Q3 2024 Capital One Financial Corp Earnings Call
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Speaker Change: Good day and thank you for standing by. Welcome to the Capital One Q3 20204 earnings call. Please be advised that today's conference is being recorded. I would not 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 Josh and welcome everyone. We're webcasting live over the Internet as usual, and to access the call on the Internet, please log on to capital ones website at capitalone.com and follow the links from there.
Speaker Change: In addition to the press release and financials, we've included a presentation summarizing our third quarter, 2024 results. When we today are Mr. Richard Fairbank, capital 1's chairman and chief executive officer, and Mr. Andrew Young, capital 1's chief financial officer. Richard Andrew will walk you through this presentation.
Speaker Change: To access the copy of the presentation in the press release, please go to Capital One's website, click on investors, then click on financials, and then click on quarterly earnings release.
Speaker Change: Please note that this presentation may contain forward-looking statements.
Speaker Change: 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.
Speaker Change: Capital One does not undertake any obligation to update or revise any of this information. Whether or not as a result of new information, future events or otherwise.
Speaker Change: Numerous factors could cause our actual results to differ materially from those described in forward-looking statements.
Speaker Change: And for more information on these factors, please see the section titled Forward-Looking Information in the earnings release presentation and the Risk Factors section of our annual and quarterly reports accessible at Capital One's website and filed with the SEC.
Speaker Change: Now I'll turn the call over to Mr. Young. Andrew?
Andrew Young: Thanks, Jeff, and good afternoon, everyone. I will start on slide three of tonight's presentation.
Andrew Young: In the third quarter, Capital One earned $1.8 billion, or $4.41 per diluted common share.
Andrew Young: Included in the results for the quarter were adjusting items related to discover integration costs and a small downward revision to our FDIC special assessment estimate.
Andrew Young: Net of these adjusting items, third quarter earnings per share, were $4.51.
Andrew Young: Pre-provision earnings in the third quarter increased 3% from the second quarter to 4.7 billion dollars.
Andrew Young: Revenue in the linked quarter increased 5% driven by higher net interest income.
Andrew Young: Non-interest expense increased 7% driven by increases in both operating expense and marketing spend.
Andrew Young: Provision for credit losses was $2.5 billion in the quarter, down $1.4 billion relative to the prior quarter.
Andrew Young: The quarterly decrease was primarily driven by the absence of the second quarter's one-time allowance bill for the termination of the Walmart partnership.
Andrew Young: a decline in the coverage ratio in CARD, and a $40 million decrease in net charge-offs.
Andrew Young: Turning to slide four, I will cover the allowance in greater detail.
Andrew Young: Thank you.
Andrew Young: We released $134 million in allowance this quarter, and our allowance balance now stands at $16.5 billion.
Andrew Young: Our total portfolio coverage ratio decreased 7 basis points to 5.16%.
Andrew Young: The decrease in this quarter's allowance and coverage ratio was largely driven by allowance releases in our card and consumer banking segments.
Andrew Young: I'll cover the drivers of the changes in allowance and coverage ratio by segment on slide 5.
Andrew Young: Thank you.
Andrew Young: In our domestic card business, we released $66 million of allowance, which decreased coverage by 18 basis points to 8.36%.
Andrew Young: Our credit outlook has improved slightly as our confidence in the stability of underlying credit trends has grown, driving a modest release in allowance.
Andrew Young: In our consumer banking segment, we released $50 million in allowance, resulting in a 10 basis point decrease to our coverage ratio.
Andrew Young: The release was driven by strong credit performance and increasing recoveries in our auto business.
Andrew Young: And finally, our commercial banking allowance decreased by $14 million, resulting in the coverage ratio remaining essentially flat at 1.76%.
Andrew Young: Turning to page six, I'll now discuss liquidity.
Andrew Young: Thank you.
Andrew Young: Total liquidity reserves in the quarter increased about $9 billion to approximately $132 billion.
Andrew Young: Our cash position ended the quarter at approximately $49 billion, up about $4 billion from the prior quarter, driven primarily by continued strong deposit growth.
Andrew Young: Our preliminary average liquidity coverage ratio during the third quarter was 163%, up from 155% in the second quarter.
Andrew Young: Turning to page 7, I'll cover our net interest margin.
Andrew Young: Our third quarter net interest margin was 7.11 percent.
Andrew Young: 41 bases points higher than last quarter and 42 bases points higher than the year ago quarter.
Andrew Young: The sequential increase in NIM was largely the result of three factors.
Andrew Young: First, we had higher card and auto yields.
Andrew Young: As a reminder, the card yield benefited from a full quarter impact of the termination of the revenue sharing agreement with Walmart.
Andrew Young: The removal of revenue sharing increased the total company NIM by 12 basis points quarter over quarter and 22 basis points relative to the year ago quarter.
Andrew Young: Second, there was one additional day in the third quarter.
Andrew Young: And finally, we had a higher mix of card loans on the balance sheet.
Andrew Young: Turning to slide 8, I will end by discussing our capital position.
Andrew Young: Our Common Equity Tier 1 Capital Ratio ended the quarter at 13.6%, 40 basis points higher than the prior quarter.
Andrew Young: Higher net income in the quarter was partially offset by the impact of dividends, loan growth, and 150 million dollars of share repurchases.
Andrew Young: As a reminder, the announcement of the acquisition of Discover constituted a material business change.
Andrew Young: Therefore, we continue to be subject to the Federal Reserve's pre-approval of our capital actions until the merger approval process has concluded. With that, I will turn the call over to Rich. Rich?
Rich: Thank you, Andrew, and good evening, everyone.
Rich: Slide 10 shows third quarter results in 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.
Rich: In the third quarter, our domestic card business delivered another quarter of top line growth, strong margins, and stable credit.
Rich: Year-over-year purchase volume growth for the quarter was 5%. Ending loan balances increased $9.1 billion, or about 6% year-over-year.
Rich: average loans increased about 7% and third quarter revenue was up 10% driven by the growth in purchase volume and loans.
Rich: Revenue margin for the quarter increased 43 basis points year-over-year to 18.7%. The full quarter effect of the end of the Walmart Revenue Sharing Agreement drove a 51 basis point year-over-year increase.
Rich: excluding this impact, the revenue margin would have been about 18.2 percent.
Rich: The charge-off rate for the quarter was 5.61%. The full quarter impact of the end of the Walmart loss-sharing agreement increased the quarterly charge-off rate by 38 basis points.
Rich: Excluding this impact, the charge-off rate for the quarter would have been 5.23%, up 83 basis points.
Rich: year-over-year. The 30-plus delinquency rate at quarter-end was 4.53%, up 22 basis points from the prior year. As a reminder, the end of the Walmart law sharing agreement did not have a meaningful impact on the delinquency rate.
Rich: The pace of year-over-year increases in both the charge-off rate and the delinquency rate have been steadily declining for several quarters and continued to shrink in the third quarter.
Rich: On a sequential quarter basis, the charge-off rate, excluding the Walmart impact, was down 63 basis points, and the 30-plus delinquency rate was up 39 basis points.
Rich: Both sequential quarter trends are consistent with seasonal expectations.
Rich: Domestic card non-interest expense was up 12% compared to the third quarter of 2023, primarily driven by higher marketing expense. Total company marketing expense in the quarter was 1.1 billion dollars, up 15% year over year.
Rich: Our choices in domestic card are the biggest driver of total company marketing. We continue to see compelling growth opportunities in our domestic card business.
Rich: Our marketing continues to deliver strong new account growth across the domestic card business.
Rich: compared to the third quarter of 2023. Domestic card marketing in the quarter included increased marketing to grow originations at the top of the market, higher media spend.
Rich: and increased investment in differentiated customer experiences like our Travel Portal, airport lounges and Capital One Shopping.
Rich: Slide 12 shows third quarter results in our consumer banking business.
Rich: Auto originations were up 23% year-over-year in the third quarter. Our stable credit performance, which is the result of choices we've made over the past couple of years, puts us in a strong position to lean into current origination opportunities in the marketplace.
Rich: Consumer banking ending loans were essentially flat year over year and average loans were down 1%. On a linked quarter basis, ending loans and average loans were both up 1%.
Rich: Compared to the year ago quarter, both ending and average consumer deposits were up about six percent.
Rich: Consumer banking revenue for the quarter was down about 3% year-over-year, largely driven by higher deposit costs compared to the prior year quarter.
Rich: Non-interest expense was up about 5% compared to the third quarter of 2023, driven largely by continued technology investments and increased auto originations.
Rich: The auto charge-off rate for the quarter was 2.05%, up 28 basis points year-over-year. The 30-plus delinquency rate was 5.61%, down 3 basis points year-over-year. Largely, as the result,
Rich: of our choice to tighten credit and pull back in 2022, auto charge-offs have been strong and stable.
Rich: Slide 13 shows third quarter results for our commercial banking business.
Rich: Compared to the linked quarter, ending loan balances decreased about two percent. Average loans were down about one percent. The modest declines are largely the result of choices we made in 2023 to tighten credit.
Rich: Ending deposits were up about 5% from the linked quarter. Average deposits were down about 1%. We continue to manage down selected less attractive commercial deposit balances.
Rich: Third quarter revenue was up 1% from the linked quarter and non-interest expense was up by about 2%.
Rich: The commercial banking annualized net charge-off rate for the third quarter increased seven basis points from the sequential quarter to 0.22 percent.
Rich: The Commercial Banking criticized performing loan rate was 7.66%, down 96 basis points compared to the linked quarter.
Rich: The criticized non-performing loan rate increased nine basis points to 1.55 percent.
Speaker Change: In closing, we continued to post strong results in the third quarter. We delivered another quarter of top-line growth in domestic card loans, purchase volume, and revenue. In the auto business, we saw year-over-year growth and originations for the third consecutive quarter, and consumer credit trends remained stable.
Speaker Change: to be modestly down compared to the 43.5% we posted in 2023. Our view included the positive impact from the end of the revenue sharing related to the Walmart partnership.
Speaker Change: and assumed the CFPB late fee rule would take effect in October. Looking forward, we now expect the full year 2024 annual operating efficiency ratio net of adjustments.
Speaker Change: to be in the low 42s.
Speaker Change: We expect a sequential quarter increase in operating expense in the fourth quarter that will be roughly in line with historical patterns as we continue to invest in our technology transformation.
Speaker Change: And we are no longer assuming that the CFPB late fee rule will be implemented in 2024, given ongoing uncertainty around industry litigation.
Speaker Change: Our view of 2024 marketing has not changed.
Speaker Change: We continue to lean into marketing to grow and to further strengthen our franchise.
Speaker Change: In the domestic card business, we continue to get traction and originations across our products and channels.
Speaker Change: In consumer banking, we're leaning into marketing to grow our digital-first national banking franchise. We continue to expect total company marketing in the second half of 2024 to be meaningfully higher than in the first half, similar to the pattern we saw last year.
Speaker Change: and that includes the much higher marketing levels that we typically see in the fourth quarter.
Speaker Change: And, turning to the Discover acquisition, we're working closely with the regulators as our applications continue to work their way through the regulatory approval process.
Speaker Change: Separately, Discover mentioned in their press release and on their earnings call last week that they continue to work in parallel with the SEC to resolve comments regarding their accounting approach for their card misclassification matter.
Speaker Change: As soon as that process wraps up, we expect to mail out a joint proxy and a schedule.
Speaker Change: and to schedule a shareholder vote most likely early next year.
Speaker Change: We remain well positioned to get shareholder and regulatory approvals and we expect to be in a position to complete the acquisition early in 2025 subject to regulatory and shareholder approval.
Speaker Change: Pulling way up, the acquisition of Discover is a singular opportunity. It will create a consumer banking and global payments platform with unique capabilities, modern technology, powerful brands, and a franchise of more than 100 million customers.
Speaker Change: It delivers compelling financial results and offers the potential to enhance competition and create significant value for merchants and customers.
Speaker Change: and now we'll be happy to answer your questions.
Speaker Change: Jeff.
Jeff Norris: Thank you, Rich.
Jeff Norris: We will now start the Q&A session. Remember, as a courtesy to other investors and analysts who may wish to ask a question, please limit yourself to one question plus a single follow-up. If you have any further questions after the Q&A session, the Investor Relations team will be available after the call.
Jeff Norris: Josh, please start the Q&A.
Josh: Thank you. As a reminder, to ask a question, please press star 11 on your telephone and wait for your name to be announced. To withdraw your question, please press star 11 again.
Speaker Change: One moment for our first question.
Speaker Change: And our first question comes from Ryan Nash with Goldman Sachs. He may proceed.
Speaker Change: Thank you. Thank you. Thank you.
Speaker Change: and Jeff Norris.
Ryan Nash: Hey good afternoon everyone. Hey Ryan. Hey Brian.
Ryan Nash: So, Richard, maybe we just...
Ryan Nash: start on credit. You obviously can see lots of different parts of the consumer market, high-end consumers, subprime, prime, private label, different parts of ordo.
Ryan Nash: And you guys seem to be bucking the trend with really solid credit results, so I think some others aren't. So maybe can you just talk about what you're seeing across consumer and some of these different cohorts, and maybe what do you think it means for where losses could be headed in some of your main asset classes? Thanks, I have a follow-up.
Speaker Change: Okay, yeah, thank you, Ryan.
Speaker Change: So let me just pull up and just talk first about the health of the consumer.
Speaker Change: You know, I think the U.S. consumer remains a source of relative strength in the overall economy.
Speaker Change: You know, think about this. The labor market remains strong. You know, we saw signs of softening in the first half of 2024, and the unemployment rate ticked up a bit.
Speaker Change: But the most recent data points on unemployment and job creation have actually shown renewed strength.
Speaker Change: Incomes are growing in real terms and last month we saw a significant upward revision of the savings rate.
Speaker Change: Consumer debt servicing burdens are stable relative to pre-pandemic levels and consumers have higher average bank account balances than before the pandemic.
Speaker Change: Now, we see some pockets of pressure related to sort of the cumulative effects of inflation and elevated.
Speaker Change: interest rates and we are almost certainly still seeing
Speaker Change: But we won't fully be able to measure that. We won't be able to measure that along the way, but that is delayed charge-offs from the pandemic period. We should remember that millions of consumers who would have charged off under normal circumstances in 2020.
Speaker Change: 2021 and 2022.
Speaker Change: avoided defaulting thanks to unprecedented stimulus and forbearance.
Speaker Change: and these consumers were on the edge and they got a lifeline but you know for some of them their underlying vulnerability remains.
Speaker Change: So...
Speaker Change: I believe that what we're seeing today is some catching up from that period of historically low charge-offs.
Speaker Change: So, I'd say consumers on the whole are in good shape compared to most historical benchmarks, but I do think there's some pockets of pressure that will persist until we fully work through this.
Speaker Change: You know the
Speaker Change: this cycle essentially of inflation and elevated interest rates.
Speaker Change: And, of course, for an unmeasurable period of time, there will be, I think, this delayed charge-off effect from the pandemic.
Speaker Change: So that's a comment, Ryan, sort of on the consumer generally. You said you had another question. Of course, I can get into Capital One's individual credit as well, but why don't I hear where you want to take this?
Ryan Nash: Yeah, and it would be helpful if if you can't comment on Capital One specifically, but maybe I'll throw another question for Andrew
Ryan Nash: and you guys can handle both of them. So Andrew, obviously there was a big beat on the net interest margin.
Ryan Nash: And, you know, the Fed has begun easing. I'm just curious if you could maybe just talk about the drivers and expectations for the margin from here. And just given, you know, you've historically operated in this kind of 6.8 or 6.9 range, but given the balance sheet, the changing balance sheet dynamics, do you think we've sort of broken out of that range? Thanks.
Speaker Change: Yeah, Ryan, as I think about the NIM in the near term, I enumerated the driving forces of what led to the increase this quarter.
Speaker Change: In the near term, outside of seasonal effects, we have one modest likely headwind, which as you can see in our disclosures is that we're asset sensitive.
Speaker Change: and so that that will put a bit of pressure on him in the immediate term but we also have
Speaker Change: one.
Speaker Change: potential tailwind, I'll call it, and that is the pace of card growth relative to the rest of the balance sheet, and you've seen that be a tailwind to NIM, all else equal, over the last few quarters.
Speaker Change: longer term. I think there's, you know, a few headwinds and tailwinds. The tailwind being, again, card even beyond the next few quarters. We've seen strong growth, particularly relative to the rest of our balance sheet. I've highlighted in the past that our current levels of cash
Speaker Change: are likely above where we think they will eventually settle out. And if we were to see a steepening of the yield curve, that's also a good guide to us, all else equal.
Speaker Change: on the on the headwind side.
Speaker Change: I think there's a question of where betas go from here, and there's a possibility that they could be, you know, slower or lower depending on a host of factors. We could...
Speaker Change: maintain cash levels.
Speaker Change: for some period of time, at least, especially in light of the strong deposit growth we're seeing, and then always there's a little bit of a wild card of the path of credit, right? And so if, for some reason, it stays elevated, the potential revenue suppression could be a headwind. But, you know, overall, I would say, taking all of those factors into account, you've kind of seen the stability over the last...
Speaker Change: a few quarters prior to this one and a step up here in the third quarter. And so, you know, I'll let you kind of weigh all of the headwinds and tailwinds that I just laid out for you.
Speaker Change: and Richard Fairbank. Thank you.
Richard Fairbank: Thank you.
Richard Fairbank: So...
Richard Fairbank: Ryan, let me just, I talk generally about the consumer, let me talk a little bit about Capital One specifically what we see, and this is of course partly because of what I just said about the consumer and some Capital One specific things as well. So, in the card business.
Richard Fairbank: We
Richard Fairbank: You know, our delinquencies and charge-offs are consistent with normal seasonality now and it's clear that our card credit has settled out.
Richard Fairbank: It's also clear that it settled out above pre-pandemic levels, and sort of there's
Richard Fairbank: Three main reasons for this. First, we still have relatively lower recoveries compared to before the pandemic as a result of historically low charge-offs in the rearview mirror and therefore in our charge-off inventory.
Richard Fairbank: So, our recovery rate per dollar of charge-offs has been stable, if anything, in fact, a bit better than before the pandemic, but just the inventory remains below pre-pandemic levels.
Richard Fairbank: It's rising. It's, you know, heading toward returning to the pre-pandemic levels.
Richard Fairbank: So, you know, this effect will diminish over the next few quarters, you know, we would expect.
Richard Fairbank: Secondly, we believe the cumulative effects of inflation and higher interest rates are creating affordability pressures for some consumers, particularly those whose incomes have not kept pace with inflation or have higher debt servicing burdens. So we think that's a factor.
Richard Fairbank: And, you know, to your point, I'm actually not making a point about the low end of the market, whether measured by income or credit.
Richard Fairbank: You know customers with the highest debt servicing burdens tend to skew more prime than subprime
Richard Fairbank: And then, of course, the other factor that we would point at as to why charge-offs are settling out above the pre-pandemic levels is the delayed charge-off effect that we think is still playing through.
Speaker Change: Just back, if I could just throw in an industry point just for a second, I should have mentioned this probably earlier, because this isn't really a Capital One effect, but.
Speaker Change: I think that what we see in industry data is that post-pandemic origination vintages are running at a higher risk level than pre-pandemic vintages, probably because of inflated credit scores during the pandemic.
Ryan Nash: And, you know, that's an industry point, not a Capital One point, because, and then here, Ryan, is when you mentioned that you're seeing Capital One credit in some cases move differently from some of the industry trends.
Ryan Nash: You know, at Capital One, we anticipated these effects.
Ryan Nash: related to some of the unusual things going on during the pandemic and particularly what we might say is the great inflation of credit scores. So we tightened our underwriting back in 2020 and 2021 when credit was the best we've ever seen.
Ryan Nash: and as credit normalized, we continued to make adjustments where we saw pockets of rising risk, what I was saying along the way where we kept trimming around the edges.
Ryan Nash: The result for Capital One has been relatively stable performance on our recent originations now for a long time.
Ryan Nash: which are really running at similar levels of risk.
Ryan Nash: to pre-pandemic vintages. But I do think there is some underlying worsening in the marketplace that may be showing up elsewhere that some of our choices were able to
Ryan Nash: We feel, you know, very good about where we are, and it's an important reason that we are, you know, leaning in, as you can see, in terms of our originations in the business. I can talk about auto at some point, but maybe I'll wait for another question on that.
Speaker Change: Next question, please.
Speaker Change: Thank you.
Speaker Change: Our next question comes from Sanjay Sikrani with KBW. You may proceed.
Sanjay Sikrani: Thank you. Good evening.
Sanjay Sikrani: Just following up on credit, sorry, just, Rich, you had mentioned, maybe it was last quarter or the quarter before, that we should start to see the credit, the delinquency improvements do better than seasonality. And I guess stabilized as, you know, it's moving along with seasonality. Is some of that related to the stuff you were just talking about, or do you still expect the improvement to be better than seasonality?
Sanjay Sikrani: and others. And I think that's a good thing. I think that's a good thing.
Sanjay Sikrani: I will.
Speaker Change: Well, at some point, of course, you know, can be a long time. No, let me just say that I don't recall saying that we expected credit to be better than seasonality. I think what we have been saying over the last number of months
Speaker Change: We're pointing out that we see...
Speaker Change: The signs of credit stabilizing, of course, we all went down that ski slope of second derivative.
Speaker Change: and that continues to be a strong effect.
Speaker Change: things Sanjay that are going on related to credit stabilizing and and we have not we have not declared that that we think
Speaker Change: the potential, you know, case for that. I want to say one other thing, though. You mentioned seasonality, and I put a marker down.
Speaker Change: last quarter about a potential seasonality, a change in seasonality patterns, and I'd like to just kind of seize the moment.
Speaker Change: and comment on this because I think all of you that are watching the credit patterns on a monthly basis, it's really important that we talk about the seasonality benchmark to which to compare that. So let's talk for a moment about how seasonality works.
Speaker Change: Our portfolio in fact tends to have more pronounced seasonal patterns than the industry average.
Speaker Change: The second quarter tends to be the seasonal low point for delinquencies and the fourth quarter tends to be the seasonal high point.
Speaker Change: and tax refunds drive a large seasonal improvement in delinquent payments in the February-March time period which flows through to lower delinquencies in April-May and then to lower charge-offs in the August-September time frame.
Speaker Change: Tax refunds also drive a seasonal uptick in our recoveries.
Speaker Change: Now, a few years ago,
Speaker Change: The tax withholding rules changed.
Speaker Change: leading to fewer tax refunds and lower average refund payments.
Speaker Change: and the IRS was paying certain refunds later than before because of fraud related issues that they had seen.
Speaker Change: Now, so we were watching all this, but there was so much noise in the payment data due to the pandemic that we were unsure.
Speaker Change: to what extent credit seasonality patterns had changed.
Speaker Change: So in the first half of this year, as credit metrics settled out, we flagged that the combined effect
Speaker Change: of lower and later tax refunds as the, you know, the more it settles out, the more we can sort of see these underlying patterns.
Speaker Change: that we flagged that this combined effect was likely
Speaker Change: affecting our near-term credit performance by delaying and muting the usual seasonal improvement that we see in the second quarter. But we didn't want to go to the highest mountaintop and declare that because we wanted to make sure we weren't explaining away credit numbers that in fact
Speaker Change: We also at the time, you know,
Speaker Change: believed that we would see more muted seasonal increases in delinquencies in the third quarter on the other side of that effect.
Speaker Change: And we've now had several quarters to look at this, and that experience has been confirmatory.
Speaker Change: You know, we're in a sense credit is coming in better than the old seasonal patterns So we've seen both the worst side and the better side
Speaker Change: You know, I think...
Speaker Change: 25% lower total refund volume in real terms.
Speaker Change: So...
Speaker Change: So what we're basically seeing and pulling way up is that seasonality, which as we believe is driven predominantly by tax refunds.
Speaker Change: As tax refunds become less of an effect, not surprisingly, in fact, we're seeing seasonality that has less amplitude to it. So that's, you know, I think the seasonality that we observe now and when we've done sort of a...
Speaker Change: An adjusted look at last year, we definitely think that we see the new trend.
Speaker Change: By the way, on the auto side, all of this happens in auto seasonality, but in an even faster and more concentrated way.
Speaker Change: So...
Speaker Change: So I think, I just wanted to share that with you, but I think what we've really been declaring here Sanjay is that there's just such a confirmation that that credit is really settling out here.
Speaker Change: Maybe my follow-up question would be the question you were looking for later, you know, what's the path to normalization? And I guess for credit as well as the reserve rate, you know, we're well above the levels we were in 2019. Maybe you and Andrew can tag team on that one. Thank you.
Speaker Change: So, why don't I start, Andrew? So, the...
Speaker Change: Thank you.
Speaker Change: You know, we're really, really pleased with how card credit is settled out after, you know, quite a period of normalization. So
Speaker Change: Looking ahead, while we're not giving guidance, you know, on future credit, I just want to point out a number of forces that play out.
Speaker Change: So...
Speaker Change: the
Speaker Change: You know one force of course is
Speaker Change: The thing that we believe so strongly is there, but we can't measure it is the.
Speaker Change: phenomenon of delayed charge-off.
Speaker Change: You know, if you kind of look at the area under the curve of all the charge-offs that sort of didn't happen, now, we don't believe all of that area will play out over time, but, you know, if you look at the area below the curve and compare it to the area, in a sense, above the curve now.
Speaker Change: one can see that conceptually there could be still quite a bit of in a sense
Speaker Change: delayed inventory that could happen. I just want to flag that effect. I think it's going to moderate at, you know, at some point, but, you know, I think that effect will be with us from for some time.
Speaker Change: and other factors the recoveries inventory that continues to rebuild and that should be a gradual tailwind to our losses over time all as all else being equal and then the moderating of inflation
Speaker Change: I think he's, you know, a good guy for card credit.
Speaker Change: but.
Speaker Change: Still, high interest rates are probably a source of pressure at the tails for some consumers, especially those with higher debt servicing burdens.
Speaker Change: And, of course, the economy will be a factor too, but those are just some of the forces I think are going to be at work as credit plays out here, Sanjay.
Speaker Change: And then, with respect to allowance, Sanjay, obviously, will be allowing for growth. So that's the starting point on a dollar basis. I suspect you are more focused on coverage, so let me talk in coverage terms.
Speaker Change: first and just very tactically as a reminder near-term the fourth quarter we typically have seasonally higher balances and those balances just have lower coverage.
Speaker Change: because of the high levels of expected payment, so all else equal.
Speaker Change: and I stress that point, but that would put downward pressure on coverage in the fourth quarter.
Speaker Change: I, in hearing your question, I think you're looking for a longer-term view, so...
Speaker Change: First, the coverage over time is going to primarily be driven by our loss forecast and our confidence.
Speaker Change: in those estimates. And so Rich just kind of shared the things that we'll be looking for and what will ultimately be driving those forecasts.
Speaker Change: how the allowance then plays out relative to that.
Speaker Change: I think it's important to note that even if we find ourselves in future quarters where our projected losses are lower than the projected losses in the current
Speaker Change: quarters forecast, we might see only modest declines in coverage as we
Speaker Change: incorporate uncertainties related to to those projections.
Speaker Change: lower loss forecast, if and when it comes through, would, you know, theoretically flow through the allowance and bring the coverage ratio down as, you know, those uncertainties become more certain, and so the direction of travel
Speaker Change: In that scenario would be down. The pace and timing would obviously depend on a variety of factors.
Speaker Change: Because you mentioned, though, Cecil Day 1, I guess I'll end, Sanjay, just as a reminder, one other call-out. You know, using Cecil Day 1 as a rough proxy for, you know, a through-the-cycle coverage assumption, it's important to note that embedded in Cecil Day 1 was the law-sharing agreement with Walmart.
Speaker Change: And so with the termination...
Speaker Change: of that agreement, the roughly 50 basis point impact to allowance coverage that we recognized last quarter. I just want to make sure that as you're thinking about, you know, CECL Day 1, excluding the Walmart effect, that six and a half, roughly, percent is actually more like seven.
Speaker Change: Hopefully that gives you, though, a sense of the direction of travel.
Speaker Change: Next question, please.
Speaker Change: Thank you.
Speaker Change: Our next question comes from Terry Mahl with Barclays. He may proceed.
Speaker Change: Oh, thank you. Good evening.
Terry Mahl: I wanted to touch on the auto business and ask kind of what you're seeing in a competitive environment and how you're thinking about growth going forward. You called out originations have been positive the last three quarters and it looks like loan growth is going to turn positive. I know you're still mindful of used car prices, so should we expect more measured growth in auto going forward?
Speaker Change: So, yeah, thank you, Terry.
Speaker Change: You know, our auto originations, as you say, they've been growing now, I guess it's the last three quarters.
Speaker Change: As we stated in our prior calls, in 2022 and in early 2023,
Speaker Change: We had anticipated risk and pull back, you know, on our originations.
Speaker Change: And even as the vehicle values have been declining, the credit performance on both our front book and our back book remains, you know, very strong. So additionally, just...
Speaker Change: Just talking about some industry factors, some of the headwinds that the industry has been facing with high interest rates and high vehicle prices are now easing as the interest rates have started to come down and vehicle values are down from their peak.
Speaker Change: although both of these remain higher than pre-pandemic levels.
Speaker Change: So, interest margins.
Speaker Change: Also, very important, interest margins on our front book have increased, and credit has stabilized, and we're seeing opportunities to grow in a resilient way.
Speaker Change: So, our strategy is to lean into areas that we like, and that is supported by our very sophisticated underwriting and technology infrastructure, our data-driven decisioning, as well as deep relationships with our dealer network.
Speaker Change: So, looking ahead, we feel good about our auto business and we feel we are well positioned to grow in a disciplined way, targeting particularly what we think is the very resilient business.
Speaker Change: Great. Thank you.
Speaker Change: Thank you, Terry. Next question please.
Speaker Change: Thank you.
Speaker Change: Our next question comes from Bill Karkatchi with Wolf Research Securities. You may proceed.
Speaker Change: Bill, your line is now open.
Bill Karkatchi: Thank you. Good evening, Rich and Andrew. Following up on your NIM commentary, Andrew, if credit continues to trend in line or potentially better than normal seasonality from here, is it reasonable to expect revenue suppression would begin to serve as more of a NIM tailwind that would arguably overwhelm some of the NIM headwinds that you described in your earlier response?
Andrew Young: outside of seasonality bill which is an important qualifier to that but yes to the extent that you know credit is coming down in an absolute sense suppression is highly correlated with with loss rates so over a period of time that's what we would expect to see
Speaker Change: Thanks and then also another follow-up for you, Andrew, on your reserve commentary. In prior quarters, qualitative overlays, it seems, and please correct me if I'm wrong, it seems like it had the effect of preventing you from releasing reserves.
Speaker Change: Is it fair to conclude that this quarter's reserve release suggests you expect consumer credit conditions to continue to gradually improve from here to the point where that would support peak losses?
Speaker Change: likely being, or sorry, peak reserve rates likely being behind us at this point.
Speaker Change: It's hard to
Speaker Change: think about
Speaker Change: the qualitative factors in isolation, Bill, because we look at the totality of the forecast and the economic backdrop. And that's just one, albeit important, but component of thinking about the allowance overall. So really the release this quarter was driven by the stability of underlying credit trends and just our confidence.
Speaker Change: in those trends. So that's really the driver that led to this quarter's release.
Speaker Change: Thank you for taking my questions.
Speaker Change: Thank you.
Speaker Change: Next question please.
Speaker Change: Our next question comes from Don Fandetti with Wells Fargo. You may proceed.
Don Fandetti: Hi, Rich. On the Discover merger, do you still feel like owning a network helps your position with regulatory approval? I mean, I guess the DOJ suit against Visa does validate that. I'm just trying to get a sense on whether or not you feel like your arguments are resonating with regulators and you have confidence in the deal closing.
Don Fandetti: Thank you.
Speaker Change: So, I think it's...
Speaker Change: a player in a certain industry, doing an acquisition of another player in that industry, and certainly a part of the consideration is looking at those aspects.
Speaker Change: is two things. First of all, one is such an important part of this acquisition is buying a network, something that we don't have, so we're not even in that part of the business.
Speaker Change: But then, secondly, of course, it is, you know, an acquisition, buying a position in an industry that is, you know, getting a tremendous amount of scrutiny for how concentrated it is.
Speaker Change: and the network that we are acquiring, for example, on the credit card side, has gone from 6% down to 4% share in recent years. And so, certainly we are making a strong case that...
Speaker Change: to a regulator that obviously has shown they care a lot about competition in that marketplace. We certainly believe that.
Speaker Change: this is very pro-competitive in that sense. Of course we also believe very much that on the credit card side the deal is pro-competitive as well.
Speaker Change: Thank you.
Speaker Change: Yeah, and
Speaker Change: Yeah, yeah, go ahead.
Speaker Change: Next question, please.
Speaker Change: Thank you. Our next question comes from John Hecht with Jeffries. He may proceed.
John Hecht: Afternoon guys, thanks very much for taking my questions. Most of them have been asked and answered.
John Hecht: I'm wondering if you guys can maybe give us some color on SpendTrend, the Build Business volumes. You know, we've heard that there's...
John Hecht: that the consumer's being a little bit more.
John Hecht: cautious and careful or responsible with their spending.
John Hecht: as opposed to reacting to some sort of weakness or concerns about the economy. And I'm wondering what your opinion is on that and how that affects your business.
Speaker Change: So, John, thank you.
Speaker Change: settling out.
Speaker Change: Since the beginning of 2023, our spend per customer
John Hecht: has remained largely flat overall, although it has begun to tick up.
John Hecht: in recent months.
John Hecht: So, the spend growth that you see for Capital One is really being driven by the growth in new accounts and the spending on those accounts.
John Hecht: And, you know, and then we see just a little bit of a tick up in the last few months.
John Hecht: Well, I know some people have kind of wondered if you double click into the spend patterns.
John Hecht: Discretionary and non-discretionary spend, the growth rates of them have been very stable.
John Hecht: lately and in fact the mix has been stable across incomes and FICOs and is in line with pre-pandemic levels.
John Hecht: You know when we it's really striking when we look at banking overall and You know pretty much the only industry
John Hecht: that's really growing is the credit card industry and it's it's been a tough way to make a living and you know most of the banking
John Hecht: product areas and that, of course, I think the credit card continues to, you know, be part of a very important and multi-decade
John Hecht: macro trend with respect to
John Hecht: the movement out of cash and checks and really into
John Hecht: the incredibly convenient spending mechanisms of a credit card. So, I think there's sort of a macro tailwind that continues to help the industry.
John Hecht: And then I think for a lot of us companies, certainly a few of us companies like Capital One, our strategies are very focused. It's what I call a...
John Hecht: spend first.
John Hecht: strategy, so that a lot of what we do, the choices we make on the marketing side, on the credit side, and really the business we want to be, has a spend first lean to it.
John Hecht: That's another.
John Hecht: benefit to our metrics.
John Hecht: Thank you, John.
Speaker Change: Thank you. Appreciate the color.
Speaker Change: Next question, please.
Speaker Change: Thank you.
Speaker Change: Our next question comes from Mihir Batya with Bank of America. You may proceed.
Mihir Batya: Good afternoon, thank you for taking my question. Actually just following up kind of similar lines as John's question about spending, maybe just drilling down specifically.
Mihir Batya: on the VentureX portfolio. And I was wondering if you could just talk a little bit more about it. It's been in the market for a couple of years. Now, just how much has it grown? How material is it to the overall start business? What are you seeing in terms of performance in that portfolio that's encouraging you to invest more in it?
Mihir Batya: or just any additional details would be great. Thank you.
Mihir Batya: All right, thank you, Amir.
Speaker Change: So we launched our Venture xCard in late 2021 and we're very pleased with the market response and the customer engagement so far.
Speaker Change: This launch is, of course, a continuation.
Speaker Change: in our journey that's been many years in the making, to win at the top of the market. And that journey, you know, started years ago with the Declaration.
Speaker Change: And then we have continued to just sort of every year stretch a little higher and lean in.
Speaker Change: to the momentum and the brand strength that we were getting and our market position to be able to keep growing. So Venture X was a very important milestone in that journey.
Speaker Change: And also, you know, very important in that journey to win at the top of the market was the launch of our Capital One travel portal and the opening of Capital One lounges, as well as enhancements to our customers.
Speaker Change: you know, overall experience more broadly.
Speaker Change: So...
Speaker Change: I'm sure you saw that actually in the third quarter of last year we then launched the Venture X business card and we're also pleased with the market response and customer engagement.
Speaker Change: so far as well.
Speaker Change: So, I guess the way, while we don't give out the specific numbers on this, we continue to be very pleased with our quest to win at the top of the market, and both of these VentureX products are.
Speaker Change: You know, getting a lot of traction so far.
Speaker Change: And as you can see, we're leaning in quite a bit. But again, what I want to say is, I think one of the mistakes that card companies sometimes make is
Speaker Change: to think about a quest to win at the top of the market related to we're going to launch a particular product with these features. I really want to stress that winning at the top of the market requires a sustained comprehensive effort
Speaker Change: to create experiences.
Speaker Change: access to things that that are unique and and sort of something to tell your friends about. Lounges.
Speaker Change: digital experience, rewards, of course.
Speaker Change: And then a very important component of this is building the brand credibility.
Speaker Change: to be viewed as a premium player in that part of the marketplace. So all of that is what we're investing in. You've, of course, seen quite an increase in our marketing.
Speaker Change: And a fair amount of that is in service of our continued quest at the top of the market. But I would leave this one.
Speaker Change: observation with you as well is that while you see
Speaker Change: the overall purchase volume growth rate for Capital One.
Speaker Change: break that data up by spend segment. Basically the higher the spend segment, meaning the higher we reach up in the marketplace, the faster our growth rate is, which is a
Speaker Change: of the traction we're getting, but also not only in overall volume, but the traction that we're getting reaching farther up.
Speaker Change: Thank you.
Speaker Change: Next question, please.
Speaker Change: Thank you.
Speaker Change: Hi, it's John Pancari at Evercore ISI. I wanted to just ask on capital, CET1 ratio at 13.6. I wanted to get your updated thoughts here on
John Pancari: on how you think about buyback in that context. Now, I know you had indicated that the Discover transaction could impact the pace of buybacks ultimately, but you still bought back about $150 million in the third quarter. So I wanted to get your updated thoughts there. Thanks.
John Pancari: Thank you.
Speaker Change: Yeah, John, look, there's a few forces at play that impact.
Speaker Change: How we think about capital management, the first, of course, being the uncertainty around the endgame rule, the re-proposal.
Speaker Change: provided some high-level indications, but the devil's in the details there, not to mention the uncertainty on implementation.
Speaker Change: timing, you know, second, although it's been moderating, of course, you know, there still continues to be a degree of macroeconomic uncertainty.
Speaker Change: But last, and perhaps most importantly, we have the pending Discover acquisition. And so post-close, we will need to run both our internal assessment of the needs of the combined company, but we'll also go through the Fed's...
Speaker Change: CCAR process to come up with our view and the Fed's view of the combined
Speaker Change: capital need, combined company entities capital need. So those are the reasons why we're, you know, operating it at current levels and believe it's prudent to do so.
Speaker Change: and we've been at this $150 million apace for a number of quarters. Once we are back under an SCB regime, we'll of course have flexibility to return capital as we see appropriate.
Speaker Change: 2021 and early 22, when we had excess capital, we were returning that at, you know, something like two and a half billion a quarter in repurchases. So if we were to find ourselves in a similar position, you know, we understand that returning excess
Speaker Change: Capital is an important part of creating shareholder value, and we have the ability to do so quickly. But I go back to the forces at play of why we're operating where we are right now.
Speaker Change: Got it. Thank you, Andrew. If I could just ask one more on the loan yield increase of about 58 basis points this quarter. How much of that increase was the impact from Walmart for the quarter, and was there any impact on the APR from any increase to the APR in response to the proposed CFPB late fee rule? Thanks.
Speaker Change: and John I just want to make sure I understand your question of the yield quarter over quarter you saying or like
John Pancari: year-over-year yield in CARD. Yeah, year-over-year yield in CARD is flat.
Andrew Young: when you take into account the effect of Walmart quarter over quarter. It's really just the seasonality effect. There's the partial quarter of Walmart, but yield is really the seasonal effects and partial quarter of Walmart when you're comparing third quarter to the second quarter.
Speaker Change: okay and then
Speaker Change: Okay, thank you.
Speaker Change: Next question, please.
Speaker Change: Thank you. And our final question comes from the line of Jeff Adelson with Morgan Stanley. You may proceed.
Jeff Adelson: Hey, good evening. Thanks for taking my question. Just one from me to follow up on John's question there.
Jeff Adelson: Just on the late fee rule, I fully appreciate that things remain in flux at this point. But could you give us an update in your latest thinking and how you're potentially preparing for that with any offsets or mitigating actions?
Jeff Adelson: have any of those actions been taken yet? And I get that you talked about taking a more mindful approach here. Just wanted to make sure that this is still the same approach you're taking, or if there's anything else we should be thinking about in our models here. Thank you.
Speaker Change: So, thank you Jeff.
Speaker Change: So, at this point, we're waiting for industry litigation to play out to see if and when the late fee rule goes into effect.
Speaker Change: And, you know, we're not going to predict when that will happen.
Speaker Change: As we've said before, if the rule is implemented in its current form, it will have a significant impact on our revenue.
Speaker Change: But we also believe that the rule will have an impact on the marketplace, including competition, pricing, customer behavior, volumes, credit.
Speaker Change: The reality is that we have spent decades painstakingly building a customer-first franchise with the fewest fees in the industry and extremely simple products.
Speaker Change: We believe that we've been rewarded for these choices with better growth, better attrition, and better credit selection.
Speaker Change: Ultimately, we will work backwards from what preserves our customer franchise, our customer loyalty and credit resilience if the rule does go into effect.
Speaker Change: Relative to anything that we've done so far, really the only thing we've done is we did defer a few investments.
Speaker Change: in anticipation of this rule being implemented. If the ruling never happens, we will likely go ahead and make these investments over time.
Speaker Change: Thank you, Jeff.
Speaker Change: and Richard Fairbank. Thank you. Thank you.
Jeff Norris: Well, that concludes our Q&A session for the evening. Thank you for joining us on this conference call today and for your continuing interest in Capital One. Everybody have a great night.
Jeff Norris: Thank you. Thank you.
Jeff Norris: [music]
Speaker Change: Richard Fairbank is a practitioner of Kantarepa, meditation practice, European Ideology. People living with unique thoughts, such as Dostoevsky's состо, be able to practice the relationship with the nature, with which these thoughts are transmitted through thoughtsassofprojections, contact this world and then be able to practice this world." With a debt to Odisha and Ranjienis,
Speaker Change: Playlist, Allsee viewers can now select which of the following is their favorite movie of all time.
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