Q2 2025 Capital One Financial Corp Earnings Call
Good day, and thank you for standing by. Welcome to the Capitol 1 second quarter, 2025 earnings call. 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 to withdraw your question. Please press star 1 1 again, I would not like to hand the conference over to your speaker today. Jeff Norris senior Vice President of Finance please go ahead.
Thanks very much Josh and welcome everybody.
Uh just a few opening remarks to access the live webcast of this call. Please go to the investor section of capital 1's website, capital 1.com
a copy of the earnings presentation, press release and financial supplement can also be found on the investor section of capital 1's website.
By selecting financials, then quarterly earnings releases.
Speaker Change: With me tonight, our Mr. Richard Fairbank Capital 1's, chairman and chief executive officer, Mr. Andrew Young. Capital 1's, Chief Financial Officer rich and Andrew are going to walk you through the presentation summarizing. Our second quarter results for 2025
Please note that this presentation may contain forward-looking statements.
Speaker Change: Information regarding Capital 1, financial performance and any forward-looking statements contained in today's discussion and the materials speak only as of the particular date or dates indicated in the materials Capital 1. Does not undertake any obligation to update or revise, any of the information, whether it is 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 Capitol 1's website and filed with the SEC.
Mr. Fairbank: And with that, I'll turn the call over to Mr. Fairbank rich.
Mr. Fairbank: Thanks uh, Jeff and good evening to everyone on tonight's call.
Mr. Fairbank: I want to begin tonight by welcoming our colleagues at Discover.
Speaker Change: To the capital 1 Journey.
Speaker Change: Cover on May 18th and we're fully mobilized and hard at work on integration which is going well.
Speaker Change: It's still early days, but we very much like what we've seen so far.
Speaker Change: We share key cultural attributes with discover, including a deep shared commitment to customers.
Speaker Change: And we're as excited as ever by the expanding set of opportunities, to grow, and create value as a combined company.
From our founding days, we've been on a quest to build um you know a great financial institution and integrated Banking and Global Payments platform. That's positioned at the Forefront of the opportunities that will come as technology and data transform Financial Services.
Speaker Change: Discover enhances and accelerates our progress on this Quest. I'll share additional thoughts on the hard work Investments and compelling opportunities. We see going forward at the conclusion of tonight's call but for now I'll turn the call over to Andrew to discuss the balance sheet and purchase accounting. Impacts of the deal.
Andrew Young: As well as our financial performance in the second quarter.
Andrew.
Andrew Young: Thanks, Rich and good afternoon everyone. I will start on slide 3 of tonight's presentation.
Speaker Change: As rich just discussed, we closed the acquisition of discover on May 18th.
Speaker Change: We have now completed provisional purchase accounting and Incorporated discovers business lines into our reported segments.
Speaker Change: With discovers domestic card and personal loans. Now included in our credit card segment,
Speaker Change: And discovers deposits and network businesses in our consumer segment.
Speaker Change: As part of the acquisition, we acquired 98.3 billion of domestic card loans, with a net fair value discount of 220 million.
We also acquired 9.9 billion of personal loans with a net fair value, discount of 114 million.
Speaker Change: And we acquired 106.7 billion dollars of deposits.
Speaker Change: With a net, fair value discount of 30 million.
Speaker Change: The amortization of these net fair value Marx decreased net, interest income by 85 million in the quarter.
Speaker Change: The full loan and deposit amortization schedule, is included on, slide 17 of the appendix.
Speaker Change: We also acquired 7.9 billion of Home Loans, which have been marked as held for sale and are now included in discontinued operations.
Speaker Change: The net credit mark on the Discover loan portfolio. Increased the allowance on the balance sheet by 8.4 billion.
With 8.8 billion of provision, expense, for non-pc loans flowing, through the p&l.
Speaker Change: I will discuss the allowance in Greater detail in a moment.
Speaker Change: There were multiple advertising and tangibles created as a result of the acquisition.
Speaker Change: We recognized a core deposit, intangible of 1 billion.
Speaker Change: A purchased credit card relationships and tangible of 10.3 billion.
Speaker Change: And network and financial partner, relationships in tangibles of 1.5 billion.
Speaker Change: The amortization of these intangibles increased non-interest expense by 255 million in the second quarter.
Speaker Change: We have included a full intangible amortization schedule on slide 18 in the appendix.
We also recognize 2 intangibles with indefinite lives.
Speaker Change: A network intangible of 3.1 billion.
Speaker Change: And brand and trade name intangibles of 2.3 billion.
Speaker Change: And finally, we recorded Goodwill of 13.2 billion.
Including the impact of purchase Accounting in the allowance build.
Speaker Change: The partial quarter impact of the Legacy, discover businesses contributed 2 billion, dollars of Revenue.
And a 6.4 billion net loss to the results from continuing operations.
Speaker Change: I'll also,
Speaker Change: Bring the 2 companies together, there are financial reporting presentation realignments.
Speaker Change: And business changes that impact the reporting geography of Revenue marketing and operating expense recognition.
Speaker Change: In total, these moves increase the operating efficiency by roughly 30 basis points.
Speaker Change: And the total efficiency by roughly 15 basis points in the second quarter.
Speaker Change: Looking ahead. We expect the Run rate impact of these changes. To result, in a roughly 90 basis point, increase to the operating efficiency ratio and a roughly 50 basis, point increase to the total efficiency ratio all else. Equal
Speaker Change: No impact from the reclassifications to the timing of recognition in either the second quarter or in future quarters. So, the net impact to the bottom line is negligible
Speaker Change: Turning to slide 4, I'll cover the second quarter financial highlights for the combined company.
Speaker Change: Our results for the quarter were significantly impacted by the completion of the Discover acquisition.
Speaker Change: On a gap basis. We had a net loss of 4.3 billion.
Speaker Change: Or a loss of 8508 per diluted common share.
Included in the results for the quarter were multiple adjusting items related to discover.
Speaker Change: As well as a small addition, to our legal reserves.
Net of these adjusting items, net income in the quarter was 2.8 billion and diluted earnings per. Share was 5.48
Speaker Change: There was also 1 notables.
Speaker Change: A law change in the state of California increased, our effective tax rate but also created a 1-time 128 million tax benefit as a result of truing up our deferred tax assets.
Speaker Change: Revenue in the second quarter increased 2.5 billion or 25% compared to the first quarter.
Speaker Change: Adjusted Revenue, increased 26% or 2.6 billion.
Speaker Change: Non-interest expense increased 18% or 14% net of adjustments.
Speaker Change: Pre-provision earnings in the second quarter were up 34% relative to the first quarter.
Speaker Change: Net of adjustments, pre-provision earnings increased by 40%.
Speaker Change: The increase in pre-provision earnings was largely driven by the partial quarter impact of discover, while also benefiting from strong Legacy Capital 1 results.
Speaker Change: On a gap basis. Our provision for credit losses was 11.4 billion in the quarter.
Speaker Change: Excluding the 8.8 billion initial uh, allowance build for discover.
Speaker Change: Provision for credit losses, was 2.7 billion dollars an increase of 294 million compared to the prior quarter.
Speaker Change: The increase was more than driven by 324 million in higher net, charge offs.
Speaker Change: A decline in charge off that Legacy Capital 1 was more than entirely offset by the addition of the partial quarter of the Discover portfolio.
Speaker Change: Turning to slide 5 I'll Now cover the allowance in Greater detail.
Speaker Change: We built 7.9 billion of allowance in the quarter, bringing the allowance balance to 23.9 billion.
Speaker Change: The primary drivers of the change in allowance related to the Discover acquisition.
Which included an 8.8 billion, expense for non-pc loans.
Speaker Change: And a 2.9 billion initial allowance for PCD, loans offset by a 3.3 billion benefit from the expected, recoveries of acquired discover loans that are fully charged off.
Speaker Change: Excluding these discover impacts the allowance balance declined by approximately 400 million.
Our total portfolio coverage ratio, increased 52 basis points to 5.43%.
Speaker Change: Driven largely by the mix shift of our portfolio.
Speaker Change: I'll cover the drivers of the changes in allowance and coverage ratio by segment on slide 6.
In our credit card segment, we built a proximately 8 billion dollars of allowance in the quarter.
Speaker Change: Roughly 760 million of the build is driven by the acquisition of discovers personal loan portfolio.
Speaker Change: With the remaining 7.2 billion build in the domestic card business.
Speaker Change: The domestic card build was driven by 2 factors.
Speaker Change: First we released approximately 400 million of allowance in the Legacy Capital 1 portfolio.
Speaker Change: This Legacy card release was driven by continued favorable credit performance in the quarter.
Speaker Change: Partially offset by modestly worse. Economic Outlook.
Speaker Change: And second, we built 7.6 billion dollars of allowance. For the discovered domestic card, loans added in the quarter.
The combination of incorporating an updated economic Outlook, aligning allowance methodologies and reserving for growth in the portfolio led to a roughly 400 million dollar increase in the allowance for discovers card. Loans relative to the equivalent balance as a standalone company, at the end of q1.
Speaker Change: The Consolidated domestic card coverage ratio. Now stands at 7.62%,
the allowance balance in our consumer banking segment was largely flat at 1.9 billion.
Speaker Change: Was largely offset by growth in the auto business.
Speaker Change: The ending coverage ratio of 2.29% was down 8 basis points from the prior quarter.
Speaker Change: And finally, the Commercial Banking allowance balance of 1.5 billion and coverage ratio of 1.74% are largely flat to the prior quarter.
Speaker Change: Turning to page 7. I'll now discuss liquidity.
Speaker Change: Total liquidity reserves ended. The second quarter at 144 billion up roughly 13 billion relative to last quarter.
Our cash position sits at 59.1 billion up 10.5% from the prior quarter.
Speaker Change: The increase in cash was primarily driven by proceeds from the sale of a portion of discover Securities as well as the addition of acquired cash from discover.
Our preliminary average liquidity. Coverage ratio increased slightly during the second quarter to 157%.
Speaker Change: And our average nsfr remained roughly flat at 136%.
Speaker Change: Turning to page 8, I'll cover our net interest margin.
Our second quarter, net interest. Margin was 7.62%.
Speaker Change: 69 basis points higher than the prior quarter.
Speaker Change: The partial quarter impact of adding discover increased Nim by roughly 40 basis points.
This 40 basis point increase includes the roughly offsetting effects of a 6 basis. Point drag from the fair value Marx,
In a 6 basis. Point Tailwind from changing, discovers historical practice to now include late fees in interest income.
Speaker Change: The remaining nearly 30 basis. Point Improvement in Nim, was driven by capacity Capital 1.
Which had lower rate paid on deposits.
Speaker Change: A liability mixed shift towards deposits and 1 additional day in the quarter.
Speaker Change: Looking ahead. We expect the full quarter benefit from the Discover acquisition to drive an additional 40 basis point. Increase to Nim all else equal
Speaker Change: Turning to slide 9. I will end by discussing our Capital position.
Speaker Change: Our common Equity Tier 1, Capital ratio ended the quarter at 14%.
Speaker Change: Approximately 40 basis points higher than the prior quarter.
Speaker Change: The impact of the equity issuance for the acquisition was partially offset by the additional Goodwill and intangible assets.
Speaker Change: The increase in Risk weighted assets, the net loss in the quarter dividends and 150 million of share repurchases.
Speaker Change: during the quarter, the Federal Reserve released the results of their stress test
Speaker Change: Our preliminary stress Capital buffer requirement is 4.5%.
Speaker Change: Resulting in a cet1 need of 9%.
Speaker Change: The new SCB becomes effective on October 1st.
Speaker Change: Now that we've closed the Discover transaction, we are working through our internal modeling of the combined companies Capital need and look forward to sharing an update. Once our work is complete with that, I will turn the call back over to Rich.
Rich: Thanks Andrew.
Rich: Slide 11 shows second 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 12.
Rich: The Discover acquisition was the dominant driver of second quarter domestic Card results, including the impact of a partial quarter of combined operations, a combined, quarter-end balance sheet, and purchase accounting effects.
Rich: Looking through the Discover impacts the combined domestic card business delivered in other quarter of Topline growth, strong margins and improving credit.
Rich: Year-over-year, purchase volume growth. For the quarter was 22%, which includes 26.5 billion dollars of discover purchase volume.
Rich: Excluding discover year-over-year purchase. Volume growth was about 6%.
Rich: Ending loan balance is increased, 72% largely. As a result of adding 99.7 billion dollars of Discover card loans, excluding discover ending loans, grew about 4% year-over-year.
Rich: And revenue was up 33% from the second quarter of 2024 driven largely by adding the partial quarter of discover Revenue.
Rich: Excluding discover year-over-year Revenue. Growth was about 8% driven by underlying growth in purchase, volume and loans.
Rich: And amortization of the purchase accounting. Fair value, mark.
Rich: Excluding these discover impacts Revenue margin would have been 18.5%.
Rich: The domestic card. Net charge off rate was 5.25% down, 80 basis points from the prior year quarter.
Rich: The 30 plus delinquency rate was 3.60% down 54 basis points from the prior year, these metrics were impacted. By the addition of discover, which is historically had lower losses and delinquencies than Capital 1.
Rich: The delinquency metric was also impacted by aligning methodologies between discover and capital 1.
Rich: Capital 1's Legacy domestic card. Portfolio would have had a net charge off rate of 5.500% down, 55 basis points, year-over-year and a 30 plus delinquency rate of 3.92% down 22 basis points from the prior year,
Rich: Capital 1's card delinquencies have been improving on a seasonally adjusted basis since October of last year and our losses have been improving since January of 2025.
Rich: Discovers card credit metrics.
Rich: Peaked about a quarter later but are now improving steadily. Following a similar path to what we observe on the Legacy Capital 1 portfolio.
Rich: Domestic card non-interest expense was up 42% compared to the second quarter of 2024 operating expense and marketing. Both increased year-over-year.
To company marketing expense in the quarter was 1.35 billion dollars up 26% year-over-year.
Rich: Is in domestic card are the biggest driver.
Rich: Of total company marketing. 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 market.
Rich: Compared to the second quarter of 2024 domestic card Marketing in the quarter included, the addition of discover marketing higher direct response, marketing higher media, spend and increased investment in premium benefits and differentiated customer experiences.
Rich: 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
13 shows second quarter results in our consumer banking business.
Rich: Global payment Network transaction, volume from the May 18th close of the Discover acquisition through quarter end was about 74 billion dollars.
Rich: Oto originations were up 28% from the prior year quarter driven by overall market growth and our strong position to pursue resilient growth in the current Marketplace.
Rich: Consumer banking ending loan balances, increased 5.6 billion dollars or about 7% year-over-year, average loans were up 6%.
Rich: Compared to the year ago, quarter ending consumer deposits grew at 36% and average. Consumer deposits were up about 21%, driven largely, by the addition of discover deposits, looking through the Discover impact. Our digital First, National Consumer banking business continues to grow and gain traction, powered by our technology transformation and our compelling, no fees, no minimums and no overdraft fees customer value proposition.
Rich: Consumer banking revenue for the quarter was up about 16% year-over-year, driven predominantly by the partial quarter of discover as well as.
Rich: Growth in auto loans. Non-interest expense was up about 37% compared to the second quarter of 2024 driven, largely by the partial quarter of discover as well as increased Auto originations. The legal Reserve Edition that Andrew mentioned higher marketing to drive growth in our National Consumer, banking business, and continued technology Investments.
Rich: You're over a year.
Rich: Largely as the result of our choice to tighten credit and pull back in 2022, autocharge offs are improving on a seasonally adjusted basis.
Rich: The 30 plus delinquency rate was 4.84% down 83 basis points year-over-year.
Compared to the linked quarter. Both ending and average loan balances were up 1%.
Rich: And ending deposits were down about 2% from the linked quarter average. Deposits were down 4%, we continue to manage down, selected less, attractive, commercial deposit, balances
Rich: Second quarter Revenue was up 6% from the linked quarter and non-interest expense was up by about 1%.
Rich: The Commercial Banking annualized. Net charge off rate for the second quarter increased 22 basis points from the sequential quarter to 0.33%.
Rich: The commercial criticized performing loan rate was 5.89% down 52 basis, points compared to the linked quarter.
Rich: The criticized non-performing loan rate was down 10 basis points to 1.30%.
Rich: As we close this presentation.
Rich: and before we open it up for Q&A,
Rich: I want to pull up and reflect, not just on the quarter, but also on where we are.
Rich: In the second quarter bringing on Discover for a partial quarter and the related purchase accounting. Impacts dominated our reported results. But looking through these effects, our adjusted earnings Top Line growth credit results and capital generation continued to be strong.
Rich: We completed the Discover acquisition on May 18th and we continue to be very excited about the opportunity.
Rich: Here are some early Financial observations. They are, of course, still subject to change, but we wanted to share our thoughts with you.
Rich: Let me start with integration costs.
Rich: Our integration budget covers a wide array of expenses including deal costs moving discover onto our Tech stack integrating their products and experiences making additional investments in risk management and compliance and integrating the talent and taking care of the associates along the way.
Rich: The integration is off to a great start, but as we have gotten more granularity on each of these efforts, we expect our integration costs will be somewhat higher than our previously announced 2.8 billion.
Rich: Let me turn now to synergies, we are on track to deliver the 2.5 billion dollars in total. Net synergies. We discussed on the April earnings call.
Rich: There are significant cost savings and also significant real revenue synergies. And we have line of sight to achieving them.
I also want to savor this moment and where we are.
Rich: We are on the cusp of even greater opportunities down the road. These opportunities come both from this deal and also from Capital 1's transformation to be at the frontier of a rapidly changing Marketplace.
These opportunities are exciting, but they will require significant investment to bring them home.
Opportunities with discover the revenue synergies. We have already identified come from moving our debit business and a portion of our credit business onto the Discover Network, to move more volume and capitalize, on the tremendous scale benefits of the network. We need to achieve greater International acceptance and then build a Global Network brand. This will enable moving bigger Spenders onto the Discover Network.
Rich: These additional moves, require sustained investment for a number of years and we will begin to undertake these Investments first in acceptance. And then when we get the network to critical mass, we will invest in the network brand.
Rich: There are only 2 banks in the world with their own network and we are 1 of them.
Rich: We are moving to capitalize on this rare and valuable opportunity.
Rich: We are in the 13th year of an all-in technology transformation.
Rich: While most companies have invested in transforming technology at the top of the tech stack. In other words leading with customer-facing applications, we have taken the much harder but ultimately necessary Journey.
We have been rebuilding the company from the bottom of the tech, Stack Up essentially building a modern technology company that does banking.
Rich: As we move up to Tech, stack the opportunities
Rich: Are accelerating.
We are also the beneficiary of Decades of investment in our data and analytics capabilities and the building of a well-known National brand.
Together with our leading technology capabilities.
Rich: They are the enablers of our many opportunities.
Rich: Take our Retail Bank.
Rich: The universal player Playbook.
In banking is to build a National Bank.
Rich: Through acquisitions.
Rich: However, we are doing it, organically on the shoulders of our modern tech stack, our full-service digital banking offerings, our thin physical distribution of showroom, branches, and our national brand
Rich: We are enjoying a lot of traction and the acquisition of a network. Propels us forward even more
Rich: Building the National Bank requires sustained investment in marketing, and we are doing that.
Rich: And we expect to lean in, even more.
Rich: Let me turn to our card business after building. A mass Market credit card business. We declared in 2010. We were launching a quest to win at the top of the market with heavy Spenders.
Rich: Few card players have chosen sustainably to take on this Quest.
Rich: We have been steadfast.
Rich: We have had a lot of success in this journey.
Rich: But it is a long 1.
Rich: Our 2 biggest competitors are investing heavily and we know we will need to keep leaning into this big opportunity.
Rich: As we have moved up, the tech stack, we have seized the opportunity to pursue emerging growth opportunities across our company.
Rich: Some of the Salient ones you have seen, and hopefully experience.
Rich: Uh, like Capital 1 shopping and capital 1 Travel.
Rich: Another example is auto Navigator, which is a 3-party platform designed to reduce friction for consumers and dealers.
Rich: In buying and financing a car.
Rich: Most importantly, we continue to invest in our modern technology stack, the gap between the modern technology companies fully in the cloud built on Modern applications and data.
Rich: And the rest of corporate America continues to grow.
Rich: the modern tech companies are well positioned to win as the world continues to evolve and we have spent years
Rich: to become 1 of them.
The Rage of the world is AI.
Some aspects of the AI Revolution will be broadly accessible to all companies. And other aspects will be very exclusive.
Rich: Most companies will benefit from the transformation and how work is done. That will be available through third-party AI tools.
But only the companies built on a modern tech stack and deeply invested in data will be in a position to reinvent. Their business model to put AI at the heart of operations, risk management and the customer experience.
Rich: The opportunities are transformational and we are well positioned in that Quest.
but these opportunities require sustained investment in Ai and in AI Talent,
And we are doing that.
In a company built for Innovation and organic growth.
Rich: I am struck by the number of compelling opportunities for Innovation and value creation that we see.
These opportunities are made possible by the choices. We have made over the last many years.
As I have been saying these opportunities require investment and for many of them timing is critical as we strive to seize competitive advantage.
Rich: Collectively these Investments across discover and Legacy Capital 1 are significant.
Rich: But they also will be the basis for our sustained growth and strong returns over the longer term.
Rich: Importantly, the earnings power of our combined company that we envision on the other side of the deal integration.
is consistent with what we assumed at the time of our deal announcement, even though some individual variables have moved along the way,
When I reflect on our journey from founding the company to where we are today, we got here by always working backwards from where winning is and driving the continual Transformations and Investments to get there.
Rich: The choices we made over the years, also created the opportunity for us to acquire discover
Rich: And in the spirit of that Quest, 38 years after the founding idea, for Capital 1, we find ourselves as well, positioned as we've ever been to drive future success, and value creation.
Rich: And now we'll be happy to answer your question.
Jeff: Jeff, thank you, rich.
Speaker Change: Well, I'll start the Q&A session, remember as a courtesy to other investors and analysts who may wish to ask a question. Please limit yourself to 1 question plus a single follow-up.
If you have follow-up questions after the Q&A session, the investor relations team will be available.
Speaker Change: Uh Josh, please start the Q&A session.
Speaker Change: Thank you as a reminder, to ask a question. Please press star 1, 1 on your telephone and wait for your name to be announced to withdraw your question. Please. Press star 1 1 again, 1 moment for questions.
Our first question comes from Terry ma with Barclays. You may proceed.
Terry MA: Hey, thank you. Good evening. Um now that you've closed the acquisition and I do appreciate the updated Financial observations. But do you have any kind of updated thoughts on economics of the deal that you can share? Whether it's, you know, earnings power over time or some sort of return targets. Um, that investors should be kind of thinking about
Terry MA: Uh, Terry. Um
Terry MA: Thank you. Uh, we, uh, uh, we're really glad to be in a position of finally being able to close the deal and, and we're, uh, uh, you know, a number of weeks, uh, into being on the other side of that, you know, I shared some comments, uh, in the prepared remarks, about how we're thinking about, uh, you know, continuing to be, uh, uh, uh, very much believing in the earnings power of our combined, uh, uh, entity and uh, also, of course we're, uh, you know, leaning into the opportunities that are are classic Capital 1 in terms of really
Terry MA: Um, laying the foundation for, uh, longer term, uh, earnings power on top of that. So we don't have any really other than my, uh, earlier comments. Uh, I don't have any, uh, further, uh, um,
Terry MA: Specific updates on that. But we certainly, uh, are very bullish about the deal and the um economics and earnings power and opportunities on the other side,
Speaker Change: Got it. Um, and then as a follow up, just on Capital level, which you mentioned, you guys are doing your internal work. Um, any sense of kind of timing of when you were kind of get that informed View and communicate that to investors, and then as I kind of take a step back, you guys were at 14% C1. That's meaningfully above what, um, Legacy Capital 1's Target was of 11% and discovers of 10 to 11. Is there any reason why, um, on a Consolidated basis? It would be kind of meaningfully different. Thank you.
Speaker Change: Yeah. Terry you know, having closed the deal, just a couple of of months ago, you know, we are just getting full access to all of discover's, customer level data and we need to run all of that information through our models. And so while we received the, the SCB from the the fed and it declined to 9%, uh, as you will,
The combined company and we have the flexibility uh, with our repurchase uh, actions. As we're operating under the the SCB, but we need to complete that work. So, as we get closer to finishing the work, I think it's reasonable to assume that, we'll begin to step up. Our repurchases from recent levels, uh, but we look forward to to sharing an update, uh, more broadly on our work, when it's complete.
Speaker Change: Next question, please.
Speaker Change: Our next question comes from Rick, Shane with JP Morgan. You may proceed.
Speaker Change: Thanks for taking my question. Uh, look, I'm going to break my own personal role here. Congratulations. Um, on this, uh, completion of the acquisition, it's, it's transformational. And it's uh, going to be very interesting um, to see what happens from here. Um, Rich, you had alluded to the fact that the integration expenses are going to be above the initial 2.8 billion. Um, Target um, could you
Help us understand that more specifically and also could you put into context where you're seeing the opportunity for incremental investment? Uh, so that that way we can sort of translate where you know what the opportunity would be
Speaker Change: So it's Aunt, Rick. Thank you. Thanks for your congratulations. Uh, it's been a long time coming. We're all very excited about it and we, um, I know our investors are pretty excited as well. Um,
Speaker Change: with respect to the integration costs. Um, you know, I think when 1 mbar on a thing at the very beginning as we're undertaking a deal, we do our very best to
Speaker Change: Take all the different, uh, things that would be involved in integration and um, you know, go around the house and uh, you know, ask everybody what they think and add it up. And basically, this is just a matter of as we get deeper into it. Uh it it is um you know coming in.
Speaker Change: um,
Speaker Change: So it's coming in. Well, first of all, you know, we're not we don't have an absolute definitive, uh, final estimate of it but it's um,
Speaker Change: You know coming in somewhat higher but it's not in any 1 thing. It's really just across a variety of uh the the many elements of this deal. So we just, you know, as we as we, you know, got a sense. It was going to be somewhat higher. We just wanted to flag that. Um,
You know the investment. Let me let me talk about it. The Investments here.
Speaker Change: Everything that I talked about in my remarks a few minutes ago about Investments our investments and opportunities. We've been talking about for some period of time.
Speaker Change: So we're not unveiling new um you know, something brand new that that we've never talked about before.
Speaker Change: but my point, the point I really wanted to make and and why I took the time to, uh,
Share that conversation, is that.
Speaker Change: Uh, all of these opportunities have we have been pursuing for a long period period of time and they stand on the shoulders.
Speaker Change: Of.
Speaker Change: Investments. We have been making for a very long period of time, most notably the investment in transforming, the the tech stack of capital 1,
um, but also very much Investments uh, in brand and uh, deep deep Investments o o over many many years on data and analytics and things like, um,
Speaker Change: Uh, machine learning and AI itself.
Speaker Change: So the point of that I was sharing with you is, as we move up the tech stack and get deeper and get closer in the pursuit of these opportunities. Um, we we find these opportunities are, um, we're very excited about these opportunities and, and some of the opportunities are sort of accelerating, uh, uh, as we look at them.
Speaker Change: Opportunities that I've seen in our history. But the only way to get there is with investment and, you know, the capital 1 philosophy. We're we we get get very rigorous about what the opportunity is and, uh, you know what, it costs to get there. But, uh, we lean into those Investments and I think that, uh, you know, the value creation for our investors. Um, on the other side of this, uh, you know, consistent with the philosophy, we would take in, in the whole history of building Capital 1. Uh, I, I think, uh, you know, it's it's, uh, there's a lot of value creation opportunity.
Speaker Change: But uh, we're going to, we're going to invest uh, significantly to get there.
Speaker Change: Thank you.
Speaker Change: Next question, please.
Speaker Change: Our next question comes from Sanjay sakrani with KBW. You may proceed
Sanjay Sakrani: Thanks um Rich. Obviously discover was working through a number of credit issues and not really leaning into growth like Capital 1, had been I guess since credits. Now uh somewhat under control there, do you expect to sort of lean into growth at Discover as well inside of prime as we look forward.
Sanjay Sakrani: Yeah. Yes. Sange.
Sanjay Sakrani: um, we
Speaker Change: We uh do uh plan to lean into growth opportunities with discover. Let me uh, comment just a little bit about
uh, their
Speaker Change: Their card business and sort of and and you've seen this from the outside but just sort of Stand Back standing back and talking about it. It's an amazing franchise. They've built over the years
Speaker Change: uh, the
Speaker Change: The uh credit losses got a higher than they expected probably higher than any 1 expected and due to a a number of choices that were made in the preceding years.
Speaker Change: and uh, they vary proactively stepped in and uh, you know, dialed back and went a little bit more back to the
Speaker Change: The.
Speaker Change: The.
Speaker Change: the, the, the, the, the basics, of, of how they had built, uh, their franchise and you know, that has
Speaker Change: you know, muted their originations and their, their growth over this period of time, but it's but they were very important choices and it's also been powering
Speaker Change: um,
Speaker Change: You know, they're good credit performance. It just as an example their vintage their their most recent vintages are coming in a lot better than prior years and it's just it's it's a manifestation of pulling back now when
Speaker Change: Pulling back happens.
Um you know there's the the growth, you know, the the growth is somewhat muted and that the situation that they're in. Now we're coming in and getting to know them and and their impressive card business and uh we
Speaker Change: um you know uh we like the products. So you know we we plan to continue their Flagship credit card products. They have an amazing student lending business that we're very excited to continue to not not student, lending, sorry student. Credit card uh business. We're excited to continue to lean into that. They've been very successful in um
Speaker Change: In in a secured card, uh, starter card business, that they have had. So from a product point of view, we're going to, uh, continue to lean into the business. We've spent a lot of time, looking at their customer experience. They score very high on metrics that we ourselves, uh, collect not just their own collected metrics, but we ourselves in, in calibrated metrics in the industry. Great, great customer experiences.
Speaker Change: Is in very high levels of customer engagement. So we are
Uh adopting, uh, um, a lot of the, the sort of, um, customer technology uh, um, choices that they have made. They have a great servicing experience that we're going to uh uh, very much. Uh, try to just uh continue uh, pretty much exactly what they're doing there.
Speaker Change: and um,
Sanjay Sakrani: And from a brand point of view, of course, discover won't be a corporate brand anymore, but on the credit card side, uh, Envision. It Sanjay as
Of uh, muted, uh, growth at the moment. And uh, I I think as we fully get into there, there'll probably be a few uh, areas will dial back around the edges, um uh and there there I'm pretty confident. There will be some areas where we will lean even harder uh, into growth than they were. But it is certainly 1 of our goals to uh uh lean into to grow the franchise and try to preserve the very special things that um, enabled them to build 1 of the great credit card companies in America.
Speaker Change: Thank you. Um, just a follow for Andrew. Sorry to ask this question because I'm sure I can parse through all of this. Excellent disclosure that you provided and your comments, um, to get to some of my conclusions. But just as we look ahead, what are some of the variables that we need to think about? As a result of these purchase accounting changes? I I heard you mention the Nim. Having a 40 basis point Tailwind because of the reclass of late fees and such but maybe Andrew could you just like help us think through some of the progression of the the major line items as a result of this?
Speaker Change: Uh, well, appreciate the acknowledgement Sanjay worked really hard to disclose uh a lot. And I think you'll find uh not only in the presentation itself and in some of the footnotes but also the monthly 8K, uh, data that went out. Today, there's some additional disclosures around, uh, delinquency and and charge offs as well. So we really did our best to provide visibility into all of those pieces.
Um, reluctant to try to give you the full reconciliation of all of the metrics, that really point you to the couple of slides in the appendix, because that very clearly spells out what are the implications to Nim? What are the implications to, uh, operating expenses in the footnote there? You will see that we not only gave annual views, but we gave a quarterly view of this year, but for instance, you can see that Nim given the very short life, for instance, of the, um, the uh, non PCD card loans which are marked above par that actually creates a net drag in the immediate term, but that burns off very quickly. And so the non PCV uh, I'm sorry the PCV uh that carries forward is actually going to be a good guy to Nim over the course of multiple years. So it's really hard.
Speaker Change: To give you assisting summary of all of those pieces, which is why we did our best to lay everything out as best we can. Uh, of course, you know, these are subject to some revisions over time, which is, uh, you know why, uh, I phrased it in the way that that we did. But, you know, we're hopeful that these ultimately end up being the the, the final marks.
Speaker Change: Next question, please.
Ryan Nash: Our next question comes from Ryan Nash with Goldman Sachs, you may receive.
Speaker Change: Good evening, everyone.
Hey Ryan, hey Ryan so rich you know you talked about significant sustained investment. I think the phrase was used several times to talk about acceptance marketing, the tech stack and Ai and I I think you know this obviously create questions about how much all of this is going to cost. So is there anything that you can share, that can give the market comfort that there isn't significant Synergy reinvestment risk and that eventually this will result in a more cons in a more efficient Consolidated company over time. Uh thank you Ryan.
Speaker Change: so,
Speaker Change: when you think about the opportunities that we're talking about investing in there are things, I think investors, uh, have come to, um, know, over the years and, um, you know, we have talked a lot about them, but it starts with the tech transformation itself.
Speaker Change: As I say, we're in the 13th year of our technology transformation, the the world continues to evolve, and we continue to um, uh build the, the most, uh, you know. Um,
Speaker Change: Lie, uh, manage, uh, risk. Credit risk. Fraud risk operating risk. Um, and, you know, to to, uh, you know, create enhanced customer experience, and, you know, collectively,
Um, we have found virtually all the things that we would like, uh, the capabilities we'd like for our company to have, they all have the same shared path which is through the modernization of technology. So we will continue to invest, uh, there. And, uh, so I don't think there's anything from an investor point of view that would surprise them with respect to that, it's just that. As we move up the tech stack, you know, when it's it's a lonely Journey. When you're in the bottom of the text stack, modernizing, 1 piece of core infrastructure because until a lot of other things are modernized. It's hard to see the tangible benefits. But moving up the text stack uh moves 1 uh closer in the ability to more monetize the opportunities.
Speaker Change: Then uh, of course.
Speaker Change: you know, beyond that we have now, the whole discover opportunity and
Speaker Change: you know, there's lots, we're investing in terms of integration and things like that, but specifically, I call out that after this first wave of moving, uh, all of our uh, debit card business and a
Speaker Change: portion of our credit card, business onto the network to really capitalize on the uh, tremendous scale that the, the scale economics in the network business. We really want to work to move more volume there and all roads in that Quest lead through investing in international acceptance. And
Speaker Change: um,
uh, and then
A Global Network brand. So, uh, you know, that, I think, and we've talked a lot to investors, uh, about that. We're very compelled by the opportunities on the other side, but it's very clear to us, that's a multi-year journey, and it's going to require quite a bit of investment.
Additionally, let's talk about our National Bank. We're the only, uh, you know, major bank that I know of that is trying to build a national. Um,
Speaker Change: Full Service Bank organically. Everybody else is doing it through Acquisitions. That requires a lot of investment. We have a, we've had a lot of success in building this. Now bringing on the Discover uh Network and seeing the traction that we're getting collectively in our business. We are the, these are very attractive, you know.
Speaker Change: We see great, uh, opportunity to continue to lean in. In fact, even lean in harder on building our national, uh, Bank.
Speaker Change: and then, of course, there's the the quest at the top of the market, we all see what, uh, even including, uh, over the last week or so, what players the the, the small number of players who are really focused on winning at the, very top of the market, they're investing hard and, um,
You know, but there's a reason they're investing hard because there is a great opportunity at at the top of the market and it's not an opportunity that is available.
Speaker Change: Widely to, you know, all the credit card companies that requires a lot of sustained investment and brand building and technology and uh experiences.
Speaker Change: um, and
Speaker Change: Uh uh products. Uh, Etc.
Speaker Change: so,
Speaker Change: That we're very pleased with the traction there, and, and Ryan. Each each year in our Quest. We've, uh, We've find that while we're getting good growth in our card business. The highest, the fastest, growing part of our card business has been with the heavier Spenders, and it's a continued indication.
Speaker Change: Of of the success as we keep moving higher in the marketplace.
Speaker Change: If you pull up Ryan and think about this, we're not trying to just build a bank, like the next Bank down the street, we're trying to build a bank that, uh, is right at the heart of consumers and and businesses Financial lives.
with the
Speaker Change: With primary banking relationships and primary spending relationships. And we now have well over a 100 million customers and the ability to over time leverage that franchise, a very highly engaged customers with
Speaker Change: not just Banking and credit card products. But in fact,
Speaker Change: Build a much broader franchise.
Uh with those highly engaged customers. That's why we're leaning into opportunities like Capital 1 shopping Capital 1 Travel and auto Navigator Each of which is
Speaker Change: Much more uh, deeply expanding our franchise. And and each of them is is
Speaker Change: getting a significant, uh, growth
And traction, and also able to leverage the size of our franchise, which by the way, just got quite a bit bigger with this acquisition.
Speaker Change: so, my point to investors is
Speaker Change: in a in an calibration across all the years I've been building Capital 1, we've always taken the philosophy of working backwards from where winning is
Speaker Change: and,
Investing with our, you know, pencil sharpened and very rigorously from a value creation framework investing on what it takes to win as the marketplace evolves.
Speaker Change: This.
Speaker Change: uh,
Speaker Change: This, you know, as you know where we are at this?
Speaker Change: uh, time in the evolution of the company has probably the best opportunities that I've seen and we are
Uh, leaning into this. And also, as I mentioned, the earnings power, even as we look at the Investments, we're talking about here, the earning power.
Speaker Change: Uh, you know, remains consistent in our estimation remains consistent.
Speaker Change: With what we expected at the announcement.
Speaker Change: Appreciate the call. I'm going to step back with somebody else. Asked question. Next question, please.
Speaker Change: Our next question comes from Erika. Najarian with UBS, you may proceed.
Erika Najarian: hi, um, good afternoon uh I'm I'm going to just move off the
Erika Najarian: Second. And we asked the question on on Capital, um, fully appreciate that you're going through review and fully appreciate the statement that you've found nothing yet. Um that's surprising, you know as we think about the 14% versus the Legacy targets of capital 1 and discover I guess another way to ask the question is, you know how much time would will? You give yourself to optimize the capital to where you think? The right level is for the company.
Erika Najarian: Yeah well there's 2 parts. I think to that question Erica 1 is kind of what uh what level are we heading towards. Uh which is also impacted at any point in time of what just happening, more broadly around us.
Which then spills into the second piece of it of how much do we want to be repurchasing at any 1 moment in time. So I don't have a precise answer for you. Of course there is, you know, some upper Bound in terms of SEC limitations to to repurchases. But um really what I would point you to is we're going to work through the uh the customer level data. Uh determine our longer term Capital need and you know, as we move towards finishing, that work. I think the the operative phrase that I I said earlier is, you know, will likely begin to step up our purchases from from recent levels. But once that work is complete, which we're doing as quickly as we can, we'll provide an update at that time.
Speaker Change: Mentioned reiterate the Synergy targets which I would compromise include the expense and targets. And so I guess the last piece that in that everyone's trying to get at is this the Run rate of expense growth at like for lack of a better word legacy, Capital 1 acceleration.
Speaker Change: And I guess based on the explanation of what you're investing in, it seems like that would have been the case. But then Rich through an EPS power, should remain consistent with what the originally saw it. So again, I I I know we're belaboring a point where you think it's critical for investors as we think about the ProForm EPS power of this company.
Uh yeah. Erica I I think we you you were uh breaking up a little bit but I we we we got the essence of what you were saying there.
Speaker Change: So Capital 1 and discover have both historically, had strong earnings power and in combining them
Speaker Change: we can build again, create a very strong institution and of course, also, at synergies
Speaker Change: There have been many moving pieces since we announced the deal.
In both companies, actual operating results and investment choices. And of course in the broader economic competitive and credit backdrop.
Speaker Change: since the deal announcement individual line items as
line items have, of course, drifted but the net drift has so far been in a favorable Direction.
At the same time, the opportunities and the investment associated with them. Have also grown
Speaker Change: so,
We estimate that the net earnings power of our combined company, as it emerges from integration.
Speaker Change: Is similar to our estimates in the deal model.
Speaker Change: Next question, please.
Speaker Change: Our next question comes from Mob with TD Cowen. You may proceed
Speaker Change: Great, thanks.
Richard a couple of times you you kind of alluded to competition in the high end of the card business. I was hoping you could kind of give us your senses to how that's likely to evolve this year. Given you know what? You've got going on at 2 of 2 of the major competitors. Perhaps 3. If you, you know, if you include all all, all of the ones that have made announcements thus far.
Speaker Change: And whether there are any elements you know of the transaction that will be kind of helpful. The capital 1 in uh you know in addressing that and I do have a follow-up. Thanks.
Uh, yes. Moshe
Speaker Change: so,
The.
Speaker Change: You know, when we look at the competitive environment, I, you know, I've said for years competition is very, uh, intense in the card business.
Certainly most striking uh, of late has been competition at the, at the, very top of the market. And you know, when before we get into specifically sort of things that happened over the last couple of weeks,
2, 2 areas that, that the stakes have gone up. And and, you know, the investment required is sort of gone up uh, to be at the highest level is in lounges and you see a little bit of the
The, um, the, the sort of like an arms race, that that's probably not the right word. But certainly the effort of the biggest players at the top of the market to build their own lounges, in addition, to offering, um, uh, partnership. You know, a network of of lounges through partners.
and um you know, Capital 1 has been doing that and we're we're very, very pleased with the
Speaker Change: 4 Lounge is that I guess 5 Lounge is that we have now uh uh I guess 5 plus what we call The Landing the 1 we have it at um
Speaker Change: Uh uh Reagan National Airport. But uh, so that's 1 of the
Speaker Change: Areas that there's a lot of competition. But the research shows people really care about lounges. And so, uh, you know, we understand that's part of the game. And we are very pleased with the customer reaction there, the traction, the volumes and the, the pickup, uh, in our own, uh, originations that, uh, we we think is coming from that.
Speaker Change: we also in this space,
Speaker Change: Uh, have um, been very pleased with some of the unique access we've been able to offer. Obviously our Taylor Swift partnership has been a uh, a special uh opportunity for us. But uh this is this is now the the flip side
Speaker Change: Of the, some of the Investments required is that uh, a small number of players I think are separating from the pack relative to their um um their offerings and the extent of their commitment to this space. So I think, uh, competitively, their real opportunities on the flip on the, on the other side of the, the sort of, uh, higher uh Stakes of investment.
Speaker Change: We then get to the products and it it is striking that at the top of the market.
Speaker Change: you know, both Chase and American Express uh have made announcements about um
Speaker Change: things that the the the well with America, with American Express, it's still, you know, we haven't seen what they're going to come out with but uh,
Speaker Change: uh certainly on the chase uh side we have seen, you know, a higher fee, on the 1 hand, but also uh ramping up some of the uh rewards and also uh, extending the list significantly of sort of the, um,
Speaker Change: Opportunities more on a coupon type basis that can come. So it's very clear both comp. And MX seems to be, you know, they've already um,
Speaker Change: Been on a similar path there for a number of years. And uh, I think that we would expect they'll come out with uh, some enhanced offerings there.
Speaker Change: We have crafted our strategy at the top of the market to not just be going out and try to exactly copy what, uh, the others do. But to try to create something that in its own way. For, the right customers is a absolutely best-in-class experience. So take our Venture x, uh, product. First of all, in terms of the uh, earn rates on Venture X, it's earning at the, the 2x rate, which is
Speaker Change: The, um, you know, uh, higher earn rate than some of the uh competitive uh, products.
Speaker Change: Other products have co-brand relationships with Airlines and they're both a lot of expenses there but also unique offerings. We instead have the any Airline and sort of the unique aspects of uh the 2x on everything with Venture X.
Speaker Change: But uh, what I would share with you is, we are very pleased with the traction on Venture X. You've seen us on television, continuing to tell our story, uh, and I think that as other competitors, um, you know, um,
Speaker Change: Um, come out with their plays that are different from ours. There continues to be. I think quite a lot of, uh, open space, uh, at our price point and our Collective set of offerings and experiences that really, uh, I think,
Speaker Change: Uh, offers a lot of opportunity for us. So we're leaning in hard with Venture X and then we're continuing to build
Speaker Change: In uh, enhanced capabilities.
Across. Um,
Speaker Change: digital experiences product offerings lounges and
Speaker Change: um uh special preferred access that I think will continue to position Capital 1 uh in a uh uh a very attractive uh way.
Speaker Change: Uh, in the competitive environment you asked about, um, the network and basically Will, adding discover what impact will that have certainly uh adding the scale of discover certainly helps um us um with respect to the uh just more opportunity to um, you know, even though discover was not a top of the market uh player. But then I think, uh, also Moshe down the road longer term. I think we see uh, opportunities on the network side of the business relative to, uh,
Speaker Change: Road than 1, uh, in the near term.
Thank you.
Speaker Change: Got it. Thanks maybe just as as kind of a follow-up.
Speaker Change: Um, I think the, you know, the
1 of the things that, you know, that we've thought about a little bit is using the, the benefit of unregulated debit Interchange to help build the banking franchise and to go to a rewards checking model and you talked about, you know, the bank and franchise and some of those impacts could you talk about how you see that in, you know, now that uh you know you've got access to this and can start migrating your debit accounts.
Speaker Change: so, our National Bank strategy is always been about offering
Speaker Change: industy industry-leading products backed by a business model that can
Speaker Change: economically support that.
So when you think about that, we have a full-service digital Bank, there are a lot of folks out there with digital banking capabilities. A key differentiator is capital 1 has full service.
Speaker Change: Digital banking.
Speaker Change: we do believe, physical presence matters, and our research continues to confirm that even ironically, so many people say, yeah, I never go into branches but, but in their choices,
physical physical presence does matter to a lot of people and that's why we have built our
Um, thin, um, distribution model of these sort of showroom branches. But again, importantly working backwards from having the economics,
That's different from a branch on every corner kind of a thing.
Speaker Change: so, the
Speaker Change: Economics of this.
Speaker Change: Have supported.
A product offer, that's industry-leading.
Speaker Change: No fees, no minimums.
And no overdraft fees.
And no other major bank has a primary offering that matches that
and actually our product offer is democratizing banking by making it available to anyone.
At no cost.
Speaker Change: And customers have responded, uh, very positively.
Now, let me turn to discover discover as a small portfolio of cashback debit cards.
Speaker Change: We plan to keep those customers in their current product.
Speaker Change: and we are and and with the benefit of the network now and you know, bringing discover on we are
Speaker Change: Raising the investment levels in our Flagship product.
To help Propel. Our National Bank growth.
With the very successful industry-leading value proposition that has gotten us here.
So we are keeping what discover had for its customers and we will lean into our industry-leading banking product.
Going forward.
Speaker Change: Next question, please.
Our next question comes from Don vanetti with Wells, Fargo. You may proceed
Speaker Change: Uh, Rich. Can you share a little bit more about um, your International acceptance buildout plans? And just trying to think, you know, if there's a way you can help size it, or talk about how the expenses get funded because I guess the revenue benefit of you know, moving the bulk of the credit cards over to the network happens after you get the the acceptance and if there are any sort of guideposts or targets that you have um
Speaker Change: That would be helpful.
all right, Don
We we we uh of course, you know, haven't been in the network business. So uh over the course of
Speaker Change: our, um,
Speaker Change: We, uh, our what was it? Uh,
15 or 16 or 17 months, uh, of pre-deal. We did everything we could to, to learn about the, um, uh, the network business. We brought in a bunch of Consultants, uh, to teach us everything they knew about that and and uh, and now, especially as we get on the other side of this, we are really going to school on the amazing. Um, you know, learnings we're able to get, uh, with discover and I really want to say, it's it.
Speaker Change: I've seen I've seen a lot of scale businesses in my days and
Speaker Change: Seen any business as scale driven as a network.
Speaker Change: Because you know the marginal cost of a transaction is is is virtually zero and you know the fixed costs are high in a business like that. So it's not an accident that there are 2 uh visa and Mastercard or or enormous companies and that, you know, most banks around the world. Don't have enough scale to have their own network even if they could solve the chicken and egg problem to get there.
Speaker Change: so we look at this and we're certainly blessed to have uh, a network and I am struck
This, that given discovers.
Speaker Change: really small scale, even, you know,
Speaker Change: domestically pretty small scale, but but but globally
uh, strikingly modest scale.
Speaker Change: I am struck at. How how
Speaker Change: Extensive the international acceptance that they have already built is now, it's not up to the levels that, um, you know, we would really wanted to be in order to move, more internationally traveling, uh, customers there.
Speaker Change: but,
I certainly was surprised.
Speaker Change: at how good it is relative to the scale and sort of uh their you know, thinking about the the the challenge they have to get their
Speaker Change: But here's the inspiring thing.
Speaker Change: They've already built.
Pretty good International acceptance.
Speaker Change: And they have a Playbook uh to do it. That is the same Playbook 1 would use to get.
Quite a bit more International acceptance.
Speaker Change: And there there are 4 ways.
Speaker Change: basically that to build International acceptance and and 4 ways that discover has cobbled together this International Network acceptance
Speaker Change: partnering with other networks.
Speaker Change: Partnering with Merchant acquirers.
Speaker Change: Partnering with card issuing financial institutions.
Speaker Change: and finally,
going directly to merchants.
Speaker Change: And they used a combination of all 4 of those. We have sat with them and said,
how feasible is it to get more? And how would you get more? And the answer really is
Speaker Change: Continue leveraging those 4 and uh just lean in harder and invest uh more than discover has historically invested.
Speaker Change: We don't, you know, we're
Speaker Change: uh,
Speaker Change: you know, I I in in the calibration of the, of the hills that Capital 1 has taken on over time, and and the journeys and the Investments, we've done in the history of our company,
Speaker Change: This is right down the Fairway of the kind of challenge. We take on working backwards from where winning is.
Speaker Change: I'm not, uh, we, we, we, we don't have, uh, you know, uh, an estimate of exactly what it will take. And there's also another thing of even what acceptance level
Speaker Change: uh, is is exactly what we need because this is something as we get into it and and and see our customers experience is, it's a bit of a, you know, it when you see it kind of a thing,
But what I'm comfortable with is.
The Playbook is there?
Speaker Change: Um, and the opportunity on the other side of this is very clear because that is the path to help us move more volume to the other side. That plus the building of of, uh, of, uh, I mean, discover already has a network brand. When I talk about building a
Speaker Change: A a a Global Network brand pictures, something that is.
Speaker Change: Uh, has a more uh, Global. Um,
Speaker Change: Uh, it's more of a global brand more of, a, a market, uh, brand and these are things working backwards from, you know, where, where we would try to go with our business down the road. So, it's a, it's to us, is a very clear path. It is classic Capital 1 and we have taken on many challenges many uh opportunities like this and patiently. Um uh um,
um, worked backwards from, um,
Rated opportunities and this is right.
In the Wheelhouse of that.
Speaker Change: Thank you.
Speaker Change: Next question, please.
Speaker Change: Our next question comes from John. Benari with evercore, you may proceed.
John Benari: Good evening. Um just to go back to the cost topic again, the expense topic. Sorry to, to go back to it. But um, just to clarify what type of costs
John Benari: Uh, are included in The Upfront, integration costs that you indicated are like within higher and then what types of Investments are netted against the 1 and a half billion in cost savings that you set out.
well, John, I want to ask for clarification on the back, half of of your question, but in terms of what is included in the integration costs,
Um, you know, we we had deal costs. Um, we are making additional investments in their risk management were integrating, you know, their people were moving them to our Tech stack. So those are the components that were included in uh in the integration cost. So it's not 1 specific thing. That I would point you to in terms of what is increasing. Uh, the
The integration and signaling that we think they might be be somewhat higher, but I didn't quite follow the second half of your question. So could you just repeat that?
John Benari: Yeah, I was just trying to determine the difference between the type of costs that are included in The Upfront. Integration costs that are coming in higher, versus the type of Investments, like the investments in the network. Any investments in regulatory areas that are, that may be netted against the net cost savings that you set out. Yeah. So Investments would include things like building out additional capabilities for debit on the network to enable future spend and increase customer engagement as opposed to in the integration cost that just reflects the sheer Act of taking their our debit volume and moving them on to their their system. So you know philosophically hopefully that provides a bit of a window into the the distinction between what is an integration spend versus what is an ongoing investment.
Speaker Change: Right? So those Investments those ongoing Investments that you mentioned being that they are netted against the cost saves and that you feel good about or that you had indicated in your prepared remarks that you are in on on track to achieve the expected 2 and a half billion synergies. So what is it fair to assume that there's no implied, expected change in those Investments that are within that 2 and a half?
John Benari: 5 billion.
There are 3 pieces to this. Maybe I'll put it in my language to make sure we're saying the same thing.
Speaker Change: 1 are the integration costs, the 2.8 billion dollar number that rich rich reference in his prepared remarks and those are the necessary expenses deal costs. Uh people costs
Speaker Change: Integrating, you know, them onto our Tech stack moving our debit onto their Network.
The second piece are the costs synergies that we have identified as a result of bringing those 2 or 2 organizations together and those cost synergies are fully intact.
Speaker Change: The third piece to it is additional Investments that in some ways like Rich enumerated that we will be making Beyond, you know, the current levels of Investments uh in certain areas that that we're making today. So that is distinct from the achievement of the cost synergies that you articulated in the the bucket. And I think you are netting, the second and third category in your question. But I really want to create a firm distinction between those 2 things because the additional Investments are things that will power future growth and create additional value and the window or the, the evaluation
Process that we use for considering those Investments are just like any other investment that we would make in in capital 1, which is importantly distinct from achieving the synergies that we laid out in announcing the deal.
Speaker Change: Okay, all right. Thank you.
Speaker Change: Next question, please.
Speaker Change: With Morgan Stanley. He may proceed.
Hey, good evening. Thanks for taking my question. Um, most of my questions have been asked and answered, but just on the, the debit conversion. I know you sort of characterized this as something that can happen relatively quickly. Uh, can you just give us an update on where you are in that process? How quickly you'll be able to pull that off? Achieve the full debit interchange benefit on a run rate basis. And maybe what are some of the steps you need to take from here to go through with that and complete the conversion? And is it a part of that question? Um, have you had any discussions with some of the largest Merchants where your legacy Capital 1 debit customers are shopping today. Um, are those merchants on board with some of the changes that are coming forth and or or are there any sort of negotiation that needs to happen?
Oh okay, thanks Jeff. Um
Speaker Change: so,
We began uh it reissuing capital 1 debit cards onto the Discover Network.
Speaker Change: With early pilot populations in June.
And we expect the conversion to continue in phases through early 2026.
Speaker Change: We expect the majority of customers to be on the debit, excuse me, on the Discover Network, by the fourth quarter of 2025.
With all debit purchase volume running on the Discover Network by early 2026.
so, um,
Speaker Change: you know, the
1 of the 1 of the real attractions to us of buying a network, is the ability to have Direct Merchant relationships.
Speaker Change: you know, when you it's all its
it's it's it's the way the market works, but but when I think, about founding Capital 1 and building a a company where I always believed that the tip of the spear,
Speaker Change: Of the technology revolution in fin in financial services would be payments.
And so you know, we built basically a payments company and it's all he's is is an odd thing to have 1.
Uh, part of the value chain, a very important part in the value chain, um, run by an intermediary. And of course, it's reflective of how scale driven the industry is and that's kind of why it happens.
Speaker Change: um, but
Speaker Change: elsewhere in our Capital 1 business.
Speaker Change: We have been working really hard to go direct to Merchants and build Direct Merchant relationships, because we have a 100 million customers. And, you know, Merchants want to, every Merchant has the same objective function. They want to drive more sales, and we have over a 100 million customers that, you know, want to, um, you know, have better deals. So, another sort of wing of capital, 1, is going direct to Merchants and, um, really being able to leverage, uh, our huge customer base and the massive investment we have made in data and Technology.
and and, uh, over time, uh, AI to be able to, uh,
Speaker Change: Create more value for merchants.
Uh in areas like um uh reducing fraud, we're way down that path and and direct relationships with merchants.
Speaker Change: Uh, direct specific, uh, Merchant funded uh deals.
Speaker Change: um, so
Speaker Change: we're excited that the Discover acquisition allows us to, uh, now take this, uh, you know, 1 piece of the value chain that, that, um, was entirely run through intermediaries. And, uh, for some of our business to really go direct. So, uh,
Speaker Change: the, uh, as we do that, uh, Jeff. Um, we will continue to have conversations with Merchants about, and, and we also like to bring them, uh, you know, data to show them the value that we're adding and, and the benefits of all of this and, uh, the the debit, uh, and now moving more of our debit business will be another part of those, uh, conversations and the growing relationship uh, with Merchants. But, uh,
Speaker Change: Really increasingly building a direct merchant business model.
Speaker Change: Next question.
Speaker Change: Our next question comes from Brian Fran. With truist Securities. You may proceed.
Brian Fran: Hi. I I know you haven't been big users of guidance historically but there have been times where you set out these guideposts you know whether it's the Opex, efficiency Target. I think there was threading the seam at 1 Point um, lost guidance, CPS guidance, those kind of things when you're helping investors navigate periods of transition or trying to understand an issue. I, I know you're kind of deferring to give specific guidance right now, but is that something you're contemplating? I mean, it is hard to look at the kind of numbers for 2 Q with the mid-quarter clothes, and all the adjustments and really get comfortable or confidence of what the core is going to look like over the next couple of quarters.
Brian Fran: You know, is it kind of, is there a thought of giving guidance on some high-level metrics or Targets on returns or something like that? Or is it going to be a little bit more of a chips fall where they may philosophy?
Uh Brian uh thank you for your question. Um, you know if if I stand back I go back to the
Brian Fran: When the day we launched, uh, the IPO of capital 1 and I had spent a lot of years. Uh,
uh, as a strategy consultant before that, a lot of time, looking at companies and being inside companies and 1 thing, I was struck by
Brian Fran: Is.
Brian Fran: um, the
Brian Fran: role that guidance, uh played in sometimes, um,
Brian Fran: Uh a well-intentioned thing ended up um ending becoming the objective function of the business instead of really creating value for investors. And so
Brian Fran: um, what we have tried to do is not run the company through guidance but to
Brian Fran: but,
it and instead what we have done from the founding days is is, you know, 1 of the first things that we build is a business model of what I call horizontal accounting where we we were very struck that companies would make choices
Brian Fran: That.
You know, working backwards from vertical learnings instead of rigorously measuring horizontal, Returns the value of, you know? And we we believe every choice that's made in the company. You know. It it it's ultimately a
Brian Fran: you know, has has cost upfront and return and we measure before during and after
What is the value that got created? And our business model is absolutely focused on.
While we invest a lot is very focused on making sure that it's creating value on the other end of that and that's been a Hallmark of what we do.
Now.
Brian Fran: um,
Brian Fran: The.
Brian Fran: Along the way. So so we we have you know hopefully tried to build a brand and a credibility with investors that that our business model is 1 that builds uh, long-term value
Brian Fran: um, and
um, you know, hopefully our track record speaks for that.
Brian Fran: We have chosen to give guidance from time to time where there are specific things that we think it's really important that investors understand uh on on something that matters a lot to them and some things where we have a prospective that can be very very uh useful there.
Brian Fran: What we try to do is to really help investors understand.
Why we are making the choices we're making and how everything we're doing is built is focused on building a franchise for the long term and create long-term. Um,
Brian Fran: Uh, growth and earnings power for our investors.
So,
when I think about this important moment here, as we bring,
Brian Fran: um,
Brian Fran: Uh, discover uh into Capital 1 and think about all the earnings power and the opportunities that we have.
my comments at the beginning were were intended to sort of, uh, give sort of a
Brian Fran: um, a little bit of a, of a, bounding of how we're thinking about things by my comments, about the
Brian Fran: Or even, even an environment where some of the metrics have already moved, the individual line items and an environment where we see a particularly uh significant you know uh uh significant number of investment opportunities.
To.
Um, you know, indicate to investors that the earnings power. We see out the other side of this is pretty consistent with what we saw at the beginning. Knowing that everyone will take it back to the envelope and try to, you know, do their own estimations of that. But generally we, um,
Brian Fran: You know, so I guess the, the, the I I would say, um, our guidance is, uh, you know, situational and it's not that we never give it. We I'm sure we will in the future on certain things but uh, I I wouldn't want to set an expectation for investors. That at a certain point here coming out of the gate with discover that we're going to lay out uh specific uh numbers because it's probably not what we're going to do.
Speaker Change: Next question, please.
And our final question comes from the line of John. Heck, with Jeffrey's you may proceed
John Heck: Uh, afternoon. Thanks for putting me in and um uh, thank you for all the information on the Discover uh, you know, the update on the Discover Journey. Um, I guess my question is going back to some of the traditional questions. We'd ask you riches, you know, what's your, I guess a 2-part question is all I have is what's your uh, opinion on the State of Affairs of the US consumer, has that changed in the last quarter. And have you noticed anything different between your customers set and the the Discover customer set in terms of payment behaviors or spend behaviors.
Speaker Change: Yes. Uh uh thank you uh so much.
John Heck: um,
John Heck: so the uh, us uh, consumer
is in a,
John Heck: Uh, in a great, uh, place here that we we continue to. Um
Speaker Change: We see the US consumer as a source of strength in the economy.
Speaker Change: The unemployment rate remains low and stable job creation remains healthy real wages are of course growing steadily.
Consumer Debt servicing. Burdens remain stable.
Speaker Change: And near pre-pandemic levels.
In our card portfolio. We're seeing improving delinquency rates and lower delinquency entries.
Speaker Change: And payment rates are improving on a year-over-year basis.
Now, of course, the circumstances of individual consumers in a households will vary as they always do.
Speaker Change: And as we've mentioned in past earnings calls,
some pockets of consumers are feeling pressure from the cumulative effects of inflation and higher interest rates.
And we're still seeing some delayed charge off effects from the pandemic. Although the improving Trend in our delinquency, suggests these effects,
Speaker Change: Our moderating.
Speaker Change: But on the whole I'd say the US consumers in really quite good shape.
And of course, like, all of you, we're keeping a close eye on the potential impact of tariffs and other uh public policy changes.
Speaker Change: um, and you know, the
Speaker Change: and,
Sort of, with the tariffs, there's been a lot of uncertainty. Uh, but you know, for now
Speaker Change: Uh, even in that area. Of course, we've all seen markets, rebound, most economic metrics have remained strong, and we haven't seen any adverse signals in our credit performance.
Speaker Change: In spend or in payments.
Speaker Change: Even in the most Leading Edge data.
Speaker Change: We're also watching closely as student loan repayments and collections resume after a pause of almost 5 years.
specifically we're watching the performance of card and auto customers with student loans and especially those customers whose student loans are now being reported as delinquent,
Speaker Change: So far, we haven't seen any spillover effects in these segments, but we'll continue to monitor this closely.
So pulling way up. There's a lot of uh positive momentum in our performance.
In our improving overall credit metrics and in the performance of our front book of new originations.
On the economy here. But I I think in a world of a lot of turbulence and if you read the news every day you can think the world's falling apart but actually uh
Speaker Change: If we don't read the news and just look at, uh, what our customers are telling us would their behaviors. Um, it is, um, it is, um, you know, a, uh, a picture
Speaker Change: Of strength.
Speaker Change: The.
uh, discover
Speaker Change: Card performance. You know, as we brought them on
We've been able to start unpacking performance across a number of Dimensions, uh, we're seeing credit improving in recent months.
Speaker Change: Uh, the loan and purchase volume growth has been muted due to their originations pullbacks in recent years.
The customer engagement and loyalty metrics uh, continue to be.
Speaker Change: Uh, very strong.
Discover has a little bit, you know, discover has a little bit more of a revolver oriented portfolio. All of us have revolvers, they have been a little bit more of a revolver. Le business. We've been a little bit more of a spend spend
Speaker Change: Uh driven business model that that of course, has a bunch of revolving. And so, uh, we we look uh,
Forward very much to, you know, rolling up our sleeves and looking at some of the differences, and I'm sure many of the Great similarities between the 2. But pulling way up, the consumer is in a good place and, and uh, both, uh, companies, uh, card performance, uh, credit performance, uh, is, um, is really um, very positive.
That concludes our session for this evening. Thank you for joining us on this. Call on this call today and thank you for your interest in capital 1.
Have a great evening, everybody.
Speaker Change: Thank you. This concludes today's conference call. Thank you for participating. You may not disconnect.
Speaker Change: Good day and thank you for standing by. Welcome to the capital 1, second quarter 2025 earnings call. 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 to withdraw your question. Please press star 1 1 again, I would not like to hand the conference over to your speaker today. Jeff Norris senior Vice President of Finance please go ahead.
Thanks very much Josh and welcome everybody.
Uh just a few opening remarks to access the live webcast of this call. Please go to the investor section of capital 1's website, capital 1.com
Speaker Change: a copy of the earnings presentation, press release and financial supplement can also be found on the investor section of capital 1's website.
Speaker Change: By selecting financials, then quarterly earnings releases.
With me tonight are Mr. Richard Fairbank Capital 1's, chairman and chief executive officer, Mr. Andrew Young, Capital 1's, Chief Financial Officer.
Speaker Change: Rich and Andrew are going to walk you through the presentation summarizing. Our second quarter results for 2025
Speaker Change: Please note that this presentation may contain forward-looking statements.
Information regarding capital and financial performance and any forward-looking statements contained in today's discussion and the materials speak only as of the particular date or dates indicated in the materials Capital 1. 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 earnings release presentation and the risk factors section of our annual and quarterly reports accessible at Capitol 1's website and filed with the SEC.
Speaker Change: And with that, I'll turn the call over to Mr. Fairbank rich.
Thanks uh, Jeff and good evening to everyone on tonight's call.
I want to begin tonight by welcoming our colleagues at Discover.
Speaker Change: To the capital 1 Journey.
As you know, we completed our acquisition of discover on May 18th and we're fully mobilized and hard at work on integration which is going well.
Speaker Change: It's still early days, but we very much like what we've seen so far.
Speaker Change: We share key cultural attributes with discover, including a deep shared commitment to customers.
And we're as excited as ever by the expanding set of opportunities, to grow, and create value as a combined company.
From our founding days, we've been on a quest to build um you know a great financial institution and integrated Banking and Global Payments platform. That's positioned at the Forefront of the opportunities that will come as technology and data transform Financial Services.
Speaker Change: Discover enhances and accelerates our progress on this Quest. I'll share additional thoughts on the hard work Investments and compelling opportunities. We see going forward at the conclusion of tonight's call but for now I'll turn the call over to Andrew to discuss the balance sheet and purchase accounting. Impacts of the deal.
As well as our financial performance in the second quarter.
Andrew Young: And Andrew.
Andrew Young: Thanks, Rich and good afternoon everyone. I will start on slide 3 of tonight's presentation.
As rich just discussed, we closed the acquisition of discover on May 18th.
Andrew Young: We have now completed provisional purchase accounting and Incorporated discovers business lines into our reported segments.
Andrew Young: With discovers domestic card and personal loans. Now included in our credit card segment,
Andrew Young: And discovers deposits and network businesses in our consumer segment.
As part of the acquisition, we acquired 98.3 billion of domestic card loans, with a net fair value discount of 220 million.
Andrew Young: We also acquired 9.9 billion of personal loans with a net fair value, discount of 114 million.
And we acquired 106.7 billion dollars of deposits.
With a net, fair value discount of 30 million.
The amortization of these net fair value Marx decreased net, interest income by 85 million in the quarter.
Andrew Young: The full loan and deposit amortization schedule, is included on, slide 17 of the appendix.
We also acquired 7.9 billion of Home Loans, which have been marked as held for sale and are now included in discontinued operations.
Andrew Young: The net credit mark on the Discover loan portfolio. Increase the allowance on the balance sheet by 8.4 billion.
With 8.8 billion of provision, expense, for non-pc loans flowing, through the p&l.
Andrew Young: I will discuss the allowance in Greater detail in a moment.
Andrew Young: There were multiple advertising intangibles created as a result of the acquisition.
We recognized a core deposit, intangible of 1 billion.
Andrew Young: A purchase credit card relationships and tangible of 10.3 billion.
Andrew Young: And network and financial partner, relationships in tangibles of 1.5 billion.
Andrew Young: The amortization of these intangibles increased non-interest expense by 255 million in the second quarter.
We have included a full intangible amortization schedule on slide 18 in the appendix.
Andrew Young: We also recognize 2 intangibles with indefinite lives.
Andrew Young: A network and tangible of 3.1 billion dollars.
Andrew Young: And brand and trade name intangibles of 2.3 billion.
Andrew Young: Including the impact of purchase Accounting. In the allowance, build the partial quarter impact of the Legacy, discover businesses contributed 2 billion, dollars of Revenue.
Andrew Young: And a 6.4 billion net loss to the results from continuing operations.
Andrew Young: We bring the 2 companies together, there are financial reporting presentation realignments and business changes.
Andrew Young: That impact the reporting geography of Revenue, marketing and operating expense recognition.
Andrew Young: In total, these moves increase the operating efficiency by roughly 30 basis points.
And the total efficiency by roughly 15 basis points in the second quarter.
Andrew Young: Looking ahead. We expect the Run rate impact of these changes. To result, in a roughly 90 basis point, increase to the operating efficiency ratio and a roughly 50 basis, point increase to the total efficiency ratio all else. Equal
There is no impact from the reclassifications to the timing of recognition in either the second quarter or in future quarters. So, the net impact to the bottom line is negligible
Andrew Young: Turning to slide 4, I'll cover the second quarter financial highlights for the combined company.
Our results for the quarter were significantly impacted by the completion of the Discover acquisition.
Andrew Young: On a gap basis. We had a net loss of 4.3 billion.
Or a loss of 8.58 per diluted common share.
Andrew Young: Included in the results for the quarter were multiple adjusting items related to discover.
Andrew Young: As well as a small addition, to our legal reserves.
Net of these adjusting items, net income in the quarter was 2.8 billion and diluted earnings per. Share was 5.48
Andrew Young: There was also 1 notable item in the quarter.
A law change in the state of California, increase our effective tax rate, but also created a 1-time 128 million tax benefit as a result of truing up our deferred tax asset.
Andrew Young: Revenue in the second quarter increased 2.5 billion or 25% compared to the first quarter.
Adjusted Revenue, increased 26% or 2.6 billion.
Andrew Young: Not interest expense increased 18%, or 14% net of adjustments.
Pre-provision earnings in the second quarter were up 34% relative to the first quarter.
Andrew Young: Net of adjustments, pre-provision earnings increased by 40%.
The increase in pre-provision earnings was largely driven by the partial quarter impact of discover, while also benefiting from strong Legacy Capital 1 results.
Andrew Young: On a gap basis. Our provision for credit losses was 11.4 billion in the quarter.
Excluding the 8.8 billion initial uh, allowance build for discover.
Andrew Young: Provision for credit losses, was 2.7 billion dollars an increase of 294 million compared to the prior quarter.
The increase was more than driven by 324 million in higher net, charge offs.
A decline in charge off that Legacy Capital 1 was more than entirely offset by the addition of the partial quarter of the Discover portfolio.
Andrew Young: Turning to slide 5 I'll Now cover the allowance in Greater detail.
We built 7.9 billion dollars of allowance in the quarter, bringing the allowance balance to 23.9 billion.
Andrew Young: The primary drivers of the change in allowance related to the Discover acquisition.
Which included an 8.8 billion expense for non-pc loans and a 2.9 billion. Initial allowance for PCD, loans offset by a 3.3 billion benefit from the expected, recoveries of acquired discover loans that are fully charged off.
Andrew Young: Excluding these discover impacts the allowance balance declined by approximately 400 million.
Our total portfolio coverage ratio, increased 52 basis points to 5.43%.
Andrew Young: Driven largely by the mixed shift of our portfolio.
Andrew Young: I'll cover the drivers of the changes in allowance and coverage ratio by segment on slide 6.
Andrew Young: In our credit card segment, we built approximately 8 billion dollars of allowance in the quarter.
Roughly 760 million of the build is driven by the acquisition of discover's personal loan portfolio.
Andrew Young: With the remaining 7.2 billion build in the domestic card business.
Andrew Young: The domestic card build was driven by 2 factors.
Least approximately dollars of allowance in the Legacy Capital 1 portfolio.
Andrew Young: This Legacy card release was driven by continued favorable credit performance in the quarter, partially offset by modestly. Worse, economic Outlook.
And second, we built 7.6 billion of allowance. For the Discover domestic card, loans added in the quarter.
The combination of incorporating and updated economic Outlook. Aligning allowance methodology and reserving for growth. In the portfolio, led to a roughly 400 million dollar increase in the allowance for discovers card. Loans relative to the equivalent balance as a standalone company, at the end of q1.
Andrew Young: The Consolidated domestic card coverage ratio. Now stands at 7.62%,
the allowance balance in our consumer banking segment was largely flat at 1.9 billion.
Andrew Young: Observed credit favorability and the impact of stable auction prices was largely offset by growth in the auto business.
The ending coverage ratio of 2.29% was down 8 basis points from the prior quarter.
And finally, the Commercial Banking allowance balance of 1.5 billion and coverage ratio of 1.74% are largely flat to the prior quarter.
Andrew Young: Turning to page 7. I'll now discuss liquidity.
Andrew Young: Total liquidity reserves ended the second quarter at 144 billion.
Andrew Young: Up roughly 13 billion relative to last quarter.
Our cash position sits at 59.1 billion up, 10.5 billion from the prior quarter.
Andrew Young: The increase in cash was primarily driven by proceeds from the sale of a portion of discover Securities as well as the addition of acquired cash from discover.
Our preliminary average liquidity. Coverage ratio increased slightly during the second quarter to 157%.
Andrew Young: And our average nsfr remained roughly flat at 136%.
Andrew Young: Turning to page 8, I'll cover our net interest margin.
Our second quarter, net interest. Margin was 7.62%.
69 basis points higher than the prior quarter.
Andrew Young: The partial quarter impact of adding discover increased Nim by roughly 40 basis points.
Andrew Young: This 40 basis point increase includes the roughly offsetting effects of a 6 basis. Point drag from the fair value Marx, and a 6 basis. Point Tailwind from changing, discovers historical practice to now include late fees in interest income.
The remaining nearly 30 basis, point Improvement in Nim, was driven by cap Legacy Capital 1.
Andrew Young: Which had lower rate paid on deposits.
Andrew Young: A liability mixed shift towards deposits and 1 additional day in the quarter.
Andrew Young: Looking ahead. We expect the full quarter benefit from the Discover acquisition to drive an additional 40 basis point. Increase to Nim all else equal
Andrew Young: Turning the slide 9, I will end by discussing our Capital position.
Our common Equity Tier 1, Capital ratio ended the quarter at 14%.
Andrew Young: Approximately 40 basis points higher than the prior quarter.
The impact of the equity issuance for the acquisition was partially offset by the additional Goodwill and intangible assets.
Andrew Young: The increase in Risk weighted assets, the net loss in the quarter dividends and 150 million of share repurchases.
during the quarter, the Federal Reserve released the results of their stress test
Andrew Young: Our preliminary stress Capital buffer requirement is 4.5%.
Andrew Young: Resulting in a cet1 need of 9%.
Andrew Young: The new SCB becomes effective on October 1st.
Speaker Change: Now that we've closed the Discover transaction, we are working through our internal modeling of the combined companies Capital need and look forward to sharing an update. Once our work is complete with that, I will turn the call back over to Rich.
rich rich: Thanks Andrew.
Slide 11 shows second quarter results, in our credit card business.
rich rich: Credit card, segment results are largely a function of our domestic Card results and Trends, which are shown on slide 12.
The Discover acquisition was the dominant driver of second quarter domestic Card results, including the impact of a partial quarter of combined operations, a combined quarter, end, balance sheet and purchase accounting effects.
Looking through the Discover impacts the combined domestic card business delivered in other quarter of Topline growth, strong margins and improving credit.
2%, which includes 26.5 billion of discover purchase volume.
rich rich: Excluding discover year-over-year purchase. Volume growth was about 6%.
Ending loan. Balances increased. 72%, largely as a result of adding 99.7 billion dollars of Discover card loans, excluding discover ending loans, grew about 4% year-over-year.
rich rich: And revenue was up 33% from the second quarter of 2024 driven largely by adding the partial quarter of discover Revenue.
rich rich: Excluding discover year-over-year Revenue. Growth was about 8% driven by underlying growth in purchase, volume and loans.
Revenue margin for the quarter was 17.3%, including a 121 basis. Point impact from the partial quarter of combined operations and amortization of the purchase accounting. Fair value. Mark.
rich rich: Excluding these discover impacts Revenue margin would have been 18.5%.
rich rich: The domestic card. Net charge off rate was 5.25% down, 80 basis points from the prior year quarter.
rich rich: The 30 plus delinquency rate was 3.60% down 54 basis points from the prior year, these metrics were impacted by the addition of discover, which has historically had lower losses and delinquencies than Capital 1.
The delinquency metric was also impacted by aligning methodologies between discover and capital 1.
Capital 1's Legacy domestic card. Portfolio would have had a net charge off rate of 5.500% down, 55 basis points, year-over-year and a 30 plus delinquency rate of 3.92% down 22 basis points from the prior year,
Capital 1's card delinquencies have been improving on a seasonally adjusted basis since October of last year and our losses have been improving since January of 2025.
Speaker Change: Discovers card credit metrics.
Speaker Change: Peaked about a quarter later but are now improving steadily. Following a similar path to what we observe on the Legacy Capital 1 portfolio.
Domestic card non-interest expense was up 42% compared to the second quarter of 2024 operating expense and marketing. Both increased year-over-year.
Speaker Change: To company marketing expense in the quarter was 1.35 billion dollars up 26% year-over-year.
Speaker Change: Is in domestic card are the biggest driver.
Of total company marketing. 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 market.
Compared to the second quarter of 2024 domestic card Marketing in the quarter included, the addition of discover marketing higher direct response, marketing higher media, spend and increased investment in premium benefits and differentiated customer experiences.
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
Speaker Change: Slide 13 shows second quarter results in our consumer banking business.
Global payment Network transaction, volume from the May 18th close of the Discover acquisition through quarter end was about 74 billion dollars.
Oto originations were up 28% from the prior year quarter driven by overall market growth and our strong position to pursue resilient growth in the current Marketplace.
Consumer banking ending loan balances, increased 5.6 billion dollars or about 7% year-over-year, average loans were up 6%.
Our digital First, National Consumer banking business continues to grow and gain traction, powered by our technology transformation and our compelling, no fees, no minimums and no overdraft fees customer value proposition.
Consumer banking revenue for the quarter was up about 16% year-over-year, driven predominantly by the partial quarter of discover as well as.
Growth in auto loans. Non-interest expense was up about 37% compared to the second quarter of 2024 driven, largely by the partial quarter of discover as well as increased Auto originations. The legal Reserve Edition that Andrew mentioned higher marketing to drive growth in our National Consumer, banking business, and continued technology Investments.
Speaker Change: The auto charge off rate for the quarter was 1.25% down 56 basis points year over year.
Largely as the result of our choice to tighten credit and pull back in 2022. Auto charge offs are improving on a seasonally adjusted basis.
Speaker Change: The 30 plus delinquency rate was 4.84% down 83 basis points year-over-year.
Compared to the linked quarter. Both ending and average loan balances were up 1%.
Ending deposits were down about 2% from the linked quarter average. Deposits were down 4%. We continue to manage down selected less, attractive, commercial deposit. Balances
Speaker Change: Second quarter Revenue was up 6% from the linked quarter and non-interest expense was up by about 1%.
The Commercial Banking annualized. Net charge off rate for the second quarter increased 22 basis points from the sequential quarter to 0.33%.
The commercial criticized performing loan rate was 5.89% down 52 basis, points compared to the linked quarter.
Speaker Change: The criticized non-performing loan rate was down 10 basis points to 1.30%.
As we close this presentation.
Speaker Change: and before we open it up for Q&A,
I want to pull up and reflect, not just on the quarter, but also on where we are.
In the second quarter bringing on Discover for a partial quarter and the related purchase accounting. Impacts dominated our reported results. But looking through these effects, our adjusted earnings Top Line growth credit results and capital generation continued to be strong.
Speaker Change: We completed the Discover acquisition on May 18th and we continue to be very excited about the opportunity.
Here are some early Financial observations. They are, of course, still subject to change, but we wanted to share our thoughts with you.
Speaker Change: Let me start with integration costs.
Our integration budget covers a wide array of expenses including deal costs moving discover onto our Tech stack integrating their products and experiences making additional investments in risk management and compliance and integrating the talent and taking care of the associates along the way.
The integration is off to a great start, but as we have gotten more granularity on each of these efforts, we expect our integration costs will be somewhat higher than our previously announced 2.8 billion.
Let me turn now to synergies, we are on track to deliver the 2.5 billion dollars in total. Net synergies. We discussed on the April earnings call.
Speaker Change: There are significant cost savings and also significant real revenue synergies. And we have line of sight to achieving them.
I also want to savor this moment and where we are.
Speaker Change: We are on the cusp of even greater opportunities down the road. These opportunities come both from this deal and also from Capital 1's transformation to be at the frontier of a rapidly changing Marketplace.
Speaker Change: These opportunities are exciting, but they will require significant investment to bring them home.
We have already identified come from moving our debit business and a portion of our credit business onto the Discover Network, to move more volume and capitalize, on the tremendous scale benefits of the network. We need to achieve greater International acceptance and then build a Global Network brand. This will enable moving bigger Spenders onto the Discover Network.
These additional moves, require sustained investment for a number of years and we will begin to undertake these Investments first in acceptance. And then when we get the network to critical mass, we will invest in the network brand.
Speaker Change: There are only 2 banks in the world with their own network and we are 1 of them.
Speaker Change: We are moving to capitalize on this rare and valuable opportunity.
With all the discussion of discover, we can lose sight of the very important Place Legacy Capital. 1 is in
Speaker Change: We are in the 13th year of an all-in technology transformation.
While most companies have invested in transforming technology at the top of the tech stack. In other words leading with customer-facing applications, we have taken the much harder but ultimately necessary Journey.
We have been rebuilding the company from the bottom of the tech, Stack Up essentially building a modern technology company that does banking.
As we move up to Tech, stack the opportunities
Speaker Change: Are accelerating.
We are also the beneficiary of Decades of investment in our data and analytics capabilities and the building of a well-known National brand.
Speaker Change: Together with our leading technology capabilities, they are the enablers of our many opportunities.
Speaker Change: Take our Retail Bank.
The universal player Playbook.
Speaker Change: In banking is to build a National Bank.
Through acquisitions.
However, we are doing it, organically on the shoulders of our modern tech stack, our full service digital banking offerings. Our thin physical distribution of showroom branches and our national brands
Speaker Change: We are enjoying a lot of traction and the acquisition of a network. Propels us forward even more
Building the National Bank requires sustained investment in marketing, and we are doing that.
Speaker Change: And we expect to lean in, even more.
Let me turn to our card business after building. A mass Market credit card business. We declared in 2010. We were launching a quest to win at the top of the market with heavy Spenders.
Few card players have chosen sustainably to take on this Quest.
We have been steadfast.
We have had a lot of success in this journey.
Speaker Change: But it is a long 1.
Our 2 biggest competitors are investing heavily and we know we will need to keep leaning into this big opportunity.
Speaker Change: As we have moved up, the tech stack, we have seized the opportunity to pursue emerging growth opportunities across our company.
Some of the Salient ones you have seen, and hopefully experience.
Speaker Change: Uh, like Capital 1 shopping and capital 1 Travel.
Another example is auto Navigator, which is a 3-party platform designed to reduce friction for consumers and dealers.
Speaker Change: In buying and financing a car.
Most importantly, we continue to invest in our modern technology stack, the gap between the modern technology companies fully in the cloud built on Modern applications and data, and the rest of corporate America continues to grow.
Speaker Change: the modern tech companies are well positioned to win as the world continues to evolve and we have spent years
Speaker Change: to become 1 of them.
The Rage of the world is AI.
Some aspects of the AI Revolution will be broadly accessible to all companies. And other aspects will be very exclusive.
Speaker Change: Most companies will benefit from the transformation and how work is done. That will be available through third-party AI tools.
But only the companies built on a modern tech stack and deeply invested in data will be in a position to reinvent. Their business model to put AI at the heart of operations, risk management and the customer experience.
we are well positioned in that Quest but these opportunities require sustained investment in Ai and in AI Talent,
Speaker Change: And we are doing that.
Speaker Change: In a company built for Innovation and organic growth.
I am struck by the number of compelling opportunities for Innovation and value creation that we see.
Speaker Change: These opportunities are made possible by the choices. We have made over the last many years.
As I have been saying these opportunities require investment and for many of them timing is critical as we strive to seize competitive advantage.
Speaker Change: Collectively these Investments across discover and Legacy Capital 1 are significant.
But they also will be the basis for our sustained growth and strong returns over the longer term.
Speaker Change: The opportunities. We are describing here have been years in the making and you have heard me talking about them for quite some time.
Importantly, the earnings power of our combined company that we envision on the other side of the deal integration.
is consistent with what we assumed at the time of our deal announcement, even though some individual variables have moved along the way,
When I reflect on our journey from founding the company to where we are today, we got here by always working backwards from where winning is and driving the continual Transformations and Investments to get there.
Speaker Change: The choices we made over the years, also created the opportunity for us to acquire discover
And in the spirit of that Quest, 38 years after the founding idea, for Capital 1, we find ourselves as well, positioned as we've ever been to drive future success, and value creation.
Speaker Change: And now we'll be happy to answer your questions.
Speaker Change: Jeff, thank you, rich.
Well, I'll start the Q&A session, remember as a courtesy to other investors and analysts who may wish to ask a question. Please limit yourself to 1 question plus a single follow-up.
Speaker Change: If you have follow-up questions after the Q&A session, the investor relations team will be available.
Uh Josh, please start the Q&A session.
Thank you as a reminder, to ask a question. Please press star 1, 1 on your telephone and wait for your name to be announced to withdraw your question. Please. Press star 1 1 again, 1 moment for questions.
Speaker Change: Our first question comes from Terry ma with Barclays. You may proceed.
Hey, thank you. Good evening. Um now that you've closed the acquisition and I do appreciate the updated Financial observations. But do you have any kind of updated thoughts on economics of the deal that you can share? Whether it's, you know, earnings power over time or some sort of return targets. Um, that investors should be kind of thinking about
Uh, Terry. Um, thank you, uh, we, uh, uh, we're really glad to be in a position of finally being able to close the deal and, and we're, uh, uh, you know, a number of weeks, uh, into being on the other side of that, you know, I shared some comments, uh, in the prepared remarks, about how we're thinking about, uh, you know, continuing to be, uh, uh, uh, very much believing in the earnings power of our combined, uh, uh, entity and uh, also, of course we're, uh, you know, leaning into the opportunities that are are classic Capital 1 in terms of really, um, laying the foundation for, uh, longer term, uh, earnings power on top of that. So,
Speaker Change: Uh, we don't have any really, uh, other than my, uh, earlier comments. Uh, I don't have any, uh, further uh, um,
Specific updates on that. But we certainly, uh, are very bullish about the deal and the um economics and earnings power and opportunities on the other side,
Got it. Um and then as a follow-up just on Capital level, which you mentioned, you guys are doing your internal work. Um, any sense of kind of timing of when you were kind of get that informed View and communicate that to investors and then as I kind of take a step back, you guys were at 14% C1. That's meaningfully above what, um, Legacy Capital 1's Target was of 11% and discovers of 10 to 11. Is there any reason why, um, on a Consolidated basis? It would be kind of meaningfully different. Thank you.
Access to all of discover.
Customer level data, and we need to run all of that information through our models. And so while we received the, the SCB, from the the fed, and it declined to 9%, uh, as you will know, you know, that number is fluctuated from, you know, 103 to 7 over the last handful of years. So we think about Capital uh, largely through the lens of our internal assessment of our longer term Capital need versus the, the feds, which is why we need to do that modeling. And so we are still in the middle of of that work. Right now. I will say that we're not finding anything surprising at all in in our analysis. Uh, and you know, we feel comfortable that at 14% we're operating with, uh, excess capital above, uh, the long term need of the combined company, and we have
Have the flexibility, uh, with our repurchase, uh, actions. As we're operating under the, the SCB, but we need to complete that work. So, as we get closer to finishing the work, I think it's reasonable to assume that, we'll begin to step up. Our repurchases from recent levels, uh, but we look forward to to sharing an update, uh, more broadly on our work, when it's complete.
Speaker Change: Next question, please.
Speaker Change: Our next question comes from Rick, Shane with JP Morgan. You may proceed.
Thanks for taking my question. Uh, look, I'm going to break my own personal role here. Congratulations. Um, on this, uh, completion of the acquisition, it's, it's transformational. And it's uh, going to be very interesting um, to see what happens from here. Um, Rich, you had alluded to the fact that the integration expenses are going to be above the initial 2.8 billion. Um, Target um, could you
Help us understand that more specifically and also could you put into context where you're seeing the opportunity for incremental investment? Uh, so that that way we can sort of translate where you know what the opportunity would be
So uh to Aunt, Rick, thank you. Thanks for your congratulations. Uh you know, it's been a long time coming. We're all very excited about it and we
Speaker Change: Uh, I know our investors are pretty excited as well.
Speaker Change: Um,
with respect to the integration costs. Um, you know, I think when 1 mbar on the thing at the very beginning is we're uh, undertaking a deal. We do our very best to
Take all the different, uh, things that would be involved in integration and um, you know, go around the house and, uh, you know, ask everybody what they think and add it up. And basically, this is just a matter of as we get deeper into it. Uh, it it is. Um,
Speaker Change: You know, coming in.
um,
So it's coming in. Well, first of all, you know, we're not we don't have an absolute definitive, uh, final estimate of it but it's um,
You know coming in somewhat higher but it's not in any 1 thing. It's really just across a variety of uh the the many elements of this deal. So we just you know as we as we, you know, got a sense. It was going to be somewhat higher. We just wanted to flag that.
um,
Speaker Change: You know the Investments. Let me let me talk about it. The Investments here.
Everything that I talked about in my remarks a few minutes ago about Investments our investments and opportunities. We've been talking about for some period of time.
Speaker Change: So we're not unveiling new um you know, something brand new that that we've never talked about before.
Speaker Change: but my point, the point I really wanted to make and and why I took the time to, uh,
Speaker Change: Share that conversation, is that.
Uh, all of these opportunities have we have been pursuing for a long period period of time and they stand on the shoulders.
Of Investments. We have been making for a very long period of time, most notably the investment in transforming, the the tech stack of capital 1,
and things like, um,
Speaker Change: uh, machine learning and AI itself.
So the point of that I was sharing with you is, as we move up the tech stack and get deeper and get closer in the pursuit of these opportunities. Um, we we find these opportunities are, um, we're very excited about these opportunities and, and some of the opportunities are sort of accelerating, uh, uh, as we look at them.
But the only way to get here, get there from here is to lean into the Investments. We've been been investing for quite some time but our point was we're we're going to really be leaning in uh from here to pursue this set of opportunities that if I calibrate relative to the whole history of founding and building Capital 1, the portfolio of opportunities we have is the broadest and and biggest set of opportunities that I've seen in our history. But the only way to get there is with investment and you know, the capital 1 philosophy where we we we get get very rigorous about what the opportunity is and uh, you know what, it costs to get there. But uh, we lean into those Investments and I think that uh, you know, the value creation for our investors. Um, on the other side of this, uh, you know, consistent with the flats we would take in the whole history of
The building Capital 1. Uh, I, I think, uh, you know, it's it's, uh, there's a lot of value creation opportunity.
But uh, we're going to, we're going to invest uh, significantly to get there.
Speaker Change: Thank you.
Speaker Change: Next question, please.
Our next question comes from Sanjay sakrani with KBW. You may proceed
Thanks um Rich. Obviously discover was working through a number of credit issues and not really leaning into growth like Capital 1, had been I guess since credits. Now uh somewhat under control there, do you expect to sort of lean into growth at Discover as well inside a prime as we look forward.
Sanjay Sakrani: Yeah. Yes Sanjay.
Sanjay Sakrani: um, we
We uh do uh plan to lean into growth opportunities with discover. Let me uh, comment just a little bit about
Uh, their, their card business and sort of and and you've seen this from the outside but just sort of Stand Back standing back and talking about it. It's an amazing franchise. They've built over the years
Uh, the the uh credit losses got a higher than they expected probably higher than anyone expected and due to a a number of choices that were made in the preceding years.
Sanjay Sakrani: and uh they very proactively stepped in and um you know dialed back and went a little bit more back to the
The.
Sanjay Sakrani: The.
Sanjay Sakrani: The, the basics of, of how they had built, uh, their franchise. And you know, that has
You know, muted their originations and their their growth over this period of time, but it's there, but they were very important choices and it's also been powering.
Sanjay Sakrani: Um,
you know, they're good credit performance. It just has an example, their vintage their their most recent vintages are coming in a lot better than prior years and it's just it's it's a manifestation of pulling back now when
Sanjay Sakrani: Pulling back happens.
Um you know there's the the growth, you know the the growth is somewhat muted in that situation that they're in. Now we're coming in and getting to know them and and they're impressive card business and uh we
Um, you know I we like the products. So you know we we plan to continue their Flagship credit card products. They have an amazing student lending business that we're very excited to continue to, not not student lending, it's already student credit card uh business. We're excited to continue to lean into that. They've been very successful in um,
Black, not just their own collected metrics, but we ourselves in, in calibrated metrics in the industry. Great. Great customer experiences and very high levels of customer engagement. So we are
Sanjay Sakrani: Uh adopting uh um, a lot of the, the sort of, um, customer technology uh, um, choices that they have made. They have a great servicing experience that we're going to uh uh very much uh try to just continue uh pretty much exactly what they're doing there.
and um,
and from a brand point of view, of course, discover won't be a corporate brand anymore, but on the credit card side. Uh, uh, Envision at Sanjay as
Um, a very Salient product brand. So uh we we will uh, lean in to the opportunities there. It's going to be in the context of a little bit of uh, muted uh, growth at the moment and uh, I I think as we fully get into there there'll probably be a few uh, areas we'll dial back around the edges. Um, uh and there there I'm pretty confident. There will be some areas where we will lean even harder uh, into growth than they were. But it is certainly 1 of our goals to uh, uh, lean into to grow the franchise. And
Sanjay Sakrani: Try to preserve the very special things that um enabled them to build 1 of the great, credit card companies in America.
Thank you. Um, just a follow for Andrew. Sorry to ask this question because I'm sure I can parse through all of this. Excellent disclosure that you provided and your comments, um, to get to some of my conclusions. But just as we look ahead, what are some of the variables that we need to think about? As a result of these purchase accounting changes? I I heard you mention the Nim. Having a 40 basis point Tailwind because of the reclass of late fees and such but maybe Andrew can you just like help us think through some of the progression of the the major line items as a result of this?
Thanks.
Uh well appreciate the the acknowledgement Sanjay worked really hard to disclose uh a lot. And I think you'll find uh not only in the presentation itself and in some of the footnotes, but also the monthly 8K, uh, data that went out. Today, there's some additional disclosures around uh, delinquency and and charged off as well. So we really did our best to provide visibility into all of those pieces. Um, reluctant to try to give you the full reconciliation of all of the metrics. That really point you to the couple of slides in the appendix because that very clearly spells out what are the implications to Nim? What are the implications to, uh, operating.
Expenses in the footnote there, you will see that we not only gave annual views, but we gave a quarterly view of this year, but for instance, you can see that Nim given the very short life, for instance, of the, um, the uh, non PCD card loans which are marked above par that actually creates a net drag in the immediate term but that burns off very quickly and so the non PCD uh, I'm sorry, the PCD uh that carries forward is actually going to be a good guy to Nim over the course of multiple years. So it's really hard to give you a succinct summary of all of those pieces which is why we did our best to lay everything out as best we can. Uh of course you know, these are subject to some revisions over time which is uh you know what? Why uh I phrased it in the way.
Sanjay Sakrani: That that we did. But you know, we're hopeful that these ultimately end up being the the the final marks.
Sanjay Sakrani: Next question, please.
Our next question comes from Ryan Nash with Goldman Sachs, you may receive.
Ryan Nash: Good evening, everyone.
Speaker Change: Hey Ryan. Hey Ryan.
So rich you know, you talked about significant sustained investment, I think the phrase was used several times to talk about acceptance marketing, the tech stack and Ai and I I think you know this obviously create questions about how much all of this is going to cost. So is there anything that you can share, that can give the market comfort that there isn't significant Synergy reinvestment risk and that eventually this will result in a more cons in a more efficient Consolidated company over time.
Speaker Change: Uh, thank you, Ryan.
Speaker Change: so,
when you think about the opportunities that we're talking about investing in there are things, I think investors, uh, have come to, um, know, over the years and, um, you know, we have talked a lot about them, but it starts with the tech transformation itself.
As I say, we're in the 13th year of our technology transformation, the the world continues to evolve, and we continue to um, uh build the, the most, uh, you know. Um,
Fully modern aspect up and down the tech. Stack there's still work to do, uh, with respect to that, but we've had amazing progress and we're not just trying to modernize the company, but, but but rebuild it in a way that, uh, uh, is really, uh, way more efficient, way more able to scale up Innovation, uh, way more able to, um, uh, you know, more effectively, uh, manage, uh, risk credit risk, fraud risk operating risk. Um, and you know, to to, uh, you know, create enhanced customer experience and, you know, collectively,
Um, we have found virtually all the things that we would like, uh, the capabilities we'd like for our company to have, they all have the same shared path which is through the modernization of technology. So we will continue to invest, uh, there. And, uh, so I don't think there's anything from an investor point of view that would surprise them with respect to that, it's just that. As we move up the tech stack, you know, when it's a it's a lonely Journey. When you're in the bottom of the tech stack modernizing 1 piece of core infrastructure because until a lot of other things are modernized. It's hard to see the tangible benefits. But moving up the text stack uh moves 1 uh closer in the ability to more monetize the opportunities.
Speaker Change: Then uh, of course.
you know, beyond that we have now, the whole discover opportunity and
you know, there's lots, we're investing in terms of integration and things like that, but specifically, I call out that after this first wave of moving, uh, all of our uh, debit card business and a
Portion of our credit card, business onto the network to really capitalize on the tremendous scale that the, the scale economics in the network business. We really want to work to move more volume there and all roads in that Quest lead through investing in international acceptance.
And um,
Speaker Change: uh, and then
A Global Network brand. So, uh, you know, that, I think, and we've talked a lot to investors, uh, about that. We're very compelled by the opportunities on the other side, but it's very clear to us, that's a multi-year journey, and it's going to require quite a bit of investment.
Additionally, let's talk about our National Bank. We're the only, uh, you know, major bank that I know of that is trying to build a national
Speaker Change: um,
Full Service Bank organically. Everybody else is doing it through Acquisitions. That requires a lot of investment. We have a, we've had a lot of success in building this. Now bringing on the Discover uh Network and seeing the traction that we're getting collectively in our business. We are the, these are very attractive, you know.
Speaker Change: We see great, uh, opportunity to continue to lean in. In fact, even lean in harder on building our national, uh, Bank.
and then, of course, there's the the quest at the top of the market, we all see what, uh, even including, uh, over the last week or so, what players the the, the small number of players who are really focused on winning at the, very top of the market, they're investing hard and, um,
Speaker Change: You know, but there's a reason they're investing hard because there is a great opportunity at at the top of the market and it's not an opportunity that is available.
Speaker Change: Widely to, you know, all the credit card companies that requires a lot of sustained investment and brand building and technology and uh experiences.
um, and
Speaker Change: Uh products, uh, Etc.
Speaker Change: so,
That we're very pleased with the traction there, and and Ryan each each year in our Quest. We've uh, we find that while we're getting good growth in our card business. The highest, the fastest growing part of our card business has been with the heavier Spenders, and it's a continued indication.
Of of the success as we keep moving higher in the marketplace.
Build the strength of our brand a little bit more each year. And, uh, you know, that's something we're excited about and the and the traction we're getting is validation to us of the payoff of continuing to invest uh, there. As we have moved up the top of the tech stack. We uh also are building customer experiences to capitalize on being a company. If you pull up Ryan and think about this, we're not trying to just build a bank, like the next Bank down the street, we're trying to build a bank that, uh, is right at the heart of consumers and and businesses Financial lives.
Speaker Change: with the
With primary banking relationships and primary spending relationships. And we now have well over a 100 million customers and the ability to over time leverage that franchise, a very highly engaged customers with
Speaker Change: not just Banking and credit card products. But in fact,
Build a much broader franchise.
Uh with those highly engaged customers. That's why we're leaning into opportunities like Capital 1 shopping Capital 1 Travel and auto Navigator Each of which is
Speaker Change: Much more uh, deeply expanding our franchise. And and each of them is is
getting a significant, uh, growth
Speaker Change: And traction. And also able to Leverage The
Size of our franchise, which by the way, just got quite a bit bigger with this acquisition.
Speaker Change: so, my point to investors is
in a in an calibration across all the years I've been building Capital 1, we've always taken the philosophy of working backwards from where winning is
Speaker Change: and,
Investing with our, you know, pencil sharpened and very rigorously from a value creation framework investing on what it takes to win as the marketplace evolves.
Speaker Change: This.
Speaker Change: uh,
Speaker Change: This mou, you know, as you know, where we are at this?
uh, time in the evolution of the company has probably the best opportunities that I've seen and we are
Uh, leaning into this. And also, as I mentioned, the earnings power, even as we look at the Investments, we're talking about here, the earning power.
Speaker Change: Uh, you know, remains consistent in our estimation remains consistent.
With what we expected at the announcement.
Appreciate the call. I'm going to step back with somebody else. Asked question. Next question, please.
Speaker Change: Our next question comes from Erica, Nigerian with UBS, you may proceed.
Hi. Um, good afternoon.
Speaker Change: I'm, I'm going to just
With the expense question for a second and we asked the question on on Capital, um, fully appreciate that you're going through review and fully appreciate the statement that you've found nothing yet. Um that's surprising, you know as we think about the 14% versus the Legacy targets of capital 1 and discover I guess another way to ask the question is, you know how much time would will? You give yourself to optimize the capital to where you think? The right level is for the company.
Yeah well there's 2 parts. I think to that question Erica 1 is kind of what uh what level are we heading towards. Uh which is also impacted any point in time of what just happening, more broadly around us.
To to repurchase is but really what? I would point you to is we're going to work through the uh the customer level data. Uh determine our longer term Capital need and you know, as we move towards finishing, that work. I think the the operative phrase that I I said earlier is, you know, will likely begin to step up our purchases from from recent levels. But once that work is complete, which we're doing as quickly as we can, we'll provide an update at that time.
Speaker Change: And just a quick.
Speaker Change: And then, just pick up on something that rich said at the end of his, um, answers to Ryan, which is that EPS power remains consistent with how he thought about it, you know, um, you know, in the beginning of this, this journey with discover, and I guess, if I break it down, you know, your integration expenses are coming in a little heavier, than at your point. 8 billion, you didn't mention you did reiterate. The Synergy targets which I would um, for my include the expense energy targets. And so I guess the last piece that ended up that everyone's trying to get at is this the Run rate of expense growth at, for lack of a better word legacy Capital 1, accelerate
And I guess based on the explanation of what you're investing in, it seems like that would have been the case. But then Rich through an EPS power should remain consistent with what you originally saw it. So again, I I I know we're belaboring a point where we think it's critical for investors as we think about the ProForm EPS power of this company.
Speaker Change: Uh yeah. Erica I I think we you you were uh breaking up a little bit but I we we we got the essence of what you were saying there.
So Capital 1 and discover have both historically, had strong earnings power and in combining them
Speaker Change: we can build, can create a very strong institution and of course, also at synergies
There have been many moving pieces since we announced the deal.
In both companies, actual operating results and investment choices. And of course in the broader economic competitive and credit backdrop.
Speaker Change: since the deal announcement individual line items as
A line items have of course, drifted but the net drift has so far been in a favorable Direction.
Speaker Change: At the same time, the opportunities and the investment associated with them. Have also grown
Speaker Change: so,
We estimate that the net earnings power of our combined company, as it emerges from integration.
Speaker Change: Is similar to our estimates in the deal model.
Speaker Change: Next question, please.
Our next question comes from Mob with CD Cohen. You may proceed
Speaker Change: Great, thanks.
Richard a couple of times you you kind of alluded to competition in the high end of the card business. I was hoping you could kind of give us your senses to how that's likely to evolve this year. Given you know what you've got going on at 2 of 2 of the major competitors. Perhaps 3 if you you know,
Speaker Change: All all all, all of the ones that have made announcements thus far.
And whether there are any elements, you know, of the transaction that will be kind of helpful. The capital 1 in uh you know in addressing that I do have a follow-up. Thanks.
Moshe: Uh, yes. Moshe
Moshe: so,
Moshe: The.
You know, when we look at the competitive environment, I, you know, I've said for years competition is very, uh, intense in the card business.
Certainly most striking uh, of late has been competition at the, at the, very top of the market. And you know, when before we get into specifically sort of things that happened over the last couple of weeks,
2, 2 areas that, that the stakes have gone up. And and, you know, the investment required is sort of gone up uh, to be at the highest level is in lounges and you see a little bit of the
The, uh, the the sort of like an arms race, that that's probably not the right word. But certainly the effort of the biggest players at the top of the market to build their own lounges, in addition, to offering, um, uh, partnership. You know, a network of of lounges through partners.
Moshe: very, very pleased with
4 Lounge that I guess 5 lounges that we have now uh I guess 5. Plus what we call The Landing the 1 we have it at um
Moshe: Uh uh Reagan National Airport. But uh, so that's 1 of the
Areas that there's a lot of competition. But the research shows people really care about lounges. And so, uh, you know, we understand that's part of the game. And we, uh, are very pleased with the customer reaction there, the traction, the volumes and the, the pickup, uh, in our own, uh, originations that, uh, we, we think is coming from that.
Another area of competition at the top of the market is competition uh in in marketing, spent and competition in in, you know, creating unique, uh access uh for customers. We also in this space, uh, have um, been very pleased with some of the unique access we've been able to offer. Obviously our Taylor Swift partnership has been a uh, a special uh, opportunity for us. But uh, this is, this is the the the flip side
Of the, some of the Investments required. Is that a small number of players I think are separating from the pack relative to their um, um their offerings and the extent of their commitment to this space. So I think, uh, competitively, their real opportunities on the flip on the, on the other side of the, the sort of, uh, higher uh Stakes of investment.
Moshe: We then get to the products and it it is striking that at the top of the market.
you know, both Chase and American Express uh have made announcements about um
things that the the the the well with America, with American Express, it's still, you know, we haven't seen what they're going to come out with but uh,
uh certainly on the chase side, we have seen, you know, a higher fee, on the 1 hand
Opportunities more on a coupon type basis that can come. So it's very clear both and MX seems to be, you know they've already um,
Been on a similar path there for a number of years. And uh, I think that we would expect they'll come out with uh, some enhanced offerings there.
We have crafted our strategy at the top of the market to not just be going out and try to exactly copy what, uh, the others do. But to try to create something that in its own way. For, the right customers is a absolutely best-in-class experience. So take our Venture x, uh, product. First of all, in terms of the uh, earn rates on Venture X, it's earning at the, the 2x rate, which is
Moshe: the, um, you know, uh, higher earn rate than some of the uh competitive uh, products.
Other products have co-brand relationships with Airlines and they're both a lot of expenses there but also unique offerings. We instead have the any Airline and sort of the unique aspects of uh the 2x on everything with Venture X.
But uh, what I would share with you is, we are very pleased with the traction on Venture X. You've seen us on television, continuing to tell our story, uh, and I think that as other competitors, um, you know, um,
Um, come out with their plays that are different from ours. There continues to be. I think quite a lot of uh, open space.
uh, at our price point and our Collective set of offerings and experiences that really, uh, I think
Uh, offers a lot of opportunity for us. So we're leaning in hard with Venture X and then we're continuing to build
in uh, enhanced capabilities.
Moshe: Across. Um,
digital experiences product offerings lounges and
Moshe: Preferred access that I think will continue to position Capital 1 uh in a uh uh a very attractive uh way.
Uh, in the competitive environment you asked about, um, the network and basically Will, adding discover what impact will that have certainly uh adding the scale of discover uh, certainly helps um uh um, with respect to the uh just more opportunity to um, you know, even though discover was not a top of the market uh player. But then I think, uh, also Moshe down the road longer term. I think we see uh, opportunities on the network side of the business relative to, uh,
The the higher end of the market, but I think, uh, that's an opportunity that is more way down the road than 1 uh, in the near term.
Speaker Change: Thank you.
Speaker Change: Got it. Thanks maybe just as as kind of a follow-up.
um, I think the, you know, the
1 of the things that you know, that we've thought about a little bit is using the, the benefit of unregulated debit Interchange to help build the banking franchise and to go to a rewards checking model and you talked about you know the banking franchise and some of those impacts could you talk about how you see that in you know now that uh you know you've got access to this and can start migrating your debit accounts.
Speaker Change: so, our National Bank strategy is always been about offering
Industry industry-leading products backed by a business model that can economically support that.
Speaker Change: so, when you think about that, we have a full-service
Digital Bank. There are a lot of folks out there with digital banking capabilities. A key differentiator is capital 1 has full service.
Digital banking.
we do believe, physical presence matters, and our research continues to confirm that even ironically, so many people say, yeah, I never go into branches but, but in their choices,
Speaker Change: physical physical presence does matter to a lot of people and that's why we have built our
um, thin, um
Distribution model of these sort of showroom branches. But again, importantly, working backwards from having the economics,
That's different from a branch on every corner kind of a thing.
Speaker Change: so, the economics of this,
Speaker Change: Have supported.
A product offer, that's industry-leading.
No fees, no minimums.
Speaker Change: And no overdraft fees.
And no other major bank has a primary offering that matches that
Speaker Change: and actually our product offer is democratizing banking by making it available to anyone.
At no cost.
Speaker Change: And customers have responded, uh, very positively.
Now, let me turn to discover discover as this small portfolio of cashback debit cards.
Speaker Change: We plan to keep those customers in their current product.
and we are and and with the benefit of the network now and you know, bringing discover on we are
Speaker Change: Raising the investment levels in our Flagship product.
Speaker Change: To help Propel. Our National Bank growth.
With the very successful industry-leading value proposition that has gotten us here.
Speaker Change: So we are keeping what discover had for its customers and we will lean into our industry-leading banking product.
Going forward.
Speaker Change: Next question, please.
Our next question comes from Don vanetti with Wells, Fargo. You may proceed
Hi Don.
Speaker Change: We we we uh of course, you know, haven't been in the network business. So uh over the course of
our, um,
Speaker Change: We, uh, our what was it? Uh,
15 or 16 or 17 months, uh, of pre-deal. We did everything we could to, to learn about the, um, uh, the network business. We brought in a bunch of Consultants, uh, to teach us everything they knew about that and and uh, and now, especially as we get on the other side of this, we are really going to school on the amazing. Um, you know, learnings we're able to get, uh, with discover and I really want to say, it's it.
Speaker Change: I've seen I've seen a lot of scale businesses in my days and
every just about every banking business I've ever seen is really quite scale driven. I've never seen any business as scale driven as a network.
Because you know the marginal cost of a transaction is is is virtually zero and you know the fixed costs are high in a business like that. So it's not an accident that there are
To uh, Visa Mastercard or or enormous companies and that, you know, most banks around the world. Don't have enough scale to have their own network even if they could solve the chicken and egg problem to get there.
Speaker Change: So we look at this and we're certainly blessed to have uh a network. And I I am struck
This, that given discovers.
Speaker Change: really small scale, you know,
Speaker Change: domestically pretty small scale, but but but globally
uh, strikingly modest scale.
Speaker Change: I am struck at. How how
Extensive the international acceptance that they have already built is now, it's not up to the levels that, um, you know, we would really wanted to be in order to move, more internationally traveling, uh, customers there.
Speaker Change: but,
Speaker Change: I certainly was surprised.
at how good it is relative to the scale and sort of uh their you know, thinking about the the the challenge they have to get their
Speaker Change: But here's the inspiring thing.
Speaker Change: They've already built.
Speaker Change: Pretty good International acceptance.
And they have a Playbook uh to do it. That is the same Playbook 1 would use to get.
Speaker Change: Quite a bit more International acceptance.
Speaker Change: And there there are 4 ways.
basically that to build International acceptance and and 4 ways that discover has cobbled together this International Network acceptance
partnering with other networks.
Speaker Change: Partnering with Merchant acquirers.
Partnering with card issuing financial institutions.
Speaker Change: and finally,
going directly to merchants.
And they used a combination of all 4 of those. We have sat with them and said,
Speaker Change: how feasible is it to get more? And how would you get more? And the answer really is
Continue leveraging those 4 and uh just lean in harder and invest uh more than discover has historically invested.
Speaker Change: we don't, you know, we're
Speaker Change: uh,
you know, I I in in the calibration of the, of the hills that Capital 1 has taken on over time, and and the journeys and the Investments, we've done in the history of our company,
Speaker Change: This is right down the Fairway of the kind of challenge. We take on working backwards from where winning is.
I'm not, uh, we we, we don't have, uh, you know, uh, an estimate of exactly what it will take. And there's also another thing of even what acceptance level
uh, is is exactly what we need because this is something as we get into it and and and see our customers experience is, it's a bit of a, you know, it when you see it kind of a thing,
But what I'm comfortable with is.
Speaker Change: The Playbook is there?
On the other side of this is very clear because that is the path to help us move more volume to the other side. That plus the building of of, uh, of, uh, I mean, discover already has a network brand. When I talk about building a
Speaker Change: a a, a Global Network brand picture, something that is
Uh, has a more uh, Global. Um,