Q4 2023 Capital One Financial Corp Earnings Call

January 25, 2024

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Good day, and thank you for standing by and welcome to capital. One Q4 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.

I ask a question during the session you will need to press star one one on your telephone you wouldn't hear an automated message advising their 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.

Jeff Norris: Our finance please go ahead.

Jeff Norris: Thanks, very much Amy and welcome everyone to capital one's fourth quarter 2023 earnings Conference call.

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

Jeff Norris: In addition to the press release and financials. We have included a presentation summarizing our fourth quarter 'twenty 2023.

Jeff Norris: <unk>.

Jeff Norris: With me today are Mr. Richard Fairbank capital one's chairman and Chief Executive Officer.

Jeff Norris: Mr. Andrew Young capital ones, Chief Financial Officer.

Jeff Norris: Richard Andrew I'm going to walk you through the presentation to.

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

Jeff Norris: Please note that this presentation may contain forward looking statements.

Jeff Norris: Formation 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.

Jeff Norris: 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.

Jeff Norris: These factors could cause our actual results to differ materially from those described in forward looking statements.

Jeff Norris: For more information on these factors. Please see the section titled forward looking information in the earnings release presentation.

Jeff Norris: And the risk factors section of our annual and quarterly reports accessible at capital one website and filed with the SEC.

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

Young Andrew: Thanks, Jeff and good afternoon, everybody I will start on slide three of today's presentation.

In the fourth quarter capital, one earned $706 million or $1.67 per diluted common share.

Young Andrew: For the full year capital, one earned $4 9 billion or $11 95 per share.

Young Andrew: Included in the results for the fourth quarter with a $289 million accrual for our current estimate of the FDIC Special assessment.

Net of this adjusting item fourth quarter earnings per share were $2 24.

Young Andrew: And full year earnings per share were $12 52.

Young Andrew: On a linked quarter basis growth in our domestic card business drove period end loans up 2% and average loans up 1%.

Period end deposits increased 1% in the quarter and average deposits were flat.

Young Andrew: Our percentage of FDIC insured deposits grew to 82% of total deposits in the fourth quarter.

Young Andrew: Revenue in the linked quarter increased 1% driven by both higher net interest and noninterest income.

Young Andrew: Noninterest expense was up 18% in the quarter.

Young Andrew: Operating expense increased 15% with roughly half of that increase driven by the FDIC special assessment.

Young Andrew: The full year operating efficiency ratio net of adjustments improved 99 basis points to 43.54%.

Young Andrew: Provision expense was $2 $9 billion.

Young Andrew: Comprised of $2 5 billion of net charge offs and an allowance build of $326 million.

Young Andrew: Turning to slide four I will cover the allowance balance in greater detail.

Jeff Norris: The $326 million increase in allowance brings our total company allowance balance up to approximately $15 $3 billion as of December 31.

The total company coverage ratio is now $4, 77% up.

Jeff Norris: Up two basis points from the prior quarter, largely driven by a higher mix of card assets.

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

Jeff Norris: Outside of interest rates most of our economic assumptions are largely unchanged from the third quarter and we continue to assume several key economic variables modestly worse than from today's levels.

Jeff Norris: In our domestic card business.

Jeff Norris: Coverage ratio decreased by 16 basis points to 763%.

Jeff Norris: The allowance balance increased by $336 million.

Jeff Norris: The predominant driver of the increased allowance when the loan growth in the quarter.

Speaker Change: In our consumer banking segment.

Speaker Change: The allowance was essentially flat at roughly $2 billion.

Young Andrew: Coverage increased by four basis points to 271% driven by a decline in auto loans in the quarter.

Young Andrew: And finally in our commercial banking business the coverage ratio declined by three basis points to 171%.

Young Andrew: The allowance decreased by $37 million primarily.

Young Andrew: Really driven by the charge offs of office real estate loans in the quarter.

Young Andrew: We have included additional details on the office portfolio on slide 17 of Tonight's presentation.

Young Andrew: Turning to page six I'll now discuss liquidity.

Young Andrew: Total liquidity reserves in the quarter increased by $2 $3 billion to about 121 billion.

Young Andrew: The increase was driven by a higher market value of our investment securities portfolio.

Young Andrew: Partially offset by modestly lower cash balances.

Young Andrew: Our cash position ended the quarter at approximately $43 $3 billion down $1 6 billion from the prior quarter.

Young Andrew: You can see our preliminary average liquidity coverage ratio during the fourth quarter was 167% up from 155% in the third quarter.

Young Andrew: The increase in the LCR was driven by holding more of our cash balances at the parent company versus our banking subsidiary.

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

Young Andrew: Our fourth quarter net interest margin was 673%.

Young Andrew: Four basis points higher than last quarter, and 11 basis points lower than a year ago quarter.

Young Andrew: The quarter over quarter increase in NIM was largely driven by a continued mix shift towards card loans and higher asset yields partially offset by higher rate paid on deposits.

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

Young Andrew: Our common equity tier one capital ratio ended the quarter at 12, 9%.

Young Andrew: Ultimately 10 basis points lower than the prior quarter.

Young Andrew: Asset growth common and preferred dividends and the share repurchases more than offset net income in the quarter.

Rich: And with that I will turn the call over to rich rich.

Rich: Thanks, Andrew Good evening everyone.

Rich: Slide 10 shows fourth quarter results and our credit card business.

Rich: Credit card segment results are largely a function of our domestic card results and trends, which are shown on slide 11.

Andrew: Topline growth trends in the domestic card business remained strong even with growth moderating somewhat in the fourth quarter.

Andrew: Purchase volume for the fourth quarter was up 4% from the fourth quarter of last year ended.

Young Andrew: Ending loan balances increased $16 billion or about 12% year over year average loans increased 14%.

Young Andrew: Fourth quarter revenue was also up 14% year over year, driven by the growth in purchase volume and loans.

Young Andrew: The charge off rate for the quarter was up 213 basis points year over year to 5.35%.

The 30, plus delinquency rate at quarter end increased 118 basis points from the prior year to $4 six 1%.

Young Andrew: On a sequential quarter basis, the charge off rate was up 95 basis points and the 30 plus delinquency rate was up 30 basis points for the month of December the charge off rate was 578%, including a one time impact of 15 basis points.

Speaker Change: Described in a footnote in the monthly credit 8-K.

Speaker Change: Adjusted for this impact the monthly charge off rate for December would have been 563%.

Speaker Change: Pulling up on domestic card credit, we believe that normalization has run its course and credit results have stabilized.

Speaker Change: The 30 plus delinquency rate.

Speaker Change: Has been stable on a seasonally adjusted basis for a number of months now.

Speaker Change: Since August our monthly delinquency rate has been moving in line with normal seasonality and that stable ratios relative to the same month in 2018 and 2019.

Speaker Change: And at this point, we have a pretty good window into January as delinquency entries in December indicate continuing delinquency rates stability in January.

Young Andrew: We've always said that delinquencies are the leading indicator of where charge offs are going charge off rate tends to follow delinquency rate by about three to six months based.

Young Andrew: Based on the stability, we've seen in our delinquencies since August and extrapolating from our current delinquency inventories and flow rates. We believe the charge off rate is stabilizing now and settling out.

Young Andrew: To about 15% above 2019 levels.

Jeff Norris: I give this window because investors have been asking for quite some time, when we will charge offs level off.

Jeff Norris: So this is the point, where we see that happening, meaning charge offs should move more or less with seasonality in the coming months.

Jeff Norris: This window comes for modeling the flows in our delinquency buckets, which have stabilized and our recoveries, which have also stabilized and started to rebuild.

Jeff Norris: This isn't designed to be longer run guidance, but rather to indicate the charge offs are finally, moving more or less with seasonality over the near term in the longer run there could be additional forces such as potential pressure from economic worsening and potential benefits from the depletion of.

Jeff Norris: Deferred charge offs from the pandemic.

Jeff Norris: And recoveries picking up overtime from increased inventories.

Jeff Norris: Noninterest expense was up 11% compared to the fourth quarter of 2022 with increases in both operating expense and marketing expense.

Jeff Norris: Total company marketing expense of about one point to $5 billion for the quarter was up 12% year over year.

Young Andrew: Our choices in our card business 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. Our marketing continues to deliver strong new account growth across the <unk>.

Young Andrew: Domestic card business.

Young Andrew: And in the fourth quarter marketing also included higher media spend and increased marketing for franchise enhancements like our travel portal airport lounges and capital one shopping.

Young Andrew: We continued to lean 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.

Young Andrew: Slide 12 shows fourth quarter results for our consumer banking business in the fourth quarter auto originations declined 7% year over year driven.

Young Andrew: Driven by the decline in auto originations consumer banking, ending loans decreased about $4 $5 billion or 6% year over year on a linked quarter basis, ending loans were down 2%.

Young Andrew: We posted another strong.

Young Andrew: Quarter.

Young Andrew: Of year over year growth in federally insured consumer deposits.

Young Andrew: Fourth quarter ending deposits in the consumer bank were up about $26 billion or 9% year over year.

Young Andrew: Compared to the sequential quarter ending deposits were up about 2% average deposits were up 11% year over year and up 1% from the sequential quarter.

Young Andrew: Howard by our modern technology, and leading digital capabilities, our digital first national direct banking strategy continues to deliver strong consumer deposit growth and gradually increase the percentage of total company deposits better FDIC insured.

Young Andrew: Consumer banking revenue for the quarter was down about 17% year over year, largely driven by lower auto loan balances and higher deposit costs.

Young Andrew: Noninterest expense was down about 3% compared to the fourth quarter of 2022, lower operating expenses were partially offset by an increase in marketing to support our national Digital bank.

Young Andrew: The auto charge off rate for the quarter was $2, one 9% up 53 basis points year over year. The 30, plus delinquency rate was 6.34% up 72 basis points year over year.

Young Andrew: Compared to the linked quarter the charge off rate was up 42 basis points, while the 30 plus delinquency rate was up 70 basis points. Both of these linked quarter increases were in line with typical seasonal expectations.

Young Andrew: Monthly auto credit began to stabilize even earlier than domestic card credit results on a monthly basis auto delinquency rate and charge off rate had been tracking normal seasonal patterns. Since the first half of 2023 and continued to do so through December.

Young Andrew: Slide 13 shows fourth quarter results for our commercial banking business compared to the linked quarter ending loan balances decreased about 1%.

Young Andrew: Average loans were also down about 1%.

Jeff Norris: Modest declines are largely the result of choices, we made earlier in the year to tighten credit.

Jeff Norris: Ending deposits were down about 9% from the linked quarter average deposits were down about 7%. The declines are largely driven by our continuing choices.

Young Andrew: To manage down selected less attractive commercial deposit balances.

Young Andrew: Reducing these less attractive deposits also drove the 14 basis point linked quarter improvement in our average rate paid on commercial deposits.

Jeff Norris: Fourth quarter revenue was down 5% from the linked quarter noninterest expense was also down about 5%.

The commercial banking annualized charge off rate for the fourth quarter increased 28 basis points from the third quarter to 0.53%.

The commercial banking criticized performing loan rate was 8.81% up 73 basis points compared to the linked quarter. The criticized nonperforming loan rate was down six basis points to 0.84% commercial banking.

Jeff Norris: Credit trends were largely driven by continuing pressure in our commercial office portfolio slide.

Jeff Norris: Slide 17 of the fourth quarter 2023 results presentation shows additional information about the remaining commercial office portfolio, which is less than 1% of our total loans.

Jeff Norris: In closing, we continued to deliver solid results in the fourth quarter we.

Jeff Norris: We posted another strong quarter.

Jeff Norris: Of topline growth in domestic card revenue purchase volume and loans.

Jeff Norris: Domestic card and auto delinquency trends were in line with normal seasonal patterns, a continuing indicator of stabilizing consumer credit results.

Jeff Norris: We grew consumer deposits and total deposits and we added liquidity and maintain capital to further strengthen our already strong and resilient balance sheet.

Jeff Norris: Our annual operating efficiency ratio net of adjustments for the full year 2023.

Jeff Norris: It was 43.54%.

Jeff Norris: In 2023, we saw incremental opportunities and made choices to grow revenue and tightly manage costs to achieve a 99 basis point improvement.

Jeff Norris: And our annual operating efficiency ratio.

Jeff Norris: The actual improvement was better than the.

Jeff Norris: Quote modest improvement on quote we had been expecting.

Jeff Norris: Over the last decade, we've driven significant operating efficiency improvement, even as we've invested to transform our technology.

Jeff Norris: And we continue to drive for efficiency improvement over time.

Jeff Norris: For the full year 2024, we expect annual operating efficiency ratio net of adjustments will be flat to modestly down compared to 2023.

Jeff Norris: Our expectation includes the partial year impact of the proposed CFPB late fee rule, assuming that rule takes effect in October 2024.

Jeff Norris: Pulling way up our modern technology capabilities are generating an expanding set of opportunities across our businesses. We continue to drive improvements in underwriting modeling and marketing as we increasingly leverage machine learning at scale and our tech engine drives growth efficiency improvement and enduring.

Jeff Norris: Value creation over the long term.

Jeff Norris: We remained re we remain well positioned to deliver compelling long term shareholder value and to thrive in a broad range of possible economic scenarios.

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

Jeff: Thank you rich, we'll now start the Q&A session.

Jeff: Courtesy to other investors and analysts who may wish to ask a question. Please limit yourself to one question plus a single follow up.

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

Jeff: Amy please start the Q&A.

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

Jeff: And our first question comes from the line of Sanjay <unk> with <unk>. Your line is open.

Jeff: Thank you rich. Thank you for the color on the charge offs I know you cited the pluses and minuses from here.

Sanjay Sakhrani: Stabilizing charge offs, but I am curious if you feel like the consumer positioning leans towards improvement here as inflation declines real income growth has resumed and should interest rates come down this coupled with the recoveries could benefit the charge off rate correct I'm, just thinking sort of how to think about the reserve rate going forward.

Sanjay Sakhrani: Yeah. So.

Sanjay Sakhrani:

Sanjay Sakhrani: Sanjay.

Sanjay Sakhrani: Yeah. So first of all my comments I just want you know I I wanted.

Sanjay Sakhrani: With my credit comments in my sort of extrapolated look at our delinquency buckets I really wanted to share where our charge offs are settling out.

Sanjay Sakhrani: She is about 15% above 2019 levels.

Sanjay Sakhrani: And.

Sanjay Sakhrani: You know we we should also note by the way that in any year first half losses are seasonally higher than second half losses.

Sanjay Sakhrani: So within any normal year. The first half is the peak.

Sanjay Sakhrani: Now as I said, we're not really giving longer run guidance, but let's.

Sanjay Sakhrani: Think about the dynamics about how things could go from here.

Sanjay Sakhrani: From from an economy point of view, we're certainly in a.

Sanjay Sakhrani: And a strong economy unemployment set at a pretty remarkable place. So I think if anything you know.

Sanjay Sakhrani: Unemployment could have more downside than it as upside perhaps inflation has more.

Sanjay Sakhrani: Upside than it does downside, but I don't have any more insight to those then then than anybody else does.

Sanjay Sakhrani: Thank.

Sanjay Sakhrani: You know I also would want to.

Sanjay Sakhrani:

Sanjay Sakhrani: You know kind of reinforce your point there there are two good guys that should play out over time.

Sanjay Sakhrani: And you know we've been talking for a long time about the.

Sanjay Sakhrani: Delayed charge off effect from the pandemic and when you think about that the pandemic had said she had just absolutely unusual.

Sanjay Sakhrani: <unk>.

Sanjay Sakhrani: Experience for consumers with all of the stimulus and the forbearance.

Sanjay Sakhrani: And so on that.

Sanjay Sakhrani: We certainly have believed that charge offs that were otherwise going to happen at that time, you know some got averted permanently, but I think some got delayed and so this phenomenon that we call delayed charge offs I think as you know, it's it's not really quantifiable effect, but I think it's very much Ben.

Sanjay Sakhrani: You know a part of what's happening with it.

Sanjay Sakhrani: In the normalization and something that intuitively.

Sanjay Sakhrani: That will run its course.

Sanjay Sakhrani: And and the other thing is.

Recoveries, so recoveries or recoveries.

Sanjay Sakhrani: Well the you know the rate per charge off dollar remained strong the number of charge off dollars in inventory.

Sanjay Sakhrani: Thanks to the pandemic, where where you know a really depressed level and so you know we have bottomed out there and theyre starting to now.

Sanjay Sakhrani: Now inventories are starting to increase of course as credit has normalized in that.

Sanjay Sakhrani: Also gradually be a good guy.

Sanjay Sakhrani:

Sanjay Sakhrani: So when I look at our origination strategy and the underwriting choices we make.

Sanjay Sakhrani: These are consistent with longer term losses that are lower than where we are now. So you know we consciously sort of.

Sanjay Sakhrani: Focus to our credit commentary to really focus on where things settle out and then you know there's a list of forces that could work in either direction, but I think you certainly point out.

Sanjay Sakhrani: Some of the good guys.

Sanjay Sakhrani: Okay.

Andrew: Follow up maybe Andrew could you just talk about the reserve rate on a go forward basis, and how we should think about it should stabilize can it come down and then maybe just also on the NIM with rates coming down how we should think about the movement over the course of the year.

Andrew: Sure Sanjay let me compartmentalize those two things the NIM will be a whole separate answer.

Andrew: But with respect to allowance well, let me first start with.

Andrew: Just a tactical housekeeping item, which is a reminder that in Q4, we have some seasonal balances that you know quickly pay off in the first quarter and therefore have negligible coverage. So the coverage ratio in Q4 as modestly lower as a result of that dynamic and it reverses itself in Q1.

Andrew: Again, a real modest effect there longer term, though projected losses are really going to be the biggest driver of coverage.

Jeff Norris: You know as we've said before delinquencies are the best leading indicator of that enrich just provided a fulsome description of all of the forces at play there. So you know from a reserve perspective every quarter, we're just going to be looking at the next 12 months of projected losses with.

Jeff Norris: The first six more consequential in the calculation, but also far more predictable given the visibility that we have through through delinquencies and then the remainder of that window really informed by by economic assumptions.

Sanjay Sakhrani: And then the reversion to the long term average and so over the last few quarters things have played out consistent with or slightly better than what we've expected and you've seen the coverage ratio in card roughly stay flat. So I think it's important to to note.

Sanjay Sakhrani: Even in a period, where projected losses in future quarters are lower than today and might otherwise indicate a release.

Sanjay Sakhrani: We could very well see a coverage ratio that that remains flat or only modestly declines.

Sanjay Sakhrani: As we incorporate some of that uncertainty into the allowance, but eventually.

Sanjay Sakhrani: In a scenario like that after a period of coverage stability like we've seen you you would see coverage coming down and the release of a non growth related reserves.

Sanjay Sakhrani: NIM NIM I'm sure.

Sanjay Sakhrani: It's there's a lot of factors at play with with NIM and maybe I'll do the same housekeeping with NIM just to remind everyone that in the first quarter with a with one fewer day, where we're going to see roughly a seven basis point.

Headwind there, but let me then also and Numerate here, the puts and takes to to NIM.

Sanjay Sakhrani: On the tailwind side.

Sanjay Sakhrani: Growth in card balances as a percentage of the balance sheet and and even within those balances, possibly higher revolve rate.

Young Andrew: Certainly a tailwind and that's something we've seen over the last couple of quarters, and then also Oh, a lower cash balance we've talked about this before but you know cash balances today you know in total of 43 billion I think the number is with about 37 billion at the fed.

Young Andrew: There's quite a bit higher than pre pandemic I don't think we'll get back to.

Young Andrew: Where we were pre pandemic, but I would expect over time that will come down from today's level. So that would also be a <unk>.

Sanjay Sakhrani: And to to NIM on the headwind side.

Sanjay Sakhrani: Right.

Sanjay Sakhrani: Even though the fed has stopped.

Sanjay Sakhrani: Moving up in July we continue to see some deposit product rotation and it creates a bit of upward pressure to our to the deposit betas.

Sanjay Sakhrani: And then even if the fed starts decreasing rates, we're going to see the assets reprice more quickly than than the deposits and you know the competitive environment and the backdrop of Q T will potentially have an impact on betas on a downward cycle.

Sanjay Sakhrani: So that would create a bit of a regular but.

Sanjay Sakhrani: And pressure.

Sanjay Sakhrani: And then a couple of other things that I would just highlight as potential headwinds you know the uncertainty around potential regulatory changes that could impact interest income as.

Sanjay Sakhrani: As well as just the path of credit you've seen suppression go up over the last few quarters as losses go up so that also creates some pressure to to NIM. So I know that that was a list of puts and takes but I partially go into that level of detail to say it it's kind of hard to say where NIM.

Sanjay Sakhrani: He's going to go in the near term, especially because the path of interest rates.

Sanjay Sakhrani: <unk> fairly wide at this point, but kind of gives you a sense of all of the forces at play but over the much longer term I would say, there's nothing really structurally different about our balance sheet from where it was pre pandemic that that leads me to believe that NIM will be materially different.

Then.

And then where it was based on at least what we know today.

Sanjay Sakhrani: Next question please.

Sanjay Sakhrani: Our next question comes from the line of.

Sanjay Sakhrani: Ryan Nash with Goldman Sachs. Your line is open.

Ryan Nash: Hey, good evening everyone.

Ryan Nash: Hey, Ryan.

Ryan Nash: Rich when I look you put about $4 billion of marketing expense for the second straight year, and you're continuing to drive strong growth.

We're hearing about some others with a little bit of a more cautious tone on growth. So maybe just talk about are you leaning in and do you expect marketing to increase and really where you're seeing the best opportunities in the market and how are you thinking about growth looking ahead, thanks, and I have a follow up.

Ryan Nash: Ah Okay. Thanks Ryan.

Ryan Nash: We feel very.

Ryan Nash: Good about.

Ryan Nash: The opportunities in the marketplace. So we are leaning in where we're definitely leaning in.

Ryan Nash: You can see obviously.

Ryan Nash: You know there was quite a lot of marketing in the fourth quarter, but.

Ryan Nash: We continue to see opportunities across the board, especially in the card business, but.

Ryan Nash: So.

Ryan Nash:

Ryan Nash: Just pulling up there are a few key factors driving our marketing that we want to continue to emphasize first of all we're just really excited about the growth opportunities across our business.

Ryan Nash: We're making.

Ryan Nash: We have over the last number of of years made some what we call sort of adjustments around the edges and trimming around.

Ryan Nash: Around the edges.

Ryan Nash: Lately, there's really even not a lot of trimming around the edges, where in a very sort of stable place with respect to.

Ryan Nash: You know the business, we're going after the results, we're getting and the and the.

Ryan Nash: The you know the deal that we have to capitalize on that.

Ryan Nash: And I think our technology transformation of course has really been beneficial, but it allows us to leverage more data.

Ryan Nash: And more machine learning models to identify basically more attractive opportunities for investment and to create better and more customized solutions for customers along the way.

Ryan Nash: So so.

Ryan Nash: So just the overall opportunities continue to be very strong the second.

Ryan Nash: Part of our marketing investment of course relates to our quest to win at the top of the market and.

No we've been going after heavy spenders now for almost 15 years and.

Ryan Nash: That need sustained high levels of investment and you can see those out in the marketplace and flagship products and groundbreaking experiences like.

Ryan Nash: I.

Ryan Nash: Things like.

Ryan Nash: Best in class digital customer experiences.

Ryan Nash: A really high level elite customer servicing.

Speaker Change: Online travel portal and you know and the.

Speaker Change: In the intersection of risk management in the quest to go to the top of the market. The incredible importance of advanced fraud defense is to ensure that the car it always works.

Speaker Change: And increasingly we're also just you know rolling out exclusive services and experiences that aren't available in the general marketplace, such as airport lounges and access to select properties.

Speaker Change: So.

Speaker Change: So we continue to lean into growth here, and obviously, you know that quest towards the top of the market and involves quite a bit of marketing investment and a lot of upfront investment for annuities that.

Speaker Change: Or just a wonderful long lasting a fabulous annuities and the third.

Speaker Change: Vector of real marketing investment is our continuing.

Speaker Change:

Speaker Change: Efforts to build our National Bank and you know just as a reminder, we have a smaller branch footprint and so we lean more heavily on our technology investments our digital experiences our cafe network.

Speaker Change: Our brand and marketing investments to continue to organically build this national Bank and we are really pleased with the traction there and.

Ryan Nash: It's been a lot of years in the making but we are definitely leaning in there and loved the results. So Ryan.

Ryan: Ryan those are kind of a window into how we're thinking about it and the compelling opportunities behind.

Ryan: You know you know across the board that we see and we are continuing to capitalize on the opportunity as we see it.

Ryan: Got it and.

Ryan: Rich if you put late fees aside for the first part of my question you talked about stable to modest improvement, which ex late fees would imply continued improvement on the operating efficiency do you think we're back X late fees on a sustained journey of improving efficiency like you were talking about before the pandemic and then second just how are you.

Rich: Thinking about the timing of offsetting late fees. Thank you.

Rich: Yeah.

Rich: Yeah. Thank.

Rich: Thank you so.

Rich: You know the we our story about efficiency I think has been a very consistent story for a bunch of years and it's it's I think a lot of companies drive efficiency by just continuing to cut costs on their way to greatness.

And we are certainly put a lot of energy into into the car side of our business, but really it's been about building a business model powered by <unk>.

Rich: Our technology and our.

Rich: You know the customer experiences we're building to drive revenue growth.

Sanjay Sakhrani: And our efficiency.

Sanjay Sakhrani: And and you know both at the same time and we've.

Sanjay Sakhrani: Talked about how so much of this is powered by technology and we continue to see the benefits of that so we at the on the one hand keep leaning into technology and keep investing there and on the other hand see a growing.

Sanjay Sakhrani: You know opportunities to drive efficiency as a beneficiary of the technology investments so pulling way up.

Sanjay Sakhrani: Any particular year can go be different from overall trends.

Sanjay Sakhrani: We continue to believe.

Sanjay Sakhrani: Believes that an important part of the value proposition with investors and the benefit of the years of investment we're making is to continue to drive.

Sanjay Sakhrani: Greater operating efficiency.

Sanjay Sakhrani: So did you did you have a CFPB question, yes, So let me.

Ryan Nash: Turn Ryan to talk about that.

Ryan Nash: So.

Ryan: The CFPB is late fee proposal as currently conflict contemplated would reduce late fees by approximately 75%.

Ryan: While the Cfpb's proposal has not been finalized we expect the.

Ryan: The CFPB to publish a proposal soon and once the CFPB publishes its final rule, we expect there to be industry litigation that could delay or blocked the implementation of the rule.

Ryan: This litigation will likely delay the implementation of the rule until at least the second half of this year and and you know maybe longer.

Ryan: You saw we talked about an estimate of October.

Ryan: If the proposed rule is implemented there will be a significant impact to our P&L in the near term relative to what our path would have been however.

Sanjay Sakhrani: 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 and these choices include changes to our policies our products and investment choices.

Sanjay Sakhrani: And some of these actions will take place before the rule change takes effect and a fewer already underway. Many will come after the rule change takes effect.

Sanjay Sakhrani: Next question please.

Sanjay Sakhrani: Our next question comes from the line of.

Sanjay Sakhrani: Erin <unk> with Citi. Your line is open.

Sanjay Sakhrani: Thanks Hope.

Sanjay Sakhrani: Can you talk a little bit about the auto business you continue to kind of pull back a little bit from from that side thinking about how you're feeling about potentially increasing some origination still still a healthy amount of originations at 27 billion. This year, but I'm just wondering when you might make a pivot there.

Hope: Thanks, Erin so we've been cautious in auto for a couple of years now.

Hope: We've noted over this period of time, a number of headwinds in the business.

Erin Smith: So, let's just tally them up margin pressure from the interest rate cycle.

Erin Smith: Normalizing credit.

Erin Smith: Vehicle values normalizing from their all time highs and affordability pressures stemming from the combined effects of elevated interest rate and still high car prices.

Erin Smith: As you know, we don't work backwards from growth targets and we remained.

Erin Smith: Disciplined in our originations setting pricing and terms that we're comfortable with and then take what the market gives us.

Erin Smith: So back in 2022.

Erin Smith: We raised price tightened our credit box at the low end of the market.

Erin Smith: And took other steps to manage the resilience of our lending.

Erin Smith: And as a result, our run rate of originations has been lower than.

Erin Smith: Like two years ago.

Erin Smith: But as a result of our actions we've been just very pleased with the performance of our auto originations. The credit performance has been really striking which of course you can see.

Erin Smith: So even as vehicle values continue to normalize.

Erin Smith: Risk on our most recent originations from from 2023.

Erin Smith: [noise] remains below what we saw in our pre pandemic originations probably as the result of our actions and vintage over vintage that risk remains stable.

Erin Smith: The margins on new originations have improved as well, particularly over the last couple of months as interest rates have come down from their recent peaks. So we feel quite good about the performance of our auto originations. So we continue to adjust our strategies, where we see opportunities for growth or emerging risks.

Erin Smith: But of course, that's what we always do but.

Erin Smith: You know when we when we think about some of the headwinds I think some of those headwinds are easing and the results that we're seeing on our own.

Erin Smith: Book are really pretty striking and gratifying so.

Erin Smith: That gives us a.

Erin Smith: You know a more bullish outlook.

Erin Smith: Still with a note of caution.

Erin Smith: Thank you.

Erin Smith: Next question please.

Erin Smith: Our next question comes from the line of Rick Shane with J P. Morgan Your line is open.

Rick Shane: Thanks for taking my questions. This afternoon.

Rick Shane: Hey, rich you've given some sort of framework for charge offs into 'twenty four one of the.

For patients we would make is that delinquencies.

Rick Shane: Even through December on a year over year basis due are trending.

Our off on a year over year basis, even though that increase has slowed substantially.

Rick Shane: That suggests very consistent with your description that charge offs will continue to rise through the first half of the year. What I'm curious about is given the delinquencies are still up 100 basis points to 115 basis points year over year in December when we look into the second half of the year I.

Sanjay Sakhrani: <unk> seasonally that they will be down but would you expect the charge offs in the second half of the year will still be up versus 'twenty three.

Sanjay Sakhrani: So I I think the best.

Sanjay Sakhrani: Way to think about this.

Sanjay Sakhrani: Is.

Sanjay Sakhrani: To focus on the most.

Sanjay Sakhrani: Stable benchmarks is where our focus here is about stability. So we're really looking at what are the most stable benchmarks that we can anchor to.

Sanjay Sakhrani: And and that.

Sanjay Sakhrani: Really leads us back to 2019 2018.

Sanjay Sakhrani: And so let me, let me just sort of speak in that.

Sanjay Sakhrani: Double click a little bit into my comments on that.

Sanjay Sakhrani: No.

Sanjay Sakhrani: Our delinquencies are above pre pandemic levels, but they've been tracking with normal seasonality for quite some time.

Sanjay Sakhrani: And now compared to 2019 since August were running around 17% above the level for the same month of 2019.

Sanjay Sakhrani: Compared to 2018.

Sanjay Sakhrani: Since may.

Sanjay Sakhrani: We're running at around 13% above the level for the same month of 2018.

And at this point, we have a pretty good window into January January of 'twenty 'twenty four.

Sanjay Sakhrani: As well based on delinquency entries in December and that looks like it's going to be another month of stability.

Sanjay Sakhrani: So we feel confident declaring that our delinquencies have stabilized.

Sanjay Sakhrani: Of course delinquencies are our best leading indicator of credit performance.

Sanjay Sakhrani: Our charge offs have been catching up to the stabilizing trend in our delinquencies over the second half of 2023.

Sanjay Sakhrani: But at this point.

Sanjay Sakhrani: What we're declaring here is that our charge offs are leveling off as well.

Sanjay Sakhrani: Now there's more month to month volatility in charge offs, then in delinquencies by by by quite a bit big.

Sanjay Sakhrani: Because every data point of delinquencies includes five months of delinquency inventories.

Sanjay Sakhrani: And of course charge offs is looking at the relatively small number that falls off at the end of the last bucket.

Sanjay Sakhrani: And there was also some noise in the fourth quarter of 2019 that makes it less reliable as a charge off benchmark. So we actually think 2018.

Sanjay Sakhrani: Is an even better benchmark for our charge offs.

Sanjay Sakhrani: For comparing our charge offs in this fourth quarter that just happened to our past stable year.

Sanjay Sakhrani: In the fourth quarter, our net charge offs were about 15% above 2018 levels and of course 2018 rolled into 2019. So that's an appropriate benchmark to look at as we head into 2024 and compare to 2019.

Sanjay Sakhrani: Now when we look ahead extrapolating from our current delinquency inventories and recent flow rates, we conclude that our net charge offs are stabilizing at about 15% above 2019.

Sanjay Sakhrani: With of course, some typical month to month volatility and normal seasonality.

Sanjay Sakhrani: Now of course, the seeds of this stabilization had been planted for quite a long time, now and partly driven by the choices that we made back in 2020 in 2021.

Rick Shane: Coming out of the pandemic, we were concerned about two trends fin.

Rick Shane: <unk> were flooding the market, especially the subprime market with credit offers creating the potential for credit worsening and adverse selection in our originations. We also anticipated that pandemic era stimulus in forbearance would temporarily inflate consumer credit scores.

And that these would revert overtime.

So we tightened our underwriting in anticipation of these effects and we have continued to make adjustments at the margin since then.

Rick Shane: And the result has been striking.

Rick Shane: That with all the kind of changes the normalization all of the noise over the last number of years.

Rick Shane: That there has been strikingly stable performance on our origination vintages.

Rick Shane: In our basically and our post pandemic originations each quarterly vintage for a given segment has been more or less on top of each.

Rick Shane: Each other.

And also relatively consistent with pre pandemic vintages and over time. This just created a lot of stability that increasingly moved into our portfolio and it contributed to the stabilization of our portfolio credit trends and as we've looked at this we said these are very.

Rick Shane: Good shoulders to stand on to have that much stabilization for so long we of course, all still waited to see exactly the manifestations ultimately of the portfolio stabilizing.

Rick Shane: Another factor.

Rick Shane: Contributing to stabilization as our recovery rate and.

Rick Shane: Unusually low recoveries have been the largest driver of our overall charge off.

Rick Shane: Right running above pre pandemic levels.

Rick Shane: And this is of course because of the very low level of charge offs over the past three years and therefore, we had a low level of raw material for future recoveries and by the way just to capital. One point here. This is a larger effect for us than for most 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 not all at once like in a debt sale.

Rick Shane: And so we've recently observed that our recovery rate has stabilized and started to tick back up and that's R and and you know and know that our recoveries inventory has started to rebuild that's of course, a good guy, although it's coming from a pretty low level and this also contributes.

Rick Shane: Two our confidence that our overall loss trends have stabilized.

Rick Shane: So when you to your question, where you at compare to 2023, what we've really done is really kind of anchor our benchmarking to the most stable years in sort of recent experience 20.

Rick Shane: <unk> 28.

Rick Shane: 2018, and 2019 and since we've seen delinquencies and charge offs stabilize relative.

Relative to you know.

Like quarters in in in those benchmarks.

Rick Shane: We felt the best the best language with which to describe where things are settling out is to do it as a multiple of those two generally stable years and so we are entering 2024, now with a real sense of stability and and we.

Rick Shane: Benchmark, where we are.

Rick Shane: As a multiple of those two.

Rick Shane: Stable year benchmarks.

Rick Shane: Next question please.

Rick Shane: Our next question comes from the line of Moshe Orenbuch with TD Cowen Your line is open.

Rick Shane: Great. Thanks, maybe rich just following up on that.

Rick Shane: I think that a lot of the marketing dollars in the card space spend with you.

Rick Shane: You don't want to transact their business, but given that that's.

Moshe Ari Orenbuch: That stability, but you're talking about it and I assume the bulk of the dollars of loss.

Moshe Ari Orenbuch: A link with GM loss are coming from you know kind of the lower end of the card spectrum.

Moshe Ari Orenbuch: So does that mean that that's an area for expansion in 2020 for like how should we think about that and I do have a follow up.

Moshe Ari Orenbuch: Sorry, Moshe are you, saying is what is the is the lower end and area for expansion.

Yes.

Moshe Ari Orenbuch: So.

Moshe Ari Orenbuch: We.

We feel we feel good about all of our segments across the credit spectrum in card and also the relative health of the consumer and <unk>.

Moshe Ari Orenbuch: You've known us for a long time motion as long as we have.

The decades, we've been.

Moshe Ari Orenbuch: Talking together.

Moshe Ari Orenbuch: You know that we have have a long history of delivering sustained resilience and profitability at the lower end of the marketplace and.

Moshe Ari Orenbuch: We.

Moshe Ari Orenbuch: But let's just reflect on this for a second if you're talking about subprime credit card. This is a complex business that requires deep investment in information based underwriting and of course, we've spent decades developing and testing tailored.

Moshe Ari Orenbuch: Tailored product structures and sort of honing the analytical and the operating and underwriting and marketing capabilities to attract and serve this.

Moshe Ari Orenbuch: This franchise, but also with the number one and two and three most important things to US has been resilient as we do this.

Moshe Ari Orenbuch: And.

Moshe Ari Orenbuch: What's really been pretty striking is how consistent our strategy has been over the years.

Moshe Ari Orenbuch: Through the great recession and.

Moshe Ari Orenbuch: And following that.

Moshe Ari Orenbuch: And if we are.

And we've talked about how the lower end of the marketplace, whether you're talking.

Moshe Ari Orenbuch: By the way, there's a whole when I talk about the lower end of the marketplace. Obviously, we.

There's a whole part of the marketplace that capital one doesn't serve but in terms of the lower end of the marketplace that we serve.

Moshe Ari Orenbuch: If you look at either income or.

Moshe Ari Orenbuch:

Moshe Ari Orenbuch: FICO and look at the.

Moshe Ari Orenbuch: The the normalization that's going on we've seen very solid curing in that part of the market.

Moshe Ari Orenbuch: In fact, even started it cleared a little bit earlier than some of the some of the other parts of the market, but the curing story. The leveling off story, we're talking about today is absolutely across the board I do want to say, though also moshe relative to your point.

Moshe Ari Orenbuch: <unk> had fintech, who we were very concerned about flooding that end of the market. Some years ago. They certainly have you know massively.

Moshe Ari Orenbuch: Dialed back and I think that the continued.

Moshe Ari Orenbuch: When we see the success of our vintages the stabilization now the sort of stabilization over all of capital one's whole portfolio and the dynamics in the marketplace I think that we are.

Like the opportunities, we see there Moshe and we will be leaning into that.

Moshe Ari Orenbuch: Great and just as a follow up I mean, you've talked in the past about not just the financial impact of the late fee, but also its deterrent.

Moshe Ari Orenbuch: Impact.

Erin Smith: How do you think about that in terms of the resilience of.

Erin Smith: That segment as we go forward post any changes to late fees and.

Erin Smith: Maybe just as a as a side point you did mentioned that you thought you could.

Erin Smith: The efficiency ratio, even with the late fee I mean that just seems it seems like like you'd have to take a couple of hundred million dollars out of there.

Erin Smith: You know out of expenses to do that so.

Erin Smith: If there's a way to talk about what how that would happen and tack that on to the answer that would help too. Thanks.

Erin Smith: So moshe.

Erin Smith: Capital one has pursued a strategy for the.

Erin Smith: Many years.

Erin Smith: Trying to create and deliver to the marketplace.

Erin Smith: Strikingly simple products, because we have some.

Erin Smith: Sort of a mission and strategy point of view, we believe so much in this but and we built a brand over.

Erin Smith: Having you know very simple.

Erin Smith: <unk> and <unk>.

Erin Smith: So things like for example on the banking side.

Erin Smith: No.

Erin Smith: You know no minimum balance requirements.

Erin Smith: You know no membership fees and even no overdraft fees. So here. We are a company that is really really reduced the fees, but you know if.

Erin Smith: If we add one fee left I think you know the fee we would most hang on too is the late fee because to your point. It plays a very important role in the deterrent Val.

Erin Smith: Value to it.

Erin Smith: Our consumer and an analogy that we sometimes use is you know a speeding ticket.

Erin Smith: I think that.

Erin Smith: You know if a speeding ticket were.

Erin Smith: Let's say, we had an $8 speeding ticket I'm not sure that that you know our highways would would be quite as safe as they are now because if we're really trying to deter behavior that we think is.

Erin Smith: Really you.

Erin Smith: Consequential for people that really is the role of the fee we've been very active in giving alerts to all of our customers.

Erin Smith: Late payment payment due alerts with a goal of trying to not trying to maximize late fees, but actually trying to.

Erin Smith: Maximize the on payment.

Erin Smith: Performance of our customers. So Moshe this is a question.

Erin Smith: That that.

Moshe Ari Orenbuch: We've been worried about your question about the what could be the impact on credit performance of individuals' and it's something that we're just gonna have to.

Moshe Ari Orenbuch: If this CFPB rule goes into effect, we're all going to experience together.

Of this you know not controlled experiment, but we certainly mark us down for having a concern about that but from a financial point of view.

Moshe Ari Orenbuch: Obviously the late fees.

Moshe Ari Orenbuch: You know are an important.

Moshe Ari Orenbuch: The thing on the on the P&L.

Moshe Ari Orenbuch: And as.

Moshe Ari Orenbuch: As I've talked about we have created a set of many actions across different types of things from policies.

Moshe Ari Orenbuch: Our products pricing structures.

Moshe Ari Orenbuch: Investment choices to two.

Moshe Ari Orenbuch: Claw back the very significant economic.

Ryan Nash: Economic impact.

Ryan Nash: Some of those things are underway some of them just to mention it by the way by the time, we get there when when.

Rick Shane: When the rule is announced some of the offsets are going to buy then be into the <unk>.

Into the run rate of the company and have a majority will still be.

Rick Shane: Waiting to to happen with respect to the fourth quarter.

Ryan Nash: You know the 25 is the big full year effect, obviously something coming in late in the fourth if something coming in and our estimate in the fourth quarter.

Sanjay Sakhrani: Doesn't have as much impact on the annual.

<unk> ratio, but it still does have an impact so essentially whats implied underneath it is quite a bit of progress on the efficiency ratio.

Sanjay Sakhrani: Heinz are flat to modestly down guidance that includes that fourth quarter effect.

Sanjay Sakhrani: Next question please.

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

Hi, Thanks for taking my call in the interest of time given its late in the call I'll ask my two parter.

Sanjay Sakhrani: All upfront here first on the marketing side.

John Hecht: Do you expect to continue.

John Hecht: Continue to lean in on marketing this year does that.

Ryan Nash: What does that imply in on how you're thinking about full year marketing expense.

You'll see marketing came in above the 4 billion level that you saw this year or could it be stable or modest decline and then my second question is on the credit side and on the commercial real estate office CRE I know you had some lumpy losses this quarter and some.

Ryan Nash: Pressure still in criticized and non accruals did you can just give us a little bit more color. There in terms of what you charged off in your outlook on that front. Thank you.

John: Uh huh, Okay, John Thanks for your good questions here.

John: We don't we don't typically give.

John: You know full year marketing guidance and the reason is because.

John: Marketing depends of course, a lot on the opportunities that we see when we get there so what I wanted to just share and in.

John Hecht: In response to Ryan Nash is question is a continuation in the positivity that we feel both about the.

John Hecht: You know real time numbers, we're seeing a response and performance of our vintages and all of that and then also the sort of more structural investments that we're making in the business, particularly with respect to the.

Ryan Nash: We are going after the heavy spenders so you.

Ryan Nash: We don't have full year guidance, but we certainly.

Ryan Nash: Continue to like the opportunities that we see.

Ryan Nash: And then John on the office side, it's virtually impossible to generalize office. It is incredibly property specific we've talked in the past about us having a fair amount in gateway cities and having a mix of both.

John: N D C properties, but frankly, the decomposition matters, a whole lot less than the individual properties and so what we saw in the quarter was a little more than $80 million.

John: Of losses tied to office loans.

John: We continue to not originate their balances have come down to.

John: How about $2 3 billion I think down about 100 and.

John: $50 million in the quarter, it's less than 1% of our total loans, but as we charged off in the quarter. We had essentially reserved entirely for that amount and then we built back up a little bit for the remaining portfolio to maintain the coverage.

John: At around are around 13%.

John: Next question please.

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

Speaker Change: Rich.

Rick Shane: Made a lot of progress on heavy spenders.

Rick Shane: As you sort of look out where are we I guess on that expense cycle are.

Rick Shane: Are we sort of still looking at many years of acceleration or do you have some type of a level, where there's some scale kicking in and I was just trying to get a sense on where we are on that investment cycle.

Rick Shane: Well done it certainly well I think the quest.

Rick Shane: Two the heavy spender to win in the heavy spender of the marketplace It will be.

Rick Shane: A quest as far out as we can see in the same way it is for.

Rick Shane: The players who the small number of players who.

Ryan Nash: Are really going after that business. The key part of it is we're getting more and more scale along the way. So you you've seen.

Ryan Nash: You know over the years the growth in purchase volume, which you don't see is the.

Ryan Nash: <unk>.

Ryan Nash: The purchase volume growth rates by level of Spender and monitor any any segmentation we've been looking at it at monotonically the growth rates monotonically faster, but the more you go up.

Ryan Nash: The.

Ryan Nash: Towards the heavy spenders, so its just indicating we're getting a lot of traction there. So I wouldn't want to say that.

Erin Smith: That you know, we just have to do a Blitz and then we're kind of done with the investment that the way that that scale is achieved is by getting more and more customers in a business where all of the players in the business, even including the largest continue to invest in that business, but we're really pleased with the traction.

Erin Smith: And.

Erin Smith: That's why we continue to invest.

Erin Smith: That's all I had.

Erin Smith: Next question please.

Speaker Change: Our next question comes from Bill Kirk Patchy with Wolfe Research Your line is open.

Andrew: Thank you good evening rich and Andrew I appreciate all of the very clear commentary on what Youre seeing in credit.

Rick Shane: There's a view that if we'd had a mild recession and experienced a purging of weaker credits that that would have provided a clear runway for growth coming out of that but instead the environment. We're in is arguably a little bit muddier than some would stay still late cycle could you speak to that dynamic rich and whether that weighs on how youre thinking about growth.

Andrew: I'm here in any way and as a follow up I'll just ask it now for you Andrew can you update us on how youre thinking about capital return from here.

Andrew: Sure.

Andrew: Art.

Andrew: Bill.

Andrew: Look at this point there still remains a number of.

Andrew: Uncertainty around capital not the least of which is the end game proposal. We're all aware there's been a quite a bit of of advocacy there and there remains a fair amount of uncertainty of where the rule will land him including.

Rick Shane: Things like the impact of the OCI and phase in and ops risk and other forces at play.

Erin Smith: So we're you know as much as we do and we're waiting to see what the final rule holds there but in addition to that you know we're coming up on CCAR, we don't yet have the scenarios for this year you look back at how impactful the scenario as well as the starting balance sheet is to those out.

Erin Smith: You've seen our SCB fluctuate over the last four years for them I think 10, one down to two seven and now we're sitting here at 93, so waiting to get a little bit more clarity of what CCAR will hold and then in addition, we continue to see a range of outcomes in our own growth projections.

Erin Smith: And and finally I'll just point to the economy there is.

Erin Smith: The consensus view is growing of a soft landing them, but theres still quite a wide range of outcomes there.

Erin Smith: And so given all of those factors, we've chosen to to operate for the last few quarters around 13%, we recognize that our you know what.

Rick Shane: We feel like we're in excess capital position that returning it is one way to create value and under the SCB.

Rick Shane: C. B framework, you know, we have that flexibility to manage repurchases dynamically and we will use that flexibility when when we think it's prudent to do so.

Rick Shane: Bill comment on our continuing to lean in a given that.

Rick Shane: Some people might argue that the.

Rick Shane: The.

Rick Shane: Make environment as late cycle. So it's certainly a great question.

Rick Shane: So.

There first of all the bottom line is we are continuing to lean in and obviously, we keep a wary eye out for.

Rick Shane: Things that could change, but I sort of start with the health of the consumer I think the U S. Consumer remains a source of strength in the overall economy and the labor market has proven strikingly resilient over the past year really defining the expectations of many economists in the face of rising interest rates.

Rick Shane: Consumer debt servicing burdens remain relatively low by historical standards again, despite rising interest rates home prices.

Rick Shane: You know our.

Rick Shane: Our.

Rick Shane: You know back end doing.

Rick Shane: A bit better and are generally near all time highs in aggregate consumers across all income levels still have excess savings also from the pandemic. Although those numbers are declining inflation has moderated to the point that real wages are growing again after shrinking for almost two years.

Rick Shane: You know student loan repayments now they resumed in October, but there's the 12 months on ramp period, and a new income driven repayment plan, which will significantly reduce payments for lower income borrowers.

Rick Shane: So.

Rick Shane: On the whole I'd say consumers are in really quite good shape relative to most historical.

Rick Shane: Benchmarks.

Rick Shane: And then if we look inside our own portfolio, we still see higher average payments compared to 2019 by segment by really pretty sizable delta.

Rick Shane: You know we.

Rick Shane: Then.

Rick Shane: We then look at the at the marketplace and you've seen it in the auto business how at times, we get alarmed by some of the practices or the pricing in the industry and we pulled back.

Rick Shane: In ways that we haven't pulled back in the card business, but I think we see a rational and stable competitive marketplace is very competitive, but it's rational and it's stable and then most importantly, the results themselves.

Rick Shane: The our vintages just continue to come in on top of prior vintages.

Rick Shane: The trimming around the edges that we've done over the last few years of really I think allowed our results to have a stability to them that even.

Rick Shane: As diverged from the sort of underlying I'm not as good performance of <unk>.

Rick Shane: In the marketplace of things recently compared to the past, but we have that real stability.

Rick Shane: Then we see that the the leveling off of our portfolio.

Rick Shane: And.

Rick Shane: Really we talk about our charge offs leveling off.

Rick Shane: At a level that's a you.

Rick Shane: You know like 15% above.

Rick Shane: Above.

Rick Shane: 2019, you know.

Rick Shane: It's interesting actually that's net charge offs, but gross charge offs are leveling off very close to the gross charge off levels of 2018 and 2019.

Rick Shane: And and actually the thing that that that creates the differential.

Rick Shane: Is the lower recoveries that we've had for.

Rick Shane: As you know in the wake of the.

Rick Shane: Inventory of recoveries being so much lower inventory of charge off debt, so pulling way up and seeing the traction in our business. The success with our brand the things that you know for competitive reasons, we don't share in the marketplace, but the traction on the tech side.

Rick Shane: In terms of enabling us to create a better really unique customized customer experiences totally customized underwriting.

Rick Shane: <unk>.

Rick Shane: You know the reaching out to you know marketing.

Rick Shane: Marketing channels that we hadn't even tapped before all of this is putting us in a position.

Rick Shane: To.

Rick Shane: Continue to you know pulling way up.

Rick Shane: Obviously in the credit business, we always worry a lot, but if I calibrate this relative to a lot of other times you know I feel really quite good about this and I actually said I felt a lot less good.

Rick Shane: A couple of years ago, because I felt that the pandemic, while you know from a credit point of view, who couldn't like those credit results I said it actually is so an abnormally good.

Rick Shane: The marketplace won't be able to help itself, but create unusual.

Rick Shane: Our practices.

Rick Shane: Unreserved underwriting et cetera, so actually what we've had if I can borrow the soft landing term from from the economy conversations is kind of a soft landing relative to the credit business and landing is really quite the right word relative to capital, one which I think.

Rick Shane: Really as I've kind of declared today is sort of landed here and I know some competitors still haven't fully landed but pulling.

Pulling way up on this I actually feel this is really quite a good time, if I calibrate too.

Rick Shane: All the times over the years and this.

Rick Shane: Our exciting journey.

Rick Shane: Next question please.

Rick Shane: Our final question comes from the line of.

Rick Shane: Yeah.

Rick Shane: Dominic Gabriel with Oppenheimer. Your line is open.

Rick Shane: Hey, great. Thanks, so much for all the color on the call today.

Rick Shane:

Dominic Gabriel: I just have two questions rich.

Dominic Gabriel: What are you seeing do you think that's making the net charge offs stabilize 15% above 2019 levels is there something in the consumer payment behavior that has changed.

Dominic Gabriel: Is there something that you think that shifted the consumer.

Dominic Gabriel: In general where the credit card industry may be seeing a higher through the cycle net charge off rate going forward or for capital one in particular and I just have a follow up thanks so much.

Dominic Gabriel: So.

I actually.

Dominic Gabriel: Yeah.

Dominic Gabriel: Believe that what we're really seeing here.

Dominic Gabriel: Is a.

Dominic Gabriel: Credit situation, that's very similar to pre pandemic.

Dominic Gabriel: It it is showing up right now and I'm going to speak through the capital one lens I think you know I'm not going to universal life for the industry, but.

Dominic Gabriel:

Dominic Gabriel: As I mentioned in the in the.

Dominic Gabriel: Two the prior answer there.

Dominic Gabriel: At.

Dominic Gabriel: If you look at gross charge offs, where they're settling out for capital. One now. This is capital one that has done a lot of trimming around the edges over the last.

Dominic Gabriel: As you know.

Dominic Gabriel: Fair amount of trimming around the edges I think we also did a very important choice that I'm not sure was universe. It might've been an unusual choice.

Dominic Gabriel: But when we saw the.

Dominic Gabriel: Incredibly.

Strong credit performance of consumer as much of it driven by stimulus in forbearance.

Dominic Gabriel: We sort of became alarmed about credit score great inflation, if you will and essentially intervened in our models too.

Dominic Gabriel: To normalize.

John Hecht: So that we didn't get fooled by that but.

John Hecht: It's this is the end.

John Hecht: <unk>.

John Hecht: So.

John Hecht: As a result of that we have stabilized.

John Hecht: We're probably one of the first players to stabilize and we've stabilized at this moment.

Speaker Change: At 15% above 20.

Speaker Change: Say benchmark to 2019 levels.

Speaker Change: Already we said that that number from a gross charge off number is is really sort of very close to 2019 levels. So the recoveries effect, which is a temporary effect that our that our recoveries are.

Speaker Change: Our.

Speaker Change: So much lower because they just don't have as much inventory of charge offs to collect on that's a good guy that should help over time.

Speaker Change: So I think also as we've talked about and we've talked about ever since the pandemic sort of we started coming out the other side of the pandemic. We said there is another effect.

Speaker Change: Let's call it the delayed charge off effect that if you think about all of those charge offs that would've happened many of that would've happened in the pandemic, but didn't.

Speaker Change: Some of them may have gotten a reprieve for the law.

Speaker Change: Long run, but a bunch of others. We certainly have felt are going to charge off over time and that is a temporary effect that we think has been playing out over this normalization thing. It's not we have we have ways that we try to measure it but nobody can precisely measure. This but this is also something that leads to an elevation.

Dominic Gabriel: <unk> of charge offs relative to probably what an equilibrium. So if I speak from capital one's point of view.

Our guidance was to guide you to the leveling off.

Dominic Gabriel: Because of the lower recoveries effect right now that's the leveling off at a you know at a 15% above 2019, the underlying credit dynamics seem very similar to me to what was there in the past.

Dominic Gabriel: I think there are you know even as we keep a wary eye on the economy. There is some just sort of actuarial good guys are making their way.

Dominic Gabriel: Through through.

Dominic Gabriel: Through the through the business and all other things being equal.

Dominic Gabriel: That that can help the.

Dominic Gabriel: Credit metrics.

More and more show that that they are strikingly similar to what was there before the pandemic. So pulling way up I don't think and again I'll speak I don't think things have shifted I think we're seeing some trends playing out but for.

Dominic Gabriel: For capital one.

Dominic Gabriel: We're we feel great about where we've stabilized and we see really good.

Dominic Gabriel: A good assessment of our future.

Dominic Gabriel: Well. Thank you very much everyone for joining us on the conference call Tonight and thank you for your continuing interest in capital one Investor Relations team is available. This evening to answer further questions. If you have them have a great evening.

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

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Dominic Gabriel: Good day, and thank you for standing by and welcome to capital. One Q4 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.

Dominic Gabriel: Our one one on your telephone.

Dominic Gabriel: Here, an automated message advising their hand is raised to withdraw your question. Please press star one again, please be advised that today's conference is being recorded.

Dominic Gabriel: I'd now like to hand, the conference over to your Speaker today, Jeff Norris Senior Vice President of Finance. Please go ahead.

Jeff Norris: Thanks, very much Amy and welcome everyone to capital one's fourth quarter 2023 earnings Conference call.

Jeff Norris: As usual, we are webcasting live over the Internet.

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

Jeff Norris: In addition to the press release and financials. We've included a presentation summarizing our fourth quarter 'twenty 2023.

Jeff Norris: <unk> would.

Jeff Norris: With me today are Mr. Richard Fairbank capital one's Chairman and Chief Executive Officer and me.

Mr Andriy: Mr Andriy on capital ones Chief Financial Officer.

Rich and Andrew we're going to walk you through the presentation.

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

Mr Andriy: Please note that this presentation may contain forward looking statements.

Mr Andriy: 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.

Mr Andriy: 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.

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

Mr Andriy: For more information on these factors. Please see the section titled forward looking information in the earnings release presentation.

Mr Andriy: And the risk factors section of our annual and quarterly reports accessible at capital one website and filed with the SEC.

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

Young Andrew: Thanks, Jeff and good afternoon, everybody I will start on slide three of today's presentation.

Young Andrew: In the fourth quarter capital, one earned $706 million or $1.67 per diluted common share.

Young Andrew: For the full year capital, one earned $4 9 billion or $11 95 per share.

Young Andrew: Included in the results for the fourth quarter with a $289 million accrual for our current estimate of the FDIC Special assessment.

Young Andrew: Net of this adjusting item fourth quarter earnings per share were $2 24.

Young Andrew: Full year earnings per share were $12.52.

Young Andrew: On a linked quarter basis growth in our domestic card business drove period end loans up 2% and average loans up 1%.

Young Andrew: Period end deposits increased 1% in the quarter and average deposits were flat.

Young Andrew: Our percentage of FDIC insured deposits grew to 82% of total deposits in the fourth quarter.

Young Andrew: Revenue in the linked quarter increased 1% driven by both higher net interest and noninterest income.

Young Andrew: Noninterest expense was up 18% in the quarter.

Young Andrew: Operating expense increased 15% with roughly half of that increase driven by the FDIC special assessment.

Young Andrew: The full year operating efficiency ratio net of adjustments improved 99 basis points to 43.54%.

Young Andrew: Provision expense was $2 9 billion.

Young Andrew: Comprised of $2 5 billion of net charge offs and an allowance build of $326 million.

Young Andrew: Turning to slide four I will cover the allowance balance in greater detail.

Young Andrew: The $326 million increase in allowance brings our total company allowance balance up to approximately $15 $3 billion as of December 31.

The total company coverage ratio is now $4, 77% up.

Young Andrew: Up two basis points from the prior quarter, largely driven by a higher mix of card assets.

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

Speaker Change: Outside of interest rates most of our economic assumptions are largely unchanged from the third quarter and we continue to assume several key economic variables modestly worse than from today's levels.

Speaker Change: In our domestic card business.

Speaker Change: Coverage ratio decreased by 16 basis points to 763%.

Speaker Change: The allowance balance increased by $336 million.

Speaker Change: The predominant driver of the increased allowance was the loan growth in the quarter.

Speaker Change: In our consumer banking segment.

Speaker Change: The allowance was essentially flat at roughly $2 billion.

Speaker Change: Coverage increased by four basis points to 271% driven by a decline in auto loans in the quarter.

And finally in our commercial banking business the coverage ratio declined by three basis points to 171%.

Speaker Change: The allowance decreased by $37 million, primarily driven by the charge offs of office real estate loans in the quarter.

We have included additional details on the office portfolio on slide 17 of Tonight's presentation.

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

Speaker Change: Total liquidity reserves in the quarter increased by $2 $3 billion to about 121 billion.

Speaker Change: The increase was driven by a higher market value of our investment securities portfolio.

Speaker Change: Partially offset by modestly lower cash balances.

Speaker Change: Our cash position ended the quarter at approximately $43 $3 billion down $1 6 billion from the prior quarter.

You can see our preliminary average liquidity coverage ratio during the fourth quarter was 167% up from 155% in the third quarter.

The increase in the LCR was driven by holding more of our cash balances at the parent company versus our banking subsidiary.

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

Speaker Change: Our fourth quarter net interest margin was 673%.

Speaker Change: Four basis points higher than last quarter, and 11 basis points lower than a year ago quarter.

Speaker Change: The quarter over quarter increase in NIM was largely driven by a continued mix shift towards card loans and higher asset yields partially offset by higher rate paid on deposits.

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

Speaker Change: Our common equity tier one capital ratio ended the quarter at 12, 9% approximately 10 basis points lower than the prior quarter.

Speaker Change: Asset growth common and preferred dividends and the share repurchases more than offset net income in the quarter.

Rick Shane: And with that I will turn the call over to rich rich.

Rick Shane: Thanks, Andrew Good evening everyone.

Rick Shane: Slide 10 shows fourth quarter results and our credit card business.

Rick Shane: Credit card segment results are largely a function of our domestic card results and trends, which are shown on slide 11.

Erin Smith: Topline growth trends in the domestic card business remained strong even with growth moderating somewhat in the fourth quarter.

Erin Smith: Purchase volume for the fourth quarter was up 4% from the fourth quarter of last year and.

Erin Smith: Ending loan balances increased $16 billion or about 12% year over year average loans increased 14%.

Erin Smith: Fourth quarter revenue was also up 14% year over year, driven by the growth in purchase volume and loans.

Erin Smith: The charge off rate for the quarter was up 213 basis points year over year to 5.35%.

Erin Smith: The 30, plus delinquency rate at quarter end increased 118 basis points from the prior year to 461%.

Erin Smith: On a sequential quarter basis, the charge off rate was up 95 basis points and the 30 plus delinquency rate was up 30 basis points for the month of December the charge off rate was 578%, including a one time impact of 15 basis points there.

Speaker Change: Ascribed in a footnote in the monthly credit 8-K.

Speaker Change: Adjusted for this impact the monthly charge off rate for December would have been 563%.

Speaker Change: Pulling up on domestic card credit.

Speaker Change: We believe that normalization has run its course and credit results have stabilized the.

Speaker Change: The 30 plus delinquency rate.

Speaker Change: Has been stable on a seasonally adjusted basis for a number of months now.

Speaker Change: Since August our monthly delinquency rate has been moving in line with normal seasonality and that stable ratios relative to the same month in 2018 and 2019.

Speaker Change: And at this point, we have a pretty good window into January as delinquency entries in December indicate continuing delinquency rates stability in January.

Speaker Change: We've always said that delinquencies are the leading indicator of where charge offs are going.

Speaker Change: Charge off rate tends to follow delinquency rate by about three to six months.

Speaker Change: Based on the stability, we've seen in our delinquency since August and extrapolating from our current delinquency inventories and flow rates. We believe the charge off rate is stabilizing now and settling out.

Speaker Change: To about 15% above 2019 levels.

Speaker Change: I give this window because investors have been asking for quite some time, when we will charge offs level off.

Speaker Change: So this is the point, where we see that happening, meaning charge offs should move more or less with seasonality in the coming months.

This window comes for modeling the flows in our delinquency buckets, which have stabilized and our recoveries, which have also stabilized and started to rebuild.

Speaker Change: This isn't designed to be longer run guidance, but rather to indicate the charge offs are finally, moving more or less with seasonality over the near term in the longer run there could be additional forces such as potential pressure from economic worsening and potential benefits from the depletion of.

Speaker Change: Deferred charge offs from the pandemic.

Speaker Change: And recoveries picking up overtime from increased inventory.

Speaker Change: Noninterest expense was up 11% compared to the fourth quarter of 2022 with increases in both operating expense and marketing expense.

Speaker Change: Total company marketing expense of about one point to $5 billion for the quarter was up 12% year over year.

Speaker Change: Our choices in our card business 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.

Dominic Gabriel: Our marketing continues to deliver strong new account growth across the domestic card business.

Dominic Gabriel: And in the fourth quarter marketing also included higher media spend and increased marketing for franchise enhancements like our travel portal airport lounges and capital one shopping.

Dominic Gabriel: We continued to lean 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.

Dominic Gabriel: Slide 12 shows fourth quarter results for our consumer banking business in the fourth quarter auto originations declined 7% year over year.

Dominic Gabriel: Driven by the decline in auto originations consumer banking, ending loans decreased about $4 $5 billion or 6% year over year on a linked quarter basis, ending loans were down 2%.

Dominic Gabriel: We posted another strong.

Dominic Gabriel: Quarter.

Dominic Gabriel: Of year over year growth in federally insured consumer deposits.

Dominic Gabriel: Fourth quarter ending deposits in the consumer bank were up about $26 billion or 9% year over year.

Dominic Gabriel: Compared to the sequential quarter ending deposits were up about 2% average deposits were up 11% year over year and up 1% from the sequential quarter.

Dominic Gabriel: Howard by our modern technology, and leading digital capabilities, our digital first national direct banking strategy continues to deliver strong consumer deposit growth and gradually increase the percentage of total company deposits better FDIC insured.

Consumer banking revenue for the quarter was down about 17% year over year, largely driven by lower auto loan balances and higher deposit costs.

Dominic Gabriel: Non interest expense was down about 3% compared to the fourth quarter of 2022, lower operating expenses were partially offset by an increase in marketing to support our national Digital bank.

Dominic Gabriel: The auto charge off rate for the quarter was $2, one 9% up 53 basis points year over year. The 30, plus delinquency rate was 634% up 72 basis points year over year.

Dominic Gabriel: Compared to the linked quarter the charge off rate was up 42 basis points, while the 30 plus delinquency rate was up 70 basis points. Both of these linked quarter increases were in line with typical seasonal expectations.

Dominic Gabriel: Monthly auto credit began to stabilize even earlier than domestic card credit results on a monthly basis auto delinquency rate and charge off rate had been tracking normal seasonal patterns. Since the first half of 2023 and continued to do so through December.

Dominic Gabriel: Okay.

Dominic Gabriel: Slide 13 shows fourth quarter results for our commercial banking business compared to the linked quarter ending loan balances decreased about 1%.

Dominic Gabriel: Average loans were also down about 1% the modest declines are largely the result of choices. We made earlier in the year to tighten credit.

Mr Andriy: Ending deposits were down about 9% from the linked quarter average deposits were down about 7%. The declines are largely driven by our continuing choices.

Mr Andriy: To manage down selected less attractive commercial deposit balances.

Mr Andriy: Reducing these less attractive deposits also drove the 14 basis point linked quarter improvement in our average rate paid on commercial deposits.

Mr Andriy: Fourth quarter revenue was down 5% from the linked quarter.

Mr Andriy: Noninterest expense was also down about 5%.

Mr Andriy: The commercial banking annualized charge off rate for the fourth quarter increased 28 basis points from the third quarter to 0.53%.

Mr Andriy: The commercial banking criticized performing loan rate was 881% up 73 basis points compared to the linked quarter. The criticized nonperforming loan rate was down six basis points to 0.84% commercial banking.

Mr Andriy: Credit trends were largely driven by continuing pressure in our commercial office portfolio.

Mr Andriy: <unk> 17 of the fourth quarter 2023 results presentation shows additional information about the remaining commercial office portfolio, which is less than 1% of our total loans.

Mr Andriy: In closing, we continued to deliver solid results in the fourth quarter.

Mr Andriy: We posted another strong quarter.

Mr Andriy: Of topline growth in domestic card revenue purchase volume and loans.

Mr Andriy: Domestic card and auto delinquency trends were in line with normal seasonal patterns, a continuing indicator of stabilizing consumer credit results.

Mr Andriy: We grew consumer deposits and total deposits and we added liquidity and maintained capital to further strengthen our already strong and resilient balance sheet.

Mr Andriy: Our annual operating efficiency ratio net of adjustments for the full year 2023 was $43 five 4%.

Mr Andriy: In 2023, we saw incremental opportunities and made choices to grow revenue and tightly manage costs to achieve a 99 basis point improvement in our.

Mr Andriy: Our annual operating efficiency ratio.

Mr Andriy: The actual improvement was better than the.

Mr Andriy: Quote modest improvement on quote we had been expecting.

Mr Andriy: Over the last decade, we've driven significant operating efficiency improvement, even as we've invested to transform our technology.

Mr Andriy: And we continue to drive for efficiency improvement over time.

Mr Andriy: For the full year 2024, we expect annual operating efficiency ratio net of adjustments will be flat to modestly down compared to 2023.

Mr Andriy: Our expectation includes the partial year impact of the proposed CFPB late fee rule, assuming that rule takes effect in October 2024.

Mr Andriy: Pulling way up our modern technology capabilities are generating an expanding set of opportunities across our businesses. We continue to drive improvements in underwriting modeling and marketing as we increasingly leverage machine learning at scale and our tech engine drives growth efficiency improvement and enduring.

Mr Andriy: Ali you creation over the long term.

Mr Andriy: We remained re we remain well positioned to deliver compelling long term shareholder value and to thrive in a broad range of possible economic scenarios.

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

Jeff: Thank you rich, we'll now start the Q&A session.

Jeff: Courtesy to other investors and analysts who may wish to ask a question. Please limit yourself to one question plus a single follow up.

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

Jeff: Amy please start the Q&A.

Sanjay Sakhrani: And our first question comes from the line of Sanjay <unk> with <unk>. Your line is open.

Sanjay Sakhrani: Thank you and rich. Thank you for the color on the charge offs I know you cited the pluses and minuses from here.

Sanjay Sakhrani: Just thinking sort of how to think about the reserve rate going forward.

Sanjay Sakhrani: Yeah. So.

Sanjay Sakhrani:

Sanjay Sakhrani: Sanjay.

Sanjay Sakhrani: Yeah. So first of all my comments I just want you know I wanted.

Sanjay Sakhrani: With my credit comments in my sort of extrapolated look at our delinquency buckets I really wanted to share where our charge offs are settling out which is about 15% above 2019 levels.

Sanjay Sakhrani: And.

Sanjay Sakhrani: You know we we we should also note by the way that in any year first half losses are seasonally higher than second half losses, so within any normal year. The first half is the peak.

Sanjay Sakhrani: Now as I said, we're not really giving longer run guidance, but let's.

Sanjay Sakhrani: Think about the dynamics about how things could go from here.

Sanjay Sakhrani: From from an economy point of view, we're certainly in a.

Sanjay Sakhrani: A strong economy unemployment at a pretty remarkable place. So I think if anything you know.

Sanjay Sakhrani: Unemployment could have more downside than it as upside perhaps inflation has more.

Sanjay Sakhrani: Upside than it does downside, but I don't have any more insight to those then then than anybody else does.

Sanjay Sakhrani: Thank you.

Sanjay Sakhrani: I also would want to.

Sanjay Sakhrani:

Sanjay Sakhrani: You know kind of reinforce your point there there are two good guys that should play out over time.

Sanjay Sakhrani: And you know we've been talking for a long time about the.

Sanjay Sakhrani: Delayed charge off effect from the pandemic and when you think about that the pandemic had said she had just absolutely unusual.

Sanjay Sakhrani: Experience for our consumers with all of the stimulus and the forbearance.

Sanjay Sakhrani: And so on that.

Sanjay Sakhrani: We certainly have believed that charge offs that were otherwise going to happen at that time some.

Sanjay Sakhrani: Some got averted permanently, but I think some got delayed and so this phenomenon that we call delayed charge offs I think as you know, it's it's not really quantifiable effect, but I think it's very much.

Sanjay Sakhrani: Ben.

Mr Andriy: A part of what's happening with <unk>.

Mr Andriy: In the normalization and something that intuitively.

Mr Andriy: You know.

Mr Andriy: We will run its course.

Speaker Change: And and the other thing is.

Speaker Change: Recoveries so.

Speaker Change: Recoveries our recoveries.

Speaker Change: While the you know the rate per charge off dollar remained strong the number of charge off dollars in inventory.

Speaker Change: Thanks to the pandemic, where were you know a really depressed level and so.

Speaker Change: We have bottomed out there and theyre starting to now.

Now inventories are starting to increase of course as credit has normalized in that.

Speaker Change: Should also gradually be a good guy.

Speaker Change:

Speaker Change: Also when I look at our origination strategy and the underwriting choices we make.

Speaker Change: These are consistent with longer term losses that are lower than where we are now. So you know we consciously sort of.

Speaker Change: Focused our.

Credit commentary to really focus on where things settle out and then you know there's a list of forces that could work in either direction, but I think you certainly point out.

Some of the good guys.

Speaker Change: Okay.

Speaker Change: A follow up maybe Andrew can you just talk about the reserve rate on a go forward basis, and how we should think about it should stabilize can it come down and then maybe just also on the NIM with rates coming down how we should think about the movement over the course of the year.

Andrew: Sure Sanjay let me compartmentalize those two things the NIM will be a whole separate answer.

Andrew: But with respect to allowance well, let me first start with <unk>.

Andrew: Tactical housekeeping item, which is a reminder that in Q4, we have some seasonal balances that you know quickly pay off in the first quarter and therefore have negligible coverage, though the coverage ratio in Q4 as <unk>.

Andrew: Modestly lower as a result of that dynamic and it reverses itself in Q1, but again, a real modest effect.

Andrew: There.

Mr Andriy: Longer term, though projected losses are really going to be the biggest driver of coverage.

Mr Andriy: And you know as we've said before delinquencies are the best leading indicator of that enrich just provided a fulsome description of all of the forces at play there. So from a reserve perspective every quarter, we're just going to be looking at the next 12 months of projected losses with.

Mr Andriy: The first six more consequential in the calculation, but also far more predictable given the visibility that we have through through delinquencies and then the remainder of that window really informed by by economic assumptions.

Mr Andriy: And then the reversion to the long term average and so over the last few quarters things have played out you know consistent with or slightly better than what we've expected and you've seen the coverage ratio in card roughly stay flat. So I think it's important to to note.

Mr Andriy: That even in a period, where projected losses in future quarters are lower than today and might otherwise indicate a release.

Mr Andriy: We could very well see a coverage ratio that that remains flat or only modestly declines.

Mr Andriy: As we incorporate some of that uncertainty into the allowance, but eventually.

Mr Andriy: In a scenario like that after a period of coverage stability like we've seen you.

Mr Andriy: You you would see coverage coming down and the release of a non growth related reserves.

Mr Andriy: NIM NIM.

Mr Andriy: Sure.

Mr Andriy: It's there's a lot of factors at play with with NIM and maybe I'll do the same housekeeping with NIM just to remind everyone that in the first quarter with a with one fewer day, where we're going to see roughly a seven basis point.

Mr Andriy: Headwind there, but let me then also and Numerate here, the puts and takes to to NIM.

Mr Andriy: On the tailwind side.

Mr Andriy: Growth in card balances as a percentage of the balance sheet and and even within those balances, possibly higher revolve rate.

Mr Andriy: Certainly a tailwind and that's something we've seen over the last couple of quarters and then also a lower cash balance we've talked about this before but you know cash balances today you know in total of 43 billion I think the number is with about 37 billion at the fed is.

Mr Andriy: There's quite a bit higher than pre pandemic.

Mr Andriy: We will get back to work.

Mr Andriy: Where we were pre pandemic, but I would expect over time that will come down from today's level. So that would also be a tail.

Mr Andriy: Alwyn to to NIM on the headwind side.

Mr Andriy: Right.

Mr Andriy: Even though the fed has stopped moving up in July we continue to see some deposit product rotation and it creates a bit of upward pressure to our deposit betas.

Mr Andriy: And then even if the fed starts decreasing rates, we're going to see the assets reprice more quickly than than the deposits.

Mr Andriy: And the.

Mr Andriy: The competitive environment and the backdrop of Q T M will potentially have an impact on betas on a downward cycle, so that would create a bit of a regular but.

Mr Andriy: Margin pressure.

Mr Andriy: And then a couple of other things that I would just highlight as potential headwinds you know the uncertainty around potential regulatory changes that could impact interest income.

Mr Andriy: As well as just the path of credit you've seen suppression go up over the last few quarters as losses go up so that also creates some pressure to to NIM. So I know that that was a list of puts and takes but partially go into that level of detail to say it it's kind of hard to say where NIM.

Mr Andriy: It is going to go in the near term, especially because the path of interest rates.

Mr Andriy: <unk> fairly wide at this point, but kind of give you a sense of all of the forces at play but over the much longer term I would say, there's nothing really structurally different about our balance sheet from where it was pre pandemic that that leads me to believe that NIM will be materially different.

Mr Andriy: Then than where it was based on at least what we know today.

Next question please.

Mr Andriy: Our next question comes from the line of Ryan Nash with Goldman Sachs. Your line is open.

Mr Andriy: Hey, good evening everyone.

Ryan Nash: Hey, Ryan.

Ryan Nash: Rich.

Ryan Nash: Look you put about $4 billion of marketing expense for the second straight year and continuing to drive strong growth.

Ryan: Hearing about some others with a little bit of a more cautious tone on growth. So maybe just talk about are you leaning in and do you expect marketing to increase and really where you're seeing the best opportunities in the market and how are you thinking about growth looking ahead. Thanks I have a follow up.

Ryan: Okay. Thanks Ryan.

Ryan: We feel.

Ryan: Very good about.

Ryan: The opportunities in the marketplace. So we are leaning in where we're definitely leaning in.

Ryan: You can see obviously.

Ryan: There was quite a lot of marketing in the fourth quarter, but.

Ryan: We continue to see opportunities across the board.

Ryan: Especially in the card business, but.

So.

Ryan: Let's.

Ryan: Just pulling up there a few key factors driving our marketing that we want to continue to emphasize our first of all we're just really excited about the growth opportunities across our business.

Ryan: We're making.

Ryan: We have over the last number of of years made some what we call sort of adjustments around the edges and.

Ryan: Trimming around the edges.

Ryan: Lately, there's really even not a lot of trimming around the edges, where in a very sort of stable place with respect to.

Ryan: You know the business, we're going after the results, we're getting and the and the the the you know the deal that we have to capitalize on that.

Ryan: And I think our technology transformation of course has really been beneficial, but it allows us to leverage more data.

Ryan: And more machine learning models to identify basically more attractive opportunities for investment and to create better and more customized solutions for customers along the way.

Ryan: So so just the overall opportunities continue to be very strong the second.

Ryan: Part of our marketing investment of course relates to our quest to win at the top of the market and.

Ryan: You know we've been going after heavy spenders now for almost 15 years and.

That need sustained high levels of investment and you can see those out in the marketplace and flagship products and groundbreaking experiences like.

Ryan: No.

Ryan: Yeah.

Ryan: Things like you know.

Ryan: Best in class digital customer experiences.

Ryan: Hum.

Ryan: Really high level of lead customer servicing.

Ryan: Online travel portal and you know and.

Ryan: The in the intersection of risk management in the quest to go to the top of the market. The incredible importance of advanced fraud defenses to ensure that the card always works.

Speaker Change: And increasingly we're also just.

Speaker Change: You know rolling out exclusive services and experiences that aren't available in the general marketplace, such as airport lounges and access to select properties.

Speaker Change: So.

Speaker Change: Or just a wonderful long lasting a fabulous annuities and.

Speaker Change: In the third.

Speaker Change: Vector of real marketing investment is our continuing.

Speaker Change: Hmm efforts to build our National Bank and you know just as a reminder, we have a smaller branch footprint and so we lean more heavily on our technology investments our digital experiences our cafe network and.

Speaker Change: Our brand and marketing investments to continue to organically build this national Bank and we are really pleased with the traction there and.

Speaker Change: It's been a lot of years in the making but we are definitely leaning in there and loved the results. So.

Ryan: Ryan those are kind of a window into how we're thinking about it and the compelling opportunities behind.

Ryan Nash: You know across the board that we see and we are continuing to.

Ryan Nash: Capitalize on the opportunity as we see it.

Ryan Nash: Got it and.

Ryan Nash: Rich if you put late fees aside for the first part of my question you talked about stable to modest improvement, which ex late fees would imply continued improvement on the operating efficiency do you think we're back X late fees on a sustained journey of improving efficiency like you were talking about before the pandemic and then second just how are you.

Ryan Nash: Thinking about the timing of offsetting late fees. Thank you.

Ryan Nash: Okay.

Ryan Nash: Yes.

Ryan Nash: Thank you so you.

Ryan Nash: You know the we our story about efficiency I think has been a very consistent story for a bunch of years and it's it's I think a lot of companies drive efficiency by just continuing to cut costs on their way to greatness.

We are certainly has put a lot of energy into into the car side of our business, but really it's been about building a business model powered by <unk>.

Dominic Gabriel: Our technology and.

You know the customer experiences we're building to drive revenue growth.

Dominic Gabriel: And our efficiency.

Speaker Change: And and you know both at the same time.

Speaker Change: And we've.

Speaker Change: Talked about how so much of this is powered by technology and we continue to see the benefits of that so we at.

Speaker Change: On the one hand keep leaning into technology and keep investing there and on the other hand see a growing.

Speaker Change: You know opportunities to drive efficiency as a beneficiary of the technology investments so pulling way up.

Speaker Change: Any particular year can go be different from overall trends.

Speaker Change: We continue to be.

Speaker Change: Believe that an important part of the value proposition with investors and the benefit of the years of investment we're making is to continue to drive.

Speaker Change: You know greater operating efficiency.

Speaker Change: So did you did you have a CFPB question, yes, So let me.

Ryan: Turn Ryan to talk about that.

Ryan: So.

Ryan: The Cfpb's late fee proposal as currently conflict contemplated would reduce late fees by approximately 75%.

Ryan: While the Cfpb's proposal has not been finalized we expect the.

Ryan Nash: The CFPB to publish a proposal soon and once the CFPB publishes its final rule, we expect there to be industry litigation that could delay or blocked the implementation of the rule.

Ryan Nash: This litigation will likely delay the implementation of the rule until at least the second half of this year and and you know maybe longer.

Ryan Nash: You saw we talked about an estimate of October.

Ryan Nash: If the proposed rule is implemented there will be a significant impact to our P&L in the near term relative to what our path would have been however.

Ryan Nash: 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.

Ryan Nash: These choices include changes to our policies our products and investment choices.

Ryan Nash: Now some of these actions will take place before the rule change takes effect and a fewer already underway. Many will come after the rule change.

Mr Andriy: <unk> effect.

Mr Andriy: Next question please.

Mr Andriy: Our next question comes from the line of.

Erin Smith: Erin <unk> with Citi. Your line is open.

Erin Smith: Thanks Hope.

Erin <unk>: Could you talk a little bit about the the auto business you continue to kind of pull back a little bit from from that side thinking about how you're feeling about potentially increasing some origination still still a healthy amount of originations at $27 billion. This year, but I'm just wondering when you might make a pivot there.

Hope: Thanks, Erin so we've been cautious in auto for a couple of years now.

Erin Smith: We've noted over this period of time, a number of headwinds and <unk>.

Erin Smith: In the business.

Erin Smith: So what's this tally them up margin pressure from the interest rate cycle.

Sanjay Sakhrani: Normalizing credit.

Mr Andriy: Vehicle values normalizing from their all time highs and affordability pressures stemming from the combined effects of elevated interest rate and still high car prices.

Mr Andriy: Now as you know, we don't work backwards from growth targets and we remained.

Mr Andriy: You know disciplined in our originations setting pricing and terms that we're comfortable with and then take what the market gives us.

Mr Andriy: So back in 2022.

Mr Andriy: We raised price tightened our credit box at the low end of the market.

Mr Andriy: And took other steps to manage the resilience of our lending.

Mr Andriy: And as a result, our run rate of originations has been lower than.

Mr Andriy: Like two years ago.

Mr Andriy: But as a result of our actions we've been just very pleased with the performance of our auto originations. The credit performance has been really striking which of course you can see.

Mr Andriy: So even as vehicle values continue to normalize.

Mr Andriy: Risk on our most recent originations from from 2023.

Mr Andriy: [noise] remains below what we saw in our pre pandemic originations probably as the result of our actions and vintage over vintage that risk remains stable.

Mr Andriy: The margins on new originations have improved as well, particularly over the last couple of months as interest rates have come down from their recent peaks. So we feel quite good about the performance of our auto originations. So we continue to adjust our strategies, where we see opportunities for growth or emerging risks.

Mr Andriy: And of course, that's what we always do but.

Mr Andriy: You know when we when we think about some of the headwinds I think some of those headwinds are easing and the results that we're seeing on our own.

Mr Andriy: Book are really pretty striking and gratifying so.

Mr Andriy: That gives us a.

Mr Andriy: You know a more bullish outlook.

Mr Andriy: Still with a note of caution.

Mr Andriy: Thank you.

Mr Andriy: Next question please.

Mr Andriy: Our next question comes from the line of Rick Shane with J P. Morgan Your line is open.

Rick Shane: Thanks for taking my questions. This afternoon.

Rick Shane: Hey, rich you've given some sort of framework for charge offs into 'twenty four one of the observations we would make is that delinquencies.

Rick Shane: Even through December or on a year over year basis due are trending.

Rick Shane: Our off on a year over year basis, even though that increase has slowed substantially.

Rick Shane: That suggests very consistent with your description that charge offs will continue to rise through the first half of the year.

Rick Shane: What I'm curious about is given the delinquencies are still up 100 basis points or 115 basis points year over year in December.

Rick Shane: When we look into the second half of the year I understand seasonally that they will be down but would you expect the charge offs in the second half of the year will still be up versus 'twenty three.

Rick Shane: So I I think the <unk>.

Rick Shane: Best.

Rick Shane: Way to think about this.

Rick Shane: Is.

Rick Shane: To focus on the most.

Stable benchmarks is where our focus here is about stability. So we're really looking at what are the most stable benchmarks that we can anchor to.

Rick Shane: And and that.

Rick Shane: Really leads us back to 2019 2018.

Rick Shane: And so let me, let me just sort of speak in that.

Rick Shane: Sort of double click a little bit into my comments on that.

Rick Shane: No.

Rick Shane: Our delinquencies are above pre pandemic levels, but they've been tracking with normal seasonality for quite some time.

Rick Shane: And now compared to 2019 since August were running around 17% above the level for the same month of 2019.

Rick Shane: Compared to 2018.

Rick Shane: Since may.

Rick Shane: We're running at around 13% above the level for the same month of 2018.

Rick Shane: And at this point, we have a pretty good window into January January of 'twenty 'twenty four.

Rick Shane: As well based on delinquency entries in December and that looks like it's going to be another month of stability.

Rick Shane: So we feel confident declaring that our delinquencies have stabilized.

Rick Shane: And of course delinquencies are our best leading indicator of credit performance.

Rick Shane: Our charge offs have been catching up to the stabilizing trend in our delinquencies over the second half of 2023.

Rick Shane: But at this point.

Rick Shane: What we're declaring here is that our charge offs are leveling off as well.

Rick Shane: Now, there's more month to month volatility in charge offs and delinquencies by by by quite a bit.

Rick Shane: Because every data point of delinquencies includes five months of delinquency inventories.

Rick Shane: And of course charge offs is looking at the relatively small number that falls off at the end of the last bucket.

And there was also some noise in the fourth quarter of 2019 that makes it less reliable as a charge off benchmark. So we actually think 2018.

Rick Shane: Is and even better benchmark for our charge offs.

Rick Shane: For comparing our charge offs in this fourth quarter that just happened to our past stable year.

Rick Shane: In the fourth quarter, our net charge offs were about 15% above 2018 levels and of course 2018 rolled into 2019. So that's an appropriate benchmark to look at as we head into 2024 and compare to 2019.

Now when we look ahead extrapolating from our current delinquency inventories and recent flow rates, we conclude that our net charge offs are stabilizing at about 15% above 2019.

Rick Shane: With of course, some typical month to month volatility and normal seasonality.

Rick Shane: Now of course, the seeds of this stabilization had been planted for quite a long time, now and partly driven by the choices that we made back in 2020 in 2021.

Rick Shane: Coming out of the pandemic, we were concerned about two trends fintech.

Mr Andriy: Fin techs were flooding the market, especially the subprime market with credit offers creating the potential for credit worsening and adverse selection in our originations. We also anticipated that pandemic era stimulus in forbearance would temporarily inflate consumer credit scores.

Mr Andriy: And that these would revert over time.

Mr Andriy: So we tightened our underwriting in anticipation of these effects and we have continued to make adjustments at the margin since then.

Mr Andriy: And the result has been striking.

Mr Andriy: That was all the kind of changes the normalization all of the noise over the last number of years.

Mr Andriy: That there has been strikingly stable performance on our origination vintages.

Mr Andriy: In our basically and our post pandemic originations each quarterly vintage for a given segment has been more or less on top of each.

Each other.

Mr Andriy: And also relatively consistent with pre pandemic vintages and over time. This just created a lot of stability that increasingly moved into our portfolio and it contributed to the stabilization of our portfolio credit trends and as we've looked at this we said these are very.

Mr Andriy: Good shoulders to stand on to have that much stabilization for so long we of course, all still waited to see exactly the manifestations ultimately of the portfolio stable.

Mr Andriy: Stabilizing.

Another factor.

Mr Andriy: Contributing to stabilization is our recovery rate and.

Mr Andriy: Unusually low recoveries have been the largest driver of our overall charge off.

Great running above pre pandemic levels.

Mr Andriy: And this is of course because of the very low level of charge offs over the past three years and therefore, we had a low level of raw material for future recoveries and by the way just to capital. One point here. This is a larger effect for us than for most competitors because we tend to have meaningfully higher recovery rates.

Mr Andriy: Than the industry average and because we tend to work our own recoveries. So they come in over time not all at once like in a debt sale.

Mr Andriy: And so we've recently observed that our recovery rate has stabilized and started to tick back up and that's R and and you know and know that our recoveries inventory has started to rebuild.

Mr Andriy: That's of course, a good guy, although it's coming from a pretty low level and this also contributes to our confidence that our overall loss trends have stabilized.

Mr Andriy: So when you to your question where are you at compare to 2023, what we've really done is really kind of anchor our benchmarking to the most stable years in sort of recent experience 20.

Mr Andriy: <unk> 28.

Mr Andriy: 2018, and 2019 and since we've seen delinquencies and charge offs.

Mr Andriy: Stabilize.

Mr Andriy: Relative to you know like quarters in in in those benchmarks.

Dominic Gabriel: We felt the best the best language with which to describe where things are settling out is to do it as a multiple of those two generally stable years and so you know we are entering 2024, now with a real sense of stability and and.

Dominic Gabriel: We've benchmarked, where we are.

Dominic Gabriel: As a multiple of those two.

Dominic Gabriel: Stable year benchmarks.

Dominic Gabriel: Yeah.

Dominic Gabriel: Next question please.

Dominic Gabriel: Our next question comes from the line of Moshe Orenbuch with TD Cowen Your line is open.

Dominic Gabriel: Great. Thanks, maybe rich just following up on that.

Dominic Gabriel: I think that a lot of the marketing dollars in the card space and spend.

Dominic Gabriel: You don't want to transact their business, but given that that.

Dominic Gabriel: That stability that you're talking about it and I assume the bulk of the dollars of loss.

Dominic Gabriel: A link with GM loss are coming from you know kind of the lower Red card spectrum.

Dominic Gabriel: So does that mean that that's an area for expansion in 2020 for like how should we think about that and I do have a follow up.

Dominic Gabriel: Sorry, Moshe are you, saying is what is the is the lower end and area for expansion.

Dominic Gabriel: Yes.

Dominic Gabriel: So.

Dominic Gabriel: We.

Dominic Gabriel: We feel we feel good about all of our segments across the credit spectrum in card and also the relative health of the consumer and you know you've known us for a long time motion as long as we have.

Dominic Gabriel: For decades, we've been.

Dominic Gabriel: Talking together.

Dominic Gabriel: You know that we have have a long history of delivering sustained resilience and profitability at the lower end of the marketplace and.

Dominic Gabriel: We do.

Dominic Gabriel: Let's just reflect on this for a second if you're talking about subprime credit card. This is a complex business that requires deep investment in information based underwriting and of course, we've spent decades developing and testing.

Dominic Gabriel: Tailored product structures and sort of honing the analytical and the operating and underwriting and marketing capabilities to attract and serve this.

Dominic Gabriel: This franchise, but also with the number one and two and three most important things to US has been resilient as we do this.

Dominic Gabriel: And what's.

Dominic Gabriel: What's really been pretty striking is how consistent our strategy has been over the years you know.

Dominic Gabriel: Through the great recession and.

Dominic Gabriel: And following that.

Dominic Gabriel: And if we.

Dominic Gabriel: And we've talked about how the lower end of the marketplace, whether you're talking.

Dominic Gabriel: By the way there's a whole.

Erin Smith: Talk about the lower end of the marketplace, obviously, we.

Erin Smith: There's a whole part of the marketplace that capital one doesn't serve but in terms of the lower end of the marketplace that we serve.

Erin Smith: Well, if you look at either income or.

Erin Smith:

Erin Smith: FICO and look at the.

Erin Smith: The the normalization that's going on we've seen very solid curing in that part of the market.

Erin Smith: In fact, even started it carried a little bit earlier than some of the some of the other parts of the market, but the curing story. The leveling off story, we're talking about today is absolutely across the board I do want to say, though also moshe relative to your point.

Erin Smith: Had fin techs, who we were very concerned about flooding that end of the market some years ago. They certainly have.

Moshe Ari Orenbuch: No massively.

Moshe Ari Orenbuch: Dial back and I think that the continued.

When we see the success of our vintages the stabilization now the sort of stabilization overall of capital once our whole portfolio and the dynamics in the marketplace I think that we like.

Moshe Ari Orenbuch: Like the opportunities, we see there Moshe and we will be leaning into that.

Moshe Ari Orenbuch: Great and just as a follow up I mean, you've talked in the past about not just the financial impact of the late fee, but also its deterrent.

Moshe Ari Orenbuch: Impact so how do you think about that in terms of the resilience of that segment as we go forward post any changes to late fees and.

Ryan Nash: Maybe just as a as a side point you did mention that you thought you could mean.

Mr Andriy: Since he ratio even with the late fee.

Mr Andriy: That just seems it seems like Oh.

But you'd have to take a couple of hundred million dollars out of the.

You know out of expenses to do that so you know if there's a way to talk about what how that would happen.

Mr Andriy: Tack that on to the answer that would help too. Thanks.

Moshe Ari Orenbuch: So moshe.

Moshe Ari Orenbuch: Capital one has pursued a strategy for the <unk>.

Moshe Ari Orenbuch: Many years.

Moshe Ari Orenbuch: Of trying to create and deliver to the marketplace.

Moshe Ari Orenbuch: Strikingly simple products, because we for some sort of a mission and strategy point of view, we believe so much in this but and we built a brand over.

Moshe Ari Orenbuch: Having.

Moshe Ari Orenbuch: Very simple products.

Moshe Ari Orenbuch: And.

Moshe Ari Orenbuch: So things like for example on the banking side.

No.

Moshe Ari Orenbuch: No minimum balance requirements.

Moshe Ari Orenbuch: Membership fees and even no overdraft fees. So here we are a company that is really really reduced the fees, but you know.

Moshe Ari Orenbuch: If we add one fee left I think you know the fee we would most hang on too is the late fee because to your point. It plays a very important role in the deterrent.

Mr Andriy: <unk> to a consumer and an analogy that we sometimes use as you know.

Mr Andriy: Speeding ticket I think that.

Mr Andriy: If a speeding ticket were.

Mr Andriy: Let's say, we had an $8 speeding ticket I'm not sure that that.

Mr Andriy: Our highways would would be quite as safe as they are now because if we're really trying to deter behavior that we think is.

Mr Andriy: Really.

Mr Andriy: Consequential for people that really is the role of the fee we've been very active in giving alerts to all of our customers you know win late.

Mr Andriy: Late payment payment due alerts with a goal of trying to not trying to maximize late fees, but actually trying to.

Mr Andriy: Maximize the on payment.

Mr Andriy: Performance of our customers. So Moshe this is a question.

Mr Andriy: That that.

With that that we've been worried about your question about the what could be the impact on credit performance of individuals and it's something that we're just gonna have to.

Mr Andriy: If this CFPB rule goes into effect, we're all going to experience together.

Mr Andriy: This you know not controlled experiment, but we certainly mark us down for having a concern about that but from a financial point of view.

Mr Andriy: Obviously the.

Mr Andriy: Late fees.

Mr Andriy: You know our are an important.

Mr Andriy: You know thing on the on the P&L.

Mr Andriy: And.

Mr Andriy: As I've talked about we have created a set of many actions across different types of things from policies.

Mr Andriy: Products pricing structures.

Mr Andriy: Investment choices to two <unk>.

Mr Andriy: Clawback the very significant.

Dominic Gabriel: Economic impact.

Speaker Change: Some of those things are underway some of them just to mention it by the way by the time, we get there when when.

Mr Andriy: When the rule is announced some of the offsets are going to buy then be into the <unk>.

Mr Andriy: Into the run rate of the company and have a majority will still be.

Mr Andriy: Waiting to.

To happen.

Mr Andriy: With respect to the fourth quarter.

Mr Andriy: You know that the 25 is the big full year effect, obviously something coming in late in the fourth if somebody coming in and our estimate in the fourth quarter.

Mr Andriy: Doesn't have as much impact on the annual.

Mr Andriy: Efficiency ratio, but it still does have an impact so essentially what's implied underneath it is quite a bit of progress on the efficiency ratio.

Mr Andriy: Behind the flat to modestly down guidance that includes that.

Mr Andriy: That fourth quarter effect.

Mr Andriy: Next question please.

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

Hi, Thanks for taking my call in the interest of time given its late in the call I'll ask my two part or.

John Hecht: All upfront here first on the marketing side I know you indicated you expect to.

John Hecht: We continue to lean in on marketing this year does that.

John Hecht: What does that imply on how you're thinking about full year marketing expense I mean could that.

John Hecht: You'll see marketing came in above the 4 billion level that you saw this year or could it be stable or were a modest decline and then my second question is on the credit side.

John Hecht: On the commercial real estate office CRE I know you had some lumpy losses this quarter.

Some pressure.

John Hecht: Pressure still in criticized and non accruals did you can just give us a little bit more color. There in terms of what you charged off in your outlook on that front. Thank you.

John Hecht: Okay, John Thanks for your good questions here.

John Hecht: No we don't we don't typically give.

John Hecht: Full year marketing guidance and and the reason is because.

John Hecht:

John Hecht: Marketing depends of course, a lot on the opportunities that we see when we get there. So what I wanted to just share and in in response to Ryan Nash is question is a continuation in the positivity that we feel both about the.

John Hecht: Going after the heavy spenders. So we don't have full year guidance, but we certainly.

Continue to like the opportunities that we see.

John: And then John on the office side, it's virtually impossible to generalize office. It is incredibly property specific we've talked in the past about us having a fair amount in gateway cities and having a mix of both.

John: N D C properties, but frankly.

John: The decomposition matters, a whole lot less than the individual properties and so what we saw in the quarter was a little more than $80 million.

John: Of losses tied to office loans.

We continue to not originate their balances have come down to.

John: About $2 3 billion down about 100 and.

At around are around 13%.

John: Next question please.

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

John: Rich you've made a lot of progress on heavy spenders.

Rick Shane: As you sort of look out where are we I guess all about expense cycle are.

Rick Shane: Well done it certainly I think the quest.

Rick Shane: The heavy spender.

Rick Shane: When in the heavy spender of the marketplace it will be.

Rick Shane: A quest as far out as we can see in the same way it is for.

Rick Shane: The players who the small number of players who.

Rick Shane: Are really going after that business. The key part of it is we're getting more and more scale along the way. So you you've seen.

Mr Andriy: You know over the years the growth in purchase volume, which you don't see is the.

Mr Andriy: <unk>.

The purchase volume growth rates by level of Spender and monitor any.

Mr Andriy: Any segmentation, we've been looking at it at monotonically the growth rate's monotonically faster.

Mr Andriy: The more you go up.

Mr Andriy: The.

Mr Andriy: Towards the heavy spenders, so its just indicating we're getting a lot of traction there. So I wouldn't want to say that.

Mr Andriy: We just have to do a Blitz and then we're kind of done with the investment that the way that that scale is achieved is by getting more and more customers in a business where all of the players in the business, even including the largest continue to invest in that business, but we're really pleased with the traction.

Mr Andriy: <unk>.

Dominic Gabriel: That's why we continue to invest.

Dominic Gabriel: That's all I had.

Dominic Gabriel: Next question please.

Dominic Gabriel: Our next question comes from Bill Crow Patchy with Wolfe Research Your line is open.

Dominic Gabriel: Thank you good evening, Richard Andrew I appreciate all of the very clear commentary on what Youre seeing in credit.

Dominic Gabriel: There's a view that if we'd had a mild recession and experienced a purging of weaker credits that that would've provided a clear runway for growth coming out of that but instead the environment. We're in is arguably a little bit muddier than some would stay still late cycle could you speak to that dynamic rich and whether that weighs on how you're thinking about growth from here.

Andrew: In any way and as a follow up I'll just ask it now for you Andrew can you update us on how you're thinking about capital return from here.

Andrew: Sure.

Andrew: I start.

Andrew: Bill.

Look at this point there still remains a number of our uncertainty around capital not the least of which is the end game proposal. We're all aware there's been a quite a bit of of advocacy there and that there remains a fair amount of uncertainty of where.

Andrew: The the rule will land them.

Mr Andriy: Including things like the impact of a OCI and phase in and ops risk and other forces at play.

Ryan Nash: So we're you know as much as we do and we're waiting to see what the final rule holds there but in addition to that you know we're coming up on CCAR, we don't yet have the scenarios for this year you look back at you know how impactful the scenario as well as the starting balance sheet is to those <unk>.

Ryan Nash: You've seen our SCB fluctuate over the last four years for them I think 10, one down to seven and now we're sitting here at 93, so waiting to get a little bit more clarity of what CCAR will hold and then in addition, we continue to see a range of outcomes in our own growth projections.

Ryan Nash: And it and finally I'll just point to the economy, there's I don't know that.

Ryan Nash: Consensus view is growing off of a soft landing them, but theres still quite a wide range of outcomes there and so given all of those factors we've chosen to to operate for the last few quarters around 13%, we recognize that our.

You know when we feel like we're in an excess capital position that returning it is one way to create value and under the SCB.

Ryan Nash: Yes, he'd be framework, you know, we have that flexibility to manage repurchases dynamically and we will use that that flexibility when when we think it's prudent to do so.

Ryan Nash: Bill comment on our continuing to lean in a given that.

Ryan Nash: You know some people might argue that the.

Ryan Nash: The.

<unk> environment is late cycle. So it's certainly a great question.

Ryan Nash: So.

There first of all the bottom line is we are continuing to lean in obviously, we keep a wary eye out for.

Things that could change, but I sort of start with the health of the consumer I think the U S. Consumer remains a source of strength in the overall economy and the labor market has proven strikingly resilient over the past year really defying the expectations of many economists in the face of rising interest rates.

<unk> debt servicing burdens remain relatively low by historical standards again, despite rising interest rates home prices.

Ryan Nash: R.

Ryan Nash: Are.

Ryan Nash: You know back end doing.

Ryan Nash: A bit better and are generally near all time highs in aggregate consumers across all income levels still have excess savings also from the pandemic. Although those numbers are declining inflation has moderated to the point that real wages are growing again after shrinking for almost two years.

Ryan Nash: You know student loan repayments now they resumed in October but there is the 12 month on ramp period, and a new income driven repayment plan, which will significantly reduce payments for lower income borrowers.

Ryan Nash: So.

Ryan Nash: On the whole I'd say consumers are in really quite good shape relative to most historical.

Ryan Nash: Benchmarks.

Ryan Nash: And then if we look inside our own portfolio, we still see higher average payments compared to 2019 by segment by a really pretty sizable delta.

Ryan Nash: You know we.

Ryan Nash: Then you know we we then look at the at the marketplace.

Ryan Nash: And <unk> seen and in the auto business, how at times, we get alarmed by some of the practices or the pricing in the industry and we pulled back.

Ryan Nash: In ways that we haven't pulled back in the card business, but I think we see a rational and stable competitive marketplace is very competitive, but it's rational and it's stable and then most importantly, the results themselves.

Ryan Nash: The vintages just continue to come in on top of prior vintages.

Ryan Nash: The trimming around the edges that we've done over the last few years of really I think allowed our results to have a stability to them that even.

Has has diverged from the sort of underlying I'm not as good performance of.

Ryan Nash: The marketplace of things recently compared to the past, but we have that real stability.

Ryan Nash: Then we see that the leveling off of our portfolio.

Ryan Nash: And.

Ryan Nash: No really we talk about our charge offs leveling off.

Ryan Nash: At a level that's a you.

Ryan Nash: You know like 15%.

Ryan Nash: Above.

Ryan Nash: 2019, it's.

Ryan Nash: Interesting actually that's net charge offs, but gross charge offs are leveling off very close to the gross charge off levels of 2018, and in 2019 and and actually the thing that that that creates the.

Ryan Nash: Differential.

Ryan Nash: Is the lower recoveries that we've had for a as a.

Ryan Nash: In the wake of the.

Inventory of recoveries being so much lower inventory of charge off debt, so pulling way up and seeing the traction in our business. The success with our brand the things that you know for competitive reasons, we don't share in the marketplace, but the traction on the tech side.

Ryan Nash: In terms of enabling us to create a better really unique customized customer experiences totally customized underwriting.

Ryan Nash:

Ryan Nash: You know the reaching out to you know.

Marketing channels that we hadn't even tapped before all of this is putting us in a position.

Ryan Nash: To.

Continue to pulling way up.

Ryan Nash: Obviously in the credit business, we always worry a lot, but if I calibrate this relative to a lot of other times you know I feel really quite good about this and I actually said I felt a lot less good.

Ryan Nash: A couple of years ago, because I felt that the pandemic, while you know from a credit point of view, who couldn't like those credit results I said it actually is so an abnormally good.

Ryan Nash: The marketplace won't be able to help itself.

Ryan Nash: But create unusual our practices.

Ryan Nash: Unreserved underwriting et cetera, so actually what we've had if I can borrow the soft landing term from from the economy conversations is kind of a soft landing relative to the credit business and landing is really quite the right word relative to capital, one which I think.

Ryan Nash: Really as I've kind of declared today is sort of landed here and I know some competitors still haven't fully landed but pulling.

Ryan Nash: Pulling way up on this I actually feel this is really quite a good time, if I calibrate to.

Ryan Nash: All the times over the years and this.

Ryan Nash: Our exciting journey.

Ryan Nash: Next question please.

Ryan Nash: Our final question comes from the line.

Yeah.

Ryan Nash: Dominic Gabriel with Oppenheimer. Your line is open.

Dominic Gabriel: Hey, great. Thanks, so much or all of the color on the call today.

Dominic Gabriel: I just have two questions rich.

What are you seeing do you think that's making the net charge offs stabilize 15% above 2019 levels is there something in the consumer payment behavior that has changed.

Dominic Gabriel: There's something you think that shifted the consumer.

Dominic Gabriel: So.

Dominic Gabriel: I actually.

Dominic Gabriel: Yeah.

Dominic Gabriel: Believe that.

Dominic Gabriel: What we're really seeing here is.

Dominic Gabriel: Is a.

Dominic Gabriel: Credit situation, that's very similar to pre pandemic.

Dominic Gabriel: It it is showing up right now and I'm going to speak through the capital one lens I think you know I'm not going to universal life for the industry, but.

Dominic Gabriel:

Dominic Gabriel: As I mentioned in the in the.

Dominic Gabriel: Two the prior answer there.

Dominic Gabriel: That.

Dominic Gabriel: If you look at gross charge offs, where they're settling out for capital. One now. This is capital one that has done a lot of trimming around the edges over the last number a fair amount of trimming around the edges. I think we also did a very important choice that I'm not sure was universe is.

Dominic Gabriel: It might've been an unusual choice.

Dominic Gabriel: But when we saw the incredibly.

Dominic Gabriel: Strong credit performance of consumer as much of it driven by stimulus in forbearance.

Dominic Gabriel: We sort of became alarmed about credit score great inflation, if you will and essentially intervened in our models too.

Dominic Gabriel: To normalize so that we didn't get fooled by that but.

It's this is the end.

Dominic Gabriel: So.

Dominic Gabriel: As a result of that.

Dominic Gabriel: We have stabilized.

Dominic Gabriel: We're probably one of the first players to stabilize and we've stabilized at this moment.

Dominic Gabriel: At 15% above 2000.

Dominic Gabriel: Say benchmark to 2019 levels.

Already we said that that number from a gross charge off number is is really sort of very close to 2019 levels. So the recoveries effect, which is a temporary effect that our that our recoveries are.

Dominic Gabriel: Our you know so much lower because they just don't have as much inventory of charge offs to collect on that's a good guy that should help over time.

Dominic Gabriel: I think also as we have talked about and we've talked about ever since the pandemic sort of we started coming out the other side of the pandemic. We said there is another effect.

Mr Andriy: Let's call it the delayed charge off effect that if you think about all of those charge offs that would've happened many of that would've happened in the pandemic, but didn't.

Mr Andriy: Some of them may have gotten a reprieve.

Long run, but a bunch of others. We certainly have felt are going to charge off over time and that is a temporary effect that we think has been playing out over this normalization thing. It's not we have we have ways that we try to measure it but nobody can precisely measure. This but this is also something that leads to an elevation.

Dominic Gabriel: <unk> of charge offs relative to probably what an equilibrium. So if I speak from capital one's point of view.

Dominic Gabriel: Our guidance was to guide you to the leveling off.

Dominic Gabriel: Because of the lower recoveries effect right now that's leveling off at a you know at a 15% above 2019, the underlying credit dynamics seem very similar to me to what was there in the past.

Dominic Gabriel: I think there are you know even as we keep a wary eye on the economy. There is some just sort of actuarial good guys are making their way.

Dominic Gabriel: Through through.

Dominic Gabriel: Through the through the business and all other things being equal.

That that can help the.

Dominic Gabriel: Credit metrics.

Dominic Gabriel: More and more show that that they are strikingly similar to what was there before the pandemic. So pulling way up I don't think and again I'll speak I don't think things have shifted I think we're seeing some trends playing out but for.

Dominic Gabriel: For capital one.

Dominic Gabriel: We're we feel great about where we've stabilized and we see really good.

A good assessment of our future.

Dominic Gabriel: Well. Thank you very much everyone for joining us on the conference call Tonight and thank you for your continuing interest in capital one.

Speaker Change: Mr Relations team is available this evening to answer further questions. If you have them.

Speaker Change: Have a great evening.

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

Q4 2023 Capital One Financial Corp Earnings Call

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