you know, let's just reflect a little bit on what has sustained this. Yes, you know, my view is, well, there's the capital one effect. We continue to have significant new account growth and that obviously powers a lot of over time loan growth. Payment rates are coming down. Interestingly, they have come down quite a bit, but as a general statement, they're not down to where they were before. Now, part of that's a mix effect at capital one because we've had a lot of traction on the spending side, but even within segments.

Going back to Ryan and John's question about net charge offs.

Think that perhaps what's holding back credit sensitive financials is.

You know obviously the prospect of recession that rich everything that you've said has seen positive piece of delinquency rate normalization slowing.

You know its stability of credit performance and recent vintages.

As we think about what happened in September in terms of the card charge off rate and look at the quarterly charge off rate in third quarter and second quarter is it fair to draw the conclusion that if we look forward to the fourth quarter net charge off rate that given the stability of all of the leading indicators that the charge off rate.

Erika Najarian: [inaudible] Our next question comes from Erika Najarian with UBS. Your line is open.

It will be mostly driven by seasonality rather than north.

Normalization if normalization highs.

They've licensed for now.

Yeah, So Eric.

Erica. Thanks. Thanks for your question, let me say a few things so lets.

First of all one of the things that makes this already a challenging business for everyone studying it including those of US who live it every day.

Is the seasonality.

The volatility, which which a big element of that is seasonality. So.

Let's just.

Let's talk just a little bit about seasonality.

You know.

Card and auto delinquencies tend to improve each year around the tax refund season, and then they worsen gradually over the rest of the year.

Second quarter is typically the seasonal low point for card delinquencies in Q4 is the seasonal high point card losses lag relative to delinquencies. So they tend to be seasonally lowest in the third quarter and highest in the first quarter.

And.

Now.

In the third quarter, so our domestic.

Domestic card delinquencies increased so it's kind of interesting that we're talking about sort of a a a leveling.

Stabilizing kind of direction when we're actually looking at delinquencies for the quarter that went up 57 basis points on us.

A sequential quarter basis.

And that's versus a typical seasonal expectation of kind of.

Sort of somewhere in the neighborhood of like 37 basis points, but.

So you know you can even see for the quarter that most of the increase that we observed with seasonal.

But then that's where we said if you zoom into months.

The months of August and September.

The month over month movement is is getting really close to just the normal seasonal trend and so this is one of the early indications that the trend of normalization, we'd been seeing maybe stabilizing now one thing I want to say, obviously you hear bullish meant in my common.

Terry I'm not here to just wave my arms and declare it turn.

We have we have a couple of months are very encouraging.

Data, we'd love to see more data, where we have seen.

Ian.

A couple of quarters, where we've seen a longer stretch of data is in the in the.

More on the lower end of the card business Interestingly as I talked about and in the auto business. So that's where it things that really kind of two appear to have stabilized. Our upmarket card business is is is getting there a little bit Ah Yeah, you know not not quite as is.

Not quite there yet so I I start by saying.

Erika Najarian: Yes, I hate to re-ass this question, but I think you know a lot of investors want to make a fine point on this and the fourth quarter, you know, going back to Ryan and Jon's question about net charge offs, you know, I think that perhaps what's holding back credit sensitive financials is, you know, you know, obviously the prospect of recession, but Rich, everything that you've said has seen positive, you know, pace of delinquency rate normalization, slowing, you know, stability of credit performance in recent ventures, you know, as we think about what happened in September in terms of the card charge off rate, and look at the quarterly, you know, charge off rate in third quarter and second quarter, is it fair to draw the conclusion that as we look forward to the fourth quarter net charge off rate, that given the stability of all the leading indicators that the charge off rate will be mostly driven by seasonality rather than, you know, normalization, if normalization has stabilized for now. Yeah, so Erica, thanks for your question.

You know, we we'd love to see.

A little more data to two.

B B fully confident of what we're seeing the second thing I wanted to say with them now to your question about charge offs.

First of all.

What we see especially in the months of August and September.

You're not going to see that show up with stabilized charge offs as soon as the fourth quarter because it really is a couple of quarters that that to the earlier question that was asked it's really a couple of quarters before the the charge offs.

You know perform sort of in line with the.

With the delinquencies so.

So we're not going to make predictions here and I don't I just you know.

I always we're always very kind of try to be as clear as we can on what we see we happen to see some pretty positive things here, but they can also.

B, a head fake and and a head fake and.

No.

Erika Najarian: Let me say a few things. So let's first of all, one of the things that makes this already challenging business for everyone studying it, including those of us who live it every day, is the seasonality in the volatility, which a big element of that is seasonality. So let's just, let's talk just a little bit about seasonality, you know, card and auto delinquencies tend to improve each year around the tax refund season, and then they worsen gradually over the rest of the year.

Hum you know not be as good as as they appear.

Next question please.

Next question please.

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

Hey, good afternoon. Thanks, so much for taking my questions.

When you think about capital ratios and Basel and game and they need to build capital specifically for unused lines. How do you think about mitigating if at all mitigating your unused lines and given your capital target of about 11% today, maybe you could just talk to us about that.

Erika Najarian: Second quarter is typically the seasonal low point for card delinquencies, and Q4 is the seasonal high point. Card losses lag relative to delinquencies, so they tend to be seasonally lowest in the third quarter and highest in the first quarter. And now in the third quarter, so our domestic card delinquencies increased, so it's kind of interesting that we're talking about sort of a leveling, you know, a stabilizing kind of direction when we're actually looking at delinquencies for the quarter that went up 57 basis points on a sequential quarter basis.

Factor Basel unused lines and the effects going forward on your capital levels and our OTC Your target and then I just had a ball.

If you don't mind.

Yes, I'm going to come back Dominic to the last half of your question I wasn't sure I followed it but in terms of.

<unk> line, you know one of our long standing strategies has been to start people with with smaller lines and allow them to grow and so I would say I wouldn't expect a meaningful shift in that strategy solely in the service of of risk weighted assets.

So overall, though as you look at the.

The risk weightings that have come out in the end game proposal and for us in aggregate recall, we're not in mortgage are trading so looking at the net of of retail and commercial inclusive of the gold plating.

Erika Najarian: And that's versus a typical seasonal expectation of kind of sort of somewhere in the neighborhood of like 37 basis points. But so, you know, you can even see for the quarter that most of the increase that we observed was seasonal. But then that's where we said if you zoom into months, the months of August and September, the month over month movement is getting really close to just the normal seasonal trend. And so this is one of the early indications that the trend of normalization we've been seeing maybe stabilizing.

Those are largely are fighting to to withdraw in terms of overall risk weighting.

Risk weighting impact specifically on on the asset side like everyone else of course, we're going to have an impact from the operational risk <unk>, but I didn't quite follow the second half of your question around ROTC.

Could you just repeat that for me sure sorry about that I was just curious are you basically had to hold more capital because it's my understanding that you would have to hold additional capital against unused lines versus just draw on lines now and so I was just curious.

Erika Najarian: Now, one thing I want to say obviously you hear bullishman in my commentary, I'm not here to just wave my arms and declare a turn. You know, we have a couple of months of very encouraging, you know, data we'd love to see, you know, more data where we have seen. You know a couple of quarters where we've seen a longer stretch of data is in the more on the lower end of the card business interestingly as I talked about and in the auto business.

Your capital ratio would have to rise.

And then that would affect the long term return on like.

What's gone on in any way.

Got it yes, sorry, I didn't quite follow the second half of it yeah that was what I was trying to explain in my answer is the net of all of that ultimately ends up being a wash the part where we will be holding more more capital on the denominator side strictly for the risk weighting.

Erika Najarian: So that's where things have really kind of to you know appear to have stabilized our market card business is is is is you know getting there a little bit. But you know not not quite as as not quite there yet so I start by saying you know we we'd love to see you know a little more data to be fully confident of what we're seeing. The second thing I want to say would then now to your question about charge offs first of all you know what we see especially in the months of August and September.

Assets again, they should Ah hi.

Lights that it's in a comment period, a lot of industry focus on it.

And you know well, particularly as it relates to the ops risk calculation there there could be a material impacts on the final outcome relative to what's proposed but taken taking what is a what.

What is currently proposed.

The asset side, specifically outside of.

The operational risk ends up being roughly a draw for us and it's really just the operational risk that's going to require us to hold more capital.

Erika Najarian: You're not going to see that show up with stabilized charge offs as soon as the fourth quarter because it really is a couple of quarters that that to the earlier question that was asked it's really a couple of quarters before the charge offs. You know you know perform sort of in line with the with the delinquencies so we're not going to make predictions here and I don't I just you know I always we're always very kind of try to be as clear as we can on what we see we happen to see some pretty positive things here but they can also be a head fake and a head fake. And you know you know not be as good as as they appear.

Tom and I have a follow up.

Next question please.

Our next question comes from Bill Kirk catchy with Wolfe Research Your line is open.

Operator: Next question please.

Okay.

Okay.

Is there bill.

Can you hear me.

Yeah can you hear me okay, great great. Thank you.

So I wanted to ask about the.

Leafy proposal the consensus view is that we will get it very soon it'll be immediate immediately litigated.

Can you give us your view on the likely path.

Uh huh.

That you that you would anticipate and.

Possibly speak to any potential costs that might be associated with it.

Okay. Thank you Bill.

So the Cfpb's late fee proposal as currently contemplated.

Dominic Gabriel: Our next question comes from dominant Gabriel with Oppenheimer your line is open. Hey good afternoon. Thanks so much for taking my questions. When you think about capital ratios and Basel and game and then need to build capital specifically for unused lines. How do you think about mitigating if at all mitigating your unused lines and giving your capital target of about 11% today. If you could just talk to us about the factor of Basel on use lines and the effect going over on your capital levels and the ROTCE target and I then I just have a follow up if you don't mind. Thanks.

Would reduce late fees by approximately 75%.

Andrew Young: Yeah I'm going to come back Dominic to the last half of your question I wasn't sure I followed it but in terms of of unused lines you know one of our long standing strategies has been to start people with with smaller lines and allow them to grow. And so I would say wouldn't expect a meaningful shift in that strategy solely in the service of of risk weighted assets. So overall though as you look at you know the risk weightings that have come out in the end game proposal for us in aggregate recall we're not in mortgage or trading.

And while the Cfpb's proposal has not yet been finalized we expect the CFPB to publish a proposal soon.

Probably before the end of the year.

Now once the CFPB publishes its final rule.

We expect there to be industry litigation that could delay or blocked the implementation of this rule.

And this litigation will likely delay the implementation of the rule until at least the second half of 2024 and maybe longer.

If the proposed rule is implemented there will be a significant impact to our P&L in the near term.

However, we have a set of mitigating actions that we're working through that we believe will gradually resolve this impact a couple of years after the rule goes into effect.

These choices include changes to our policies products and.

And investment choices.

Some of these actions will take place before the rule change takes effect many will come after the rule change takes effect.

Andrew Young: So looking at the net of retail and commercial inclusive of the gold plating you know those those are largely fighting to to a draw in terms of overall risk weighting risk weighting impact specifically on on the asset side like everyone else of course we're going to have an impact from the operational risk RWA. But I didn't quite follow the second half of your question around ROTCE. Could you just repeat that for me?

Okay.

Next question please.

Yes.

Okay.

Next question. Please one moment please.

Yeah.

Our final question is a follow up from Dominic Gabriel with Oppenheimer. Your line is open.

Hey, sorry about that I think I got cut off can you hear me okay. Yes.

Andrew Young: Sure, sorry about that. I was just curious if you basically had to hold more capital because it's my understanding that you would have to hold additional capital against unused lines versus just drawn lines now. And so I was just curious if your capital ratio would have to rise in the, you know, and this that would affect the long term return on like, you know, return on in any way. Got it. Yeah, sorry, I didn't quite follow the second half of it.

Yes, we can Dominic alright.

Alright, sorry about that guys.

I was actually just curious on the quarter over quarter increase in domestic card yield I know that there's sometimes some seasonality in the third quarter and we've also had a lot of rate hikes in previous years around the third quarter. I was wondering if you could just walk us through some of the dynamics in the quarter over quarter increase in domestic card. Thanks, so much.

Yes, Dominick I can't remember, who asked it earlier, but I'm just reiterating some of those points I think you largely answered answered your own question, which is there is seasonality.

Andrew Young: That was what I was trying to explain in my answer is the net of all of that ultimately ends up being a wash, the part where we will be holding more capital on the denominator side strictly for the risk waiting assets. Again, I should highlight that it's in a comment period. A lot of industry focus on it. And, you know, well, particularly if it relates to the opt-risk calculation, that there could be material impacts on the final outcome relative to what's proposed, but taking what is what is currently proposed, you know, the asset side, specifically outside of the operational risk ends up being roughly a draw for us. And it's really just the operational risk that's going to require some more capital.

That in part a is a or is a function of the.

The revolve rates driven by some of the dynamics rich talked about over the course of the year, we did see the fed.

Dominic Gabriel: Dominic, you have a follow-up.

The fed move and then we also saw a bit of late fees, which I would lump into the seasonality dimension and then finally, we had one more day in the third quarter. So day count Hum in an absolute sense not necessarily relative to peers.

I think it was the nature of the question earlier.

But at least in an absolute sense those are the big drivers of what what drove the quarter over quarter yield.

Well, thanks, everybody for joining us on the conference call. This evening and thank you for your continuing interest in capital one.

Investor Relations team will be here later this evening to answer any questions.

Bill Carcache: Next question, please. Our next question comes from Bill Carcacci with Wolf Research. Your line is open. Can you hear me? Yeah, can you hear me? Great. Thank you. Yeah, so I wanted to ask about the leafy proposal. The consensus view is that we'll get it very soon. It'll be immediately litigated. Can you give us your view on the likely path that you that you would anticipate and possibly speak to any potential costs that that might be associated with it?

You may have have a great evening everyone.

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

Okay.

Yeah.

Okay.

[music].

Hum.

Yeah.

Hum.

Okay.

Mhm.

Okay.

Bill Carcache: Okay, thank you, Bill. So the CFPB's late-feet proposal, as currently contemplated, would reduce late fees by approximately 75%. And while the CFPB's proposal has not yet been finalized, we expect the CFPB to publish a proposal soon, probably before the end of the year. Now, once the CFPB publishes its final rule, we expect there to be industry litigation that could delay or block the implementation of this rule. And this litigation will likely delay the implementation of the rule until at least the second half of 2024 and maybe longer.

Yeah.

Hmm.

Yeah.

Okay.

Yeah.

Yeah.

Okay.

Yes.

Yeah.

Yeah.

Yes.

Okay.

[music].

Okay.

Bill Carcache: If the proposed rule is implemented, there will be a significant impact to RP&L in the near term. However, we have a set of mitigating actions that we're working through that we believe will gradually resolve this impact a couple of years after the rule goes into effect. These choices include changes to our policies, products and investment choices. Some of these actions will take place before the rule change takes effect.

Yeah.

Yeah.

[music].

Okay.

Yes.

Okay.

[music].

Okay.

[music].

Yeah.

Okay.

Hum.

Yeah.

Okay.

Bill Carcache: Many will come after the rule change takes effect.

Yes.

Okay.

Operator: Next question please. One moment please. Our final question is a follow-up from Dominick Gabriel with Oppenheimer your line is open. Are you sorry about that? I think I cut off. Can you hear me okay? Yes, we can Dominick. All right, sorry about that guys. I was actually just curious on the quarter over quarter increase in domestic car yield. I know that there's sometimes some seasonality in the third quarter and we've also had a lot of rate hikes in previous years around the third quarter.

Okay.

Okay.

Yeah.

Yeah.

Yeah.

Hmm.

Hmm.

Okay.

Yes.

Okay.

Okay.

Operator: I was wondering if you could just walk us through some of the dynamics in the quarter over quarter increase in domestic car. Thanks so much. Dominick, I can't remember who asked it earlier but just reiterating some of those points. I think you largely answered your own question which is there is seasonality that in part is a function of the revolve rates driven by some of the dynamics rich talked about over the course of the year.

Yeah.

Yeah.

Okay.

[music].

Yeah.

[music].

Yes.

Yes.

[music].

Yeah.

Operator: We did see the Fed move and then we also saw a bit of late fees which I would lump into the seasonality dimension. And then finally we had one more day in the third quarter so day count in an absolute sense not necessarily relative to peers which I think was the nature of the question earlier but at least in an absolute sense.

Dominic Gabriel: Those are the big drivers of what drove the quarter over quarter yield.

Operator: Well thanks everybody for joining us on the conference call this evening and thank you for your continuing interest in capital one. The investor relations team will be here later this evening to answer any questions that you may have. Have a great evening everyone.

Operator: This concludes today's conference call. Thank you for participating. You may now disconnect. Thank you very much. [inaudible] you, thank you, thank you, thank you, thank you,[inaudible] . . [inaudible] . .

[music].

Good day and thank you for standing by welcome to the capital One Q3 2023 earnings 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 the session you will need to press star one one on your telephone.

Didn't hear an automated message advising 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 everyone to capital one's third quarter 2013 earnings conference call.

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

In addition to the press release and the financials. We've included a presentation summarizing our third quarter 2000, and 2023 results.

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

Rich and Andrew will walk you through this presentation.

To access a copy of this 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 infer.

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 accessible the capital one website.

And filed with the SEC.

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

Thanks, Jeff and good afternoon, everyone I will start on slide three of Tonight's presentation.

In the third quarter capital, one earned $1 $8 billion or $4.45 per diluted common share.

Pre provision earnings of $4 $5 billion.

We're up 7% compared to the second quarter.

17% compared to the year ago quarter.

Both period end and average loans held for investment increased 1% relative to the prior quarter driven by growth in our domestic card business.

Period end deposits increased 1% in the quarter.

While average deposits were flat.

Our percentage of FDIC insured deposits ended the quarter at 80% of total deposits.

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

Revenue in the linked quarter increased 4% driven by both higher net interest and noninterest income.

Noninterest expense increased 1% in the quarter.

As higher marketing expense was partially offset by lower operating expense.

Provision expense was $2 $3 billion.

With 2 billion of net charge offs and an allowance build of $322 million.

Turning to slide four.

I'll cover the allowance balance in greater detail.

Yeah.

The 322 million dollar increase in allowance brings our total company allowance balance up to $15 billion as of September 30th.

The total company coverage ratio is now $4 75 per cent.

Up five basis points from the prior quarter.

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

Relative to last quarter's assumptions underlying the allowance.

The baseline forecast in this quarter for most key economic variables improved.

However, we continue to assume several key economic variables worsen from today's levels.

In our domestic card business, the allowance balance increased by $349 million.

The coverage ratio was largely flat at 7.79%.

The predominant driver of the increased allowance was the growth in loans.

The positive impact from the modestly improved economic outlook was largely offset by the impact of replacing the loss content of the third quarter of 2023.

With a 12 month reasonable and supportable period that now includes the third quarter of 2024.

In our consumer banking segment, the allowance balance declined by $136 million.

The improved economic outlook and a decline in loan balances drove the release.

And in our commercial banking business, the allowance increased by $97 million.

The build reflected the impact of rising interest rates and other factors on certain commercial real estate and corporate borrowers, including our commercial office portfolio.

Operator: Please note that this presentation may contain forward-looking statements. Information regarding CapitalOne's financial performance and any forward-looking statements contained in today's discussion in the materials, speak only as of the particular date or dates indicated in the materials. CapitalOne 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.

On slide 17 in the appendix we have included additional details on the office portfolio.

I'll also note that in the third quarter, we completed the sale of approximately $900 million of loans from our commercial office portfolio that were previously marked as held for sale.

The commercial with a coverage ratio in the commercial business increased by 12 basis points and now stands at 1.74%.

Operator: For more information on these factors, please see the section titled Forward-looking Information in the earnings release presentation and the Risk Factor section in our annual and quarterly reports, accessible to CapitalOne website and filed with the SEC.

Turning to page six I'll now discuss liquidity.

You can see our preliminary average liquidity coverage ratio during the third quarter was 155%.

Up from 150% last quarter, and 139% a year ago.

Andrew Young: Now I'll turn the call over to Mr. Young. Andrew, thank you, and good afternoon everyone.

Total liquidity reserves in the quarter were largely flat at $118 billion.

Andrew Young: I will start on slide three of tonight's presentation. In the third quarter, CapitalOne earned $1.8 billion, or $4.45 per diluted common share. Pre-prevision earnings of $4.5 billion, were up 7% compared to the second quarter and 17% compared to the year ago quarter. Both period and average loans held for investment increased 1% relative to the prior quarter, driven by growth in our domestic card business. Period and deposits increased 1% in the quarter, while average deposits were flat.

Higher cash balances were offset by a decline in the market value of our investment securities portfolio.

Our cash position ended the quarter at approximately $45 billion up about $3 billion from the prior quarter.

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

Yeah.

Our third quarter net interest margin was $6 six 9% 20.

21 basis points higher than last quarter.

And 11 basis points lower than the year ago quarter.

The quarter over quarter increase in NIM was largely driven by higher card yields.

Andrew Young: Our percentage of FDIC-insured deposits ended the quarter at 80% of total deposits. We have provided additional details on deposit trends on slide 18 in the appendix. Revenue in the linked quarter increased 4% driven by both higher net interest and non-interest income. Non-interest expense increased 1% in the quarter, as higher marketing expense was partially offset by lower operating expense. Prevision expense was $2.3 billion, with $2 billion of net charge-off and an allowance build of $322 million.

A continued mix shift towards card loans.

And one additional day in the quarter.

Partially offset by higher rate paid on deposits.

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

Our common equity tier one capital ratio ended the quarter at 13%.

Approximately 30 basis points higher than the prior quarter.

Net income in the quarter was partially offset by an increase in risk weighted assets.

Common and preferred dividends and.

And the share repurchases, we completed in the quarter.

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

Andrew Young: Turning to slide four, I'll cover the allowance balance in greater detail. The $322 million increase in allowance brings our total company allowance balance up to $15 billion as of September 30. The total company coverage ratio is now 4.75% up five basis points from the prior quarter.

Thanks, Andrew and good evening everyone.

Slide 10 shows third quarter results in our credit card business credit card segment results are largely a function of our domestic card results and trends, which are shown on slide 11.

The domestic card business posted another strong quarter.

Year over year topline growth.

<unk> volume for the third quarter was up 6% from the third quarter of last year, ending loan balances increased $19 billion or about 16% year over year.

Andrew Young: I'll cover the drivers of the changes in allowance and coverage ratio by segment on slide five. Relative to last quarter's assumptions underline the allowance, the baseline forecast in this quarter for most key economic variables improved. However, we continue to assume several key economic variables worsened from today's levels. In our domestic card business, the allowance balance increased by $349 million. The coverage ratio was largely flat at 7.79%. The predominant driver of the increased allowance was the growth in loans.

Andrew Young: The positive impact from the modestly improved economic outlook was largely offset by the impact of replacing the lost content of the third quarter of 2023 with a 12 month reasonable and supportable period that now includes the third quarter of 2024.

Third quarter revenue.

Was up 15% year over year, driven by the growth in purchase volume and loans.

Revenue margin declined 31 basis points from the prior year quarter and remained strong at 18.24%. The decline was driven by two factors first loans grew faster than purchase volume and net interchange revenue in the quarter. This dynamic as 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 revolve rate.

On a linked quarter basis, the revenue margin increased seasonally by 48 basis points.

Andrew Young: In our consumer banking segment, the allowance balance declined by 136 million. The improved economic outlook and a decline in loan balances drove the release. And in our commercial banking business, the allowance increased by $97 million. The builds reflected the impact of rising interest rates and other factors on certain commercial real estate and corporate borrowers. Including our commercial office portfolio. On slide 17 in the appendix, we have included additional details on the office portfolio.

Domestic card credit results continue to normalize from the historically strong results. We saw during the pandemic consistent with our expectations the charge off rate for the quarter was up 220 basis points year over year to four 4% the 30 plus delinquency rate.

At quarter end increased 134 basis points from the prior year to 4.31% on a sequential quarter basis, the charge off rate was essentially flat.

The 30, plus delinquency rate was up 57 basis points, both for monthly delinquency rate and the monthly charge off rate are now modestly above 2019 levels. Our delinquencies are the best leading indicator of domestic card credit performance and the pace of delinquency.

Andrew Young: I'll also note that in the third quarter, we completed the sale of approximately $900 million of loans from our commercial office portfolio that were previously marked as held for sale. The commercial, the coverage ratio in the commercial business increased by 12 basis points and now stands at 1.74%.

Normalization is slowly.

Noninterest expense was essentially flat compared to the third quarter of 'twenty two.

Andrew Young: Turning to page six, I'll now discuss liquidity. You can see our preliminary average liquidity coverage ratio during the third quarter was 155%. Up from 150% last quarter and 139% a year ago. Total liquidity reserves in the quarter were largely flat at $118 billion. Higher cash balances were offset by a decline in the market value of our investment securities portfolio. Our cash position ended the quarter at approximately $45 billion, up about $3 billion from the prior quarter.

At 2022.

Total company marketing expense of $972 million for the quarter was also relatively flat year over year.

Compared to the sequential quarter marketing increased 10%.

Our choices in domestic card 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 our marketing continues to deliver strong new account growth across the domestic card business. As a result, we are leaning into marketing to drive a resilient growth and enhance our domestic card franchise as always we're keeping a close eye on competitor actions and potential marketplace risks.

Andrew Young: Turning to page seven, I'll cover our net interest margin. Our third quarter net interest margin was 6.69%. 21 basis points higher than last quarter and 11 basis points lower than the year ago quarter. The quarter over quarter increase in them was largely driven by higher card yields, a continued mid shift towards card loans, and one additional day in the quarter partially offset by higher rate paid on deposits.

We expect fourth quarter marketing will be seasonally higher.

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

In the third quarter auto originations declined 10% year over year.

Driven by the decline in auto originations consumer banking ending loans.

Andrew Young: Turning to slide eight, I will end by discussing our capital position. Our common equity tier one capital ratio ended the quarter at 13%. Approximately 30 basis points higher than the prior quarter. Net income in the quarter was partially offset by an increase in risk-weighted assets, common and preferred dividends, and the share repurchases we completed in the quarter.

Decreased about $4 $4 billion or five 4% year over year on a linked quarter basis, ending loans were essentially flat.

We posted another strong.

At quarter in year over year retail deposit growth third quarter ending deposits in the consumer bank were up about $34 billion or 13% year over year.

Richard Fairbank: With that, I will turn the call over to Rich. Rich.

Richard Fairbank: Thanks Andrew, and good evening everyone. Slide 10 shows third quarter results in our credit card business. Credit card segment results are largely a function of our domestic card results and trends, which are shown on slide 11. The domestic card business posted another strong quarter of year over year, top line growth. Purchase volume for the third quarter was up 6% from the third quarter of last year ending loan balances increased 19 billion dollars or about 16% year over year. And third quarter revenue was up 15% year over year driven by the growth and purchase volume and loans. Revenue margin declined 31 basis points from the prior year quarter and remained strong at 18.24%.

Compared to the sequential quarter ending deposits were up about 2% average deposits were up 12% year over year and up 1% from the sequential quarter.

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

Consumer banking revenue for the quarter was down about 7% year over year, driven by the higher rate paid on deposits and lower auto loan balances and margins.

Non interest expense.

Was down about 6% compared to the third quarter of 2022.

Lower operating expenses were partially offset by an increase in marketing to support our national Digital Bank.

Richard Fairbank: 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 revolve rate on a linked quarter basis, the revenue margin increased seasonally by 48 basis points domestic card credit results continue to normalize from the historically strong results.

The auto charge off rate for the quarter was 177% up 72 basis points year over year. The 30, plus delinquency rate was 5.64% up 79 basis points year over year.

Compared to the linked quarter the charge off rate was up 37 basis points, while the 30 plus delinquency rate was up 26 basis points. Both of these linked quarter increases were better than typical seasonal expectations.

Slide 13 shows third quarter results for our commercial banking business comp.

Richard Fairbank: We saw during the pandemic consistent with our expectations. The charge off rate for the quarter was up 220 basis points year over year to 4.4%. The 30 plus delinquency rate at quarter end increased 134 basis points from the prior year to 4.31% on a sequential quarter basis. The charge off rate was essentially flat and the 30 plus delinquency rate was up 57 basis points. Both the monthly delinquency rate and the monthly charge off rate are now modestly above 2019 levels.

Compared to the linked quarter.

Ending loan balances were essentially flat average loans were down about 2%.

The decline is largely the result of choices, we made earlier in the year to tighten credit.

Both ending deposits and average deposits were down about 2% from the linked quarter consistent with the general trend we've seen for several quarters as we continue to manage down selected less attractive commercial deposit balances.

Third quarter revenue was up 2% from the linked quarter noninterest expense was up about 6%.

Richard Fairbank: Our delinquencies are the best leading indicator of domestic card credit performance and the pace of delinquency rate normalization is slowing. Non-interest expense was essentially flat compared to the third quarter of 2022 total company marketing expense of $972 million for the quarter was also relatively flat year over year compared to the sequential quarter marketing increased 10%. Our choices in domestic card are the biggest driver of total company marketing. We continue to see attractive growth opportunities in our domestic card business.

The commercial banking annualized charge off rate for the third quarter declined 137 basis points from the second quarter to 0.25% the second quarter charge off rate was elevated by charge offs. We recognize when we moved to portfolio of commercial office loans to held for.

Sale we.

We completed the sale of that portfolio in the third quarter Slide 17 of the third quarter 2023 results presentation shows and it shows additional information about the remaining commercial office portfolio, which is less than 1% of our total loans.

The commercial banking criticized performing loan rate was 8.08% up 135 basis points compared to the linked quarter. The criticized nonperforming loan rate was essentially flat at 0.9%.

Richard Fairbank: Our opportunities are enhanced by our technology transformation and our marketing continues to deliver strong new account growth across the domestic card business. As a result we are leaning into marketing to drive resilient growth and enhance our domestic card franchise. As always we're keeping a close eye on competitor actions and potential marketplace risk.

In closing we continued to deliver solid results in the third quarter, we posted another quarter of strong topline growth in domestic card revenue purchase volume and loans.

Richard Fairbank: We expect fourth quarter marketing will be seasonally higher.

Richard Fairbank: Slide 12 shows third quarter results for our consumer banking business. In the third quarter, auto originations declined 10% year over year. Driven by the decline in auto originations, consumer banking ending loans decreased about $4.4 billion, or 5.4% year over year.

The pace of domestic card delinquency normalization slowed we grew consumer and total deposits.

And we added liquidity and capital to further strengthen our already strong and resilient balance sheet.

Turning now to operating efficiency, the third quarter operating efficiency ratio was particularly strong operating efficiency ratio can vary from quarter to quarter, driven by the timing of revenue and operating expense.

Richard Fairbank: On a linked quarter basis, ending loans were essentially flat. We posted another strong quarter in year over year retail deposit growth. Third quarter ending deposits in the consumer bank were up about $34 billion or 13% year over year. Compared to the sequential quarter, ending deposits were up about 2%. Average deposits were up 12% year over year and up 1% from the sequential quarter.

We expect 2023 annual operating efficiency ratio net of adjustments will be modestly down compared to 2022.

Pulling way up 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.

Richard Fairbank: Powered by our modern technology and leading digital capabilities, our digital first national direct banking strategy continues to deliver strong results. Consumer banking revenue for the quarter was down about 7% year over year driven by the higher rate paid on deposits and lower auto loan balances and margins. Non-interest expense was down about 6% compared to the third quarter of 2022. Lower operating expenses were partially offset by an increase in marketing to support our national digital bank.

Our tech engine drives growth efficiency improvement and enduring value creation over the long term, we remain well positioned to deliver compelling long term shareholder value and to thrive in a broad range of possible economic scenarios and now we'll be happy to answer your question.

Jeff.

Thanks, Rich we'll now.

I'll 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 one 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.

Amy please start the Q&A session.

Richard Fairbank: The auto charge off rate for the quarter was 1.77% up 72 basis points year over year. The 30 plus delinquency rate was 5.64% up 79 basis points year over year. Compared to the length quarter, the charge off rate was up 37 basis points while the 30 plus delinquency rate was up 26 basis points. Both of these length quarter increases were better than typical seasonal expectations.

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.

Please standby will be compile the Q&A roster.

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

Hey, good evening everyone.

Hey, Ryan.

So rich you noted several times that delinquency normalization has slowed it looked like September charge off performance was better than we would've expected.

Richard Fairbank: Flight 13 shows third quarter results for our commercial banking business. Compared to the length quarter, ending loan balances were essentially flat. Average loans were down about 2%. The decline is largely the result of choices we made earlier in the year to tighten credit. Both ending deposits and average deposits were down about 2% from the length quarter. Consistent with the general trend we've seen for several quarters as we continue to manage down selected less attractive commercial deposit balances.

We're hearing from others that pressure is becoming broader not just subprime, but it's also into prime. So can you maybe just talk about what youre seeing within your portfolio. What do you think about the pace of delinquency normalization and do you have any line of sight. When you think losses will inevitably peak. Thank you.

Thanks Ryan.

So, let's just pull up on the metrics here.

Our third quarter domestic card charge off rate was essentially flat from the prior quarter up two basis points to 4.40%.

Richard Fairbank: Third quarter revenue was up 2% from the length quarter. Non-interest expense was up about 6%. The commercial banking annualized charge off rate for the third quarter declined 137 basis points from the second quarter to 0.25%. The second quarter charge off rate was elevated by charge offs we recognize when we moved to portfolio of commercial office loans to held for sale. We completed the sale of that portfolio in the third quarter. Flight 17 of the third quarter 2023 results presentation shows additional information about the remaining commercial office portfolio, which is less than 1% of our total loan. The commercial banking criticized performing loan rate was 8.08 percent, up 135 basis points compared to the length quarter. The criticized non-performing loan rate was essentially flat at 0.9 percent.

Our 30, plus delinquency rate increased 57 basis points from the prior quarter to 431%.

Both our losses and our delinquencies are modestly above their pre pandemic levels now, let's talk about sort of what's happening at the margin here the.

The trend of normalization in our credit metrics.

Here's to be slowing.

In August and September the month to month movement in our delinquencies was.

Essentially.

In line with normal seasonality for the first time since normalization began.

Okay.

We've also seen some stabilization in new delinquency entries relative to normal seasonal patterns.

So we are hopeful these stabilization trends continue now.

Net charge offs of course are a lagging metric. So they have some months of catching up still to do.

In auto we have seen stabilization even longer.

Richard Fairbank: In closing, we continued to deliver solid results in the third quarter. We posted another quarter of strong top-line growth in domestic card revenue, purchase volume, and loans. The pace of domestic card delinquency normalization slowed. We grew consumer and total deposits. And we added liquidity and capital to further strengthen our already strong and resilient balance sheet. Turning now to operating efficiency, the third quarter operating efficiency ratio was particularly strong. Operating efficiency ratio can vary from quarter to quarter driven by the timing of revenue and operating expense.

Our losses are modestly above pre pandemic levels, but.

Moving in line with normal seasonality.

For the past few.

A few quarters.

So back to our card business for a moment, there's another stabilization trend that we see as well.

Which is our recovery rate.

Our recovery rate had been falling for several years because of the low level of charge offs through the pandemic.

So we've had less inventory if you will to recover on.

And this was a larger effect for capital. One then for most of our competitors because we tend to have meaningfully higher recovery rates than the industry average.

Richard Fairbank: We expect 2023 annual operating efficiency ratio net of adjustments will be modestly down compared to 2022. Pulling way up 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. At our tech engine, drives growth, efficiency improvement, and enduring value creation over the long term. We remain well positioned to deliver compelling long-term shareholder value and to thrive in a broad range of possible economic scenarios.

And because we tend to work our own recoveries.

So they come in over time and not all at once.

And of that sale.

We've now seen the recovery rates stabilize although it remains at unusually low levels.

Now recoveries of course don't impact our delinquencies, but they are a pretty significant factor.

When you're on in our charge offs, and particularly when comparing our charge offs to pre pandemic benchmarks.

Yeah.

Other capital one specific point here.

Richard Fairbank: And now we'll be happy to answer your questions. Jeff? Thanks, 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 one 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 session. 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 when we compile the Q&A roster.

There's another factors sort of driving stabilization, but this is.

It has been going on for a long time, and that's the stability of credit performance and our recent origination vintages.

<unk>.

Looking ahead, the economy is as always a source of uncertainty.

And our outlook, we still expect the unemployment rate to worsen over the coming year.

And as always we remain very focused on resilience in our underwriting.

And making sure that we build resilience a lot of resilience into all of our choice choices.

Ryan Nash: Our first question comes from the line of Ryan Nash with Goldman Sachs. Your line is open. Hey, good evening, everyone. Hey, Ryan. So, Rich, you know, you know, several times that delinquency normalization has slowed. It looked like September charger performance was better than we would have expected. But we are hearing from others that pressure is becoming broader. You know, not just subprime, but it's also interprime. So if you maybe just talk about what you're seeing within your portfolio, what do you think about the pace of delinquency normalization? And do you have any line of sight when you think losses will inevitably peak? Thank you. Thanks, Ryan.

Maybe rich as my follow up question.

So Andrew you had highlighted.

That the domestic card allowance was relatively stable and I think you gave.

Three different factors, maybe can you just remind us again what is included from a macro perspective in terms of unemployment.

I take what rich said regarding delinquency slowing and obviously charge offs of catch up a little bit do you think we're at the point, where the replacement and the allowances is going to be less of a tailwind or a headwind going forward and we can now finally have.

The allowance more closely following the allowance build more closely following loan growth. Thank you.

Richard Fairbank: And so, let's just pull up on the metrics here. Our third quarter domestic card charge off rate was essentially flat from the prior quarter up to basis points to 4.40%. Our 30 plus delinquency rate increased 57 basis points from the prior quarter to 4.31%. Both our losses and our delinquencies are modestly above their pre-pandemic levels. Now let's talk about sort of what's happening at the margin here. The trend of normalization in our credit metrics appears to be slowing.

Sure Ryan so to your economic assumption that point.

I'll focus on unemployment rate, although recall that a whole lot more is considered a whole bunch more variables, but we are now assuming that the unemployment rate moves into the mid fours by the middle of 'twenty four and basically holds there.

Sure.

Period of time, but it's not just the absolute level of unemployment as we've talked about before it's also the change that influences underlying credit performance.

How that then plays through the allowance, though like a number of factors are going into the allowance calculation is as rich said.

Richard Fairbank: In August and September, the month to month movement in our delinquencies was essentially in line with normal seasonality for the first time since normalization began. We've also seen some stabilization in new delinquency entries relative to normal seasonal patterns. So we are hopeful these stabilization trends continue. Now charge off, of course, are lagging metrics so they have some months of catching up still to do. In auto, we have seen stabilization even longer.

The projected loss rates are going to be by far the biggest driver and as we've talked about many times delinquencies are the best leading indicator of.

Credit performance, particularly over the next couple of quarters.

And I won't go through the the reasonable and supportable and reversion process elements that.

We've we've discussed previously, but I will say beyond the credit forecast. It is worth noting that the allowance framework considers a range of outcomes and uncertainties, which are generally wider in periods of either worsening or improving.

Richard Fairbank: Our losses are modestly above pre-pandemic levels but moving in line with normal seasonality for the past few quarters. So back to our card business for a moment, there's another stabilization trend that we see as well, which is our recovery rate. Our recovery rate had been falling for several years because of the low level of charge-offs through the pandemic. So we've had less inventory, if you will, to recover on. And this was a larger effect for capital one than for most of our competitors because we tend to have meaningfully higher recovery rates than the industry average.

Moving transitions so are at the core of your question you know even in a period, where projected losses in future quarters may be lower than today and might otherwise indicate a release, we could very well see a coverage ratio that remains flat or.

Richard Fairbank: And because we tend to work our own recoveries, so they come in over time and not all at once, like in a debt sale. We've now seen the recovery rate stabilize, although it remains at unusually low levels. Now, recoveries, of course, don't impact our delinquencies but they are a pretty significant factor in our charge-offs and particularly when comparing our charge-offs to pre-pandemic benchmarks. Now, another capital one specific point here, there's another factor sort of driving stabilization, but this has been going on for a long time.

Only modestly declines at least in the near term as we incorporate the related uncertainty into the allowance and so we'll go through our process as we do every year to take all of those factors into account and roll forward the.

The allowance each quarter.

Next question please.

Our next question comes from Mihir Bhatia with Bank of America. Your line is open.

Hi, good afternoon, and thank you for taking my questions.

I was curious.

The health of the consumer and I was curious if you see trends at all diverged.

Between higher cycle FICO scores, whether it's on credit.

<unk> performance or spending.

We go through the recovery.

Yes.

Yes.

May here.

Thank you for your question.

So let's talk about our credit.

Credit.

Our performance.

Yeah.

When when credit first started to normalize we called out that this trend was more pronounced at the low end of the market.

Richard Fairbank: And that's the stability of credit performance in our recent origination ventages. So, looking ahead, the economy is, as always, the source of uncertainty. In our outlook, we still expect the unemployment rate to worsen over the coming year. And as always, we remain very focused on resilience in our underwriting, and making sure that we build a lot of resilience into all of our choices.

Whether defined by income or credit score.

And.

And strikingly those were the segments that it improved the most early in the pandemic. So this was not surprising to us.

Later, we observed that normalization was becoming more broad based and in fact for.

Many.

Quarters now right now for several quarters now every segment was basically and normalizing at about the same rate in other words, if you look at for any segment, where its credit metrics.

Andrew Young: Maybe as my follow-up question, so Andrew, you had highlighted that the domestic card allowance was relatively stable and I think you gave three different factors. Maybe you just remind us again what is included from a macro perspective in terms of unemployment. And if I take what Rich said regarding delinquency, slowing and obviously charge-ups will catch up a little bit, do you think we're at the point where the replacement and the allowance is going to be less of a headwind going forward?

Were relative to like as delinquencies for example relative to.

Pre pandemic every segment was kind of on top of each other everything had caught up.

Now we are seeing stabilization come more quickly at the lower end of the market in fact over the last few months our delinquencies in these segments have essentially stabilized on a seasonally adjusted basis.

Andrew Young: And we could now finally have the allowance more closely following the allowance build more closely following the loan growth. Thank you. Sure, Ryan, so to your economic assumption point, I'll focus on unemployment rate, although recall that a whole lot more is considered a whole bunch more variables, but we are now assuming the unemployment rate moves into the mid-4s by the middle of 24 and basically holds therefore a period of time. But it's not just the absolute level of unemployment as we talked about before, it's also the change that influences underlying credit performance.

And our.

Market.

Our segments are sort of just a little bit behind that.

So now I don't think this is necessarily a description of the marketplace per se. This this is what we see at capital one our performance has been assisted by some of the underwriting changes that we've made over the past couple of years, especially in response to credit to what we <unk>.

Anticipating would be the impact of credit scores inflating fintech flooding the market. So as we've been talking about really for a couple of years now we we in our originations.

Andrew Young: How that then plays through the allowance, though, a number of factors are going into the allowance calculation, as Rich said, the projected loss rates are going to be by far the biggest driver. And as we've talked about many times, the linkancies are the best leading indicator of credit performance, particularly over the next couple of quarters. And I won't go through the reasonable and supportable and reversion process elements that we've discussed previously.

And overall in our credit policy, we were trimming around the edges for things that we saw or or or risks that we anticipated and this has contributed I think to.

Our strength and stability and performance. That's now are contributing to what we see here.

In terms of our spend.

The.

Andrew Young: But I will say beyond the credit forecast, it is worth noting that the allowance framework considers a range of outcomes and uncertainties, which are generally wider in periods of either worsening or improving transitions. So at the core of your question, even in a period where projected losses in future quarters may be lower than today and might otherwise indicate a release, we could very well see a coverage ratio that remains flat or only modestly declines, at least in the near term, as we incorporate the related uncertainty into the allowance. And so we'll go through our process as we do every year to take all of those factors into account and roll forward the allowance each quarter.

The spend is basically.

Pretty.

You know when we look at spend per customer. This has really moderated after the surge of spending coming out of the pan pandemic, so year over year I'm convinced that overall capital one point year over year.

Operator: Next question, please.

Spend growth per customer has been roughly flat for several months.

So the growth in spend that you're seeing in our metrics is really being driven by.

New account origination.

Now with respect to.

The various segments.

The spend on the at the lower end of the marketplace is certainly probably the most moderated although we are at it moderated first we've seen.

Mihir Bhatia: Our next question comes from me here, Batia, with Bank of America. Your line is open. Hi, good afternoon, and thank you for taking my question. I was curious, it does the health of the consumer. I was curious if you're seeing trends at all diverge between higher cycle and lower cycle scores, whether it's on credit performance or spending here as we go through the outcomes. Yes, Mihir, thank you for your question. So let's talk about credit performance.

Spend growth.

Across our segments.

Sort of.

Fairly moderated, but I'd say the biggest effect on the moderating side has been.

In the lower end of the market.

Got it thank.

That's quite helpful.

And then maybe just starting to NIM very quickly can you just talk about some of the puts and takes on the in the near term.

Particularly on the deposit competition side any thoughts on where deposit betas go what are you seeing from a competitive standpoint. Thank you.

Yeah with respect to beta.

As we've discussed in previous calls there's.

Really a couple of key factors that are impacting betas. The first is product mix sort of the rotation of customers across products and then the second is competitive pricing and within that I would include the notion of just deposit pricing lags that.

Mihir Bhatia: When when credit first started to normalize, we called out that this trend was more pronounced at the low end of the market. Whether defined by income or credit score. And strikingly, those were the segments that had improved the most early in the pandemic. So this was not surprising to us. Later, we observed that normalization was becoming more broad based. And in fact, for many quarters now, now for several quarters now, every segment was better.

That we've talked about.

And so for us the quarter over quarter beta with that lag effect with something like 160% our accumulative beta now stands at 57.

And so what.

Mihir Bhatia: We're basically normalizing at about the same rate. In other words, if you look at for any segment where its credit metrics were relative to like its delinquencies, for example, relative to pre-pandemic, every segment was kind of on top of each other. Everything had caught up. Now we are seeing stabilization come more quickly at the lower end of the market. In fact, over the last few months, our delinquencies in these segments have essentially stabilized on a seasonally adjusted basis and our market segments are sort of just a little bit behind that.

That getting factored into to NIM as we look ahead on that dimension, and particularly assuming if rates do stay higher for longer I wouldn't be surprised if there continues to be some upward pressure on data at least in the near term driven by those factors that I described at the <unk>.

And product mix piece.

So beyond that then in the NIM.

We have seen spreads widen a bit here and.

Wholesale funding costs.

Are up a bit and I think rich talked about suppression in card, but depending on the path of credit you know there's the potential at least for increased revenue suppression. So I would lump all of those three things together is as potential headwinds but from it.

Mihir Bhatia: Now, I don't think this is necessarily a description of the marketplace per se. This is what we see at Capital One. Our performance has been assisted by some of the underwriting changes that we made over the past couple of years, especially in response to what we anticipated would be the impact of credit scores inflating, fintech flooding the market. So as we've been talking about really for a couple of years now, we in our originations and overall in our credit policy, we were trimming around the edges for things that we saw or risks that we anticipated.

Tailwind perspective, and how we can continue to see growth in card and particularly revolving card balances as a percent of the balance sheet. Like you saw this quarter and then the other thing that I would note, even though our cash balances remain elevated.

Relative to historical standards.

We will see it settle out at a lever level, that's higher than pre pandemic, but ultimately lower than where we are today. You know as you look ahead over over multiple quarters. So those are really the primary factors that I would say are at play with respect to NIM.

Next question please.

Mihir Bhatia: And this has contributed, I think, to strengthens and stability and performance that's now contributing to what we see here. In terms of spend, the spend is basically pretty, you know, when we look at spend per customer, this is really moderated after the surge of spending coming out of the pandemic. So year over year, I'm committed to an overall capital one point year over year, spend growth per customer has been roughly flat for several months.

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

Yeah, just touching on the last discussion on net interest margin. The card loan yields expanded I think 89 basis points and that was quite a bit higher than the base III expansion for the quarter. You mentioned higher revolve rates is that part of what Youre seeing there and how does the revolve rates compare.

Today versus maybe where they were pre pandemic.

Yeah.

Yes, so part of it is just.

The fed if youre looking at yield as opposed to margin is you get a tailwind just from the the fed rate changes, but the other primary end larger factor than than the fed changes is I would say largely seasonality.

Mihir Bhatia: Yes, so the growth in spend that you're seeing in our metrics is really being driven by new account origination. Now, with respect to the various segments, the spend on the lower end of the marketplace is certainly probably the most moderated, although we it moderated first, we've seen spend growth across our segments, sort of fairly moderated, but I say the biggest effect on the moderating side has been in the lower end of the market.

Which does we typically see a revolve.

Revolve rates in the third quarter, just naturally be a be higher than they are throughout the year.

And we also tend to see a bit more on the late fee.

Piece there. So there is a seasonality dimension in terms of where we are with revolve rates.

Going forward I'll, let rich talk a little bit about the trends that we're seeing in the portfolio.

Yes, Aaron so.

Overall.

In our domestic card business revolve rates are.

Basically where they were.

Mihir Bhatia: Thank you, that's quite helpful.

So for example, the.

Operator: And then maybe just turning the name very quickly. Can you just talk about some of the puts and takes on them in the near term, particularly on the deposit competition side? Any thoughts on where deposit data go? What are you seeing from a competitive standpoint? Thank you. Yeah, with respect to data as we've discussed in previous calls, there's really a couple of key factors that are impacting beta. The first is product mix, sort of the rotation of customers across products.

Third quarter 2023 revolve rates right on top of third quarter.

2019, but it's it's very sort of very different within within segments.

The place that the revolve rate is.

Quite a bit higher as in our partnerships business because we have the the Walmart portfolio, we didnt have before the pandemic.

Operator: And then the second is competitive pricing. And within that, I would include the notion of just deposit pricing lags that we've talked about. And so, for us, the quarter over quarter beta with that lag effect was something like 160 percent. Our cumulative beta now stands at 57. And so that getting factored into them as we look ahead on that dimension, particularly assuming if rates do stay higher for longer, I wouldn't be surprised if there continues to be some upward pressure on beta, at least in the near term driven by those factors that I described that the pricing and product mix piece.

Pretty much everywhere else.

Across our branded book revolve rates are a little bit generally speaking a little a little bit too.

Quite a bit lower than they were before but then that impression I would leave with you. So our branded book overall is is somewhat lower and.

The.

And the partnerships.

I have offset that.

Got it and then on the marketing it looks like it was down just slightly year over year.

Almost double where it was from a pre pandemic perspective have you have you essentially hit kind of a.

Almost a peak year in terms of marketing dollars.

And how do you think the expenses will go from there with respect to them.

Okay well.

Aaron.

Operator: So beyond that, then, in the name, we have seen spreads widen a bit here. And, you know, wholesale funding costs are up a bit. And I think Rich talked about suppression in card, but depending on the path of credit, there's the potential at least for increased revenue suppression. So I would lump all of those three things together as potential headwinds. But from a tailwind perspective, we can continue to see growth in card and particularly revolving card balances as a percent of the balance sheet, like you saw this quarter.

On marketing, so just pulling up.

Total company marketing was.

10% compared to the prior quarter and flat year over year, let's just pull up and talk about the big drivers.

Of our marketing first we continue to really like the opportunities we're seeing in the market.

Including.

Additionally, you know the opportunities that we get in expanding channels and growing the number of card products. We have the benefit from our technology transformation that that that sort of is is everywhere in what we do as we leverage more data.

Operator: And then the other thing that I would note, even though cash balances remain elevated relative to historical standards, you know, I think we will see it settle out at a level that's higher than pre-pandemic, but ultimately lower than where we are today, you know, as you look ahead over multiple quarters. So those are really the primary factors that I would say are at play with respect to them.

Sure.

Well to take advantage of powerful machine learning models create customized.

Better experiences for consumers.

So that continues to have a lot of traction and we're leaning into that.

We also are very important part of our marketing spend and a thing we're really leaning into is our focus on heavy spenders.

Aaron Cyganovich: Next question, please.

Aaron Cyganovich: Our next question comes from Aaron Cyganovich with City, your line is open. Yeah, just touching on the last discussion on that interest margin, the card loan yields expanded by the 89 basis points, and that was quite a bit higher than the base rate expansion for the quarter. You mentioned higher revolver rates. Is that part of what you're seeing there and how do the revolver rates compare today versus maybe where they were pre-pandemic?

So when we think about our quest for heavy spenders, It really goes back to 2010.

When we launched our venture card and that was the beginning of a strategic push that we have a continued and accelerated ever since.

And that involved more than just putting a and attractive product out there heavy spenders of course.

You know to win with heavy spenders, we need great servicing.

Aaron Cyganovich: Yeah, it's a part of it. Aaron is just a fed. If you're looking at yield as opposed to margin, you get a tailwind just from the fed rate changes, but the other primary and larger factor than the fed changes is I would say largely sees anality which does we typically see revolver rates in the third quarter just naturally be higher than they are throughout the year. And we also tend to see a bit more on the late C piece there.

Jawdropping customer experiences of course, great value propositions.

And this takes a significant investment in upfront promotions and marketing and in brand building and this is all about you know my observation all the years of doing this business and watching players who succeed here and those who get less traction it's very much about that.

Sustained investment and the the ultimately the brand that one builds.

So we're continuing to invest in and also in building the properties and experiences to drive heavy spender growth at the top of the market. So these investments include our travel portal.

Aaron Cyganovich: So there is a seasonality dimension in terms of where we are with revolver rates going forward. I'll let Rich talk a little bit about the trends that we're seeing in the portfolio. Yes, Aaron. So overall in our domestic card business revolver rates are basically where they were, so for example, third quarter 2023 revolver rates right on top of third quarter 2019, but it's very different within segments. The place that the revolver rate is quite a bit higher is in our partnerships business because we have the Walmart portfolio we didn't have before the pandemic.

Access to exclusive properties and experiences.

Airport lounges and capital one shopping.

And our sustained investment at the top of the market has helped drive momentum in.

Overall in our spender business, but we've grown even faster with the heaviest of spenders.

And we very much like this business. In addition to the obvious spend growth. We're enjoying it generated strong revenues has very low losses, low attrition and lifts.

It lifts the entire brand of the company.

The final factor driving our marketing levels as our investment in continuing to build our national Bank.

Aaron Cyganovich: Pretty much everywhere else across our branded book revolver rates are a little bit generally speaking a little bit to quite a bit lower than they were before. But the net impression I would leave with you. So our branded book overall is somewhat lower and the and the partnerships have offset that.

And of course, as we have a smaller branch footprint our growth is powered by modern technology, a compelling digital experience.

A.

Cafe presence.

In and.

Heavily traveled traveled.

Locations across the nation and of course, a sustained investment in marketing.

These are the really compelling opportunities that are driving our marketing levels and we continue to see great traction pretty much across the board and we continue to lean into these opportunities and.

Richard Fairbank: Got it. And then on the marketing looks like it was down just in a slightly year over year still almost double where it was from a pre-pandemic perspective. Have you essentially hit a peak here in terms of marketing dollars and how do you think the expenses will go from there up with respect to them? Okay. Well, Aaron, on marketing, so just pulling up total company marketing was 10% compared to the prior quarter and flat year over year.

It's an important part of the creation of long term value for our shareholders.

Next question please.

Our next question comes from Rick Shane with J P. Morgan Your line is open.

Thanks for taking my question this afternoon.

To talk a little bit about the depository franchise.

Obviously, there's been a.

Very strong growth this year in the consumer banking franchise, particularly on the deposit side can you just talk a little bit about the competitive landscape.

Richard Fairbank: Let's just pull up and talk about the big drivers, of our marketing. First, we continue to really like the opportunities we're seeing in the market, including, you know, additional, you know, the opportunities that we get in expanding channels, in growing the number of card products we have, the benefit from our technology transformation, that sort of is everywhere in what we do as we leverage more data, we're able to, you know, take advantage of powerful machine learning models, create customized better experiences for consumers.

You started to rich you talked a little bit about the network the cafes, the less concentrated branch.

Approach, but can you describe what you're seeing sort of broadly in the market and where you think you're gaining share.

Well you know one of the.

Thank thank you Rick one of the core.

Strategic.

Approaches capital one it really defined the founding idea of the company and pretty much all of the choices. We've made it made sense.

Is to look at.

The market place and the tsunami forces that are driving.

Richard Fairbank: So that continues to have a lot of traction and we are leaning into that. We also, a very important part of our marketing spend, and a thing we're really leaning into, is our focus on heavy spenders. So when we think about our quest for heavy spenders, it really goes back to 2010 when we launched our venture card, and that was the beginning of a strategic push that we have continued and accelerated ever since.

Such change in the marketplace and really try to discern with all the noise in these marketplaces where is it at.

That that where where is winning are going to be what's what's the future of these things and almost always it's a question of how technology.

Is driving change and so in retail banking we of course are entered banking weigh back.

In the Middle OS driven most importantly by a desire to transform the balance sheet of our company to to get away from capital market reliance and get not just a.

Richard Fairbank: And that involved more than just, you know, putting an attractive product out there. Heavy spenders, of course, you know, to win with heavy spenders, we need great servicing, jaw-dropping customer experiences, of course, great value propositions. And this takes a significant investment in upfront promotions and in marketing and in brand building. And this is all about, you know, my observation all the years of doing this business and watching players who succeed here and those who get less traction, it's very much about sustained investment and the ultimately the brand that won build.

Deposit.

Driven balance sheet, but an insured deposit driven balance sheet, hence the quest for a.

[noise] tumor deposit.

Franchise now along the way.

As a very important part of our strategy as well we look forward to.

Trying to get at the forefront of where the world was going to go over time with respect to retail banking.

From a heavy reliance on branches and by the way I want to say at the outset I think branches will be an important thing in.

Richard Fairbank: So we're continuing to invest in, also in building the properties and experiences to drive heavy spender growth at the top of the market. So these investments include our travel portal, access to exclusive properties and experiences, airport lounges, and capital one shopping. And our sustained investment at the top of the market is help drive momentum in, you know, overall in our spender business, but we've grown even faster with the heaviest of spenders.

And in the World.

In banking for as far out as we can see but you just can't help but see the evolution from.

The branch.

The branch on the corner to the branch in your hand, and really over time.

Sorry to the bank in your hand to over time the bank in your life, that's very digitally interactive and both reactively and proactively being there where a consumer needs. It on a real time customized basis. So that's.

That's where we have it.

Richard Fairbank: And, you know, we very much like this business. In addition to the obvious spend growth, we're enjoying, it generates strong revenues, has very low losses, low attrition, and, you know, lifts the entire brand of the company. The final factor driving our marketing levels is our investment in continuing to build our national bank. And, of course, as we have a smaller branch footprint, our growth is powered by modern technology, the compelling digital experience, a, you know, cafe presence in, you know, heavily traveled locations across the nation and, of course, a sustained investment in marketing.

That's that's the vision that we've been working backwards from so are.

In that journey.

First step of course was building a national savings business that was absolutely central to our.

Our balance sheet strategy for the company.

But beyond that.

We have worked very much to build a.

Not just a national savings business, but a national foot full service bank.

And to do that it's not just a matter of sort of offering checking accounts, but I think capital one was in an unique position having retail banks in our branches in in in about 20% of the nation and they have a lot of experience with retail banking. Our view was if we're going to win in Nash.

Richard Fairbank: So these are the really compelling opportunities that are driving our marketing levels. And we continue to see great traction pretty much across the boards. And we continue to lean into these opportunities. And it's an important part of the creation of long-term value for our shareholders.

Banking, we actually have to digitize the entire customer experience and just about everything that you can get in a branch to be able to for customers to get that on a digital basis. So what we've done over the years is build a full service digital National Bank.

Operator: Next question, please.

Rick Shane: Our next question comes from Rick Shane with JP Morgan. Your line is open. Thanks for taking my question this afternoon. I'd just like to talk a little bit about the depository franchise. Obviously there's been very strong growth this year in the consumer banking franchise particularly on the deposit side. Can you just talk a little bit about the competitive landscape? You started rich, you talked a little bit about the network, the cafes, the less concentrated branch approach, but can you describe what you're seeing sort of broadly in the market where you think you're gaining share?

And.

We.

Then you know as.

As we have built this we even.

You know leverage the big customer base, we have the national brand that we have and really added to our marketing and.

You know everywhere in our strategy the build out of this national Bank and we're getting a lot of traction.

Nice growth and a lot of traction on the brand side as as consumers realize.

Realize that capital one even though the brand on branches across the nation really is a full service national Bank.

Richard Fairbank: Well, one of the thank you, Rick. One of the core strategic approaches of CapitalOne, it really defined the founding idea of the company and pretty much all the choices we've made sense is to look at the marketplace and the tsunami forces that are driving such change. We've changed in the marketplace and really tried to discern with all the noise in these marketplaces. Where is it that where is winning going to be?

Bank.

So that's our that's been our strategy for years, we continue to it. It is an important thing that we lean into from a marketing point of view, but basically.

Our quest is to build continue to build a national.

Bank without.

Getting there by virtue of just lots and lots of acquisitions of branch based banks.

Thank you rich.

Next question please.

Richard Fairbank: What's the future of these things and almost always its question of how technology is driving change? In retail banking, we have of course entered banking way back in the middle of driven most importantly by a desire to transform the balance sheet of our company to get away from capital market reliance and get not just a deposit driven balance sheet but an insured deposit driven balance sheet. And hence the quest for a consumer deposit franchise.

Our next question comes from Don Vendetti with Wells Fargo. Your line is open.

Yes, Richard I was wondering given your good trends in auto delinquencies.

Are you sort of inclined to be leaning a little harder into auto lending or do you need to see something before making that decision.

Okay.

Don Thank you for your question.

It's funny, we have zagged.

While others Zagged.

It's for so long as long as I can remember in the auto business.

Our strategy isn't just to zig, while others Zag, it's always too.

Look at this marketplace.

And really objectively see where the opportunities are this is a more volatile business in terms of our growth strategies.

Richard Fairbank: Now along the way as a very important part of our strategy as well, we looked forward to trying to get at the forefront of where the world was going to go over time with respect to retail banking. From a heavy reliance on branches and by the way I want to say at the outset I think branches will be an important thing in banking for as far out as we can see but you just can't help but see the evolution from the branch on the corner to the branch in your hand and really over time to the bank in your hand.

And then.

The credit card business is because of the role that a dealer plays in the in the business in a sense holding auctions at the dealership such that.

Our growth strategies are particularly sensitive to the credit and underwriting choices that our competitors make because it's sort of amplified in this auction based environment with dealers really quite a contrast from the credit card business to the credit card business, where certainly the competitive choices matter, but it's really.

Richard Fairbank: To over time the bank in your life, that's very digitally interactive and both reactively and proactively being there where a consumer needs it on a real time customized basis. So that's where we have and that's that's the vision that we've been working backwards from. So in that journey, the first step of course was building a national savings business that was absolutely central to our balance sheet strategy for the company. But beyond that we have worked very much to build a Not just a national savings business, but a national full service bank.

Still a one on one.

Our business with our customers and prospective customers. That's why you see so much more stability in sort of the the marketing and the marketing sort of and the.

And leaning into the growth that you see on the card side. So.

As you know when you think about the last.

A few years. So we certainly had in the last five or six years tremendous growth and traction in the auto business.

And.

We our strategy was so powered.

Powered by our technology that we've invested in the business the data the underwriting capabilities.

Richard Fairbank: And to do that, it's not just a matter of sort of offering a checking accounts, but I think CapitalOne was in a unique position having retail banks in branches in about 20% of the nation. I have a lot of experience with retail banking. Our view was, if we're going to win in national banking, we actually have to digitize the entire customer experience and just about everything that you can get in a branch to be able to, for customers to get that on a digital basis.

And the very deep relationships that we've been building with dealers.

Over the last couple of years, we were.

We're concerned at what was happening.

With margins as they were pressured by interest rate increases in 'twenty two 2022 in early 2023, some competitors were slow to adjust their pricing now more recently industry lending margins have largely normalized as interest rates have stabilized and many players including late <unk>.

<unk> have continued to increase pricing.

Richard Fairbank: So what we've done over the years is build a full service digital national bank. And we then, as we have built this, we have then leveraged the big customer base. We have the national brand that we have and really added to our marketing and everywhere in our strategy, the build out of this national bank. And we're getting a lot of traction, nice growth, and a lot of traction on the brand side as consumers realize that CapitalOne, even though the branch is across the nation, really is a full service national bank.

The other thing of course was watching very closely the credit side of the business and we just as we did in the card business.

Probably actually more proactively and more significantly in auto we trimmed back around the edges in anticipation of certain worsening and with concerns about score of drift.

In.

With respect to the data.

Fort with from consumers.

So that has and you've seen the data that we're capital one has pulled back quite a bit our our our outstandings.

Have been shrinking a little bit.

Richard Fairbank: So that's been our strategy for years. We continue to, it's an important thing that we lean into from a marketing point of view. But basically, our quest is to continue to build a national bank without getting there by virtue of just lots and lots of acquisitions of branch-based banks.

You also have seen the striking credit performance we've had in the stability now that are you know as is.

At least two quarters long in terms of what we're seeing on various credit metrics. So seeing the good metrics and seeing the marketplace, where certainly on.

On the lookout for opportunities, but I'm not here to predict.

Operator: Thanks. Thank you, Rich.

You know an acceleration, but we certainly do like the performance.

Don Fandetti: Next question, please.

Of both our front book and our back book at this point.

Thanks.

Don Fandetti: Our next question comes from Don Sanvedi with Wells Fargo. Your line is open. Yes, Rich, I was wondering, you know, given your good trends in auto delinquency, are you sort of inclined to be leaning a little harder into auto lending, or do you need to see something before making that decision?

Next question please.

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

Thanks.

First question just on the adjusted operating efficiency rate.

And we've seen some nice improvements over the last two quarters and I know rich you talked about sort of the year outlook I'm. Just wondering if we could see this type of level or trends sustain itself into next year.

Richard Fairbank: Don, thank you for your question. You know, it's funny. We have ZIGG. Well, others have ZIGG for so long as long as I can remember in the auto business. And, you know, our strategy isn't just to ZIGG. Well, others have ZIGG. It's always to look at this marketplace and really objectively see where the opportunities are. This is a more volatile business in terms of our growth strategies than the credit card business is because of the role that a dealer plays in the business in a sense, holding auctions at the dealership such that our growth strategies are particularly sensitive to the credit and underwriting choices that our competitors make because it's sort of amplified in this auction based environment with dealers really quite a contrast from the credit card business to the credit card business where certainly the competitive choices matter, but it's really still a one on one business with our customers and prospective customers.

Okay.

Sanjay, we're not going to be giving out guidance on at this point on where we're operating efficiency goes. We certainly are pleased with the progress that we've made over time and operating efficiency ratio, even as we've continued to.

Really invest in the business and we're starting to see you know we have these two competing things going on inside capital one both a real investment in technology and also at the same time.

Generating a bunch of benefits and efficiencies from that technology. So you know.

The net result of these two things has been as we've been able to really make.

Tremendous strides forward in technology and also get some.

Efficiencies.

Along the way.

Richard Fairbank: That's why you see so much more stability in sort of the marketing and the marketing and leaning into the growth that you see on the card side, as, you know, when you think about the last few years, so, you know, we've certainly had, in the last, you know, five or six years, tremendous growth and traction in the auto business, and we, our strategy was so powered by our technology that we've invested in the business, the data, the underwriting capabilities, and the, very deep relationships that we've been building with dealers. Over the last couple of years, we, you know, were concerned at what was happening with margins as they were pressured by interest rate increases in 2022, 2022 and early 2023, some competitors were slow to adjust their pricing.

I wouldn't put too much reliance on any one quarter you know these numbers kind of bounce around but.

Certainly I mean, you know you probably noticed.

That in our guidance, we we had a guidance of flat to modestly down with respect to our efficiency ratio for.

Full year 2023, and we took the.

The flat part out and where.

We're now just at modestly down so.

We continue to believe over the long term.

You know our.

<unk> transformation offers a lot of promise for operating efficiencies.

And delivering operating efficiency is an important part of I think the value creation.

Equation for investors I do want to say, though you know at the same time, we continue to you know.

Really see great opportunities in the business, we continue to still invest in technology to capitalize on even greater opportunities over time and that's.

Richard Fairbank: Now, more recently, industry lending margins have largely normalized as interest rates have stabilized. And many players, including late movers, have continued to increase pricing. The other thing, of course, was watching very closely the credit side of the business, and we, just as we did in the card business, the probably actually more proactively and more significantly in auto, we trimmed back around the edges in anticipation of certain worsening and with concerns about score drift in, you know, with respect to the data from consumers.

That's that's.

That's the story of.

Our operating efficiency ratio perfect.

Follow up question just on the leaning into growth in card.

Where exactly is that happening I mean, obviously you talked about adjusting the risk parameters and that's obviously flowing through in the credit numbers improving is it more on the transaction side that you have.

Leaning into growth or is it balanced across all segments I'm, just curious sort of the implications on a go forward basis. Thank you.

Yeah. Thank you.

So are we.

We are finding traction across the spa.

Spectrum really so and we're leaning in across the spectrum, one thing I do want to say about.

Richard Fairbank: So, that has, and you've seen the data that where CapitalOne has pulled back quite a bit, our, our, our outstanding have been shrinking a little bit. But you also have seen the striking credit performance we've had in the stability now that, you know, is at least two quarters long in terms of what we're seeing on various credit metrics. So, seeing the good metrics and seeing the marketplace, we're certainly, you know, on the lookout for opportunities, but I'm not here to predict, you know, an acceleration, but we certainly do like the performance of both our front book and our back book at this point. Thanks.

Gross the Outstandings growth, if we really are.

Think about it.

Just the strength of.

Sanjay Sakhrani: Next question, please.

Of our loan growth.

For a while.

The striking loan growth for capital one and the industry was.

We all said well this is just.

Reversing the pullbacks from the pandemic, but.

You know I think for us and for a lot of players in the industry. These low numbers have blown past prior levels.

And.

Let's just reflect a little bit on what has.

Sustained this my view is.

Sure well there there's the capital one effect, we continue to have significant new account growth and that obviously powers.

Sanjay Sakhrani: Our next question comes from Sanjay Sakhrami with KBW. Your line is open. Thanks.

Sanjay Sakhrani: First question is just on the adjusted operating efficiency rate. You know, it seems some nice improvements over the last two quarters, and I know Rich, you talked about sort of the year outlook. I'm just wondering if we could see this type of level or trends of pain itself into next year. Sanjay, we're not going to be giving out guidance on at this point on where, where operating efficiency goes. We certainly are pleased with the progress that, that we've made over time in operating efficiency ratio, even as we've continued to really invest in the business.

Lot of overtime.

Over time loan growth payment rates are coming down.

Interestingly, they're there they they have come down quite a bit but as a general statement theyre not down too.

Where they were before now part of that is a mix effect at capital one because we've had a lot of attraction on the spending side, but even within segments.

If I were to generalize.

You know payment rates.

The payment rates are still.

Higher than they were pre pandemic. So again inside that is partly a capital one effect, but I think also sort of a.

Sanjay Sakhrani: And, you know, we're starting to see, you know, we have these two competing things going on inside capital one, both a real investment in technology and also at the same time, generating a bunch of benefits and efficiencies from that technology. So, you know, the net result of these two things has been as we've been able to really make, you know, tremendous strides forward in technology and also get some efficiencies along the way.

A strength of the consumer effect, however, the payment rates have come down and and that somewhat and that has powered growth and I think likely.

No one's going to be able to prove this but I think there are inflation effects underneath the surface.

You know when things cost more.

As long as you know.

<unk> incomes.

Ste.

You know stay up to where inflation is you generally have some natural I think inflation effects that.

Sanjay Sakhrani: I wouldn't, you know, put too much reliance on any one quarter, you know, these numbers kind of bounce around, but certainly, you know, you probably noticed that in our guidance, we had guidance of flat to modestly down with respect to our efficiency ratio for full year 2023. And we took the, the flat part out and we're, we're now just at modestly down. So, you know, we continue to believe over the long term that, you know, our technology transformation offers a lot of promise for operating efficiencies and delivering operating efficiency is an important part of, I think, the value creation.

You know drive.

Some of this growth as well so we see a lot of strength there.

Some of those are capital one specific comments I'm, making and several of those are really kind of industry points.

Next question please.

Our next question comes from John think Hari with Evercore ISI. Your line is open.

Good afternoon.

On the back to the your commentary around the slowing pace of the increase in delinquencies that youre seeing in card and in some of the stabilization that you're citing I know you indicated that charge offs I'm sure.

Course lag that can you give us maybe some way to think about how long that lag could be a two to three quarter type of window that we're looking.

Sanjay Sakhrani: Equation for investors, I do want to say though, you know, at the same time we continue to, you know, really see great opportunities in the business. We continue to still invest in technology to capitalize on even greater opportunities over time. And that's, that's the story of our operating efficiency ratio.

For a for losses to follow through on that front. Thanks.

Well I don't I don't want to make a precise prediction on that I want to I want to first of all pull up and say.

When we.

It's the the thing that we tell everybody to look at as well.

I would say is what we look at is delinquencies because that.

Richard Fairbank: Perfect. Then I'll follow question just on the lenient to growth and card. Where exactly is that happening? I mean, obviously you talked about adjusting the risk parameters and that's obviously flowing through and the credit numbers improving. Is it more on the transactors side that your lenient growth or is it balanced across all segments on just curious sort of the implications on a go forward basis? Thank you. So, we are finding traction across the spectrum really so, and we're leaning in across the spectrum.

That is the you know that.

That is the first indicator that's why we you know.

They have been talking not just quarterly but really even looking at the last couple of months and seeing.

Uh huh.

Sorted more stabilization on the credit card side, which as you know.

Very encouraging.

Delinquencies basically a cut.

Customers go delinquent and ultimately charge off.

Six months later.

And so.

Richard Fairbank: One thing I do want to say about growth, the outstanding growth, if we really think about just the strength of, of loan growth. You know, for a while, the striking loan growth for capital one and the industry was, you know, we all said, well, this is just, you know, reversing the pullbacks from the pandemic. But, you know, I think for us and for a lot of players in the industry, you know, these loan numbers have blown past prior levels.

There is but sometimes they go faster sometimes they go slower and of course lots of times, they make their payments, but we're talking about.

These things being measured in over a couple of quarters.

The relationship between the delinquencies and charge offs.

Next question please.

Next question comes from Erica Nausea, Ryan with UBS. Your line is open.

Yes.

I hate to re ask this question, but I think you know a lot of investors I wanted to make a fine point on this in the fourth quarter.

Richard Fairbank: And, you know, let's just reflect a little bit on what has sustained this. You know, my view is, well, there's the capital one effect. We continue to have significant new account growth and that obviously powers a lot of overtime loan growth. Payment rates are coming down. Interestingly, they have come down quite a bit, but as a general statement, they're not down to where they were before. Now, part of that's a mix effect at capital one because we've had a lot of traction on the spending side, but even within segments, case.

Going back to Ryan and in John's question about net charge offs.

I think that perhaps what's holding back credit sensitive financials is.

You know obviously the prospect of recession that rich everything that you've said has seen positive you know pace of delinquency rate normalization slowing.

The stability of credit performance and recent vintages.

As we think about what happened in September in terms of the card charge off rate and look at the quarterly charge off rate in third quarter and second quarter is it fair to draw the conclusion that if we look forward to the fourth quarter net charge off rate that given the stability of all of the leading indicators that the charge offs.

Richard Fairbank: If I were to generalize, you know, payment rates, the payment rates are still higher than they were pre-pandemic. So, again, inside that, there's partly a CapitalOne effect, but I think also sort of a, you know, a strength of the consumer effect. However, the payment rates have come down, and that somewhat, and that has powered growth. And I think likely, you know, no one's going to be able to prove this, but I think there are inflation effects underneath the surface, you know, when things cost more, you know, as long as, you know, consumer incomes stay up to where inflation is, you generally have some natural, I think, inflation effects that, you know, drive some of this growth as well. So, we see a lot of strength there, and, you know, some of those are CapitalOne specific comments I'm making, and several of those are really a kind of industry points.

<unk> will be mostly driven by seasonality rather than you know.

Normalization is normalization highs.

They've licensed for now.

Richard Fairbank: Next question, please.

Yeah, So Eric.

Erica. Thanks. Thanks for your question, let me say a few things so let's.

First of all one of the things that makes this already a challenging business for everyone studying it including those of US who live it every day.

Is the seasonality.

The volatility, which which a big element of that is seasonality. So.

Let's just.

Let's talk just a little bit about seasonality.

You know.

Card and auto delinquencies tend to improve each year around the tax refund season, and then they worse and gradually over the rest of the year.

Second quarter is typically the seasonal low point for card delinquencies and Q4 is the seasonal high point card losses lag relative to delinquencies. So they tend to be seasonally lowest in the third quarter and highest in the first quarter.

John Pancari: Our next question comes from John Pancari with Evercore ISI. Your line is open. Good afternoon. On the back to your commentary around the slowing pace of the increase in the length with these that you're seeing in card and some of the stabilization that you're writing, I know you indicated that charge offs should, but of course, lag that. Can you give us maybe some way to think about how long that lag could be, is it a two to three quarter type of window that we're looking for a, for losses to follow through on that front? Thanks.

And.

Now.

In the third quarter, so our domestic card delinquencies are at.

Increased so it's kind of interesting that we're talking about a sort of a a a leveling.

A stabilizing kind of direction when we're actually looking at delinquencies for the quarter that went up 57 basis points on us.

A sequential quarter basis, and that's versus a typical seasonal expectation of kind of.

Richard Fairbank: Well, I don't want to make a precise prediction on that. I want to, I want to first of all, pull up and say, you know, when we, we, it's the thing that we tell everybody to look at is, oh, what we say is what we look at is the linkancies because that is the, you know, that is the first indicator. That's why we, you know, have been talking not just quarterly, but really even looking at the last couple of months and seeing the sort of more stabilization on the credit card side, which is, you know, very encouraging.

Sort of somewhere in the neighborhood of like 37.

Basis points, but.

So you know you can even see for the quarter that most of the increase that we observed with seasonal.

But then that's where we said if you zoom into months are the months of August and September.

The month over month movement is is getting really close to just the normal seasonal trend and so this is one of the early indications that the trend of normalization. We have been seeing maybe stabilizing now one thing I want to say, obviously you hear bullish meant in my commentary.

Terry I'm not here to just wave my arms and declare it turn.

Richard Fairbank: You know, the linkancies basically, you know, customers go the link went and ultimately charge off six months later. And so there is, but sometimes they go faster, sometimes they go slower, and of course, lots of times they make their payments, but we're talking about these things being measured in over a couple of quarters, the relationship between the, the linkancies and the charge off.

We have we have a couple of months are very encouraging.

Data, we'd love to see you know more of data, where we have seen.

Erika Najarian: Next question, please.

Ian.

A couple of quarters, where we've seen a longer stretch of data is in the in the.

More on the lower end of the card business Interestingly as I talked about and in the auto business. So that's where it things that really kind of two appear to have stabilized. Our upmarket card business is is is getting there a little bit Ah Yeah, you know not not quite as is.

Erika Najarian: Our next question comes from Erika Najarian with UBS. Your line is open? Yes, I hate to re-ass this question, but I think a lot of investors want to make a fine point on this and the fourth quarter, you know, going back to Ryan and Jon's question about net charge-offs. You know, I think that perhaps what's holding back credit sensitive financials is, you know, obviously the prospect of recession, but Rich, everything that you've said has seen positive, you know, pace of delinquency, rate normalization, slowing, you know, stability of credit performance and recent ventages, you know, as we think about what happened in September in terms of the card charge-off rate, and look at the quarterly, you know, charge-off rate in third quarter and second quarter, is it fair to draw the conclusion that as we look forward to the fourth quarter net charge-off rate, that given the stability of all the leading indicators that the charge-off rate will be mostly driven by seasonality rather than, you know, normalization, if normalization has stabilized for now. Yeah, so, Erica, thanks for your question. Let me say a few things.

Not quite there yet so I I start by saying.

We'd love to see a little more data to two.

B B fully confident of what we're seeing the second thing I wanted to say with them now to your question about charge offs.

First of all.

You know, what we see especially in the months of August and September.

Youre not going to see that show up with stabilized charge offs as soon as the fourth quarter because it really is a couple of quarters that that to the earlier question that was asked it's it's really a couple of quarters before the the charge offs.

You know.

Reform sort of in line with the with the delinquencies so.

So we're not going to make predictions here and I don't I just you know.

I always we're always very kind of try to be as clear as we can on what we see we happen to see some pretty positive things here, but they can also.

B, a head fake in and a head fake and.

Hum you know not be as good as as they appear.

Richard Fairbank: So let's, first of all, one of the things that makes this already challenging business for everyone studying it, including those of us who live it every day, is the seasonality in the volatility, which a big element of that is seasonality. So let's just, let's talk just a little bit about seasonality, you know, card and auto delinquencies tend to improve each year around the tax refund season, and then they worsen gradually over the rest of the year.

Next question please.

Next question please.

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

Hey, good afternoon. Thanks, so much for taking my questions.

When you think about capital ratios and Basel and game and the need to build capital specifically for unused lines.

Do you think about mitigating if at all mitigating your unused lines and given your capital target of about 11% today, maybe you could just talk to us about the factor Basel unused lines and the effects going over on your capital levels.

Richard Fairbank: The second quarter is typically the seasonal low point for card delinquencies, and Q4 is the seasonal high point. Card losses lag relative to delinquencies, so they tend to be seasonally lowest in the third quarter and highest in the first quarter. And now in the third quarter, so our domestic card delinquencies increased, so it's kind of interesting that we're talking about sort of a, you know, a stabilizing kind of direction when we're actually looking at delinquencies for the quarter, that went up 57 basis points on a sequential quarter basis.

Our OTC target.

I have a follow up if you don't mind.

Thanks.

Yeah, I'm going to come back Dominic to the last half of your question I wasn't sure I followed it but in terms of of unused lines. You know one of our long standing strategies has been to start people with with smaller lines and allow them to to grow and so I would say I wouldn't expect.

A meaningful shift in that strategy solely in the service of of risk weighted assets. So overall, though as you look at our you know the risk weightings are that have come out in the end game proposal.

Richard Fairbank: And that's versus a typical seasonal expectation of kind of sort of somewhere in the neighborhood of like 37 basis points. But so, you know, you can even see for the quarter that most of the increase that we observed was seasonal. But then that's where we said if you zoom in the month, the months of August and September, the month over month movement is getting really close to just the normal seasonal trend.

For us in aggregate recall, we're not in mortgage are trading so.

Looking at the net of of retail and commercial inclusive of the gold plating and those those are largely are fighting to to withdraw in terms of overall risk weighting risk.

The risk weighting impact specifically on on the asset side like everyone else of course, we're going to have an impact from the operational risk <unk>, but I didn't quite follow the second half of your question around ROTC.

Richard Fairbank: And so this is one of the early indications that the trend of normalization we've been seeing maybe stabilizing. Now, one thing I want to say, obviously you hear bullishman in my commentary, I'm not here to just wave my arms and declare a turn. You know, we have, we have a couple of months of very encouraging, you know, data we'd love to see, you know, more data, where we have seen. You know, a couple of quarters where we've seen a longer stretch of data is in the more on the lower end of the card business interestingly as I talked about and in the auto business.

Could you just repeat that for me sure sorry about that I was just curious are you basically had to hold more capital because it's my understanding that you would have to hold additional capital against unused lines versus just draw on lines now and so I was just curious if.

Your capital ratio would have to rise in it.

And then that would affect the long term return on like a.

What's gone on in any way.

Got it yes, sorry, I didn't quite follow the second half of it yeah that was what I was trying to explain in my answer is the net of all of that ultimately ends up being a wash the part where we will be holding more more capital on the denominator side strictly for the risk weighting.

Richard Fairbank: So that's where things have really kind of to, you know, appear to have stabilized our market card business is is is, you know, getting there a little bit. But you know, not not quite as, as not quite there yet. So I start by saying, you know, we'd love to see, you know, a little more data to be fully confident of what we're seeing. The second thing I want to say with this then now to your question about charge offs.

Assets again, they should Uh huh.

Highlights that it's in a comment period, a lot of industry focus on it.

And you know well, particularly as it relates to the ops risk calculation there there could be a material impacts on the final outcome relative to what's proposed but taken taking what is a what is currently proposed you know the the asset side specifically outside.

Richard Fairbank: First of all, you know, what we see especially in the months of August and September. You're not going to see that show up with stabilized charge offs as soon as the fourth quarter because it really is a couple of quarters that that to the earlier question that was asked it's really a couple of quarters before the charge offs, you know, you know, perform sort of in line with the, with the delinquencies.

Of the.

The operational risk ends up being roughly a draw for us and it's really just the operational risk that's going to require us to hold more capital.

Tom and I have a follow up.

Next question please.

Our next question comes from Bill Kirk catchy with Wolfe Research Your line is open.

Okay.

Richard Fairbank: So, so we're not going to make predictions here and I don't, I just, you know, I always, we're always very kind of try to be as clear as we can on what we see. We happen to see some pretty positive things here, but they can also be a head fake and a head fake and, you know, not be as good as they appear.

You there bill.

Can you hear me.

Yeah can you hear me okay.

Okay, great great. Thank you.

So I wanted to ask about the.

Leafy proposal the consensus view is that we'll get a very soon it'll be immediate immediately litigated.

Can you give us your view on the likely path.

Uh huh.

That you that you would anticipate and possibly speak to any potential costs that that might be associated with it.

Dominic Gabriel: Next question, please.

Okay. Thank you Bill.

So the Cfpb's late fee proposal as currently contemplated.

Dominic Gabriel: Our next question comes from Dominic Gabriel with Oppenheimer. Your line is open. Hey, good afternoon. Thanks so much for taking my questions. When you think about capital ratios and Basel and game and the need to build capital specifically for unused lines. How do you think about mitigating if at all mitigating your unused lines and giving your capital target of about 11% today. If you could just talk to us about the factor of Basel on use lines and the effect going over on your capital levels and the ROTCE target.

Would reduce late fees by approximately 75%.

Now while the Cfpb's proposal has not yet been finalized we expect the CFPB to publish a proposal soon.

Probably before the end of the year.

And once the CFPB publishes its final rule.

We expect there to be industry litigation that could delay or blocked the implementation of this rule.

And this litigation will likely delay the implementation of the rule until at least the second half of 'twenty 'twenty, four and maybe longer.

Dominic Gabriel: And then I just have a follow up if you don't mind. Thanks. Yeah, I'm going to come back Dominic to the last half of your question. I wasn't sure I followed it, but in terms of of unused lines, you know, one of our longstanding strategies has been to start people with smaller lines and allow them to grow. And so I would say wouldn't expect a meaningful shift in that strategy solely in the service of of risk weighted assets.

If the proposed rule is implemented there will be a significant impact to our P&L in the near term.

However, we have a set of mitigating actions that we're working through that we believe will gradually resolve this impact a couple of years after the rule goes into effect.

Dominic Gabriel: So overall, though, as you look at the risk weightings that have come out in the end game proposal for us in aggregate recall, we're not in mortgage or trading. So looking at the net of retail and commercial inclusive of the gold plating, you know, those are largely fighting to to a draw in terms of overall risk weighting risk weighting impact specifically on on the asset side. Like everyone else, of course, we're going to have an impact from the operational risk RWA, but I didn't quite follow the second half of your question around ROTCE.

These choices include changes to our policies products and.

And investment choices.

Some of these actions will take place before the rule change takes effect many will come after the rule change takes effect.

Okay.

Next question please.

Yes.

Okay.

Next question. Please one moment please.

Okay.

Our final question is a follow up from Dominic Gabriel with Oppenheimer. Your line is open.

Hey, sorry about that I think I got cut off can you hear me okay. Yes.

Dominic Gabriel: Could you just repeat that for me? Sure, I'm sorry about that. I was just curious if you basically had to hold more capital because it's my understanding that you would have to hold additional capital against unused lines versus just drawn lines now. And so I was just curious if your capital ratio would have to rise in the, you know, and this that would affect the long term return on, like, you know, return on and anyway, got it.

Dominic Gabriel: Yeah, sorry, I didn't quite follow the second half of it. That was what I was trying to explain in my answer is the net of all of that ultimately ends up being a wash, the part where we will be holding more, more capital on the denominator side, strictly for the risk-weighting assets. Again, I should highlight that it's in a comment period, a lot of industry focus on it. And, you know, well, particularly if it relates to the Ops risk calculation, there could be material impacts on the final outcome relative to what's proposed, but taking what is what is currently proposed, you know, the asset side, specifically outside of the operational risk, ends up being roughly a draw for us. And it's really just the operational risk that's going to require some more capital. Dominic, you have a follow-up.

Yes, we can Dominic alright.

Alright, sorry about that guys.

I was actually just curious on the quarter over quarter increase in domestic card yield I know that there's sometimes some seasonality in the third quarter and we've also had a lot of rate hikes in previous years around the third quarter. I was wondering if you could just walk us through some of the dynamics in the quarter over quarter increase in domestic card. Thanks, so much.

Yeah, Dominic I can't remember, who asked it earlier, but I'm just reiterating some of those points I think you largely answered answered your own question, which is there is seasonality.

That in part a is a or is a function of.

The revolve rates are driven by some of the dynamics rich talked about over the course of the year, we did see the fed.

The fed move and then we also saw a bit of a late fees, which I would lump into the seasonality dimension and then finally, we had one more day in the third quarter. So day count Hum in an absolute sense not necessarily relative to peers.

I think it was the nature of the question earlier.

But but at least in an absolute sense that those are the big drivers of what what drove the quarter over quarter yield.

Well, thanks, everybody for joining us on the conference call. This evening and thank you for your continuing interest in capital one.

Investor Relations team will be here later this evening to answer any questions.

Andrew Young: Next question, please. Our next question comes from Bill Carcacci with Wolf Research. Your line is open. Okay, there, Bill. Can you hear me? Yeah, can you hear me? Okay, great. Great. Thank you. Yeah, so I wanted to ask about the leafy proposal. The consensus view is that we'll get it very soon. It'll be immediately litigated. Can you give us your view on the likely path that you would anticipate and possibly speak to any potential costs that might be associated with it?

You may have have a great evening everyone.

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

Andrew Young: Okay, thank you, Bill. So the CFPB's late-feed proposal, as currently contemplated, would reduce late fees by approximately 75%. And while the CFPB's proposal has not yet been finalized, we expect the CFPB to publish a proposal soon, probably before the end of the year. And once the CFPB publishes its final rule, we expect there to be industry litigation that could delay or block the implementation of this rule. And this litigation will likely delay the implementation of the rule until at least the second half of 2024 and maybe longer.

Andrew Young: If the proposed rule is implemented, there will be a significant impact to RPNL in the near term. However, we have a set of mitigating actions that we're working through that we believe will gradually resolve this impact a couple of years after the rule goes into effect. These choices include changes to our policies, products, and investment choices. Some of these actions will take place before the rule change takes effect. Many will come after the rule change takes effect.

Bill Carcache: Next question please. One moment please. Our final question is a follow up from Dominick Gabriel with Oppenheimer your line is open. Are you sorry about that? I think I cut off. Can you hear me okay? Yes, we can Dominick. Alright, sorry about that guys. I was actually just curious on the quarter over quarter increase in domestic car yield. I know that there's sometimes some seasonality in the third quarter and we've also had a lot of rate hikes in previous years around the third quarter.

Bill Carcache: I was wondering if you could just walk us through some of the dynamics in the quarter over quarter increase in domestic car. Thanks so much. Yeah, Dominick. I can't remember who asked it earlier but just reiterating some of those points. I think you largely answered answered your own question, which is there is seasonality that in part is or is a function of the revolve rates driven by some of the dynamics rich talked about over the course of the year.

Bill Carcache: We did see the Fed move and then we also saw a bit of late fees which I would lump into the seasonality dimension. And then finally we had one more day in the third quarter so day count in an absolute sense not necessarily relative to peers which I think was the nature of the question earlier but at least in an absolute sense. Those are the big drivers of what drove the quarter over quarter yield.

Operator: Well, thanks everybody for joining us on the conference call this evening and thank you for your continuing interest in capital one investor relations team will be here later this evening to answer any questions that you may have. Have a great evening everyone.

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