Q1 2025 Capital One Financial Corp Earnings Call
Speaker Change: Good day and thank you for standing by. Welcome to the CapitalOne Q1 2025 earnings call.
Speaker Change: Please be advised that today's conference is being recorded. After the speaker's presentation, there will be a question and answer session. To ask a question, please press star 1-1 on your telephone and wait for your name to be announced.
Speaker Change: To withdraw your question, please press star one one again. I would not like to hand the conference over to your speaker today, Jeff Norris, senior vice president of finance, please go ahead.
Speaker Change: Thanks very much, Josh, and welcome to everyone. To access our live webcast of this call, please go to the investor section of CapitalOne's website at capitalone.com and follow the links from there.
Speaker Change: With me this evening are Mr. Richard Fairbank, CapitalOne's Chairman and Chief Executive Officer and Mr. Andrew Young, CapitalOne's Chief Financial Officer.
Speaker Change: Richard Andrew, we're going to walk you through our presentation, summarizing our first quarter results for 2025.
Please note that this presentation may contain forward-looking statements.
Speaker Change: Information regarding CapitalOne'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: CapitalOne does not undertake any obligation to update or revise any of this information, whether as a result of new information, future events or otherwise.
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 Oren's Release Presentation, and the Risk Factor Section of our annual and quarterly reports, accessible at CapitalOne's website and filed with the SEC.
Speaker Change: And now I'll turn the call over to Ms. Gianna, Andrew.
Andrew Young: Thank you, Jeff, in good afternoon everyone. I will start on slide three of tonight's presentation.
Andrew Young: In the first quarter, CapitalOne earned $1.4 billion, or $3.45 per diluted common share.
Andrew Young: Included in the results for the quarter were adjusting items for legal reserve activities and discover integration expenses.
Andrew Young: Net of these adjusting items, first quarter earnings per share were $4.00 and $6.00. [inaudible]
Thank you.
Andrew Young: Pre-Privision Earnings in the first quarter were largely flat to the fourth quarter, at $4.1 billion.
Andrew Young: on an adjusted basis, pre-prevision earnings increased 2% from the fourth quarter.
Andrew Young: Revenue in the linked quarter, decline 2% driven by two fewer days in the quarter.
Andrew Young: Non-interest expense decreased 5% on an adjusted basis driven by declines in both marketing
Andrew Young: Our provision for credit losses was $2.4 billion in the quarter, a decrease of 273 million compared to the prior quarter.
Andrew Young: The decrease was driven by $148 million lower net charge-off and $123 million larger reserve release.
Andrew Young: Turning to slide four, I will cover the allowance in greater detail.
We released $368 million in allowance this quarter.
Bringing the Allowance Balance to $15.9 billion.
Andrew Young: Our total portfolio coverage ratio decreased five basis points to 4.91%.
Andrew Young: I'll cover the drivers of the changes in allowance and coverage ratio by segment on slide five.
Andrew Young: In our domestic car business, we released 458 million in allowance.
Andrew Young: The allowance release was driven by continued favourable credit performance in the quarter, partially offset by a higher consideration to our downside economic scenario and increased qualitative factors to account for heightened uncertainty.
Andrew Young: The coverage ratio remained largely flat as the impact of the allowance release was offset by the denominator effect from the paydown of seasonal balances.
Andrew Young: As a reminder, our domestic card coverage ratio is about a hundred basis points above Cecil Day 1 after taking into account the impact of the termination of the Walmart agreement.
Andrew Young: The allowance balance in our consumer banking segment was largely flat at $1.9 billion.
Andrew Young: observed credit favorability in the impact of stable auction prices was largely offset by growth in the auto business.
The coverage ratio decreased by four basis points.
And finally, our commercial banking allowance increased by $170 million.
Andrew Young: The build and allowance was driven by increased qualitative factors to account for heightened uncertainty.
Andrew Young: as well as specific reserves for a small number of individual credits.
coverage ratio increased by 12 basis points to 1.73 percent.
Turning to page 6, I'll now discuss liquidity.
Total liquidity reserves in the quarter increased to $131 billion in dollars.
about 7 billion higher than last quarter.
Andrew Young: Our cash position ended the quarter at approximately $49 billion, up five billion from the prior
Andrew Young: The increase was driven by continued strong deposit growth in our retail banking business and the paydown of seasonal card balances.
Andrew Young: Our preliminary average liquidity coverage ratio during the first quarter was 152 percent.
Turning to page 7, I'll cover our net interest margin.
Thank you.
Andrew Young: Our first quarter net interest margin was 6.93%, 10 basis points lower than last quarter.
Andrew Young: The quarter over quarter decrease was driven by the 15 basis point impact of having two fewer days in the quarter.
Andrew Young: Beyond Day Count, Nim increased five basis points as the beneficial impact of the reduction in the rate paid on our deposits was only partially offset by the seasonal impact of lower average card loans and higher cash.
Andrew Young: On a year-over-year basis, Nim increased 24 basis points, driven by a favorable mix towards
and the termination of the Revenue Sharing Agreement with Walmart.
Andrew Young: Partially offset by one fewer day relative to last year's leap year.
Andrew Young: Turning to slide 8, I will end by discussing our capital position.
Andrew Young: Our Common Equity Tier One Capital Ratio ended the quarter at 13.6%. Approximately 10 basis points higher than the prior quarter.
Andrew Young: Net income in the quarter and the impact of seasonal loan declines were largely offset by the impact of the final Cecil phase in dividends and $150 million of share repurchases.
Andrew Young: Looking ahead, we expect the record date for the second quarter dividend for both Discover and CapitalOne to be after the May 18th closing date.
Andrew Young: As a result, we expect current discover shareholders, will be shareholders of CapitalOne's common stock as of the expected record date, and will therefore receive CapitalOne's 60 cent second quarter dividend subject to board approval.
With that, I will turn the call over to Rich.
Thank you.
So thanks, Andrew, and good evening everyone.
Andrew Young: Slide 10 shows first quarter results in our credit card business.
Andrew Young: Credit card segment results are largely a function of our domestic card results and trends, which are shown on slide 11.
Andrew Young: In the first quarter, our domestic card business delivered another quarter of top line growth, strong margins and improving credit.
Year-over-year purchase volume growth for the quarter was 5 percent.
Andrew Young: The first quarter of 2024 had an extra day since it was a leap year.
Andrew Young: Adjusting for this leap year effect, year over year purchase volume growth was about 6%. Ending loan balances increased $6.4 billion or about 4% year over year. Average loans increased about 5%.
Andrew Young: Fifth, and Revenue was up 7% from the first quarter of 2024 driven by the growth in purchase
Andrew Young: Revenue Margin, for the quarter, increased 37 basis points from the prior year quarter to 18.2%. Primarily driven by the impact of the end of the Walmart Revenue Sharing Agreement.
The charge-off rate for the quarter
Andrew Young: was 6.19 percent, up 25 basis points year over year. The impact of the end of the Walmart Art Law Sharing Agreement increased the first quarter charge-off rate by 42 basis points.
Andrew Young: excluding this impact, the charge off rate for the quarter would have been 5.77% a year over year improvement of 17 basis points.
Andrew Young: Our delinquencies have been improving steadily for several quarters on a seasonally adjusted basis. The 30 plus delinquency rate at the end of the first quarter was down 4.25% down 23 basis points from the prior year.
Andrew Young: Domestic card, non-interest expense was up 13% compared to the first quarter of 2024. Operating expense and marketing both increased year-over-year. Total company marketing expense in the quarter was $1.2 billion up 19% year-over-year.
Andrew Young: Our choices in domestic card are the biggest driver of total company marketing.
Andrew Young: We continue to see compelling growth opportunities in our domestic card business. Our marketing continues to deliver strong new account growth across the domestic card business and build an enduring franchise with heavy spenders at the top of the marketplace.
Andrew Young: compared to the first quarter of 2024. Domestic card marketing in the quarter included higher direct response marketing, higher media spend, and increased investment in premium benefits, and differentiated customer experiences like our travel portal, airline lounges, and CapitalOne shopping.
Andrew Young: As always, all of our marketing and origination choices are informed by our continuous monitoring of portfolio trends, market conditions, and consumer and competitor behaviors.
Thank you all. Thank you.
Andrew Young: Slide 12 shows first quarter results in our consumer banking business. Auto originations were up 22% from the prior year quarter driven by overall market growth and our strong position to pursue resilient growth in the current marketplace.
Andrew Young: Consumer Banking, ending loan balances increased $3.8 billion or about 5% year over year. Average loans were also up 5%.
Andrew Young: Compared to the year ago quarter, ending consumer deposits grew about 8% and average consumer deposits were up about 9%.
Andrew Young: Our digital first national consumer banking business continues to grow and gain traction, powered by our technology transformation and are compelling no fees, no minimums and no overdraft fees, customer value proposition.
Andrew Young: Consumer Banking Revenue for the Quarter was down about 2% year over year driven by margin compression and retail banking, partially offset by growth in auto loans and retail deposits.
Andrew Young: Non-interest expense was up about 27% compared to the first quarter of 2024 driven largely by the first quarter adjusting item Andrew discussed as well as increased auto-originations.
Andrew Young: Higher Marketing to Drive Growth in our National Consumer Banking Business and Continued Technology Investments.
The auto charge off rate for the quarter.
Andrew Young: was 1.55% down 44 basis points year over year. Largely as the result of our choice to tighten credit and pull back in 2022, auto charge-offs have been a strong and stable...
Andrew Young: Contributor on a seasonally adjusted basis. The 30 plus delinquency rate was 4.93% down 35 basis points year over year.
Andrew Young: Slide 13 shows first quarter results for our commercial banking business.
Andrew Young: Company, compared to the length quarter, both ending and average loan balances were essentially flat.
Andrew Young: Ending deposits were down about 5% from the linked quarter. Average deposits were roughly flat. We continue to manage down, select less attractive commercial deposit balances.
Andrew Young: First Quarter Revenue was down 7% from the link quarter and non-interest expense was down by about 6%
Andrew Young: The commercial banking annualized net charge off rate for the first quarter declined 15 basis points from the sequential quarter to 0.11%
Andrew Young: The commercial criticized performing loan rate was 6.41%, up 6 basis points compared to the linked quarter. The criticized non-performing loan rate was essentially flat at 1.40%.
Andrew Young: Inclosing, we continued to pose strong and steady results in the first quarter. We delivered another quarter of top line growth in domestic card loans, purchase volume and revenue.
Andrew Young: In the auto business, we posted growth in originations and loan balances. Our national consumer banking business continued to deliver strong year over year growth and consumer credit continued to improve.
Andrew Young: Looking forward, we're very excited to move forward with our acquisition of Discover.
Andrew Young: Last week, we received regulatory approval for our acquisition of Discover, and we're fully mobilized to complete the transaction on May 18th. Until we close, we are still separate public companies, so we have limited access to the Discover's information.
Andrew Young: Based on our due diligence and integration planning, we continue to expect that we will achieve the synergies we estimated when we announce the deal enabled by the integration costs we estimated at the announcement.
Andrew Young: and we continue to believe that we'll achieve the Synergy's run rate in about 24 months following the May 18th closing date.
Andrew Young: and also, just a reminder, our Network Synergy Estimate assumed the implementation of lower debit interchange rates proposed by the Fed under reg II in October 2023.
Those proposed rates are still pending because of various lawsuits.
Andrew Young: If there is ultimately no reduction to the current debit interchange fee levels, it would lower our debit network synergy because it would increase the baseline to which we are comparing.
Andrew Young: by about $170 million. But it would have no impact on our company's future revenue because of course the debit business will be on the Discover Network.
Andrew Young: Pulling way up, the acquisition of Discover is a singular opportunity.
Andrew Young: The combination of CapitalOne and Discover will create a leading consumer banking and payments platform with unique capabilities, modern technology, powerful brands, and a customer franchise of over 100 million customers that spans the marketplace.
Andrew Young: It combines proven and complementary banking and credit card businesses with a global payments network. It leverages CapitalOne's technology transformation and digital capabilities across the significantly larger customer franchise.
Andrew Young: It delivers compelling financial results and offers the potential to enhance competition and create significant value for merchants and customers. And it enables and drives significant strategic and economic upside over the long term.
and now we'll be happy to answer your questions, Jeff.
Jeff Norris: Thank you, Rich. We'll now start the Q&A session. Remember as a courtesy to other investors and analysts who may wish to ask a question, please limit yourself to one question plus a single follow-up. If you have follow-up questions after this session is over, investor relations team will be available to answer them.
Josh, please start the Q&A.
Speaker Change: Our first question comes from Ryan Nash, with Goldman Sachs, he may proceed.
Good evening, Rich, good evening, Andrew.
Hey Ryan. Good evening.
Speaker Change: So, you know, which obviously a lot of concerns in the market regarding tariffs and the state of the consumer, you know, it's hard to see those concerns in the results, you know, given better than expected credit and the reserve release, so...
Speaker Change: Maybe just talk a little bit about what you are seeing in the data within CapitalOne, what gave you the conference to release reserves?
Speaker Change: And then for Andrew, you mentioned some of the driver's favourable credit, higher allocation to the downside. Maybe just remind us what's included within the allowance for both unemployment and the overall economy. Thank you.
Speaker Change: Great. Thanks, Ryan. So let me take your question about what we're seeing in the data. Let
Speaker Change: A discussion of the health of the consumer and how our...
Major Metrics, Credit Metrics are performing.
Speaker Change: And then let me just kind of double click into the data that we're seeing on the spending side over the last couple of weeks because of course everybody's watching that so closely but first pulling kind of way up on the consumer.
Speaker Change: The US consumer remains the source of strength in the economy.
Speaker Change: That's true for almost any metric that we look at. The unemployment rate is low and stable. Job creation remains healthy. Real wages are growing.
Consumer debt, servicing burdens, remains stable near pre-pandemic levels.
Speaker Change: In our card portfolio, we're seeing improving delinquency rates and lower delinquency entries.
and payment rates are improving on a year-over-year basis.
Speaker Change: Now of course the circumstances of individual consumers and households will vary as they always do and what we look at often you know with with national metrics is averages
Speaker Change: And as we discussed before, some pockets of consumers are feeling pressure from the cumulative effects of inflation and higher interest rates.
Speaker Change: and we're still seeing delayed charge-off effects from the pandemic, although are improving delinquency suggests that this effect may be moderating. But on the whole, I'd say the US consumer is in good shape.
Speaker Change: You know, we watch, we always watch all the sort of leading indicator credit metrics to have a view of where credit is headed. So let me just take a look at those and then I'll come back to the sort of last couple of weeks of spend data.
We-
Speaker Change: You know, our delinquencies were stable on a seasonally adjusted basis throughout most of 2024. And as I mentioned, they improved
Speaker Change: Relative to our seasonal expectation over the last six months. So that's obviously very good news there.
Looking at other metrics.
Speaker Change: Payment rates. We've seen card payment rates increase year-over-year for the last two quarters.
Speaker Change: and this improvement is co-incident with the improvements that we're seeing in our delinquency rate. Now of course, you know...
Speaker Change: Increasing payment rates, slow down loan growth rate, but it's a trade we're always happy to make because of the flip side of the coin of the better credit performance.
Speaker Change: Now, underneath the service of this average improvement in payment, we are also seeing the portion of customers making just the minimum payment, running somewhat above free pandemic levels.
Speaker Change: So, while the average customer is doing well, some customers at the margin are likely feeling stress from inflation and elevated interest rates.
Speaker Change: Revolve rates. Let me turn to look at that. Revolve rates have stabilized over the past year, but remain below pre-pandemic levels for our major products and segments.
Speaker Change: So that again is another healthy indicator, healthy indicator. Now, none of these observations are conclusive on their own, but I think they are collectively helpful at giving us insight into credit and economic trends.
Speaker Change: Now, there's another thing Ryan that we look at, of course, is new account origination.
Speaker Change: and when we look at our new originations, we see early performance that is consistent with our expectations, it's stable and even improving a bit, vintage over vintage and consistent with pre-pandemic levels.
Dow.
Speaker Change: This might be less of that observation, maybe more of a CapitalOne effect specifically because much of this stability comes from decisions we made starting back in 2020 to account for inflated bureau scores and competitive dynamics and the flood of fintech supply.
Speaker Change: and so, you know, I think our interpretation is our active management is probably offset some underlying worsening that has happened in the marketplace.
Speaker Change: The other metric we look at is recoveries and our recoveries inventory continues to rebuild, of course, from the prior normalization of charge off.
Speaker Change: That should be a gradual tailwind to our losses over time, all else being equal.
Speaker Change: So that's the strong credit situation that we see and of course we especially in the current uncertain environment we're monitoring that very very carefully.
Speaker Change: The latest in terms of spend trends in our card business and in auto.
Shall let me start with card.
Speaker Change: The spend trends were largely stable through the end of the first quarter. In recent weeks we've started to see an uptick in spend growth per customer relative to this time last year across our consumer segment.
Speaker Change: I wouldn't know we haven't observed this more recent trend in our small business card portfolio.
Speaker Change: Now, some of this uptick is likely driven by the timing of the Easter holiday, which fell in April this year versus March last year.
Speaker Change: So, you know, we maybe should discount that a little bit.
Speaker Change: We've also seen a recent increase in retail spending, particularly electronics in the past few weeks. Maybe that's a pulling forward of purchases in light of the tariffs we'll have to see over time.
Speaker Change: At the same time, we've seen some easing in the T and E growth and airfare in particular. And the final thing I want to do is just talk about the auto.
Speaker Change: Patterns that we're seeing. While it's early, when we look at industry data, there appears to be a bit of a pull forward in auto purchases.
Speaker Change: You know, likely as consumers are trying to get ahead of tariff impacts.
Speaker Change: and we continue to monitor our application and origination of volumes.
Speaker Change: I think also there is some early indication that auction prices are increasing more than seasonal norms. All of this is very early but that would be...
What We See Right At The Margin. [inaudible]
Andrew Young: So, with that, I'll turn that over to Andrew for your other question.
Andrew Young: Ryan, a few factors at play with respect to the allowance. Why don't I just start with our baseline forecast and then I'll touch on broader considerations.
Speaker Change: So, for the baseline forecast, as Rich just talked about, it are seasonally adjusted delinquency, delinquency rates have been
Speaker Change: Improving on a year-over-year basis since about October of last year and charge-offs have been improving for the last few months after you account for Walmart.
Speaker Change: and so when we take those observed credit results, and then we take our baseline forecast,
Speaker Change: Our baseline forecast at the end of March, we use consensus estimates and so consensus estimates at that point looked quite similar to consensus estimates at the end of December .
Speaker Change: Unemployment was in the, I think, peaking in the four three range and GDP growth around two and inflation in the high tunes coming down from there and so if we take our observed
Speaker Change: Credit Results with that baseline forecast, what's baking in the oven resulted in an allowance release that would have been quite a bit larger than what we actually released this quarter.
and so the effect of…
was really our consideration to the downside economic risks.
Speaker Change: and greater uncertainty. You know, that really manifested itself in the final days.
Speaker Change: of the quarter, and so we more heavily considered our downside scenario which includes
More severe rising unemployment.
Speaker Change: and the favorable trends that I described then were partially offset by that greater consideration of the downside as well as the uncertainties around the forecast, and all of that ultimately led to the roughly $450 million release you saw in the quarter.
Next question please.
Thank you.
Moderator: Our next question goes from Sanjay Sakhrani with KBW, you may proceed.
Thank you.
Sanjay Sakrani: Rich, Andrew, Rich, you mentioned you're fully mobilized to integrate. I'm just curious how we should think about the timing in terms of some of the milestones to achieve the synergies. For example, you know, how long would it take for the debit conversion to happen and maybe similar point on expenses?
[inaudible]
Sanjay Sakrani: Yeah, Sanjay said we're still in the midst of doing our planning but what I would highlight for you is based on what we know today.
Sanjay Sakrani: You know, our assumption is that we're essentially just picking up all of the assumptions that we provided 14 months ago at deal announcement and pushing it back by a little less than six months.
Sanjay Sakrani: because you'll recall we assumed the transaction would close when we did the announcement in late Q4, early Q1 so a center date there of January 1st.
Sanjay Sakrani: Now we're closing on May 18th. I would point you back to the timing that we included in the announcement and just shift all of that back to correspond to the later closing date.
Okay, great, and then maybe follow-up on.
Speaker Change: Capital Return. Obviously you guys are well above the CET-1 tire, I think discoverers as well.
Speaker Change: You've talked about sort of a phased migration back towards your target. Could you just discuss how we should think about it going forward in terms of when you might be able to start, you know, sort of elevating the amount of capital return? Thanks.
Speaker Change: Yeah, we're still operating as two independent companies, Sanjay, so at this point are access.
to a lot of the...
Speaker Change: More private area and confidential data has been limited and after we close.
The Transaction, you know, will have...
Speaker Change: Access to the data we need to do the analysis to determine what we believe is the capital need of the combined company.
Speaker Change: and in addition, we're in the midst of this year's C-Car and we'll get our new F-E-B in June .
Speaker Change: And so, as a result of that, I'd say, at least for the second quarter, it's...
reasonable to assume will likely maintain the peace.
Speaker Change: We've been on until we get to the other side of clothes and do that analysis, but once we've completed that work, you know, we understand the importance of returning excess capital to share holders and we intend to do so.
Next question please.
Speaker Change: Our next question comes from Terry Ma, with Barclays, he may proceed.
Terry MA: Hey, thank you. Good evening. So you caught up marketing was up 19% year of a year. It seems like you're still seeing some compelling opportunities and are leaning in. So maybe just talk about where you've seen the best opportunities right now. And then also how are you thinking about balancing that investment for growth versus risk management, particularly in subprime. Thank you.
Yes, Terry. Thank you and good evening.
So...
Terry MA: Our marketing investment continues to power the future growth of the company.
as we capitalize on opportunities that have become available.
Terry MA: from many of the choices we've made over the past years but especially on the shoulders of our technology transformation.
Terry MA: So our marketing investments generally fall into three categories. First is our investments to fuel customer growth and we remain really excited about the opportunities that marketing is providing, especially in our card business.
Terry MA: The tech transformation has allowed us to leverage much more data and also you know more advanced modeling techniques leveraging machine learning and AI and the insights that
Terry MA: We get from all of this these advancements allow us to create more and more tailored solutions for customers providing them with the right products and services when they need them.
Terry MA: Another thing that's been going on is we've continued to expand the channels.
and the sources for generating new accounts.
Terry MA: So that's kind of the basic right down the fairway marketing, very stimulus response kind of driven side of the business. Second is our continued investment to win at the top of the market with heavy spenders.
Terry MA: And this has been a quest that we have been on for years, of course, and spent a lot of time talking about this.
Terry MA: But our growth and heavy spenders provide long-term benefits to our business, not only in generating a lot of spend growth, but also because of what comes with the franchise.
Terry MA: Very low losses, low attrition and the lifting of the brand and really the lifting of I think all of our franchises across the company.
so
Terry MA: Of course, acquiring these customers is expensive and requires a number of sustained investment in order to attract and retain them. So, significant marketing investment.
Significant upfront early spend bonuses.
Terry MA: Also, of course, we continue to invest in the experiences that we're offering our high-end customers, including exclusive
Terry MA: Access and experiences that aren't available in the general marketplace like Lounge Access, our full service travel portal, and access to unique properties and events.
Terry MA: and of course we have the continued investment in brand. So we believe this opportunity is very big. This is a long-term quest we've been on for, you know, over a decade so far and
Terry MA: You know, while all the players in the card business do some, you know, effort to win at the top of the market, I think it's...
Terry MA: You know, a much smaller number of players that are really leaning in and focused and doing the investments to put themselves in a position to win there.
Terry MA: By the way, it's not lost on us that that small list of
Terry MA: of most aggressive competitors at the top of the market is really leaning in.
Terry MA: to their marketing investments and their experiences. So, you know, the the bar of competition is high, but I think that the payoff is very large.
Terry MA: over the long run. The third area of marketing investment for CapitalOne is building our national bank.
Terry MA: You know, we declared really over a decade ago that we were going to build a digital first full-service national bank.
Terry MA: and this, of course, involves thin physical distribution across the nation in terms of branches in some markets and cafes and leading metropolitan areas.
Terry MA: We've had a big investment in the digital capabilities for full service banking on a remote basis.
and for most banks that are building...
Terry MA: You know, most full service banks, virtually all full service banks, their marketing statement is their branches themselves.
Terry MA: CapitalOne by organically building a digital first full service bank, the role that marketing plays.
Terry MA: Relative to physical distribution is just a different ratio there and so we're leaning very heavily into that.
Terry MA: But we are really pleased with the momentum we have there and we're excited by the combination with discover, we'll give us more scale and more momentum in that space.
Terry MA: So those are the three sort of big areas that we're leaning into in marketing and you know the investments are significant.
Terry MA: We're putting a lot of energy, of course, leveraging all of our…
Terry MA: We spent so many years building the measurement infrastructure to be able to measure before
Terry MA: Various investments are doing and but pulling way up this is really the engine that is driving a lot of the future growth of our company and as you can see from some of the numbers that we're posting in some of the investment dollars we're putting into this.
We are feeling very optimistic about our prospects.
and Andrew Young. Thank you.
Thank you.
Speaker Change: Next question. He also asked just what about the growth versus risk management and with the eye toward subprime.
Terry MA: You know, I think the consumer is in a good place. We are leaning into our marketing across the spectrum.
Terry MA: The subprime consumer actually has had a little bit of a faster rate of sort of curing post-normalization of even relative to the
the rest of the spectrum, as we've seen.
Terry MA: So we continue to feel very good there. We're leaning into that. Now of course we know that the uncertainty out there, the tariff prospects and everything has us.
Terry MA: Very, very vigilant because, you know, if there's a shock to the system, we would expect that that could hit harder at that part of the market. So, but I would leave you with the following impression, we're still leaning in.
Terry MA: But we're very, very vigilant, watching every day for early indicators of
problems.
Next question please.
Speaker Change: Our next question comes from Moshe Orenbuch with TD Cowan, you may proceed.
Thank you.
Speaker Change: It's going to kind of help advance kind of the national banking franchise and, um,
Speaker Change: I'm hoping maybe you could kind of drill into that is, you know, when you think about...
Speaker Change: The elements that either discover brings are things you'd like to add to your national banking products. I mean, it's rewards checking them on them. Like, what are the things that you think CapitalOne needs to do better to enhance that as you think about that?
Speaker Change: So Moshe, if we, if we pull way up on our national banking strategy.
Speaker Change: It's very, very differentiated from most banks. Obviously, most banks have a branch on every corner kind of thing, not really every corner of these days, but it's physical distribution, one, two, and three, all about physical distribution, and then creating the customer experiences to go along with that.
Speaker Change: And, of course, also, their strategies of, you know, most of, you know...
Speaker Change: Regional Banks are out there trying to build national banks and the way they're going to get there is through acquisition. Now, it's ironic I'm going to make the comment I'm going to, you know, in the wake of a few days ago, announcing
The regulators approved a major acquisition, but...
Speaker Change: But it's not the regular, you know, buying of a, you know, full service branch bank, base bank. So our national bank,
Speaker Change: doesn't have as it's in its growth agenda buying other sort of regional and local banks.
Thank you for tuning in.
Speaker Change: Our business model is in building a national bank is one that doesn't, we haven't really seen an example in nature here in America of doing that but the key there is
We...
Have...
We're trying to build a bank with…
Liener Economics
that comes from not having branches all over the place.
and then to take, and also to be very, very...
Speaker Change: You know, modern in its technology and its digital experiences and in terms of the customer base that we attract to self-select to a more digitally first kind of experience. And with that, with that business model.
comes
Thank you.
Less Expensive Economics
Speaker Change: and then what we've done is to pass the better economics onto the consumer in the form of
Speaker Change: Very aggressive pricing with no fees, no minimums and no overdraft fees.
So it is a-
You know, streamlined economics.
Thin Margin, Aggressively Priced, Business Model
The Benefit of the Discover [inaudible]
Speaker Change: Acquisition relative to that, even though paradoxically it's a bit of a paradox there because of course we're buying.
Speaker Change: especially a credit card business, is that the benefit of vertical integration.
Building organically,
Speaker Change: This National Bank, which has never really been done before, but that's the key way that the Discover acquisition is going to help to charge our national bank.
Speaker Change: Got it, thanks. Maybe just keeping on the theme with discover recognizing that obviously you don't run the company yet and haven't been inside. But just from what you know about the card business and its focus and what it's done and the fact that
Speaker Change: It's probably been less aggressively managed over the last somewhere between year and two years depending on when you start that.
Speaker Change: You know, what do you think are the things that need to be done and, you know, does that portfolio shrink before it grows? Any thoughts or stuff, you know, the discover market and and how to how to think about, you know, what you'd like to do with it.
Well, you know Moshe Oren [inaudible]
Speaker Change: We are very struck at how complimentary their business model is related to ours. So we have stretched
Speaker Change: across the credit spectrum to the tippy top, down to into subprime. They of course have much more stuck to their knitting right in the sort of prime part of the marketplace.
Speaker Change: They have spent years and years optimizing that business model in a way that I have great respect for relative to how to target the customers they want and the marketing and the message.
and the Experience. [inaudible]
We've also really come to appreciate just how exceptional.
Speaker Change: Some of their customer experiences are that you've seen, you know, there I don't know of any other card issuer that goes on national TV and does a lot of advertising about about their servicing experience. I mean not that we don't have great stories to tell too.
Speaker Change: But I've always been struck, wow, they're on TV talking about this thing. Well, when we look at...
Speaker Change: Just data that we've collected over time, and we've collected a lot of it lately. Data as an outsider looking at what people think about their customer experience, their servicing experience, some of their product experiences, they get very high marks.
Speaker Change: that one of the most striking things about Discover is there.
Speaker Change: Focus on the customer. They're sticking to the knitting in their kind of one or a couple of sort of big.
segments.
Speaker Change: and then having everything work backwards from winning in that space. So what we're going to do, even as we integrate and generate, of course, efficiencies and the benefits of leveraging CapitalOne's technology, CapitalOne's risk management, capabilities and a lot of things.
is very much have a great reverence and respect for.
Speaker Change: The business model they've created in making sure to preserve some of those really, really key success factors there.
Speaker Change: and so we're excited to jump in and do that. Of course, we're still two separate companies, so we're going to learn a lot more in the next few weeks, but this is going to be...
Speaker Change: and a lot of acquisitions are just the goal of the acquisitions is just to take two companies squash them together and rip out the costs. I think the discover represents, you know, brings us a growth platform.
Speaker Change: both on the network side and with respect to their card franchise that allows us to preserve the best of what they do, leverage a lot of CapitalOne's...
Capabilities that we bring and build something really special.
Next question please.
Thank you.
Thank you.
Speaker Change: Our next question comes from Rick Shane with JP Morgan, you may proceed
Rick Shane: Hey guys, thanks for taking my questions this afternoon. Look, I think one thing that is pretty clear
Rick Shane: over the last few years as there's been a significant divergence in technology investment between CapitalOne and Discover. Obviously you are very interested in the synergies. I'm curious as you've gone through your due diligence process, how the technology stacks.
Rick Shane: Campera for each company. Is this going to be an easy transition to get…
Rick Shane: The Discover systems onto the CapitalOne system, or is it going to be sort of the equivalent of you're looking for folks who can code cobalt or something antiquated because of the more limited investment.
So we are… [inaudible]
very benefitted by the...
Rick Shane: Now, a 12-year technology transformation that we have had at CapitalOne and
That includes a tremendous investment.
Rick Shane: starting at the bottom of the tech stack up in building core infrastructure.
and we're talking about... [inaudible]
Rick Shane: You know, going to the cloud, of course, applications that, you know, modernizing all of the 1300 applications on which CapitalOne is built.
Rick Shane: doing a transformation of our data ecosystem and so on. The bottom of the tech stack investments that we have made are...
Rick Shane: Just ideally suited for doing an acquisition, of course, especially in a, of a credit card company, because the discoverer will be able to.
Rick Shane: Step right in on the shoulders of our own technology transformation and we can...
and Andrew Young.
Generate, a lot of both. [inaudible]
Rick Shane: Cross-savings, but even more importantly, help them leverage a more modern.
Rick Shane: TechStack, along the way. Now they are a main front, they have-
Rick Shane: Data Centers and mainframes, even as they've also taken some of their business to the cloud, so we will be going back into the world of...
Data Centers, we've been there, done that, and...
We have a lot of experience with respect to.
Rick Shane: Managing those environments but also over time, moving those environments to the cloud. The new thing for CapitalOne from a technology point of view, of course, is going to be the network.
You know, running a global network is a really very...
You know, I'm sure that we will.
Rick Shane: Together, go on a great journey with their network to help over time take a strong network that they built and modernize it over time but we should note that this will be a return for
Rick Shane: A number of years for CapitalOne into the world of data centers, but we don't think this is a...
Speaker Change: Step into the past. What we do think is an ability.
Rick Shane: to leverage the scale and stand on the shoulders of what we have built.
Speaker Change: And to take a really extraordinary company and bring it onto more modern technology and generate even better experiences and economics.
Speaker Change: Got it, but it sounds like you will be on their tech stack for a couple of years and in their data center still.
Speaker Change: Well, on the network side, so we have on the credit card side, we have a whole roadmap of how we're going to take their credit card business and move it onto our tech stack.
Speaker Change: on the network side given that we don't have the equivalent on our side. We don't have a road map of a different destination. What we want to do is go in there and
Thank you.
Speaker Change: You know, see what they've got and, you know, and take and we would expect to take that on the same journey that we've taken all the rest of CapitalOne.
Speaker Change: But I think this is going to be measured in a whole bunch of years because they have built a global network and that's not going to be a quick kind of transformation to put that thing in the cloud.
Next question please.
Thank you.
Speaker Change: Our next question goes from John Pancari, with Evercore ISI, you may proceed.
Good evening.
Speaker Change: I appreciate that you said it no change to the discover synergies or integration. I also know you indicated you don't own the company yet.
Speaker Change: Tough to completely look under the hood. Is there anything about the backdrop today, the regulatory development?
The competitive backdrop or anything that you see today.
Speaker Change: that you think could lead to a revision to those synergies once you close a deal in May and then separately, you didn't mention the 15% EPS accretion the 27 or the 14% E-T-1 on close. Just wondering if there's any change there. Thanks.
Speaker Change: with John to the last point in terms of the assumptions of the metric. First of all, with TET1, again, that was just what we assumed at the time of the announcement, where both companies would be combined for TET1. And so you can look, we haven't yet seen discovers results for T1, but you'll be able to do that math.
Speaker Change: Quite easily of where the combined CEP-1 will be, and then I'd refer you back to the the earlier question in terms of. [inaudible]
Speaker Change: Our Capital plans from there, with respect to metrics like EPS Recreation or ROWIC, a number of things have changed.
Speaker Change: Look at the overall numbers and the moving parts, I would just say the strategic and financial benefits that
We assumed 14 months ago remain fully intact.
Speaker Change: and we're just excited today as we were at the time of the announcement.
Speaker Change: and then with respect to the regulatory environment and backdrop, I would sort of lump that in with a number of...
Speaker Change: Things have changed over the course of the last 14 months, but nothing that we're specifically pointing to in terms of the strategic implications at all to the deal.
Speaker Change: John , let me just also just say a few things and of course we're still separate public companies so we won't have full access to discover information until after we close the acquisition. But
Speaker Change: You know, so we we continue to expect that we'll achieve the synergies that we estimated when we announced the deal based on the integration budget that we estimated at the announcement.
Speaker Change: So, and on the risk management side to Andrew's point, we've always said, look, we believe that's going to be a big investment.
Speaker Change: Continue to believe it. It's going to be a big investment. They're well down that path. We haven't, from, from afar, haven't seen anything to change our estimate for what that will take. But of course, you know, we, we of course will do whatever it takes to get there, but, but we. We.
Speaker Change: You know, we have a similar view of the magnitude of what the undertaking is as we had before.
Speaker Change: One also just make a comment about sort of long-term opportunity. When we announced the deal, we also said that we saw potentially significant long-term strategic and economic opportunities that we did not include in our synergy estimates.
or the deal model. [inaudible]
Speaker Change: And this would involve moving even more of our business onto the Discover Network.
then what we put into the deal model.
Speaker Change: The path to get there is to build international acceptance of the Discover Network and to enhance
and Elevate the Discover Global Network Brand.
Speaker Change: and the more we've thought about that, we believe that brand investment is better made.
Speaker Change: as the international acceptance gets to a good place, but as it gets to an even better place, that's probably more when we would lean into really building the sort of global network brand.
Speaker Change: But like many investments we made over the years, we believe that these investments are longer term in nature, and will generate significant benefits that will grow and accumulate over time.
Speaker Change: So, what we're saying here is we had a deal model for very...
Speaker Change: kind of close-in benefits that we saw and the associated costs and that's very much...
Speaker Change: You know, what we see and then additionally we are excited about longer term possibilities that will take some that's a longer term quest that's investments over and a more extended period of time with benefits that would transcend things that we put into the deal model.
Next question, please.
[inaudible]
Thank you.
Speaker Change: Our next question comes from Mihir Bhatia with Thank you, America, you may proceed.
Speaker Change: Hi, and good afternoon. Thank you for taking my question here. Just a little bit about, you know, just see, on certain macro, maybe rich.
Speaker Change: It's been a while since we've had what you would call maybe a normal recession, obviously we had COVID a few years back, but I was just wondering if you could talk a little bit about just the recession, resiliency at CAP, CapitalOne.
Speaker Change: Maybe some of the factors or some of the levers that you can pull, if you start seeing the macro, Erika, you're right, Andrew.
Speaker Change: How is it different now than the last time, you know, it's been 10-15 years since we had one? So just how is CapitalOne different between the mix-changing as you leaned into higher spending improvements and technology? Just how is CapitalOne different from a recession resiliency? One big thank you.
Thank you, Mihir.
Speaker Change: So, it's interesting you use the word normal recession and of course, I smile as I say that because you're right, certainly COVID, it's hard to learn much of anything in COVID, we'll give that by the way credit exploded to the best place it's ever been, we'll start with that anomaly but
You know, we-
We...
Thank you.
Of course.
Our whole business model works backwards from…
resilience.
Speaker Change: That's what it's all about and we you know every underwriting decision we underwrite to and you know something you know quite a bit more stressed than the current environment so we look in the rear view mirror to see results and then we stress it in every underwriting decision that we make.
Speaker Change: We of course, you know, I think the whole stress testing exercise that the Fed has led is really I think to help push all institutions to get more rigorous in their modeling in that and we put a lot of energy into that but I tip my hat to the
Speaker Change: to the, I think some of the resilience modeling that all banks are encouraged to do. And it's...
Speaker Change: and so one needs significant buffers, you know, on the capital side.
Buffers in terms of margins. [inaudible]
and then buffers in terms of flexibility as well.
So...
Speaker Change: One of the real benefits of having a credit card business.
Speaker Change: Well, one of the sort of striking things about a credit card.
Speaker Change: Business in a, let's call it a normal recession, Mihir is that
Spending tends to consumers tend to pull back.
and so...
Speaker Change: You actually get some relief on the balance sheet side. The Fed does not model it that way because they insist that companies continue.
to lean in. [inaudible]
Speaker Change: and Crankup, the growth, even though empirically we have never done that in recessions and so on. But so you've got the flexibility with respect to the...
Speaker Change: There's balance sheet flexibility. The marketing, of course, we have a very big marketing budget. There is recession flexibility there. I would note that
Speaker Change: You know, some of our marketing investments, things like lounges, some of the investments at the top of the market are a little more fixed in nature than...
Speaker Change: One might just think about, you know, because you can, when you're sending out solicitations, you can just stop doing that or do a lot less of it. So there is flexibility on the marketing side.
Speaker Change: As a percent of the entire marketing budget, it's probably a little less, you know, sort of instantly flexible than it once was but you have that.
as well.
Speaker Change: We, there are levers within the business on product structures and so on that are additional flexibility. One thing I would point out in the last quote, unquote normal recession.
which CapitalOne, you know, I think.
Speaker Change: had a pretty great performance during. I would point out, for all of us card players, we had
Speaker Change: A majority of our balance sheet of our card balance sheet was off, our card assets were off balance sheet and so
Speaker Change: Next time around we won't have some of the benefits that we had in terms of the balance sheet pressures there were under Cecil, of course.
Speaker Change: as well. But if I pull way up on this your question goes near and dear to what we talk about every day to take our business model to stress it as we underwrite it.
Speaker Change: to stress it as we manage it, every choice that we make, and I think that...
Speaker Change: Paradoxically, the unsecured credit card business, I think, you know, has...
Speaker Change: really great resilience to it and I say paradoxically because people love to have you know assets that are collateral but if you look at most of the you know bad things that have happened in the world of banking
Speaker Change: They happen that the collateral has a collapse in value and so the business becomes a lot more unsecured than one thinks.
Speaker Change: The reality of a card business, it's unsecured to start with.
And we underwrite it in full.
A knowledge of that and build in the buffers and flexibility.
Speaker Change: to be resilient when really bad times come. Rich, just in the spirit of what's different this time than the last time maybe a word about when a really different place in the technology world.
and the capability that that gives us to sort of?
Speaker Change: You know, look at way more data and way more algorithms in our underwriting and you know, fine tune things around the edges.
Speaker Change: That's also a big change. Well, the ability we can certainly move quite a bit faster than ever before.
Speaker Change: It's one thing to decide on credit policy changes. It's another thing for any company to be able to implement it right away so with the ability to move quickly.
The ability to gather data at an incredibly granular level.
across so many different.
Speaker Change: Slices of the business is very valuable, but the ability to leverage.
Machine Learning and AI to diagnostically help us see.
Speaker Change: Variances and aberrations that might take, you know, humans some precious months to sort of identify.
Thank you.
Speaker Change: So, I think that one of the big benefits of our tech transformation is the ability to have way better granularity and monitoring and the monitoring has the opportunity to be full file.
Real Time [inaudible]
Speaker Change: and Diagnostic in its nature, and these things can really help.
in when the economy turns.
Thank you. Thank you. Thank you. Thank you. Thanks for your next question, please.
Thank you.
Speaker Change: Our next question comes from Don Van Derry with Wells Fargo, you may proceed.
Don Venditti: Rich, I was wondering if you could talk a little bit about the auto landing business in terms of how you're thinking about long growth, you've got a lot of different dynamics like tariffs going on, are you still leaning in? And do you think that they'll be the demand to support that growth?
Thank you.
So, what we feel, we feel certainly great about.
Don Venditti: The Auto Business. You've seen the delinquency and loss performance in the auto business and it's really quite striking how strong it is.
Don Venditti: Our auto credit performance has been consistently strong and it's the result of the proactive choices we made over the past several years where we trimmed around the edges, you know.
Don Venditti: In card, we trimmed around the edges, but in auto, we did even more. We pulled back sharply in 2022 and 2023 in response to the combination of margin pressure, normalizing credit and inflated vehicle values.
Don Venditti: But that's put us in a really strong position now with respect to the auto-credit performance that you see.
Don Venditti: Now, from a growth point of view, over the past year we've leaned into the growth.
Don Venditti: to take advantage of the opportunities that we see in the market. You've seen our origination volumes, I think they were like 22% higher.
Don Venditti: on a year-over-year basis in the first quarter and outstanding have now finally moved and we're up I think 5% year-over-year.
Don Venditti: We have invested very heavily in technology in the auto business, both in terms of credit underwriting, but also in terms of...
Don Venditti: Building our navigator platform to allow customers and dealers to use the platform to help for a customer to be able to
see
Don Venditti: What the financing on any vehicle in any lot in America, in a fraction of a second, what the financing for that individual would be, and so from a customer point of view, and then a dealer point of view in terms of
Don Venditti: and helping the customer get to the right place with their financing. This platform has also been beneficial with respect to generating good volumes and helping customers.
Don Venditti: Both consumers and the dealers. So we we we have it a lot of momentum in the business. So now you ask about tariffs. Certainly I think if tariffs
Thank you.
are
If the tariff wars sort of really continue on...
V.
Don Venditti: The auto business is, I think, might be really quite impacted.
Don Venditti: Because the immediate effect would be an almost certain increase in vehicle prices.
and that would…
have sort of mixed effects on auto credit.
the
You know, I think but with…
Don Venditti: Production costs, rising supply chain costs, rising, you could just really end up with vehicle value, disruption in the business. And then we kind of say, how would higher vehicle prices?
What would be the impact on our auto business?
It would
Don Venditti: Actually support the credit performance of our backbook by improving equity positions for borrowers and increasing the recovery rates.
Don Venditti: But, you know, for new originations, higher vehicle prices would be a headwind both in terms of consumer demand and in terms of credit.
Don Venditti: So, and just one other thing to just keep a mind, he'd been mine whenever...
There is tariffs that might gyrate quite a bit.
Don Venditti: Even in the case where tariffs are abruptly removed at some point, you can see vehicle values drop abruptly which can...
Don Venditti: sort of adversely affect credit in a business like this one. So basically pulling way up we feel great about our auto business, great about the position we're in and the traction that we're getting, we feel good about the consumer right now.
Don Venditti: And so we are still leaning in, but it's with a very watchful eye with respect to this uncertain economy.
Thank you.
Next question please.
and Jeff Norris. Thank you. Thank you.
Thank you.
Don Venditti: Our next question goes from Bill Carcache with both research securities he may proceed.
Bill Karkatchi: Thank you. Good evening, Rich and Andrew. Following up on your expense commentary and the choices you're making, do you think Rich?
Don Venditti: may be necessary to adjust your investment priorities as you continue to build out your various businesses while now also allocating capital to the build out of the network business. And if you could speak more broadly to how focused you are on managing expenses for the revenue environment and generating positive operating leverage along the way as you make these investments. Thank you very much.
Thank you so much, Bill.
Don Venditti: You know, we've been focused on operating efficiency improvement for years, as you know.
and we'd like to go back to…
2013, because that's...
Don Venditti: When we began our technology transformation and started really leaning into investment in technology from that point all the way to today.
Don Venditti: Over that time we've driven about 700 basis points of improvement.
Even as we've continued to make significant investments in technology.
Don Venditti: and this improvement was driven by significant revenue growth, powered by marketing and credit breakthroughs, enabled by the technology transformation.
as well as expense efficiency from process automation.
Analog Cost Savings, and Reduction and Legacy, Tech Vendor Costs.
Don Venditti: So it's not an accident that operating efficiency ratio improvements and significant tech investments.
have been traveling companions.
Thank you.
Don Venditti: And you know, that's because technology investments and efficiency improvement are on a shared path.
Don Venditti: As modern technology is the engine of sustained revenue growth and digital productivity gain.
Don Venditti: Now 2023 and 2024 witnessed quite a big improvement in the efficiency ratio.
Don Venditti: I do want to point out that with the late fee risk hanging over the last couple of years there was some deferral of investment.
Don Venditti: So with that risk effectively off the table, there's a little catch up there that you see in our numbers now but our story on efficiency continues to be the same.
Don Venditti: and we continue to have our eyes very focused on the longer term where operating efficiency continues to be an important way that we generate returns.
Two-year point about priorities.
Don Venditti: It is not lost on us that we have a lot of opportunities.
Don Venditti: that we are blessed with. We have all the opportunities that come from moving up the tech stack.
Don Venditti: The more we move up the tech stack, the more there are sort of direct benefits to the business in the form of better customer experiences, more opportunities.
Better.
You know, leveraging of data to create marketing and credit.
Don Venditti: opportunities and things like that. And we have the Discover Deal and I've talked, you know, many times about
Don Venditti: There's the sort of immediate opportunity that we capture in our deal model.
Don Venditti: But then there's the longer term opportunity that comes from really investing in the network, especially internationally, investing in the brand and then really being able to put more business.
on the network.
So...
Don Venditti: In that environment, we spend a lot of time on prioritization.
Don Venditti: and you know, it's a good problem to have, to have as many opportunities as we do.
Don Venditti: But to the point of your question, we very much keep our big picture in mind and the measuring stick associated with our journey, and a very important one of those, is our...
Efficiency Journey
Thank you.
Next question, please.
Speaker Change: Our next question comes from John Hecht with Jeffries, you may proceed.
Thank you.
Afternoon. Thanks for taking my question.
Speaker Change: I guess my question is around marketing synergies. On one hand, it seems that the amount of media advertising
Speaker Change: and maybe the physical mailings to the customers. One plus one is not going to equal two, I think, with those endeavors. But on the other hand, Rich, I think you're interested in really focusing on continued brand development, particularly on the global network. So, how do we think about the kind of puts and takes the opportunities for synergies versus the desire to spend and invest in the brand? Yeah, and. [inaudible]
Thank you.
So...
Speaker Change: Discover, and are you referring to the Discover brand, the Capital One brand, you're referring to both there as you're particularly a Discover point and the synergies associated with Discover?
Speaker Change: Correct, yeah. So, you know, it's a real blessing to...
have-
The opportunity in this acquisition to
Speaker Change: Bring on board a company with a rare, well-recognized, very strong brand.
Speaker Change: So, we now have, you know, two companies with very strong brands. So, what we plan to do is we plan to
Speaker Change: continue of course, I shouldn't say of course because all of this, you know, we've done a lot of thinking about, but we're...
Speaker Change: We are very strong in our views that the Discover brand is absolutely the right brand for the network and we will continue to invest in that brand and especially build
The credibility and the capabilities globally. [inaudible]
with respect to the brand.
Speaker Change: We will also continue the Discover brand on the credit card side. It will be more of a really powerful product brand obviously it's not going to be a corporation brand anymore but we intend to have it as a...
Speaker Change: Strong Product Brand, and it goes back to what I think is the collective, you know, the combination of...
Speaker Change: The business model they've created that has generated such amazing results over the year, which the brand plays an important role there. So we will continue to invest in that. Now there are some savings around the edges that we can do in our collective marketing campaigns, I am sure. So there's some benefit there. And I want to make one other comment about investing in the network brand. That is something that.
We don't plan to come roaring out of this...
Speaker Change: Acquisition, you know, on national TV, really leaning into the network brand.
Speaker Change: What we much more plan to do is we believe that the
Speaker Change: Synergies and the whole moves that we have talked about at the time we announced our deal of moving our entire debit business and a portion of our credit card business onto the network.
Speaker Change: We believe that can be done within the context of the current brand and the acceptance and the capabilities that discover has built so skillfully.
What we, what? [inaudible]
Speaker Change: We need to do in order to generate longer term opportunity is to build the acceptance.
Internationally,
Speaker Change: up to a sort of you know it when you see it point, when it's the right time to lean into
Speaker Change: Brand Development of a global brand, a global acceptance brand, so that in terms of the brand spend there, that's more of a delayed thing, it is something that we certainly plan to lean into over time, but that would come...
as we see it today, that would come…
Sort of.
Speaker Change: After we have gotten the international acceptance to sort of, you know, when you see it point that it's ready to really take this story, you know, on TV.
Thank you.
Next question, please.
and Andrew Young. Thank you. Thank you.
Speaker Change: Our next question comes from Eric Najarian with UBS, you may proceed.
Yes, good evening. Just two quick follow-up questions.
Speaker Change: First is for you, Andrew. I'm just going all the way back to Ryan's question on ACL. Is there any way to have a meet answer on what the weighted average unemployment rate would be if we took into account the heavier waiting on the downside scenario? And as we look forward for Capital One standalone, how should we think about the ACL ratio given improved credit performance? [inaudible]
and relative to the heightened macro uncertainty, and I did have a follow-up.
[inaudible]
Speaker Change: In terms of the weighted average, Erika, our process is one where we take the baseline and then apply various considerations.
Speaker Change: to the downside scenario and uncertainties, so it's not a formulaic.
Speaker Change: Multiple scenarios with multiple probabilities that allow us to give you a weighted average.
Speaker Change: A Weighted Average Number, which is why we kind of give the qualitative description there, and then, you know, in terms of how we think about things...
looking ahead with the allowance. [inaudible]
Speaker Change: Look, if we continue to see near-term favorability in our credit performance, that's going to bring down coverage.
All Elf Equal, over time.
if we see a meaningful worsening in…
Economic Outlooks or...
Speaker Change: Change is in consumer credit behavior from what we see today that could put upward pressure on our coverage and just given heightened uncertainty.
Speaker Change: in which we're living at this point, I don't want to try to project where that's going to land a quarter from now and so we'll go through our full process at the end of the second quarter and we'll see where the allowance ultimately lands.
and just my follow up question.
Um, um, [inaudible]
Speaker Change: Implicit in your response to John Pancari's question, are you also affirming the purchase accounting assumptions from February of 2024 and just confirming that if there are any adjustments to be made given the heightened uncertainty to the Discover Portfolio in terms of credit I'm going forward, it would be on the day to provision of course not the purchase credit impaired mark?
Speaker Change: Well, we're going to segment their portfolio for PCD and non-PCD in part of that, obviously would run through. The balance sheet in part of that would run through the P&L on day two.
Speaker Change: with respect to affirming balance sheet marks, they'll explicitly not affirm the balance sheet marks given that rates.
Speaker Change: and Credit, and the Stock Price, and a number of other variables have...
Speaker Change: We have moved and so we need to get to day one and do all of our analysis on those marks and will provide the relevant updates at the appropriate time after we get to the other side of clothes.
Thank you.
That question, please.
Speaker Change: Our next question comes from Brian Farhan, with Truist, you may proceed.
Speaker Change: So, hi, I had one on spend and one on the network on spend.
Brian Farran: You know, in prior quarters, you've given us a high-end versus low-end kind of updating commentary. I wonder if you could give us that and maybe specifically on the tariffs, reaction, any differences you're observing in high-end versus low-end or is it about the same?
John Pancari, Richard Fairbank, Richard Fairbank
So Brian , [inaudible]
Brian Farran: The relative to the tariffs and any early impact that we have seen.
Brian Farran: We have not seen that a big difference between high end versus low end there. Again, these are very early observations, you know, spend his...
Brian Farran: generally picked up a little bit in the last...
a week or two.
Brian Farran: Whether that, you know, is a poll forward or whether that's some other effect remains to be seen but we haven't seen a striking difference on where on the spectrum that falls.
Thank you very much.
Brian Farran: And then on the network, and I apologize, I feel like I'm going to oversimplify this and ask this in a dumb way but
Brian Farran: You know, when I talk to people, I mean, I think everyone sees the value of a globally competitive network, you know, we can just look at the multiple views and metric our trade at. It also seems like a very long and expensive journey.
Speaker Change: I'm just trying to unpack what you're signaling. Is it incrementally each year investing in the network? Or is it like...
Speaker Change: And again, I know I'm oversimplifying this, I'm not trying to put words on your mouth, but like, is there some signaling that like, hey guys, we might reset the expense outlook to take on Visa Mastercard, full stop?
Yeah, so...
Speaker Change: Well, I'm glad you asked that question. We aren't on a quest to...
Speaker Change: Replicate these in MasterCards model. It's an extraordinary model they have and on behalf of really all the banks in the United States, almost all of them. They are the intermediary between all the banks and the merchants.
Speaker Change: and of course they get paid one, you know, a few basis points here and there times the trillions of dollars of transactions. It's an amazing business model.
You know, we, so, we... [inaudible]
Speaker Change: By the way, just with respect to that, it is the case that discovered does have on the debit side a
Speaker Change: They are a network provider for several thousand banks, so I don't want to diminish that particular business model. It's a great thing. It came from their acquisition in 2005 of the Pulse Network.
And it's a very nice business model and we would...
Speaker Change: You know, love to grow that. So I do think that being...
Speaker Change: A network for other financial institutions would be a part of the business model over the years.
Speaker Change: That, like most other things, the road to significantly change the game there probably again goes through that same path of building greater global network acceptance.
Speaker Change: and the brand credibility sort of for the network that goes along with that, but anyway, but the
The biggest opportunity for CapitalOne, beyond the...
Speaker Change: The sort of the direct opportunity that we identified with the amount of volume that we move is to be able to you know put more of our volume
on the network.
and it is our view that…
Speaker Change: You know, as we look to do more of that, we, you know, again, those roads lead to because lots of people, you know, so many of our customers, you know, are international travelers. And again, it did discover for a company.
Speaker Change: Their size, I marvel at what they've built globally. Now, in the United States, it's, you know, virtually, you know, it's basically accepted everywhere.
in the United States.
Speaker Change: Internationally, no one has accepted everywhere, but they've gotten a great head start on that, but we believe that in order to really capitalize on the network and to give the network the scale.
Speaker Change: that in this profoundly scaled-driven business, the scale that that that would really help it and sort of getting the flywheel of scale in this network effect business, all roads lead through
Speaker Change: Building more international acceptance and then really leaning into the global brand associated with that network.
Speaker Change: But as we look at it, the primary payoff of that would be just putting more volume on the business.
in a very scale driven business, and then...
Speaker Change: You know, over time we could also look at other opportunities such as being a network for other financial institutions.
Thank you very much.
Next question please.
Hi, y'all.
Speaker Change: And our final question comes from the line of Robert Wildhack, with Autonomous Research,
Speaker Change: Hi, guys. Rich, you've hit on the international acceptance team quite a bit this evening and they're internationally
Speaker Change: It seems like that's more of a chicken and egg problem where you have to kind of build and catalyze acceptance. I'm wondering if you could share your thoughts on the specific investments.
Speaker Change: Strategies and or levers you might have to solve that chicken and egg dilemma internationally and ultimately close the acceptance gap. Thanks.
Um, um, [inaudible]
Speaker Change: Yeah, so if you look at how any of the big networks have built their business, including how discover has built international acceptance.
Speaker Change: It's really a, it's really cobbling together a variety of solutions internationally, really through a partnership.
Speaker Change: You know, in Discover's case, certainly, and this would, you know, be where the leverage is to partner with networks.
Speaker Change: to partner with, to go through merchant acquirers who can, you know, weigh more than one retailer at a time, more at scale, create acceptance.
Speaker Change: to partner with financial institutions, basically card issuing banks in different countries and finally to go directly to merchants.
Speaker Change: They have gotten to their pretty striking levels of acceptance through a combination of those four.
Speaker Change: and it's a boots on the ground, roll up your sleeves, do something, but what I'm comfortable is this is something they've already done.
Speaker Change: and it's just something that we will lean into and probably lean into it.
More than they were able to because of the
Speaker Change: You know the opportunity and the prize that we see on the other end of this with the combined scale that we have to your point it is it is a chicken and egg problem. One.
Speaker Change: and you know when you show up they want to know how much volume you're bringing and you know as we get people and as we sign up customers they want to know how much acceptance we have so it's it's
Speaker Change: It's a classic chicken and egg thing, but it's... [inaudible]
It's not so it's starting at zero [inaudible]
It's starting at a, you know, at a pretty striking
Speaker Change: level of acceptance. They've sloped the work that they work backwards from where Americans travel.
and so the playbook is there.
Speaker Change: We would lean into this playbook and then I think that the opportunities also...
Speaker Change: You know, our outside of what we've sort of modeled in terms of the benefits in our deal model.
and Andrew Young. Thank you.
Well, it concludes our Q&A thanks.
Speaker Change: That concludes our Q&A session. Thank you all for joining us on the conference call today and thank you for your continuing interest in CapitalOne. Have a great evening everybody.
Speaker Change: Thank you. This concludes today's conference call. Thank you for participating. You may now disconnect.
And I think there is a better place than here