Jeff Norris:

Thanks very much, Josh, and welcome everyone to Capital One's second quarter 2024 earnings conference call. As usual, we are webcasting live over the Internet. To access the call on the Internet, please log on to Capital One's website at capitalone.com and follow the links from there. In addition to the press release and the financials, we've included a presentation summarizing our second quarter 2024 results. With me this evening are Mr. Richard Fairbank, Capital One's Chairman and Chief Executive Officer; and Mr. Andrew Young, Capital One's Chief Financial Officer. Rich and Andrew will walk you through the presentation. To access a copy of the presentation and press release, please go to Capital One's website, click on Investors, and click on Quarterly Earnings Release. Please note that this presentation may contain forward-looking statements. Information regarding Capital One's financial performance and any forward-looking statements contained in today's discussion in the materials speak only as of the particular date or dates indicated in the materials. Capital One does not undertake any obligation to update or revise any of this information, whether as a result of new information, future events, or otherwise. Numerous factors could cause our actual results to differ materially from those described in forward-looking statements. 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 in our annual and quarterly reports accessible at the Capital One website and filed with the SEC. And with that done, I'll turn the call over to Mr. Young. Andrew?

Richard Fairbank:

Thanks, Andrew, and good evening, everyone. Slide 10 shows second quarter results in our credit card business. Credit card segment results are largely a function of our domestic card results and trends, which are shown on Slide 11. In the second quarter, our domestic card business delivered another quarter of strong results as we continued to invest in flagship products and exceptional customer experiences to grow our franchise. Year-over-year purchase volume growth for the quarter was 5%. Ending loan balances increased $11.1 billion or about 8% year-over-year. Average loans also increased about 8% and second quarter revenue was up 9%, driven by the growth in purchase volume and loans. Revenue margin for the quarter remained strong at 17.9%. The revenue margin includes a positive impact of about 18 basis points resulting from the partial quarter effect of the end of the Walmart revenue sharing agreement. The charge-off rate for the quarter was 6.05%. The partial quarter impact of the end of the Walmart loss sharing agreement increased the quarterly charge-off rate by 19 basis points. Excluding this impact, the charge-off rate for the quarter would have been 5.86%, up 148 basis points year-over-year. The 30 plus delinquency rate at quarter end was 4.14%, up 40 basis points from the prior year. As a reminder, the end of the Walmart loss sharing agreement did not have a meaningful impact on delinquency rates. The pace of year-over-year increases in both the charge-off rate and the delinquency rate have been steadily declining for several quarters and continued to shrink in the second quarter. On a sequential quarter basis, the charge-off rate excluding the Walmart impact was down 8 basis points and the 30 plus delinquency rate was down 34 basis points. Domestic card non-interest expense was up 5% compared to the second quarter of 2023, primarily driven by higher marketing expense. Total company marketing expense in the quarter was $1.1 billion, up 20% year-over-year. Our choices in domestic card are the biggest driver of total company marketing. We continue to see compelling growth opportunities in our domestic card business. Our marketing continues to deliver strong new account growth across the domestic card business. Compared to the second quarter of 2023, domestic card marketing in the quarter included increased marketing to grow originations at the top of the marketplace, higher media spend, and increased investment in differentiated customer experiences, like our travel portal, airport lounges, and Capital One Shopping. Slide 12 shows second quarter results for our Consumer Banking business. After returning to positive growth last quarter, auto originations were up 18% year-over-year in the second quarter. Consumer banking ending loans were down $1.6 billion or 2% year-over-year and average loans were down 3%. On a linked quarter basis, ending loans were up 1% and average loans were flat. Compared to the year ago quarter, ending consumer deposits were up about 7% and average deposits were up 5%. Consumer banking revenue for the quarter was down about 9% year-over-year, largely driven by higher deposit costs and lower average loans compared to the prior year quarter. Non-interest expense was up about 2% compared to the second quarter of 2023, driven by an increase in marketing to support our national digital bank. The auto charge-off rate for the quarter was 1.81%, up 41 basis points year-over-year. The 30 plus delinquency rate was 5.67%, up 29 basis points year-over-year, largely as a result of our choice to tighten credit and pull back in 2022, auto charge-offs have been strong and stable. Slide 13 shows second quarter results for our commercial banking business compared to the linked quarter, ending loan balances decreased about 1%. Average loans were also down about 1%. The modest declines are largely the result of choices we made in 2023 to tighten credit. Ending deposits were down about 6% from the linked quarter. Average deposits were down about 3%. The declines are largely driven by our continued choices to manage down selected less attractive commercial deposit balances. Second quarter revenue was essentially flat from the linked quarter and non-interest expense was lower by about 6%. The Commercial Banking annualized net charge-off rate for the second quarter increased 2 basis points from the sequential quarter to 0.15%. The commercial banking criticized performing loan rate was 8.62%, up 23 basis points compared to the linked quarter. The criticized non-performing loan rate increased 18 basis points to 1.46%. In closing, we continued to deliver strong results in the second quarter. We delivered another quarter of top line growth in domestic card loans, purchase volume, and revenue and a second consecutive quarter of year-over-year growth in auto originations. Consumer credit trends continued to show stability and our operating efficiency ratio improved. We had guided to 2024 annual operating efficiency ratio, net of adjustment to be flat to modestly down compared to 2023, assuming the CFPB late fee rule takes effect in October. And we're on a very consistent path with what we expected when we gave that guidance. If the implementation of the rule is delayed, that would be a tailwind to 2024 annual operating efficiency ratio. One thing that has changed is the Walmart relationship. Our partnership ended in the second quarter, which will increase charge-off rates, but have a positive impact on operating efficiency ratio. Including the Walmart impact, we expect full year 2024 operating efficiency ratio, net of adjustments to be modestly down compared to 2023. We continue to lean into marketing to grow and to further strengthen our franchise. In the domestic card business, we continue to get traction in originations across our products and channels and our origination opportunities are enhanced by our technology transformation, which enables us to leverage machine learning at scale to identify the most attractive growth opportunities and customize our marketing offers. We are also getting traction in building our franchise at the top of the market with heavy spenders. It is not lost on us that competitive intensity and marketing levels are increasing at the very top of the market and we know we have important investments to make. We continue to be pleased to see our investments pay-off in customer and spend growth and returns. And we're building and enduring franchise with annuity like revenue streams, very low losses, and very low attrition. In consumer banking, our modern technology and leading digital capabilities are powering our digital first national banking strategy, and we're leaning even harder into marketing to grow our national checking franchise, which has had industry leading pricing with no fees and industry leading customer satisfaction. Pulling up, marketing is a key driver of current and future growth and value creation across the company and we're leaning hard into our marketing investments. We expect total company marketing in the second half of 2024 to be meaningfully higher than the first half, similar to the pattern we saw last year. We are all-in and working hard to complete the Discover acquisition. Our applications for regulatory approval are in process and we're fully mobilized to plan and deliver a successful integration. We continue to expect that we'll be in a position to complete the acquisition late this year or early next year, subject to regulatory and shareholder approval. The combination of Capital One and Discover creates game changing strategic opportunities. The Discover payments network positions Capital One as a more diversified, vertically integrated global payments platform, and adding Capital One's debit spending and a growing portion of our credit card purchase volume to the Discover network will add significant scale, increasing the network's value to merchants, small businesses, and consumers and driving enhanced network growth. In credit cards and consumer banking, we're bringing together proven franchises with complementary strategies and a shared focus on the customer. And we will be able to leverage and scale the benefits of our 11 year technology transformation across every business and the network. Pulling way up, the acquisition of Discover is a singular opportunity. It will create a consumer banking and global payments platform with unique capabilities, modern technology, powerful brands, and a franchise of more than 100 million customers. It delivers compelling financial results and offers the potential to create significant value for merchants and customers. And now we'll be happy to answer your questions. Jeff?

Operator:

Thank you. [Operator Instructions] Our first question comes from Sanjay Sakhrani with KBW. You may proceed.

Andrew Young:

Sure, Sanjay. Well, let me start by covering this quarter's allowance and then I'll talk about the future. So in the quarter, as you said, first, we had the effect of Walmart, the $826 million build that we spelled out as an adjusting item. We also reserved for the growth we saw in the quarter. Beyond that coverage in card, as you referenced, grew, I think it was just over 10 basis points, which is a little over 1% of the allowance balance. And so, as part of that process each quarter, not only are we rolling forward our baseline forecast, but we're also looking at a range of macroeconomic and consumer behavior uncertainties, including things like the changing seasonal customer behavior we talked about last quarter. And so as a result, in this quarter, we increased the qualitative factors to reflect those uncertainties and that's what drove the modest increase in coverage this quarter. As I look ahead and talking conceptually here, but in a period where projected loss rates in future quarters are projected to stabilize and ultimately decline and might indicate a decline in the coverage ratio, I would say, you could very well see a coverage ratio that remains flat for some period of time as we incorporate the uncertainty of those future projections into the allowance. And in a period where forecasted losses are rising, we're quick to incorporate those higher forecasted losses and also potentially add qualitative factors for uncertainty like you saw early in the pandemic, but I would say it is unlikely to be symmetric on the way down. And so eventually, the projected stabilizing and ultimately lower losses will flow through the allowance, particularly as the uncertainties around that forecast become more certain. But at this point, I'm not going to be in the business of forecasting when that's actually going to take place for us.

Richard Fairbank:

Sanjay, I think what we see is something that's very stable. The U.S. consumer remains a source of strength in the overall economy. Of course, the labor market remains strikingly resilient. Rising incomes have kept consumer debt servicing burdens relatively low by historical standards despite high interest rates. When we look at our customers, we see that on average, they have higher bank balances than before the pandemic and this is true across income levels. On the other hand, inflation shrank real incomes for almost two years and we've only recently seen real wage growth turn positive again. And in this high interest rate environment, the cost of new borrowing has gone up in every major asset class, mortgages, auto loans, and credit cards. So we'll obviously keep an eye on that. And I think at the margin, these effects are almost certainly stretching some consumers financially. But on the whole, I think I'd say consumers are in reasonably good shape relative to most historical benchmarks. And as our credit numbers came in five months [Technical Difficulty] I'm sorry. Can you hear me? Can you still hear me? You can hear me, okay? I just had some cross message coming in on my phone. But with respect to credit, we were very pleased with the credit performance in the quarter. We had talked a bit about the seasonality, maybe people want to ask question about that, but we saw basically pulling up, we see things settling out nicely in the card business and there things are very strong in the auto business.

Mihir Bhatia:

Hi. Thanks for taking my question. Maybe just turning to NIM for a second. With the Fed or at least expectations for rate cuts coming into view, can you just comment on the current backdrop for deposit competition? How do you -- and how do you expect deposit betas to trend during the early stages of the Fed rate cutting cycle?

Mihir Bhatia:

Got it. That's helpful. Thank you. And then just switching back to the health of the customer overall. As you look across your portfolio, we've heard a little bit of talk about pull -- people pulling back, particularly on discretionary spend and lower income cohorts, etc. Is that a dynamic you are also seeing when you look at your customer base? And then relatedly, Rich mentioned how pleased he is with the progress you're making on the higher income side, if you will, on the big -- on the transactor in that high end transactor balance side. I was just wondering, how does that change your portfolio as you think about it like over the next few years, like as you grow that book further?

Mihir Bhatia:

Thank you.

Operator:

Our next question comes from Rick Shane with J.P. Morgan. You may proceed.

Richard Fairbank:

Yeah. Okay. So let's just pull up for a minute on just talking about how the subprime consumer is holding up. So, way back in the global financial crisis, we observed that credit metrics in subprime moved earlier in both directions. Subprime, also worsened less on a percentage basis than prime, but of course, it -- in absolute delta, it still moved more. In the pandemic, subprime credit moved more and more quickly than prime. It normalized more quickly and appears to be stable and appeared basically to stabilize sooner as well. And that's in the context of lower income consumers seeing disproportionate benefits of government aid and forbearance on financial products and then the unwinding of that over time. And so subprime is, of course, not synonymous with lower income, although they're correlated and we saw these effects across credit both in talking about the credit spectrum and also the income gradients. So on the other hand, just a couple of other effects just on the credit side that have happened over the recent years. Subprime consumers have been subject to more industry credit supply, including fintech competition during and after the pandemic. So that's been something we've always kept a close eye on and worried about whether that was going to disproportionately impact the credit performance of subprime for customers. I don't really -- I mean, given the overall pretty strong performance in subprime, I think we haven't seen that effect too much. And another thing to point out is that income growth has been consistently higher for lower income consumers over the past several years and this is the opposite of what we saw during and after the global financial crisis. But while no two cycles alike -- are alike, I think again we're seeing that subprime consumers and lower income consumers again they're not the same thing, but they tend to move earlier, but not necessarily more than the overall market. Now when you -- let's talk a little bit about payment rates. So throughout the course of the pandemic, payment rates increased not only for us but across the industry. And more recently payment rates have drifted down from pandemic highs as the effects of stimulus have waned. And the payment rates generally we have seen this effect, so the effect that we've seen of payment rates going down relative to where they were, one to two years ago relative to their peak basically. In every part of our business, they have come down, but are still above where they were pre-pandemic. And again, I think part of that is the mix effect that we talked about in the prior question. There is a mix effect not only across our whole portfolio but even within the segments of our portfolio, we just had more emphasis on the spender side versus the revolver side internally. And so I think you see some of that showing up in the metrics. One other thing I want to say is that talk about your question about minimum payments. So we have simultaneously -- we're sort of seeing an effect where payment rates while they're going down, continue to be well above pre-pandemic levels, even as minimum -- the percentage of customers paying minimum payments. This by the way is not a subprime effect. This is a portfolio effect I'm talking about. The percent of customers paying minimum payments is also somewhat above pre-pandemic levels. Now, it seems a little odd to have both of those effects happening at the same time. But I think in many ways this is a very natural way that normalization is happening. And you've heard us talk for a long time now about what we call the delayed charge-off effect in consumer credit that so many customers got stimulus and forbearance that I think a lot of people who otherwise would have charged off were able to avoid that charge-off. Many, hopefully, we're able to permanently avoid that, but for some, we have believed it was more of a deferral of an inevitability and this phenomenon of delayed charge-offs, which can't be separately measured, we believe is a driving factor behind why credit has been settling out higher than pre-pandemic. Because I think there's just a delayed charge-off effect for some of these customers who otherwise would have charged off earlier. And that then would be consistent with a very healthy consumer payment rates generally even being higher than pre-pandemic, but there is a tail of consumers paying a higher percentage on minimum payments, and some of them going through a charge-off that might have otherwise happened a few years earlier.

Jeff Norris:

Next question, please.

Ryan Nash:

Hey, good afternoon, Rich. So maybe to ask about marketing. So I think you’re -- the guide that you provided said around $2.6 billion roughly of marketing spend in the second half. And you talked a little bit about the competitive intensity in the top of the market is increasing. Can you maybe just talk about how much of the increase in marketing is being driven by the -- investing more to acquire more customers versus competition pushing up the cost to acquire? And then just given what you just talked about around low end consumers, are you pulling back and else anywhere to cover the increased cost of acquiring?

Ryan Nash:

Thanks for the color.

Operator:

Thank you. Our next question comes from Bill Carcache with Wolfe Research Securities. You may proceed.

Richard Fairbank:

Yeah. Bill, yeah, let me make a couple of comments on credit. Let me seize a moment in the spirit of Henry Kissinger who says, I hope you have questions for my answers. I -- let me just ask myself a question, so I can answer it because it's going to -- it's set the table for answering your question. Which you may remember last quarter, we pointed at tax refund patterns and said that there may be a new seasonality pattern emerging and it would be too early to call that but it was making it a little bit -- things were not following as closely on a month-by-month basis to some pre-pandemic delinquency patterns that our hypothesis was three months ago that we're seeing a tax refund effect. So let me just talk about that for a second and then Bill, I'll pull up and talk about just sort of what does this mean for sort of how I feel about where we are with respect to credit. So, the -- let's just talk for a second about how seasonality works. We've always seen seasonal credit patterns in our card business and our portfolio trend, they have in generally been more -- they've had more pronounced seasonal patterns than the industry average. I think that's because we have a higher subprime component and those customers are even more linked I think to the seasonal patterns associated with tax refunds, that would be our hypothesis there. Now the second quarter tends to be the seasonal low point for delinquencies and Q4 tends to be the seasonal high point for delinquencies. Card losses lag relative to delinquencies, the losses tend to be seasonally lowest in the third quarter and highest in the first quarter. Now, we believe that tax refunds, again are a significant driver of these seasonal trends. And tax refunds drive a large seasonal improvement in delinquent payments in the February, March time period, which then flows through to lower delinquencies in April and May and then to lower charge-offs. And tax refunds also drive a seasonal uptick in our recoveries. So the tax code actually new tax withholding rules went into effect way back in 2020. They were passed in 2019, went into effect in 2020, but the pandemic and the normalization since then have kind of swamped seasonality. So we haven't really got -- been able to get a really good read at it -- of it. So we've tended to benchmark to the seasonality of pre-pandemic like 2018 and 2019. But we've now had several more months to look at this pattern and we're seeing a pattern. Well, let me back up. What we've done is what we call de-trending of our credit metrics. So we in hindsight, take the trends out of them to the best we can, so we can see what the net seasonality effects are. And on a detrended basis, last year showed a seasonality with less amplitude on the high side and the low side than had previously been seen pre-pandemic. We assumed that was probably again a manifestation of the new behaviors going in with the new tax refunds. As we now have seen this tax season play out, the seasonality, the payment patterns have been very close to our de-trended 2023 line, so that we believe that we are seeing and it's very plausible, we are seeing a new seasonality. I just want to share that with investors. So later tax refunds and later and lower sort of -- lower the seasonal improvement in delinquencies. But we think the seasonal increase in delinquencies that we see in the back half of the year, likely will also be less pronounced going forward than it has been in the past. All of this by the way happens in auto seasonality but in an even faster, more concentrated way. So we -- what we see, we felt it was a little bit noisy. Last quarter when we were talking to you, we were finding each quarter things were coming in a little bit. I mean, the second derivative was still doing great things. But relative to our sort of close in expectations based on seasonality, things were a little bit off. With the revised seasonality, what we see is things very nicely settling out in card credit. And we feel very good about the last couple of months that came in relative to that new seasonality curve. So I think settling out is the real word from here. Given that from -- but to your question about peak, we're not really going to -- we're not giving really forward guidance about declarations at peak. But from a seasonal point of view, things should head down from here in Q3, and then sort of pop up around October. October is often a month, we tend to get just a little bit of an October surprise, so we'll keep an eye on that. But the other thing I just want to say about credit is our recoveries inventory is starting to rebuild and that should be a gradual tailwind to our losses over time, all else being equal. And then other than the economy, I think the other real factor that's going to drive credit performance for us and other issuers in the next couple of years will be, what is the size of this delayed charge-off effect from the pandemic. Thank you.

Jeff Norris:

Next question, please.

Don Fandetti:

Yes. Rich, can you talk a bit about how you're seeing loan growth in auto? And also as banks potentially come back in, are you seeing or worried about spread or yield compression on new originations?

Don Fandetti:

Thanks.

Jeff Norris:

Next question, please.

Moshe Orenbuch:

Great. Thanks. When you talked about the increase in the reserve rate, not the dollars or the reserve, not the Walmart piece, but the reserve rate itself. Andrew, you didn't mention like mix of receivables. Is it -- has there been any shift towards mass market or subprime from super prime within the card business?

Moshe Orenbuch:

Got it. Okay. And just as a follow-up, Rich, given what's happened with Walmart and the pending Discover acquisition, could you talk a little about your thoughts on the partner or private label business kind of in the current environment? Like what are your thoughts now in terms of your existing contracts and the tendency to want to get new ones or any thoughts on that in this environment?

Jeff Norris:

Thank you, Rich, and thanks everyone for joining us on the conference call today. Thank you for your continuing interest in Capital One. Have a great evening.

Jeff Norris:

Thanks very much, Josh, and welcome to everyone. We are webcasting live over the internet this evening. To access the call on the internet, please log on to Capital One's website at capitalone.com and follow the links from there. In addition to the press release and financials, we have included a presentation summarizing our first quarter 2024 results.

Ryan Nash:

So Rich, maybe just start off on credit. It sounds like you're running a little bit ahead of what you had outlined in the last quarter. But when you put aside the time the tax refund, maybe just talk about what you're seeing from the consumer? And do you think we've now reached the inflection where we can more closely follow seasonal patterns? And once the noise settles, do you think we're kind of back at that 15% level that you had outlined?

Andrew Young:

Yes. Sure, Ryan. I'd like to say from my perspective that there's a simple answer but there's not. And then there's a host of things that are going to drive allowance from here, not the least of which is growth, but just focusing on coverage and assuming that's what others are pointing to. The first thing I'd highlight and I said in my talking points that fourth quarter had seasonal balances, they quickly pay off in the first quarter and therefore, have negligible coverage, which we see every year.

Operator:

Our next question comes from Mihir Bhatia with Bank of America.

Richard Fairbank:

Okay. Thank you, Mihir. So we have filed our merger applications with both the Fed and the OCC and we are engaged with the -- sorry, with the DOJ as they, of course, play a key role in advising the Fed and the OCC on competition questions. We believe our applications make a very compelling case for approval. We believe strongly that this merger will increase competition among banks and credit card issuers and payment networks, and provide significant benefits for consumers, merchants and the communities that we serve. While some have raised concerns about competition, we believe that the facts in favor of the deal will be compelling.

Mihir Bhatia:

Got it. That is helpful. Just turning back to the health of the consumer for a second for my follow-up. If you could just talk a little bit about the environment for card acquisitions, you did mention, I think, that the growth you see good growth opportunities in the card business. So wondering if you can expand on that. Maybe talk about just some of the puts and takes as you consider where to make those investments? Are there parts of the market where you're being more cautious given the environment?

Jeff Norris:

Next question, please.

Richard Shane:

Rich, I want to make sure I fully understand what you're describing in terms of credit. The framework is that charge-off rates will be about 15% higher than '18, '19 levels in the near term. But now with tax refunds, it might be a little bit higher than that, that over time, it will converge back towards slightly above '18, '19 levels. When I look at the delinquencies. And 1 of the things we've observed is that role from delinquency to charge-off is actually higher than it has been pretty much at any time in recent history. Does that suggest that delinquencies actually need to get back below '18, '19 levels to achieve that level of charge-off performance?

Operator:

Our next question comes from John Pancari with Evercore ISI.

Richard Fairbank:

Okay. Thanks, John. So let me comment on the Federal Reserve and the OCC extending the comment period. It's standard practice for the Federal Reserve to extend the comment period on bank mergers. We expected the extension and we don't take any signaling on our deal from the Fed's decision here. So with respect to the overall timing, the Fed and the OCC typically take several months to work through bank merger applications in consultation with the DOJ on competition questions and they engage frequently with our team along the way. And of course, that process is underway. And we continue to have the same views about the timing of all of this that we did at the time of the announcement.

Andrew Young:

Yes, John, with respect to the deal, I'll just say, as we talked about when we announced it, we, at the time, used a blend of consensus estimates of where we would have the CET1 at the time of close. There's a number of variables that are going to move between now and in legal day 1, not just the stand-alone performance of each of our companies but balance sheet marks, some of which are driven by credit and stock price. And so I'm not going to be in the business of sort of recasting every time a little number moves. But I will say our valuation of the deal considered a wide range of outcomes. And so we remain just as excited today about the financial and strategic benefits of the transaction as we did when we announced the deal.

Jeff Norris:

Next question please.

Moshe Orenbuch:

Rich, putting aside the tax refund thing, I mean, yours -- we're sitting here looking you've still got what has been a somewhat persistently high inflation environment and the potential for increases in unemployment, given the nature of your portfolio, you've got kind of a lower end consumer and higher-end consumer. How do you think about that, those factors in terms of thinking about what type of charge-off level you're going to reach over some period of time, not a particular point in time, but over some point in the next year or 2, like where you think about that -- they driving a higher level of charge-off expectations? Or how should we think about that?

Moshe Orenbuch:

Got it. And maybe just as a follow-up question. You alluded to or Andrew alluded to the fact that you expect that late fee -- you can still kind of achieve your objectives from a efficiency ratio even with the late fee coming into effect. But could you talk a little bit about your thoughts about any mitigating efforts that you're planning or in the process of doing? Or is it something that you're going to try and use from a competitive standpoint to take share? How do you think about it?

Jeff Norris:

Next question, please.

Donald Fandetti:

Yes. Rich, can you provide your latest thoughts on auto lending? I know a lot of focus has been around cards, but -- and used car prices have been a little bit lighter recently as well as the tax issue. Maybe talk a bit about a potential pivot there.

Jeff Norris:

Next question, please.

Sanjay Sakhrani:

Rich, I think your point on tax refund is clearly a very valid one. Interestingly, though, to your point on the second derivative, that's improved quite nicely even into March. And I think when I look at the tax refund stats now from the IRS, it seems like you've seen a catch-up in refunds and it seems like the average refund numbers have kind of come in line with last year, if not slightly higher. So I think those are improving, too. Is there a lag effect there? So like should we see that more pronounced if that's the case in April and May? How has been in the past?

Richard Fairbank:

Right. So look, can I just -- I want to just seize that point. The second derivative continues to be strong. In fact, when you look at sort of all the card players, you can see the strength of Capital One's second derivative. There's another topic, so you didn't know when you were studying all that calculus that this would be at the heart of what you do. But -- so there's lots of good to pull from this. I just wanted to just clarify the tax refund effect, which I think has a little bit more impact on Capital One than certain other players and to point out that we actually think we see that effect in both of our consumer businesses.

Andrew Young:

Well, there's 2 parts to that, Sanjay. The first is, given the transaction, we are in the process of submitting a new capital plan. So that's just a procedural piece. So once that new capital plan is approved, then we have unlimited capacity relative to the SCB in this intervening period, the amount that we repurchase is constrained to what we've requested.

Operator:

Our next question comes from Bill Carcache with Wolfe Research.

Andrew Young:

Yes, I'll start, Bill, with the -- Rich, do you want to do the...

Andrew Young:

And then, Bill, with respect to category 2. Well, first, let me just note, we're going to be below the $700 billion threshold at closing and the trigger is really a 4-quarter average beyond that. So I just wanted to mention the specifics of what is going to trigger it. But within category 2 to category 3, there's really 3 big distinctions. The first one is losing the tailoring benefit for LCR and NSFR, and you can see based on the ratios that we hold there and our conservatism around liquidity. We feel very well prepared. The other 2, which are the inclusion of AOCI in regulatory capital and the DTA threshold going from 25 to 10. Those are both already included at least in what was proposed for the Basel III end game rules. We all know that those proposals are being debated and refined. But ultimately, we're looking at those 2 implications as part of the proposal anyway.

Jeff Norris:

Next question, please.

Jeffrey Adelson:

Rich, I just wanted to circle back on your comment about how you continue to kind of trim around the edges. I think last quarter, you were suggesting that the trimming was sort of abating after a number of years of trimming. But given your comments today about how you're continuing to lean in, how the U.S. consumer remains a strength of source, how are you thinking about potentially opening up the credit box a little bit more from here? And relatedly, does the pending deal with Discover factor into how you're thinking about allocating capital at all into more growth at this point?

Jeffrey Adelson:

And I also wanted to just ask really quickly about the small business car strategy. I know you recently just launched that new Venture X business card recently. It seems like a really unique value proposition with the charge card component. Can you just talk a little bit more about the opportunity to drive growth there and maybe how that's going so far? Any early reason to the type of customers you're getting?

Operator:

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

Jeff Norris:

Thanks very much, Amy, and welcome everyone to Capital One's fourth quarter 2023 earnings conference call. As usual, we are webcasting live over the Internet. To access the call on the Internet, please log on to Capital One's website at capitalone.com and follow the links from there. In addition to the press release and financials, we have included a presentation summarizing our fourth-quarter of 2023 results. With me today are Mr. Richard Fairbank, Capital One's Chairman and Chief Executive Officer, and Mr. Andrew Young, Capital One's Chief Financial Officer. Rich and Andrew are going to walk you through the presentation. To access a copy of the presentation and the press release, please go to Capital One's website, click on Investors, then click on Quarterly Earnings Release. Please note that this presentation may contain forward-looking statements. Information regarding Capital One's financial performance and any forward-looking statements contained in today's discussion and the materials speak only as of the particular date or dates indicated in the materials. Capital One does not undertake any obligation to update or revise any of this information, whether as a result of new information, future events, or otherwise. Numerous factors could cause our actual results to differ materially from those described in forward-looking statements. And for more information on these factors, please see the section titled Forward-Looking Information in the earnings release presentation and the Risk Factors section of our annual and quarterly reports accessible at Capital One's website and filed with the SEC. Now, I will turn the call over to Mr. Young. Andrew?

Richard Fairbank:

Thanks, Andrew. Good evening, everyone. Slide 10 shows fourth quarter results in our credit card business. Credit card segment results are largely a function of our domestic card results and trends, which are shown on Slide 11. Top line growth trends in the domestic card business remained strong, even with growth moderating somewhat in the fourth quarter. Purchase volume for the fourth quarter was up 4% from the fourth quarter of last year. Ending loan balances increased $16 billion or about 12% year-over-year. Average loans increased 14%. And fourth-quarter revenue was also up 14% year-over-year, driven by the growth in purchase volume and loans. The charge-off rate for the quarter was up 213 basis points year-over-year to 5.35%. The 30-plus delinquency rate at quarter-end increased 118 basis points from the prior year to 4.61%. On a sequential-quarter basis, the charge-off rate was up 95 basis points and the 30 plus delinquency rate was up 30 basis points. For the month of December, the charge-off rate was 5.78%, including a one-time impact of 15 basis points, described in a footnote in the monthly credit 8-K. Adjusted for this impact, the monthly charge-off rate for December would have been 5.63%. Pulling up on Domestic Card credit, we believe that normalization has run its course and credit results have stabilized. The 30-plus delinquency rate has been stable on a seasonally adjusted basis for a number of months now. Since August, our monthly delinquency rate has been moving in line with normal seasonality and at stable ratios relative to the same month in 2018 and 2019. And at this point, we have a pretty good window into January as delinquency entries in December indicate continuing delinquency rate stability in January. We've always said that delinquencies are the leading indicator of where charge-offs are going. Charge-off rate tends to follow delinquency rate by about three to six months. Based on the stability, we've seen in our delinquencies since August and extrapolating from our current delinquency inventories and flow rates, we believe the charge-off rate is stabilizing now and settling out to about 15% above 2019 levels. I give this window, because investors have been asking for quite some time when will charge-offs level off. So this is the point where we see that happening, meaning charge-offs should move more or less with seasonality in the coming months. This window comes from modeling the flows in our delinquency buckets which have stabilized, and our recoveries which have also stabilized and started to rebuild. This isn't designed to be longer-run guidance but rather to indicate that charge-offs are finally moving more or less with seasonality over the near term. In the longer run, there could be additional forces such as potential pressure from economic worsening and potential benefits from the depletion of deferred charge-offs from the pandemic and recoveries picking up over time from increased inventory. Non-interest expense was up 11% compared to the fourth quarter of 2022, with increases in both operating expense and marketing expense. Total company marketing expense of about $1.25 billion for the quarter was up 12% year-over-year. Our choices in our card business are the biggest driver of total company marketing. We continue to see attractive growth opportunities in our Domestic Card business. Our opportunities are enhanced by our technology transformation. Our marketing continues to deliver strong new account growth across the Domestic Card business. And in the fourth quarter, marketing also included higher media spend and increased marketing for franchise enhancements, like our travel portal, airport lounges, and Capital One Shopping. We continue to lean into marketing to drive resilient growth and enhance our domestic card franchise. As always, we're keeping a close eye on competitor actions and potential marketplace risks. Slide 12 shows fourth-quarter results for our Consumer Banking business. In the fourth-quarter auto originations declined 7% year-over-year. Driven by the decline in auto originations, consumer banking ending loans decreased about $4.5 billion or 6% year-over-year. On a linked-quarter basis ending loans were down 2%. We posted another strong quarter of year-over-year growth in federally insured consumer deposits. Fourth-quarter ending deposits in the consumer bank were up about $26 billion or 9% year-over-year. Compared to the sequential quarter, ending deposits were up about 2%, average deposits were up 11% year-over-year, and up 1% from the sequential quarter. Powered by our modern technology and leading digital capabilities, our digital-first national direct banking strategy continues to deliver strong consumer deposit growth and gradually increase the percentage of total company deposits that are FDIC-insured. Consumer Banking revenue for the quarter was down about 17% year-over-year, largely driven by lower auto loan balances and higher deposit costs. Non-interest expense was down about 3% compared to the fourth quarter of 2022. Lower operating expenses were partially offset by an increase in marketing to support our national digital bank. The auto charge-off rate for the quarter was 2.19%, up 53 basis points year-over-year. The 30-plus delinquency rate was 6.34%, up 72 basis points year-over-year. Compared to the linked quarter, the charge-off rate was up 42 basis points, while the 30-plus delinquency rate was up 70 basis points. Both of these linked-quarter increases were in line with typical seasonal expectations. Monthly auto credit began to stabilize even earlier than domestic card credit results. On a monthly basis auto delinquency rate and charge-off rate had been tracking normal seasonal patterns since the first half of 2023 and continued to do so through December. Slide 13 shows fourth-quarter results for our Commercial Banking business. Compared to the linked-quarter, ending loan balances decreased about 1%. Average loans were also down about 1%. The modest declines are largely the result of choices we made earlier in the year to tighten credit. Ending deposits were down about 9% from the linked quarter. Average deposits were down about 7%. The declines are largely driven by our continuing choices to manage down selected less attractive commercial deposit balances. Reducing these less attractive deposits also drove the 14 basis point linked-quarter improvement in our average rate paid on commercial deposits. Fourth-quarter revenue was down 5% from the linked quarter. Non-interest expense was also down about 5%. The Commercial Banking annualized charge-off rate for the fourth quarter increased 28 basis points from the third quarter to 0.53%. The Commercial Banking criticized performing loan rate was 8.81%, up 73 basis points compared to the linked quarter. The criticized non-performing loan rate was down 6 basis points to 0.84%. Commercial Banking credit trends were largely driven by continuing pressure in our commercial office portfolio. Slide 17 of the fourth-quarter 2023 results presentation shows additional information about the remaining commercial office portfolio, which is less than 1% of our total loans. In closing, we continued to deliver solid results in the fourth quarter. We posted another strong quarter of top line growth in domestic card revenue, purchase volume, and loans. Domestic card and auto delinquency trends were in line with normal seasonal patterns, a continuing indicator of stabilizing consumer credit results. We grew consumer deposits and total deposits. And we added liquidity and maintained capital to further strengthen our already strong and resilient balance sheet. Our annual operating efficiency ratio, net of adjustments for the full year 2023, was 43.54%. In 2023, we saw incremental opportunities and made choices to grow revenue and tightly manage costs to achieve a 99 basis point improvement in our annual operating efficiency ratio. The actual improvement was better than the “modest improvement” growth we had been expecting. Over the last decade, we've driven significant operating efficiency improvement even as we've invested to transform our technology. And we continue to drive for efficiency improvement over time. For the full-year 2024, we expect annual operating efficiency ratio, net of adjustments, will be flat to modestly down compared to 2023. Our expectation includes the partial year impact of the proposed CFPB late fee rule, assuming that rule takes effect in October 2024. Pulling way up, our modern technology capabilities are generating an expanding set of opportunities across our businesses. We continue to drive improvements in underwriting, modeling, and marketing, as we increasingly leverage machine learning at scale. And our tech engine drives growth, efficiency improvement, and enduring value creation over the long term. We remain well-positioned to deliver compelling long-term shareholder value and to thrive in a broad range of possible economic scenarios. And now we'll be happy to answer your questions. Jeff?

Operator:

[Operator Instructions] And our first question comes from the line of Sanjay Sakhrani with KBW. Your line is open.

Richard Fairbank:

Yeah. So, Sanjay, yeah -- so first of all, my comments, I just want -- I wanted with my credit comments in my sort of extrapolated look at our delinquency buckets, I really wanted to share where our charge-offs are settling out, which is about 15% above 2019 levels. And we should also note, by the way, that in any year first-half losses are seasonally higher than second-half losses. So within any normal year, the first half is the peak. Now, as I said, we're not really giving longer-run guidance. But let's think about the dynamics about how things could go from here. From an economy point of view, we're certainly in a strong economy, unemployment is at a pretty remarkable place. So, I think if anything, unemployment could add more downside than it adds upside. Perhaps inflation has more upside than it does downside. But I don't have any more insight to those than anybody else does. I think, I also would want to kind of reinforce your point, there are two good guys that should play out over time. And we've been talking for a long time about the delayed charge-off effect from the pandemic. And when you think about that the pandemic had such a just absolutely unusual experience for consumers, with all of the stimulus and the forbearance and so on that, we certainly have believed that charge-offs that were otherwise going to happen at that time, some got averted permanently, but I think some got delayed. And so this phenomenon that we call delayed charge-offs, I think, it's not a really quantifiable effect, but I think it's very much been a part of what's happening with -- in the normalization and something that intuitively will run its course. And the other thing is recoveries. So recoveries -- our recoveries, while the rate per charge-off dollar remained strong, the number of charge-off dollars in inventory, thanks to the pandemic, were at a really depressed level. And so we have bottomed out there and they're starting to -- now inventories are starting to increase, of course, as credit has normalized and that should also gradually be a good guy. Also when I look at our origination strategy and the underwriting choices we make, these are consistent with longer-term losses that are lower than where we are now. So we consciously sort of focused our credit commentary to really focus on where things settle out. And then there is a list of forces that could work in either direction, but I think you certainly point out to some of the good guys.

Andrew Young:

Sure. Sanjay, let me compartmentalize those two things, NIM will be a whole separate answer, but with respect to allowance. Well, let me first start with just a tactical housekeeping item, which is a reminder that in Q4 we have seasonal balances that quickly pay off in the first quarter and therefore have negligible coverage. So the coverage ratio in Q4 is modestly lower as a result of that dynamic and it reverses itself in Q1, but again a real modest effect there. Longer-term though, projected losses are really going to be the biggest driver of coverage. And as we've said before, delinquencies are the best leading indicator of that and Rich just provided a fulsome description of all of the forces at play there. So from a reserve perspective, every quarter we're just going to be looking at the next 12 months of projected losses with the first six more consequential in the calculation, but also far more predictable, given the visibility that we have through delinquencies. And then the remainder of that window really informed by economic assumptions, and then the reversion to the long-term average. And so over the last few quarters, things have played out consistent with or slightly better than what we've expected and you've seen the coverage ratio in card roughly stay flat. So, I think it's important to note that even in a period where projected losses in future quarters are lower than today and might otherwise indicate a release, we could very well see a coverage ratio that remains flat or only modestly declines as we incorporate some of that uncertainty into the allowance, but eventually in a scenario like that, after a period of coverage stability like we've seen, you would see coverage coming down in the release of non-growth related reserves.

Andrew Young:

NIM, sure. There is a lot of factors at play with NIM and maybe I'll do the same housekeeping with NIM. Just to remind everyone that in the first quarter with one fewer day, we're going to see roughly a 7 basis points headwind there. But let me then also enumerate here the puts and takes to NIM. On the tailwind side, growth in card balances as percentage of the balance sheet and even within those balances possibly a higher revolver rate. Certainly a tailwind, and that's something we've seen over the last couple of quarters. And then also a lower cash balance, we've talked about this before, but cash balances today in total of $43 billion. I think the number is with about $37 billion at the Fed is quite a bit higher than pre-pandemic. I don't think we'll get back to where we were pre-pandemic but I would expect over time that, that will come down from today's level. So that would also be a tailwind to NIM. On the headwind side, even though the Fed has stopped moving up in July, we continue to see some deposit product rotation, and it creates a bit of upward pressure to the deposit betas. And then even if the Fed starts decreasing rates, we're going to see the assets reprice more quickly than the deposits. And the competitive environment in the backdrop of QT will potentially have an impact on betas on a downward cycle. So that would create a bit of marketing pressure. And then a couple of other things that I would just highlight as potential headwinds, the uncertainty around potential regulatory changes that could impact interest income as well as just the path of credit. You've seen suppression go up over the last few quarters, as losses go up, so that also creates some pressure to NIM. So, I know that that was a list of puts and takes, but I partially go into that level of detail to say, it's kind of hard to say where NIM is going to go in the near term, especially because the path of interest rates remains fairly wide at this point, but kind of gives you a sense of all of the forces at play. But over the much longer term, I would say there's nothing really structurally different about our balance sheet from where it was pre-pandemic, that leads me to believe that NIM will be materially different than where it was based on at least what we know today.

Operator:

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

Andrew Young:

Hey, Ryan.

Ryan Nash:

Rich, when I look you put about $4 billion of marketing expense for the second straight year and you continuing to drive strong growth, we're hearing about some others with a little bit of a more cautious tone on growth. So maybe just talk about, are you leaning in and do you expect marketing to increase, and really where you're seeing the best opportunities in the market and how are you thinking about growth looking ahead? Thanks. And I have a follow-up.

Ryan Nash:

Got it. And, Rich, if you put late fees aside for the first part of my question, you talked about stable to modest improvement which ex-late fees would imply continued improvement on the operating efficiency. Do you think we're back ex-late fees on a sustained journey of improving efficiency, like you were talking about before the pandemic? And then second, just how are you thinking about the timing of offsetting late fees? Thank you.

Jeff Norris:

Next question, please.

Arren Cyganovich:

Thanks. I was hoping you talk a little bit about the auto business. You continue to kind of pull back a little bit from that side, thinking about how you're feeling about potentially increasing some originations. Still a healthy amount of originations at $27 billion this year, but just wondering when you might make a pivot there.

Arren Cyganovich:

Thank you.

Operator:

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

Richard Fairbank:

So, I think the best way to think about this is to focus on the most stable benchmarks. As our focus here is about stability, so we're really looking at what are the most stable benchmarks that we can anchor to. And that really leads us back to 2019, 2018. And so let me just sort of speak in that, sort of double-click a little bit into my comments on that. So our delinquencies are above pre-pandemic levels, but they've been tracking with normal seasonality for quite some time. And now, compared to 2019, since August we're running around 17% above the level for the same month of 2019. Compared to 2018, since May, we're running at around 13% above the level for the same months of 2018. And at this point, we have a pretty good window into January of 2024, as well based on delinquency entries in December and that looks like it's going to be another month of stability. So, we feel confident declaring that our delinquencies have stabilized. And of course, delinquencies are our best leading indicator of credit performance. Our charge-offs have been catching up to the stabilizing trend in our delinquencies over the second half of 2023. But at this point, what we're declaring here is that our charge-offs are leveling off as well. Now, there's more month-to-month volatility in charge-offs than in delinquencies by quite a bit. Because every data point of delinquencies includes five months of delinquency inventories. And of course, charge-offs is looking at the relatively small number that falls off at the end of the last bucket. And there was also some noise in the fourth quarter of 2019, that makes it less reliable as a charge-off benchmark. So, we actually think 2018 is an even better benchmark for our charge-offs, for comparing our charge-offs in this fourth quarter that just happened to a past stable year. In the fourth quarter, our net charge-offs were about 15% above 2018 levels. And of course, 2018 rolled into 2019, so that's an appropriate benchmark to look at as we head into 2024 and compared to 2019. Now when we look ahead, extrapolating from our current delinquency inventories and recent flow rates, we conclude that our net charge-offs are stabilizing at about 15% above 2019, with of course some typical month-to-month volatility and normal seasonality. Now, of course, the seeds of this stabilization have been planted for quite a long time now and partly driven by the choices that we made back in 2020 and 2021. Coming out the pandemic, we were concerned about two trends. FinTechs were flooding the market, especially the subprime market with credit offers, creating the potential for credit worsening and adverse selection in our originations. We also anticipated that pandemic era stimulus and forbearance would temporarily inflate consumer credit scores and that these would revert over time. So, we tightened our underwriting in anticipation of these effects and we have continued to make adjustments at the margin since then. And the result has been striking, that with all the kind of changes, the normalization, all the noise over the last number of years, that there has been strikingly stable performance on our origination vintages. In our -- basically and our post-pandemic originations, each quarterly vintage for a given segment has been more or less on top of each other. And also, relatively consistent with pre-pandemic vintages. And over time, this just created a lot of stability that increasingly moved into our portfolio and it contributed to the stabilization of our portfolio credit trends. And as we've looked at this, we said these are very good shoulders to stand on, to have that much stabilization for so long. We of course all still waited to see exactly the manifestations ultimately of the portfolio stabilizing. Another factor contributing to stabilization is our recovery rate. And unusually low recoveries have been the largest driver of our overall charge-off rate running above pre-pandemic levels. And this is of course because of the very low level of charge-offs over the past three years. And therefore, we had a low level of raw material for future recovery. And by the way, just a Capital One point here, this is a larger effect for us and for most competitors because we tend to have meaningfully higher recovery rates than the industry average. And because we tend to work our own recoveries, so they come in overtime, not all at once like in a debt sale. And so, we’ve recently observed that our recovery rate has stabilized and started to tick back up. And that's our -- and you know, and now that our recoveries inventory has started to rebuild, that's of course a good guy, although it's coming from a pretty low level. And this also contributes to our confidence that our overall loss trends have stabilized. So when you -- to your question where you at compared to 2023, what we've really done is really kind of anchor our benchmarking to the most stable years in sort of recent experience, 2018 and 2019. And since we've seen delinquencies and charge-offs stabilize relative to like quarters in those benchmarks, we felt the best language with which to describe where things are settling out, is to do it as a multiple of those two generally stable years. And so we are entering 2024 now with a real sense of stability and we've benchmarked where we are as a multiple of those two stable year benchmarks.

Operator:

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

Richard Fairbank:

Sorry, Moshe, are you saying, is what -- is the lower-end an area for expansion?

Richard Fairbank:

So, we feel -- well, we feel good about all of our segments across the credit spectrum in card and also the relative health of the consumer. And you've known us for a long time, Moshe, as long as we have -- for the decades we've been talking together, you know that we have a long history of delivering sustained resilience and profitability at the lower end of the marketplace. And we -- let's just reflect on this for a second. If you're talking about subprime credit cards, this is a complex business that requires deep investment in information-based underwriting. And of course, we've spent decades developing and testing tailored product structures and sort of honing the analytical and the operating and underwriting and marketing capabilities to attract and serve this franchise, but also with the number one and two and three most important things to us has been resilient as we do this. And what's really been pretty striking is how consistent our strategy has been over the years, through the Great Recession and following that. And if we -- and we've talked about how the lower-end of the marketplace, whether you're talking, by the way, there's a whole -- when you talk about the lower end of the marketplace, obviously, we -- there is a whole part of the marketplace that Capital One doesn't serve. But in terms of the lower end of the marketplace that we serve, if you look at either income or FICO and look at the normalization that's going on, we've seen very solid curing in that part of the market. It in fact even started -- it cured a little bit earlier than some of the other parts of the market but the curing story, the leveling-off story we're talking about today is absolutely across the board. I do want to say though also, Moshe, relative to your point, you've had Fintechs who we were very concerned about flooding that end of the market. Some years ago, they certainly have massively dialed back. And I think that the continued -- when we see the success of our vintages, the stabilization, now the sort of stabilization overall of Capital One's whole portfolio and the dynamics in the marketplace, I think that we like the opportunities we see there, Moshe, and we will be leaning into that.

Andrew Young:

So, Moshe, Capital One has pursued a strategy for many years of trying to create and deliver to the marketplace, strikingly simple products. Because we, from sort of a mission and strategy point of view, we believe so much in this, but -- and we've built a brand over having very simple products. And so things like, for example, on the banking side, no minimum balance requirements, no membership fees, and even no overdraft fees. So here we are a company that has really, really reduced the fees. But if we add one fee left, I think the fee we would most hang on to is the late fee. Because to your point, it plays a very important role in the deterrent value to a consumer. And an analogy that we sometimes use is a speeding ticket. I think that if a speeding ticket were -- let's say, we had an $8 speeding ticket, I'm not sure that our highways would be quite as safe as they are now because if we're really trying to deter behavior that we think is really consequential for people, that really is the role of the fee. We've been very active in giving alerts to all of our customers when the late payment due alerts, with the goal of trying to -- not trying to maximize late fees, but actually trying to maximize the on-payment performance of our customers. So, Moshe, this is a question that -- we've been worried about your question about the what could be the impact on credit performance of individuals and it's something that we're just going to have to. If this CFPB rule goes into effect, we're all going to experience together sort of this -- not controlled experiment, but we certainly mark us down for having a concern about that. But from a financial point of view, obviously, the late fees are an important thing on the P&L. And as I've talked about, we have created, I've said it many actions across different types of things from policies, products, pricing structures, investment choices to claw back the very significant economic impact. Some of those things are underway. Some of them just to mention it, by the way. By the time we get there when the rule is announced, some of the offsets are going to by then be into the run rate of the company and the majority will still be waiting to happen. With respect to the fourth quarter, the [‘25] (ph) is the big full-year effect, obviously something coming in late in the fourth -- it's something coming in, in our estimate in the fourth quarter. It doesn't have as much impact on the annual efficiency ratio, but it still does have an impact. So, essentially, what's implied underneath it, is quite a bit of progress on the efficiency ratio, behind the flat to modestly down guidance that includes that fourth quarter effect.

Operator:

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

Richard Fairbank:

Okay, John, thanks for your good questions here. We don't typically give full-year marketing guidance. And the reason is because, marketing depends of course a lot on the opportunities that we see when we get there. So what I wanted to just share in response to Ryan Nash's question is a continuation in the positivity that we feel both about the real-time numbers we're seeing of response and performance of our vintages and all of that. And then also the sort of more structural investments that we're making in the business, particularly with respect to the -- going after the heavy spenders. So, we don't have full-year guidance, but we certainly continue to like the opportunities that we see.

Jeff Norris:

Next question, please.

Don Fandetti:

Rich, you've made a lot of progress on heavy spenders. As you sort of look out, where are we I guess on that expense cycle? Are we sort of still looking at many years of acceleration or do you hit some type of level where there is some scale kicking in? Just trying to get a sense on where we are on that investment cycle.

Don Fandetti:

That's all I had. Thanks.

Operator:

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

Andrew Young:

Sure. Why don't I start? Bill, look, at this point, there still remains a number of uncertainty around capital, not the least of which is the end-game proposal. We're all aware there is been quite a bit of advocacy there and that there remains a fair amount of uncertainty of where the rule will land, including things like the impact of AOCI and phase-in and ops risk and other forces at play. So we are -- you know as much as we do, and we're waiting to see what the final rule holds there. But in addition to that, we're coming up on CCAR, we don't yet have the scenarios for this year. You look back at how impactful the scenario as well as the starting balance sheet is to those outcomes. You've seen our SCB fluctuate over the last four years, from I think 10.1% down to 7%, and now we're sitting here at 9.3%. So waiting to get a little bit more clarity of what CCAR will hold. And then in addition, we continue to see a range of outcomes in our own growth projections. And finally, just point to the economy, there is -- the consensus view is growing of a soft landing, but there is still quite a wide range of outcomes there. And so given all of those factors, we've chosen to operate for the last few quarters around 13%. We recognize that, when we feel like we're in an excess capital position, that returning it is one way to create value. And under the SCB framework, we have that flexibility to manage repurchases dynamically and we'll use that flexibility when we think it's prudent to do so.

Jeff Norris:

Next question, please.

Dominick Gabriele:

Hey, great. Thanks so much for all the color on the call today. I just have two questions. Rich, what are you seeing you think that's making the net charge-off stabilize 15% above 2019 levels? Is there something in the consumer payment behavior that's changed? Is there something you think that shifted the consumer, in general, where the credit card industry may be seeing a higher through-the-cycle net charge-off rate going forward or for Capital One in particular? And I just have a follow-up. Thanks so much.

Jeff Norris:

Well, thank you very much everyone for joining us on the conference call tonight, and thank you for your continuing interest in Capital One. The Investor Relations team is available this evening to answer further questions if you have them. Have a great evening.

Jeff Norris:

Thanks very much, Amy, and welcome, everyone to Capital One's third quarter 2023 (ph) earnings conference call. As usual, we are webcasting live over the Internet. To access the call on the Internet, please log on to Capital One's website at capitalone.com and follow the links from there. In addition to the press release and the financials, we have included a presentation summarizing our third quarter 2023 results. With me this evening are Mr. Richard Fairbank, Capital One's Chairman and Chief Executive Officer; and Mr. Andrew Young, Capital One's Chief Financial Officer. Rich and Andrew will walk you through this presentation. To access a copy of the presentation and the press release, please go to Capital One's website, click on Investors, then click on quarterly earnings release. Please note that this presentation may contain forward-looking statements. Information regarding Capital One's financial performance and any forward-looking statements contained in today's discussion and the materials speak only as of the particular date or dates indicated in the materials. Capital One does not undertake any obligation to update or revise any of this information, whether as a result of new information, future events or otherwise. Numerous factors could cause our actual results to differ materially from those described in forward-looking statements. For more information on these factors, please see the section titled Forward-Looking Information in the earnings release presentation and the Risk Factors section in our annual and quarterly reports accessible at Capital One website and filed with the SEC. Now I'll turn the call over to Mr. Young. Andrew?

Richard Fairbank:

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

Operator:

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

Richard Fairbank:

Thanks, Ryan. So let's just pull up on the metrics here. Our third quarter domestic card charge-off rate was essentially flat from the prior quarter, up 2 basis points to 4.40%. Our 30 plus delinquency rate increased 57 basis points from the prior quarter to 4.31%. Both our losses and our delinquencies are modestly above their pre-pandemic levels. Now let's talk about sort of what's happening at the margin here. The trend of normalization in our credit metrics appears to be slowing. In August and September, the month-to-month movement in our delinquencies was essentially in line with normal seasonality for the first time since normalization began. We've also seen some stabilization in new delinquency entries, relative to normal seasonal patterns. So we are hopeful these stabilization trends continue. Now charge-offs, of course, are a lagging metric, so they have some months of catching up still to do. In auto, we have seen stabilization even longer. Our losses are modestly above pre-pandemic levels, but moving in line with normal seasonality for the past few quarters. So back to our card business for a moment. There's another stabilization trend that we see as well, which is our recovery rate. Our recovery rate had been falling for several years because of the low level of charge-offs through the pandemic. So we've had less inventory, if you will, to recover on. And this was a larger effect for Capital One than for most of our competitors because we tend to have meaningfully higher recovery rates than the industry average. And because we tend to work our own recoveries, so they come in overtime and not all at once, like in a debt sale. We've now seen the recovery rates stabilize, although, it remains at unusually low levels. Now recoveries, of course, don't impact our delinquencies, but they are a pretty significant factor when -- in our charge-offs and particularly when comparing our charge-offs to pre-pandemic benchmarks. Now another Capital One's specific point here. There's another factor sort of driving stabilization, but this is -- has been going on for a long time and that's the stability of credit performance in our recent origination vintages. So looking ahead, the economy is, as always a source of uncertainty. In our outlook, we still expect the unemployment rate to worsen over the coming year. And as always, we remain very focused on resilience in our underwriting and making sure that we build resilience, a lot of resilience into all of our choices.

Andrew Young:

Sure, Ryan. So to your economic assumption point, I'll focus on unemployment rate, although recall that a whole lot more is considered a whole bunch more variables, but we are now assuming the unemployment rate moves into the mid-4s by the middle of '24 and basically hold there for a period of time. But it's not just the absolute level of unemployment, as we've talked about before, it's also the change that influences underlying credit performance. How that then plays through the allowance, though, like a number of factors are going into the allowance calculation. As Rich said, the projected loss rates are going to be by far the biggest driver. And as we've talked about many times, delinquencies are the best leading indicator of credit performance, particularly over the next couple of quarters. And I won't go through the reasonable and supportable and reversion process elements that we've discussed previously, but I will say beyond the credit forecast, it is worth noting that the allowance framework considers a range of outcomes and uncertainties, which are generally wider in periods of either worsening or improving transitions. So at the core of your question, even in a period where projected losses in future quarters may be lower than today and might otherwise indicate a release. We could very well see a coverage ratio that remains flat or only modestly declined, at least in the near term as we incorporate the related uncertainty into the allowance. And so we'll go through our process as we do every year to take all of those factors into account and roll forward the allowance each quarter.

Operator:

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

Richard Fairbank:

Yes, Mihir. Thank you for your question. So let's talk about credit performance. When credit first started to normalize, we called out that this trend was more pronounced at the low end of the market, whether defined by income or credit score. And strikingly, those were the segments that had improved the most early in the pandemic. So this was not surprising to us. Later, we observed that normalization was becoming more broad-based. And in fact, for many quarters now -- for several quarters now, every segment was basically normalizing at about the same rate. In other words, if you look at for any segment where its credit metrics were relative to like its delinquencies, for example, relative to pre-pandemic every segment was kind of on top of each other, everything had caught up. Now we are seeing stabilization come more quickly at the lower end of the market. In fact, over the last few months, our delinquencies in these segments have essentially stabilized on a seasonally adjusted basis. And our upmarket segments are sort of just a little bit behind that. So now, I don't think this is necessarily a description of the marketplace per se. This is what we see at Capital One. Our performance has been assisted by some of the underwriting changes that we made over the past couple of years, especially in response to credit to what we anticipated would be the impact of credit scores inflating FinTech's flooding the market. So as we've been talking about really for a couple of years now, we -- in our originations and overall in our credit policy, we were trimming around the edges for things that we saw or risks that we anticipated, and this has contributed, I think, to strength and stability and performance that's now contributing to what we see here. In terms of spend, the spend is basically -- pretty -- when we look at spend per customer, this has really moderated after the surge of spending coming out of the pandemic. So year-over-year, I'm [indiscernible] an overall Capital One point. Year-over-year spend growth per customer has been roughly flat for several months. So the growth in spend that you're seeing in our metrics is really being driven by new account origination. Now with respect to the various segments, the spend on the -- at the lower end of the marketplace is certainly probably the most moderated, although, we -- it moderated first, we've seen spend growth across our segments. Sort of fairly moderated, but I'd say the biggest effect on the moderating side has been in the lower end of the market.

Andrew Young:

Yeah. With respect to beta, as we've discussed in previous calls, there's really a couple of key factors that are impacting betas. The first is product mix. Sort of the rotation of customers across products. And then, the second is competitive pricing. And within that, I would include the notion of just deposit pricing lags that we've talked about. And so for us, the quarter-over-quarter beta with that lag effect was something like 160%. Our cumulative beta now stands at $57 million. And so that getting factored into NIM as we look ahead on that dimension, particularly assuming if rates do stay higher for longer, I wouldn't be surprised if there continues to be some upward pressure on beta at least in the near term, driven by those factors that I described, the pricing and product mix piece. So beyond that then, in the NIM, we have seen spreads widen a bit here and wholesale funding costs are up a bit. And I think Rich talked about suppression in card, but depending on the path of credit, there's the potential at least for increased revenue suppression. So I would lump all of those three things together as potential headwinds. But from a tailwind perspective, we can continue to see growth in card and particularly revolving card balances as a percent of the balance sheet like you saw this quarter. And then the other thing that I would note, even though cash balances remain elevated relative to historical standards, I think we will see it settle out at a level that's higher than pre-pandemic, but ultimately lower than where we are today as you look ahead over multiple quarters. So those are really the primary factors that I would say are at play with respect to NIM.

Operator:

Our next question comes from Arren Cyganovich with Citi. Your line is open.

Andrew Young:

Yeah. So part of it, Arren, is just said, if you're looking at yield as opposed to margin is you get a tailwind just from the Fed rate changes, but the other primary and larger factor than the Fed changes is, I would say, largely seasonality which does -- we typically see revolve rates in the third quarter just naturally be higher than they are throughout the year. And we also tend to see a bit more on the late fee piece there. So there is a seasonality dimension in terms of where we are with revolve rates going forward, I'll let Rich talk a little bit about the trends that we're seeing in the portfolio.

Arren Cyganovich:

Got it. And then on the marketing, it looks like it was down just slightly year-over-year, still almost double where it was from a pre-pandemic perspective. Have you essentially hit kind of an -- almost a peak here in terms of marketing dollars and how do you think the expenses will go from there with respect to that?

Jeff Norris:

Next question please.

Richard Shane:

Thanks for taking my questions this afternoon. I'd just like to talk a little bit about the depository franchise. Obviously, there's been very strong growth this year in the consumer banking franchise, particularly on the deposit side. Can you just talk a little bit about the competitive landscape -- you started, Rich, you talked a little bit about the network, the cafes, the less concentrated branch approach. But can you describe what you're seeing sort of broadly in the market where you think you're gaining share?

Richard Shane:

Thank you, Rich.

Operator:

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

Richard Fairbank:

Don, thank you for your question. It's funny. We have zig (ph) while others is zag for so long -- as long as I can remember in the auto business. And our strategy isn't just as zig, while other is zag, it's always to look at this marketplace and really objectively see where the opportunities are. This is a more volatile business in terms of our growth strategies, then the credit card business is because of the role that a dealer plays in the business in a sense, holding auctions at the dealership such that -- we -- our growth strategies are particularly sensitive to the credit and underwriting choices that our competitors make because it's sort of amplified in this auction-based environment with dealers really quite a contrast from the credit card business -- to the credit card business where certainly the competitive choices matter. But it's really still a one-on-one business with our customers and prospective customers. That's why you see so much more stability in sort of the marketing and the marketing sort of and the and leaning into the growth that you see on the card side. So as when you think about the last few years. So we've certainly had in the last five or six years, tremendous growth and traction in the auto business. And we -- our strategy was so powered by our technology that we've invested in the business, the data, the underwriting capabilities and the very deep relationships that we've been building with dealers. Over the last couple of years, we were concerned at what was happening with margins as they were pressured by interest rate increases in 2022 and early 2023, some competitors were slow to adjust their pricing. Now more recently, industry lending margins have largely normalized as interest rates have stabilized and many players, including late movers have continued to increase pricing. The other thing, of course, was watching very closely the credit side of the business. And we -- just as we did in the card business, probably actually more proactively and more significantly in auto, we trimmed back around the edges in anticipation of certain worsening and with concerns about score drift in, with respect to the data [indiscernible] from consumers. So that has -- and you've seen the data that where Capital One has pulled back quite a bit. Our outstandings have been shrinking a little bit. You also have seen the striking credit performance we've had and the stability now that is at least two quarters long in terms of what we’re seeing on various credit metrics. So seeing the good metrics and seeing the marketplace, we’re certainly on the lookout for opportunities, but I’m not here to predict an acceleration, but we certainly do like the performance of both our front book and our back book at this point.

A – Jeff Norris:

Next question please.

Sanjay Sakhrani:

Thanks. First question just on the adjusted operating efficiency rate. You've seen some nice improvements over the last two quarters. And I know, Rich, you talked about sort of the year outlook. I'm just wondering, if we could see this type of level or trends sustain itself into next year?

Sanjay Sakhrani:

Perfect. Then I have a follow-up question just on the leaning into growth in card. Where exactly is that happening? I mean, obviously, you talked about adjusting the risk parameters, and that's obviously flowing through in the credit numbers improving. Is it more on the transactor side that you're leading into growth or is it balanced across all segments? I'm just curious sort of the implications on a go-forward basis? Thank you.

A – Jeff Norris:

Next question please.

John Pancari:

Good afternoon. On the -- back to the -- your commentary around the slowing pace of the increase in delinquencies that you're seeing in card and some of the stabilization that you're citing. I know you indicated that charge-offs should of course, lag that. Can you give us maybe some way to think about how long that lag could be? Is it a two to three quarter type of window that we're looking for losses to follow through on that front? Thanks.

Jeff Norris:

Next question, please.

Erika Najarian:

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

Jeff Norris:

Next question, please. Next question, please.

Dominick Gabriele:

Hey. Good afternoon. Thanks so much for taking my question. When you think about capital ratios and Basel end game and the need to build capital specifically for unused lines, how do you think about mitigating if at all, mitigating your unused lines and given your capital target of about 11% today, maybe you could just talk to us about the factor of Basel unused lines and the effect going over on your capital levels and the ROTCE target? And then I just have a follow-up, if you don't mind. Thanks.

Dominick Gabriele:

Sure. Sorry about that. I was just curious, if you basically had to hold more capital because it's my understanding that you would have to hold additional capital against unused lines versus just drawn lines now. And so I was just curious, if your capital ratio would have to rise and -- and if that would affect the long-term return on like return on in any way?

Jeff Norris:

Dominick, you have a follow-up? Next question, please.

Jeff Norris:

You there Bill.

Richard Fairbank:

Yeah.

Richard Fairbank:

Okay. Thank you, Bill. So the CFPB's late fee proposal as currently contemplated would reduce late fees by approximately 75%. And while the CFPB's proposal has not yet been finalized, we expect the CFPB to publish a proposal soon, probably before the end of the year. Now once the CFPB publishes its final rule, we expect there to be industry litigation that could delay or block the implementation of this rule. And this litigation will likely delay the implementation of the rule until at least the second half of 2024 and maybe longer. If the proposed rule is implemented, there will be a significant impact to our P&L in the near term. However, we have a set of mitigating actions that we're working through that we believe will gradually resolve this impact a couple of years after the rule goes into effect. These choices include changes to our policies, products and investment choices. Some of these actions will take place before the rule change takes effect many will come after the rule change takes effect.

Operator:

One moment please. Our final question is a follow-up from Dominick Gabriele with Oppenheimer. Your line is open.

Richard Fairbank:

Yes, we can Dominick.

Andrew Young:

Yeah, Dominick. I can't remember who asked it earlier, but just reiterating some of those points, I think you largely answered your own question, which is there is seasonality that in part is -- or is a function of the revolve rates driven by some of the dynamics, Rich talked about over the course of the year, we did see the Fed move. And then we also saw a bit of late fees, which I would lump into the seasonality dimension. And then finally, we had one more day in the third quarter, so day count in an absolute sense, not necessarily relative to peers, which I think was the nature of the question earlier, but at least in an absolute sense. Those are the big drivers of what drove the quarter-over-quarter yield.

Operator:

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

Jeff Norris:

Thanks very much, Amy, and welcome, everybody, to Capital One's Second Quarter 2023 Earnings Conference Call. As usual, we are webcasting live over the internet. To access the call on the Internet, please log on to Capital One's website at capitalone.com and follow the links from there.

Andrew Young:

Thanks, Jeff, and good afternoon, everyone. I'll start on Slide 3 of tonight's presentation. In the second quarter, Capital One earned $1.4 billion or $3.52 per diluted common share. Pre-provision earnings of $4.2 billion were up 7% compared to the first quarter and 16% compared to the year ago quarter. Both period end and average loans held for investment increased 1% relative to the prior quarter, driven by growth in our Domestic Card business. Period-end deposits declined 2% in the quarter, largely driven by tax-related outflows. Our percentage of FDIC insured deposits grew 1% to end the quarter at 79% of total deposits. We have provided additional details on deposit trends on Slide 18 in the appendix.

Richard Fairbank:

Thank you, Andrew, and good evening, everyone. The Domestic Card business posted another quarter of strong year-over-year top line growth. Purchase volume for the second quarter was up 7% from the second quarter of last year. Ending loan balances increased $21 billion or about 18% year-over-year. And second quarter revenue was also up 18% year-over-year, driven by the growth in purchase volume and loans. Revenue margin declined 40 basis points from the prior year quarter and remained strong at 17.76%.

Jeff Norris:

Thank you, Rich. We'll now start the Q&A session [Operator Instructions]. Amy, please start the Q&A.

Ryan Nash:

Maybe to start on the margin, Andrew, where we saw some pressure. Can you maybe just talk about how to think about the margin from here? You talked about card loan run faster, which is a tailwind. But there's obviously -- rising deposit cost has been headwind. So when you put it all together, what do you see the trajectory of the margin shaking out? And embedded within that, what are your most updated expectations for deposit betas at this point? And I have a follow-up question.

Ryan Nash:

Got it. And then Rich, maybe as my follow-up, maybe just an update on what you're seeing with the consumer. When I look in the credit -- in the card book, delinquencies in the past 4 months have been rising, let's call it, 130, 140 basis points per year. And given all the growth that has come on to the books in the past 24 months, can you give us a sense for how to think about how far past 2024 level -- 2019 levels, we could be going on losses and maybe, Andrew tie in, what this all can mean for the allowance over time?

Operator:

Our next question comes from Richard Shane with JPMorgan.

Richard Fairbank:

My greatest strategic optimism, Richard, is in the card business. We've -- first of all, we've always been a big fan of the card business starting from the beginning of the company. It's not an accident that we chose the card business because we love the industry structure. We love the opportunity to leverage kind of strategies that we wanted to put in place, the information-based, technology-based strategies. And while that is something one can apply across all of financial services, it certainly has tremendous leverage in a business like the card business. So we've always loved the business.

Mihir Bhatia:

I wanted to start maybe with expenses. It has come in a little bit better than I think what we were expecting, they were down quarter-over-quarter. You mentioned -- you talked a little bit about returning to normal in your prepared remarks. And I was just wondering if you could expand on that a little bit. Was there a decision like to slow down on growth investments, pullback? Like, I guess, what changed just in terms of the expenses or the cadence of expenses through the year?

Mihir Bhatia:

Okay. And then maybe just going back to the NIM conversation. I think you talked about some of the puts and takes in the near term. But I was curious just about company-wide NIM or compared to historical, right, I mean, it wasn't atypical for Capital One's NIM to be closer to 7%, high 6s. Do you expect you'll get back there? Or have something fundamentally changed in the business, whether it's the growth in the high balance transactors or something else where you wouldn't get back there?

Operator:

Our next question comes from Betsy Graseck with Morgan Stanley.

Richard Fairbank:

Thanks, Betsy. Let me talk about the marketing, yes, thanks for commenting about the seasonality. I mean every year is different in terms of the quarterly patterns. But we pointed out this year is, it seems like a more normal year with the back half, with the more common back half, higher back half than we've had in some of the anomalous times during the pandemic. The marketing was flat compared -- in this quarter, was flat compared to the prior quarter and down 12% year-over-year. But I wouldn't draw really strong conclusions from that because as I already talked about, we're leaning into the marketing. It's just from a timing point of view of some of our marketing, it was just didn't happen to fall as much in this quarter.

Betsy Graseck:

And its growth rate expectations should be following similar patterns to the pre-COVID environment?

Operator:

Our next question comes from Sanjay Sakhrani with KBW.

Andrew Young:

Yes. So the baseline assumption and our outlook focusing, I imagine you're looking mostly for unemployment rate. So we have it increasing from the 3.6% it is today to 4.3% at the end of this year and then moving higher in the 4s, but staying in the 4s through 2024. That compares to our assumption last quarter of, I believe, it was 5.1%. But remember that our models tend to use the change in unemployment rates or the rate of job creation, which we're forecasting to come down to nearly 0, rather than the level of unemployment. And so it's not just about those factors, too, in our allowance. We're also considering downside scenarios that are much more severe than that baseline.

Sanjay Sakhrani:

Okay. Rich, I asked this question to one of your competitors earlier. But can you just pinpoint what's exactly attractive about the growth you're seeing in card today versus in the past? They are also growing at a pretty rapid rate. And obviously, you guys have been very successful at growing this business over time, but the market remains competitive. You talked about the credit normalization. There's obviously a potential for economic challenges. I'm just trying to think through the risks.

Donald Fandetti:

Yes. Rich, can you talk about what you're seeing on credit card spend growth rates recently in terms of the like-for-like account basis, I know it was sort of flat to down last quarter. And do you think that we'll continue to see moderation?

Operator:

Our next question comes from Arren Cyganovich with Citi.

Dominick Gabriele:

Rich, I was just thinking about turns in the credit cycle. What are some of the mistakes that you think card issuers make and even lenders in general? And where do you look for the weakness in the overall space of lending to give you caution when you start to see that turns in the credit cycle? And I also have a follow-up.

Dominick Gabriele:

Yeah. Thanks, Rich. I can't agree with you more on the late fee comments as well, especially access to credit, makes perfect sense. This one is not as interesting. I guess I was just looking for some help on the model. When you look at professional fees or professional service expense, it was down pretty big year-over-year while the salaries were maybe a little elevated versus seasonality. I was wondering if you brought some of those folks in-house or how to think about the professional services given that is some of the debt collection piece, I believe. And then was there a gain in the other noninterest income from the sold portfolio? Any help there would be great. And thanks for everything and the comments.

Jeff Norris:

Well, that concludes our Q&A session and our call for this evening. I want to thank everybody for joining us on the conference call today, and thank you for your continuing interest in Capital One. The Investor Relations team will be here this evening to answer further questions you may have. Have a good night, everybody.

Jeff Norris:

Thanks very much, Amy, and welcome, everybody, to Capital One's First Quarter 2023 Earnings Conference Call. As usual, we are webcasting live over the Internet. To access the call on the Internet, please log on to Capital One's website, capitalone.com, and follow the links from there. In addition to the press release and financials, we've included a presentation summarizing our first quarter 2023 results.

Andrew Young:

Thanks, Jeff, and good afternoon, everyone.

Jeff Norris:

[Operator Instructions]

Operator:

[Operator Instructions]

Kevin Barker:

I just want to follow up on the reserve build within the card portfolio. You said it in the slide presentation worsening credit trends and domestic credit cards. But at the same time, your prepared remarks said this is more of a normalization than anything else and you continue to grow. So what gives you confidence that this reserve build and the fairly rapid increase in delinquency and net charge-offs is truly a normalization as opposed to signs of further deterioration that's likely to occur.

Kevin Barker:

Okay. And then in the past, you made comments that the new growth -- the flow rates were relatively normal on a lot of your newer business. Do you continue to see that? And then also in the near term, are you still seeing the type of traction from your marketing spend, I guess, in the first quarter as you did in 2022?

Betsy Graseck:

So just want to make sure I understand on the reserve ratio. I know you already spoke a lot about it. So I just want to make sure I understand you just say yes or no. Is it fair to assume that the reserve ratio should go up every quarter where the macro stays in the current situation that we've got right now because the book that's rolling on is worse quality than the book that's rolling off. Is that fair?

Betsy Graseck:

Okay. And then the follow-up question is just on a slightly different topic, which has to do with the expense ratio. I know you mentioned that you're looking for the operating efficiency to be flat to down this year on a year-on-year basis. I'm just wondering how to square that with what you mentioned on the marketing side where it sounds like you see a lot of opportunities in card and you are planning on leaning into the marketing side. So I just wanted to square those 2 things up.

Richard Fairbank:

Yes. Well, I was going to say the same thing. So our guidance is with respect to operating efficiency ratio to be flat to modestly down relative to 2022. And we continue to put a lot of energy into that, of course. The total efficiency ratio includes also the marketing side of the business, as we've talked about. That's not part of our specific guidance. Our marketing choices are very dependent on the opportunity that we see, and Betsy -- you and most of the people on this call have known Capital One for a long time. And when we see opportunities, we really lean in on them. And so we can talk about marketing maybe on another question, but that's the efficiency point there.

Moshe Orenbuch:

Great. Rich, you had mentioned that you expected the card charge-offs to kind of reach 2019 levels by the middle of the year. You also talked a little bit about assuming higher unemployment over time. I guess, what's the -- what should we think about as the trajectory, I guess, in other words, which is 2019 a stopping point? Or is -- if your expected unemployment levels are reached, then we would expect to see those losses go up even higher.

Moshe Orenbuch:

Great. Maybe just switching gears a little bit. You mentioned the capital ratio and then the capital ratio if the AOCI were excluded or included. When you think about capital return over the next year, which one of those are you using as your base?

Richard Shane:

Andrew, I'd like to talk a little bit about the impact of the surge in deposits. When we look at the impact, it appears that it primarily runs through the corporate and other line in terms of where the NIM impact is. But the other change that I think we see is that it looks like the transfer pricing on deposits went down modestly. When we think about things going forward, should we assume that there's a continued drag at the corporate line from the elevated deposits and that because the reinvestment rate is lower, that the transfer pricing is going to be a little bit lower as well.

Richard Shane:

Understood. But actually, we've figured out a way over the years to calculate the NII on the transferred deposits through the consumer bank and it looks like they were down, and it's been very accurate over a long time. It looks like the transfer deposit rate was down about 8 basis points -- so at the consumer bank. So I'm curious, it looks like there was a drag in terms of corporate and other and actually the benefit of the bank was a little bit less attractive from an NII perspective as well.

Richard Shane:

Okay, terrific. Thank you, guys.

Arren Cyganovich:

Maybe talk a little bit about credit card purchase volumes look like they inched up a little bit during the quarter. We've heard that from others that they're seeing slowdown in purchase volume in March and into April. What are you seeing within your portfolio? And are there kind of any differences between different income demographics that you're seeing within your customers?

Andrew Young:

Yes. Let me start by talking about kind of what isn't in the disclosure that we provided because I know there's differences across various organizations. I mean as you know, Arren, that it's a little less than $4 billion and represents about 1% of our total loans, but this is our commercial office space. It is excluding, as you probably saw in the footnote, medical office and REIT and REIF medical office just has very different characteristics and so 2 does that's REIT and REIF.

Operator:

Our next question comes from Ryan Nash with Goldman Sachs.

Richard Fairbank:

So yes, Ryan, I think the best net impression despite the fact that when we look at all our credit metrics, the -- some of them, like half of them aren't sort of back to pre-pandemic levels, and half of them are. My gut feel is it's a better net impression to view them as back. And I just think the underlying effects of continuing to lean into spenders, not only at the very top of the market, but within our segments and just the emphasis that we put on spend and some of the products, the marketing, the way we manage accounts, the kind of -- the people we raise lines to, et cetera. I just think there's been a subtle shift a little more towards the spending side. So I think that might explain why a few of these metrics are behind, but behind in terms of the -- but I think I walk around with the perception that things are pretty much at the levels of where they were a few years ago.

Bill Carcache:

As a follow-up for you, Andrew, on your allowance commentary, just to make sure I have the mechanics right. If macro conditions do indeed worsen from here as you expect? And each new quarter, that comes on reflects the worse outlook than each old quarter that rolls off. Is it reasonable to expect that your reserve rate would drift higher in future quarters given that dynamic?

Bill Carcache:

Understood. That's super helpful. And then separately, Rich, I wanted to ask you about the CFPB [ lengthy ] proposal. We know it's less significant for you than it is for others who are more deeply involved in the partnership business. But as we try to think through how this may play out across the industry, can you give any perspective on the extent to which you'd expect some merchants to possibly push back against efforts by their issuing partners to renegotiate economic terms following the proposed reduction in late fees, particularly in cases where merchants expect their sales to come under pressure?

Operator:

Our next question comes from John Hecht with Jefferies.

Dominick Gabriele:

Almost to piggyback on that last question a little bit. There have been a lot of new card issuers and types of cards and payment types like P2P, debit rewards, FedNow is coming out. Could you talk about the evolving of both debit and credit card space? And how you expect the competition and offerings could change over time, not just versus, let's say, Discover Synchrony or American Express, but other payment types and how Capital One is positioned as payment preferences among consumers might change.

Operator:

Our next question comes from Sanjay Sakhrani with KBW.

Andrew Young:

Well, as I said in my talking points, Sanjay, I think that is something that we do expect to remain at least elevated compared to pre-pandemic levels. So yes, I would -- that's probably where I would leave that.

Andrew Young:

Yes. Why don't I start with the second one first, which is -- if you look at our AFS AOCI, about 40% of that will pull to par between now and the end of '24. In terms of capital targets, I absolutely would not say it's a mechanical linkage that we are thinking about our capital targets inclusive of AOCI. There's a lot of uncertainty of regulatory treatment. It is not included in our regulatory ratios at this point. I just referenced that, that is one thing that we look at in addition to a number of other factors inclusive of just economic uncertainty and our growth opportunities. And so for now, we've been operating above our target. We're going to keep an eye on those things. And as we have more certainty of the future, we have a lot of flexibility with how we return capital to shareholders, if that's appropriate.

John Pancari:

On the net interest margin front, I wanted to see if you could possibly give us some color on how you see the margin trajectory here from the 660 level just given what you said about cash balances likely to remain elevated? And then maybe how deposit pricing plays into that and how you're thinking about through cycle deposit beta at this point.

John Pancari:

That's very helpful. And then just secondly, we've seen some headlines regarding the Walmart partnership. And I don't know if you can provide a little bit of color there and where that stands, maybe can you confirm the discussions, the timing of when any change could be? And then lastly, if you can update us on any other upcoming negotiations or maturities of other types of partnerships on that front?

Operator:

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

Jeff Norris:

Thank you very much, Victor. And welcome everybody to Capital One’s fourth quarter 2022 earnings conference call. As usual, we are webcasting live over the internet. To access the call on the internet, please log on to Capital One’s website at capitalone.com and follow the links from there. In addition to the press release and financials, we have included a presentation summarizing our fourth quarter 2022 results. With me this evening are Mr. Richard Fairbank, Capital One’s Chairman and Chief Executive Officer; and Mr. Andrew Young, Capital One’s Chief Financial Officer. Rich and Andrew will walk you through the presentation. To access a copy of the presentation and the press release, please go to Capital One’s website, click on Investors and click on Quarterly Earnings Release. Please note that this presentation may contain forward-looking statements. Information regarding Capital One’s financial performance and any forward-looking statements contained in today’s discussion and the materials speak only as of the particular date or dates indicated in the materials. Capital One does not undertake any obligation to update or revise any of this information, whether as a result of new information, future events or otherwise. Numerous factors could cause our actual results to differ materially from those described in forward-looking statements. For more information on these factors, please see the section titled, Forward-Looking Information in the earnings release presentation and the Risk Factors section in our annual and quarterly reports, which are accessible at Capital One’s website and filed with the SEC. With that, I’ll turn the call over to Mr. Young. Andrew?

Richard Fairbank:

Thank you, Andrew, and welcome, everybody. I’ll begin on slide 10 with fourth quarter results in our Credit Card business. Year-over-year growth in purchase volume and loans, coupled with strong revenue margin drove an increase in revenue compared to the fourth quarter of 2021. Credit Card segment results are largely a function of our domestic card results and trends, which are shown on slide 11. In the fourth quarter, strong year-over-year growth in every top line metric continued in our Domestic Card business. Purchase volume for the fourth quarter was up 9% from the fourth quarter of 2021. Ending loan balances increased $22.9 billion or about 21% year-over-year. Ending loans grew 8% from the sequential quarter. And revenue was up 19% year-over-year, driven by the growth in purchase volume and loans as well as strong revenue margin. Both the charge-off rate and the delinquency rate continued to normalize and were below pre-pandemic levels. The domestic card charge-off rate for the quarter was 3.2%, up 173 basis points year-over-year. The 30-plus delinquency rate at quarter-end was 3.43%, 121 basis points above the prior year. On a linked quarter basis, the charge-off rate was up 102 basis points and the delinquency rate was up 46 basis points. Noninterest expense was up 12% from the fourth quarter of 2021, which includes an increase in marketing. Total company marketing expense was about $1.1 billion in the quarter. Our choice in domestic card marketing are the biggest driver of total company marketing. In our Domestic Card business, we continue to lean into marketing to drive resilient growth. We’re keeping a close eye on competitor actions and potential marketplace risks. We’re seeing the success of our marketing and strong growth in domestic card new accounts, purchase volume and loans across our card business and strong momentum in our decade-long focus on heavy spenders at the top of the marketplace continues. Slide 12 shows fourth quarter results for our Consumer Banking business. In the fourth quarter, we continued to see the effects of our choice to pull back on auto growth in response to competitive pricing dynamics that have pressured industry margins. Auto originations declined 32% year-over-year and 20% from the linked quarter. Driven by the decline in auto originations, Consumer Banking loan growth continued to be slower than previous quarters. Fourth quarter ending loans grew 3% compared to the year ago quarter. On a linked-quarter basis, ending loans were down 2%. Fourth quarter ending deposits in the Consumer Bank were up 6% year-over-year, and up 5% over the sequential quarter. Average deposits were up 4% year-over-year and up 3% from the sequential quarter. Our digital-first national direct banking strategy continues to get good traction. Consumer Banking revenue was up 10% year-over-year as growth in auto loans and deposits was partially offset by the year-over-year decline in auto margins. Noninterest expense was up 13% compared to the fourth quarter of 2021, driven by investments in the digital capabilities of our auto and retail banking businesses and marketing for our national digital bank. The auto charge-off rate and delinquency rate continued to normalize in the fourth quarter. The charge-off rate for the fourth quarter was 1.66%, up 108 basis points year-over-year. The 30-plus delinquency rate was 5.62%, up 130 basis points year-over-year. On a linked quarter basis, the charge-off rate was up 61 basis points, and the 30-plus delinquency rate was up 77 basis points. Slide 13 shows fourth quarter results for our Commercial Banking business. Compared to the linked quarter, fourth quarter ending loan balances were down 1% and average loans were flat. Ending deposits were down 1% from the linked quarter. Average deposits grew 7%. Fourth quarter revenue was down 23% from the linked quarter. The decline was primarily driven by an internal funds transfer pricing impact that was offset by an equivalent increase in the other category and was therefore neutral to the Company. Excluding this impact, fourth quarter commercial revenue would have been down about 6% quarter-over-quarter and up 2% year-over-year. Noninterest expense was up 2% from the linked quarter. The Commercial Banking annualized charge-off rate was 6 basis points. The criticized performing loan rate increased 74 basis points from the linked quarter to 6.71%, and the criticized nonperforming loan rate was up 17 basis points from the linked quarter to 0.74%. In closing, we continue to drive strong growth in card revenue, purchase volume and loans in the fourth quarter. Loan growth in our Consumer Banking business was slower compared to previous quarters as we continued to pull back on auto originations. Consumer deposits grew. And in our Commercial Banking business, ending loans and deposits were roughly flat compared to the linked quarter. Charge-off rates and delinquency rates continue to normalize across our business and were below pre-pandemic levels. Total company operating expense net of adjustments was up 2.4% from the linked quarter. Our annual operating efficiency ratio for full year 2022 was 44.5% net of adjustments, a 15 basis points improvement from full year 2021. And we expect that the full year 2023 annual operating efficiency ratio net of adjustments will be roughly flat to modestly down compared to 2022. Pulling way up, we continue to see opportunities for resilient asset growth that can deliver sustained revenue annuities. We continue to closely monitor and assess competitive dynamics and economic uncertainty. Powered by our modern digital technology, we’re continuously improving our proprietary underwriting, marketing and product capabilities. We’re focusing on efficiency improvement and we’re managing capital prudently. As a result of our investments to transform our technology and to drive resilient growth, we’re in a strong position to deliver compelling long-term shareholder value and thrive in a broad range of possible economic scenarios. And now, we’ll be happy to answer your questions. Jeff?

Operator:

Thank you. One moment for our first question. Our first question comes from line of Mihir Bhatia from Bank of America.

Richard Fairbank:

Yes. Thank you. Let me just start with a reminder of what we mean by growth math. As a general rule of thumb, losses on new loans tend to ramp up over a couple of years and then peak and then gradually come down. When we accelerate growth and especially when those new loans are added to a seasoned back book with low losses, it can increase the overall level of losses of a portfolio. We grew rapidly – for example, just looking back at when we talk a lot about growth math, we grew rapidly in 2014, 2015 and 2016, and had a particularly visible growth math effect in the wake of that growth. At that time, the large front book was adding to a back book that was unusually seasoned because it had survived the Great Recession. Given our recent rate of growth, I think it’s likely we’ll see some growth math effect again over the next few years. But I think the general normalization trend will be the bigger driver of our credit trajectory. One other thing that’s different about growth math going forward is CECL. Under the CECL accounting regime, the allowance impact of new growth are pulled forward significantly. We haven’t seen this effect for most of the pandemic, even as we have accelerated our growth because of the offsetting favorable factors in our allowance. But as our growth continues, a portion of our allowance builds going forward are intended to support that growth.

Andrew Young:

Sure Mihir. As I said in the past, we are largely consumers of economic assumptions. In this particular case for unemployment, we are assuming something that’s a little modestly higher than consensus estimates for where we will land in the fourth quarter. I think consensus is somewhere around 4.8. We’re – our baseline forecast gets up to around 5% in the fourth quarter. But it’s important to note there’s a lot of other things that go into the calculation of the reserve, things like unemployment – sorry, changes in the unemployment rate, inflation, home prices, wages, all of those factors matter as well, but our unemployment assumption is to be around 4% in the fourth quarter – sorry, around 5% in the fourth quarter.

Jeff Norris:

Hey Victor, I don’t think that’s right.

Jeff Norris:

Hey Ryan, why you don’t go ahead.

Richard Fairbank:

Okay. Thanks, Ryan. So consumer credit metrics remain strong. And of course, as we’ve seen, they’ve been normalizing steadily through 2022 and are approaching pre-pandemic levels. At first, normalization was more pronounced in some segments more than others. It was – of course – and by the way, this is always the case that front book, new originations tend to be higher. So, that would have been shocking, had it been different. But the other thing we also said and talked to investors about it was more – normalization was happening everywhere, but it was more pronounced at the lower end of the market. More recently, we’ve actually seen more uniform trend of normalization across businesses and segments, so, for example, across various FICO ranges and also across income levels. When we index them on credit metrics back to where they were before the pandemic, the sort of rest of the credit spectrum and rest of the income spectrums caught up to the, very recently in the last few months, to the lower end. So really, if I pull on that, it looks like the normalization is pretty consistent across the board. And – yes, go ahead, Ryan.

Richard Fairbank:

So, you asked various competitors are forecasting or talking about different times at which things cross 2019 levels. I think at Capital One, we’re not making specific predictions on that. But I think the key thing I would have you look at is the delinquency metrics. Delinquency metrics are the best single predictor of where things are going to go in the near term. And in fact, if we look at flow rates, we can see that very early flow rates into delinquency buckets are pretty normalized. So, we’re not giving specific guidance. But we would say, look at the credit metrics, look at the dynamics across other metrics, but we feel this is – it’s clearly normalizing as we see it.

Richard Fairbank:

Yes. Ryan, our efficiency outlook is exactly the same as it was last quarter. If you recall, actually, we guided to the – for full year 2022 for efficiency to be flat – basically kind of flat to 2021, and then modestly down for 2023 relative to 2021. What happened is that ‘22 came in a little bit lower. So, our guidance of flat to modestly down, it’s the same outlook as we had before. And so, there’s not big investments behind that. It’s a continued journey of Capital One to lean into our opportunities to continue to invest in the tech opportunities that we see and the opportunities to create breakthroughs in the marketplace and continue to transform how we work. But pulling way up the sort of story if you kind of pull way back on operating efficiency, the journey that where we’ve driven 440 basis points of improvement from 2013 – well, through 2019. And then we had the whole pandemic thing. But if I pull way up the gradual operating efficiency improvement is what we are continuing to drive for through the leveraging of our tech transformation even as we continue to invest.

Betsy Graseck:

So two questions. One, just as we think about the margin and the net interest margin, interest margin outlook, – can you give us a sense as to how you’re thinking about deposit betas and how that’s likely to grow here over the course of the year. I noticed you talked a little bit earlier about deposit growth was really strong. Maybe give us a sense as to which types of deposits you’re really leaning into at this stage. And then help us understand how asset yields are likely to trend given – forward curve, I’m assuming is the base case, but tell me if you have a different point of view on that. Thanks.

Betsy Graseck:

Okay. That’s super helpful color. As a follow-up, I just wanted to get a sense as to how you’re thinking about the outlook for marketing, obviously, a critical driver of growth, and I know it’s been something that you’ve been very successful with in generating that top of wallet customer. But just wanted to see how we should think about that investment as we go into the next year with this NIM headwind, et cetera. Thanks.

Operator:

Our next question comes from the line of Bill Carcache with Wolfe Research.

Richard Fairbank:

Well, what we have said, Bill, is there are lots of metrics to look at, and I can even talk to you about a few – some of the others we’re looking at as well. But number one, that we would point our investors to look at is delinquency. And delinquency entries and individual delinquency flow rates have – we see the normalization happening there, as I mentioned earlier. And we think the there continues – it’s interesting the – when you look at the delinquencies themselves and most of the credit metrics, they continue to just keep on moving toward what we’re calling sort of normalization. Normalization, of course, is not any precise point. But there are also a number of other things that we look at that I think show sort of the strength of where this thing is headed. And one is on the vintage curves from new originations. They continue to be pretty flat month after month. They’re, of course, lagged by several months, but pretty flat. And in – when we compare individual segments to where they were back in the pre-pandemic period. It’s pretty much on top of each other. So, that is a good sign. We continue to look at our payment rates, which continue to be elevated. We like elevated payment rates that we’ve assumed they’re going to normalize part of the way down to where they were before. But of course, there’s been some mix shift towards more spender within Capital One’s portfolio. But payment rates continue to be strong. The percent of customers making just the minimum payment is still below pre-pandemic levels. The percent of customers making full payments is above pre-pandemic levels. Revolve rate is roughly flat relative to last year and remains below pre-pandemic. So, these are all things that are positive indicators. But I do want to say also, again, there’s been some mix change in our own portfolio with a bit of a shift toward the heavier spenders. So, many of these metrics may not fully get back to where they were pre-pandemic. But if we pull up on this, what we see is – nothing we see is surprising. It would be consistent with a consumer coming off of some of the extreme stimulus and some of the extreme pullbacks in the pandemic and returning to more normal behavior. And I think the delinquency metrics are certainly leading indicators of that trajectory.

Jeff Norris:

Before you go, we’re getting a lot of background noise, Bill. Could you go on mute?

Richard Fairbank:

So, a phrase that I’ve often used is the tip of the spear in the transformation of banking is payments, both on the consumer and the commercial side. And the reason I say this is that first of all, it’s very prone to significant changes in technology, and also, it’s not as heavily regulated a space as much of banking is. You don’t have to be a bank holding company to be doing a lot of those things. And that’s actually the area that we have seen certainly a lot of traction in – by some very successful tech company. So, Capital One has – we continue to support the various technology players who have developed payment innovations, and we continue to develop innovations of our own. There were some news out about in the news today, in fact, about potentially a new wallet coming out. We are 1 of 7 co-owners of EWS. And we’re one of the thousands of banks that use EWS. But on that one, we really don’t have any specific comments to get ahead of the EWS management team on that.

Don Fandetti:

Rich, I was wondering if you can talk a little bit about your thoughts on auto credit. And then, as a follow-up, what you’re seeing on credit card spend, in particular, heavy spenders and whether or not they can sustain for travel and spend numbers.

Don Fandetti:

Okay. And then on the credit card spend, same story. Are you seeing moderation? And can you talk about heavy spenders trends?

Operator:

Sanjay Sakhrani with KBW.

Andrew Young:

Sure, Sanjay. In terms of thinking about the capital that we have moved down over the course of the last couple of years from – in the 14 to we hit a low point of 12.1, a couple quarters ago. But as we sit here today, we’re just looking at the actual and forecasted levels and the earnings and growth and in particular, economic conditions, and there’s some pretty wide error bars around those factors, particularly with respect to growth and economic uncertainty. And so, we feel like at this moment in time that it’s good to be a little bit more on the conservative side with risk management of managing that capital. But clearly, we have the flexibility around our capital decisions under SCBs. And so – and I don’t know, Rich, if you wanted to make any comments about repurchases as well.

Sanjay Sakhrani:

So, should we assume sort of the fourth quarter pace as a good run rate or just not assume anything?

Operator:

Our next question comes from the line of Arren Cyganovich with Citi.

Richard Fairbank:

Yes. Arren, yes, marketing – the marketing story has several components to it. One is just the – and an important part of that is the sort of real-time response to the opportunities that we see. And we continue – and especially talking about card and of course, card is where most of the marketing is. But, we continue to see attractive growth opportunities really across our business and are leaning into them. So that – and it’s corresponded with some expansion in opportunities that are just a byproduct of our tech transformation, and it’s just more access points, more channels, more better credit models that give a little bit deeper and wider access to opportunities and more granularity. The more granularity that we get from our models, actually, the more we can separate the attractive customers from the less attractive and it allows us to lean in more. So, the marketing – the pursuit of the real-time opportunities we see is an important part of the marketing, and that is going very well. The second important driver, of course, is the continued traction we’re getting in our really 10-year journey to drive more and more upmarket with focus on heavy spenders. And I think back to when we launched the Venture card in 2010. And – but of course, this journey – and we’ve been declaring for years that the pursuit of the top of the market is not something that is an opportunistic one of in and out. And it is much more about working backwards from what it takes to win with heavy spenders and then investing to be able to do that. And that’s about great products with heavy reward content, great servicing, exceptional digital experiences but also more and more of the experiences that are consistent with the very high end lifestyle and so on. So, there have been a bunch of investments there. Most of that – not all of it, but a lot of that shows up in marketing. That also has a significant upfront component in terms of not only the direct marketing and the brand building, but also the early spend bonuses that go right through the marketing line when we – at the early stage of these accounts. So, that’s something that we’ve been growing and sustaining over the last number of years. We love the traction that we’re getting. And so, we continue to lean into that. And then again, the national bank, where I just want to comment, we are really pleased with the national bank that we’ve built. This is a – we are the really only kind of full service national bank that is – doesn’t have a national quest to – through acquisition to continue to grow. In other words, of all the banks our size or even smaller, the realistic path to growth is to do that through mergers and acquisitions, our path is an organic one. We’ve invested quite a bit to create full digital capabilities for almost everything you can do in a branch to be able to be done by a customer digitally. And so that our growth story is not just about savings accounts, but it’s very much about checking accounts as well. And this is our quest we’ve been on for some number of years to build a national bank. That also is – that’s physical distribution light and marketing heavy. So a bunch of things kind of come together to create the pretty big marketing levels that we have now, but we feel very good about the traction that we’re getting.

Operator:

Our next question comes from the line of Richard Shane with JP Morgan.

Andrew Young:

Well, there’s a number of factors, Rick, that will play into coverage ratio. So, why don’t I just pull up and lay out the key pieces and forecast assumptions of our allowance. And I will get to your kind of seasonal balance point in a moment. But I think it’s important to lay out all of the component parts rather than just talk about one individual one since all of them will affect where coverage goes from here. So, the first part of the allowance is we’re using models to estimate the next 12 months of losses. And the early period of this forecast is generally more accurate because, as Rich was talking about earlier, we can look at the existing delinquency inventories and flow rates, beyond those months we incorporate in the economic assumptions, they become a more significant driver of expected loss content. I referenced that in the answer to the first question that was asked on the call, but the error bars around the loss content widened the further we go out over the course of the year. The second factor impacting the allowances, we start from the year one exit rate for losses and then assume a reversion to a long-term average over the following 12 months. And then, the third thing is we net forecasted recoveries against the loss estimates for all of those periods. And so, on top of all of those assumptions, we then put qualitative factors in places where we believe modeled outcomes have limitations. And so, we end up putting all of those pieces together to evaluate the allowance. The open-ended product of credit card is different than closed-end loans as we go through those mechanics because with closed-end loans, we’re reserving for estimated loss content for the account. But in a revolving product like card, we’re only able to reserve for the loss content related to the balances that are on the books at the end of the quarter as opposed to the projected loss content for the account. So getting to your question then, when we have elevated seasonal balances in the fourth quarter, we expect a portion of those balances to pay down very quickly. And therefore, those specific balances are likely to have very, very low loss content given the life of the balance is far shorter than the life of the account. So all else equal, the coverage ratio in the fourth quarter has a bit of natural downward pressure from that elevated denominator as you suggest. But looking ahead, there’s a bunch of factors that can impact where the allowance goes from here beyond that single effect. In periods where future losses may increase we would replace the low loss content of the current quarter with the projected higher loss content in a future period. And for what it’s worth, those assumptions also then carry into that reversion period. As we have growth with seasonally adjusted balances, Rich mentioned this before, CECL significantly pulls forward that allowance cost of growth. And then the third factor is coming out of a period where we have unusually low losses like we’ve experienced, over the last couple of quarters, you have lower recoveries to offset the forecasted loss content. So, all of those things can put upward pressure on allowance but we can also have revisions to our economic assumptions, to delinquency flow rates, to just our overall loss content. And so, there’s pressures in the other direction. And so, I appreciate your bearing with me for a long-winded complex answer, but I think we all saw the complexity and pro-cyclicality of CECL play out during the pandemic when we had to make a bunch of assumptions as the pandemic played out, we built a sizable allowance only to release virtually all of it over the subsequent quarters. And so, it’s just a very difficult thing to predict given all of the assumptions at play, which is why we are trying to focus you on Mako [ph] and having delinquencies as a leading edge indicator of Mako because that is ultimately where the real economic cost is felt.

Operator:

Our next question comes from the line of Moshe Orenbuch with Credit Suisse.

Richard Fairbank:

Yes. So Moshe, I’m glad you asked the question because I would not want the net impression to be – I think what you were saying is that, is our marketing primarily just in the upscale customer segment? Differentially relative to years ago, we’ve certainly had a shift to the higher end in terms of our marketing. The marketing is also so expensive at that end. And then, also the marketing at the higher end tends to, in some sense, lift the boats across the franchise. So, the marketing at the higher end is carrying a lot on its shoulders, Moshe. But, we do a lot of marketing in the mass market of the card business, including in the higher end of the subprime segment of the market. This is – our strategy here is – well, it changes all – we tweak it around the edges all the time. We’ve been doing this for pretty much approaching three decades now, at the lower end of the market. And the marketing there is direct marketing, stimulus response, very information based. And so, the marketing machine that we’ve built, which has been enhanced by technology here is definitely leaning into that opportunity. And I do want to say that the – we continue to get good traction in the subprime and prime parts of the marketplace, even as we certainly relative to 10 years ago, have a lot more marketing going on at the top of the market. So, there’s quite a bit going on, and we feel good about the traction there.

Richard Fairbank:

Yes. The way this tends to happen is it happens in one little segment, one micro segment at the margin in response to things that we see going on there. I use this phrase a lot, trimming around the edges. And you’ve heard me use that for many, many years. And this is something that we always do or something we’re expanding around the edges. The net feel of these days is we’re doing more trimming around the edges than expanding around the edges, but it is – so it’s less about at the top of the house saying, we just believe we should do – obviously, at the top of the house, we’re looking at all the macro things, but we’re linking what we see in the macro level to what we’re seeing right there in real time or the earliest we can see from our credit metrics. And then, using the technology we’ve continued to invest so heavily in to have a more and more granular diagnosis. And at an earlier time than ever before diagnosis of where anything is deviating from the trajectory that we would expect. And then one is sort of the diagnosis of deviation. And the second thing, of course, is trying to get sort of a root cause, understanding of what may be driving that. And this is something that we continue to put a lot of energy into and it has led us to trim some – there are some things that we have seen degrade a fair amount around the edges. They’re fairly small in the overall size of things, but we’re certainly glad when we see them. And then, what we try to do is to link data that we see to behavior that – excuse me, to sort of an explanation of what’s going on from a customer and credit dynamic to be able to be – it makes total sense. So therefore, as things play out, it’s less likely – and let’s say, we go more into a downturn, it’s less likely on the card side that you would see a big pullback. The kind of things you’d see is more trimming around the edges, more reduction of the credit lines that are given, and that would be more how it would play out.

John Pancari:

On the – regarding the reserve build in terms of the drivers of the reserve build this quarter, I know you cited loan growth, you cited the macro backdrop, and you sited credit normalization. Is there any way to help parse out how much of the build of $1 billion is attributable to loan growth versus macro versus credit normalization?

John Pancari:

Okay. No, I get it. That’s helpful. The normalization point, if I could just ask one more thing on that, was there anything about the normalization? And I appreciate the color you already gave. But is there anything about the normalization that you’re seeing that is kind of faster than expected, or any change like that that necessitated the size of the build this quarter?

Jeff Norris:

And I think that concludes our Q&A for the evening. Thank you for joining us on the conference call today, and thank you for your continuing interest in Capital One. Investor Relations team will be here later this evening if you have any further questions. Have a good night.

Operator:

Ladies and gentlemen, this concludes today’s conference call. Thank you for participating, and you may now disconnect.

Jeff Norris:

Thank you very much, Liz, and welcome, everyone to Capital One’s third quarter 2022 earnings conference call. As usual, we are webcasting live over the Internet. To access the call on the Internet, please log on to Capital One’s website at capitalone.com and follow the links from there. In addition to the press release and financials, we have included a presentation summarizing our third quarter 2022 results. With me this evening are Mr. Richard Fairbank, Capital One’s Chairman and Chief Executive Officer; and Mr. Andrew Young, Capital One’s Chief Financial Officer. Rich and Andrew are going to walk you through this presentation. To access a copy of the presentation and press release, please go to Capital One’s website, click on Investors and click on Quarterly Earnings Release. Please note that this presentation may contain forward-looking statements. Information regarding Capital One’s financial performance and any key forward-looking statements contained in today’s discussion and the materials speak only as of the particular date or dates indicated in the materials. Capital One does not undertake any obligation to update or revise any of this information, whether as a result of new information, future events or otherwise. Numerous factors could cause our actual results to differ materially from those described in forward-looking statements. For more information on these factors, please see the section titled, Forward-Looking Information in the earnings release presentation and the Risk Factors section in our annual and quarterly reports accessible at the Capital One website and filed with the SEC. Now, I’ll turn the call over to Andrew.

Richard Fairbank:

Thanks, Andrew, and good evening, everyone. I’ll begin on Slide 10 with third quarter results in our Credit Card business. Year-over-year growth in purchase volume and loans coupled with strong revenue margin, drove an increase in revenue compared to the third quarter of 2021. Credit Card segment results are largely a function of our Domestic Card results and trends, which are shown on Slide 11. In the third quarter, strong year-over-year growth in every top line metric continued in our Domestic Card business. Purchase volume for the third quarter was up 16% year-over-year and up 47% compared to the third quarter of 2019. Ending loan balances increased $22 billion or about 22% year-over-year. Ending loans grew 5% from the sequential quarter, and revenue was up 21% year-over-year, driven by the growth in purchase volume and loans as well as strong revenue margin. Strong credit results continued in the quarter. Both the charge-off rate and the delinquency rate are well below pre-pandemic levels and continue to normalize. The Domestic Card charge-off rate for the quarter was 2.2%, up 84 basis points year-over-year. The 30-plus delinquency rate at quarter end was 2.97%, 104 basis points above the prior year. On a linked quarter basis, the charge-off rate was down 6 basis points. The delinquency rate was up 62 basis points from the linked quarter. Non-interest expense was up 28% from the third quarter of 2021, including an increase in marketing. Total company marketing expense was $978 million in the quarter. Our choices in Domestic Card marketing are the biggest driver of total company marketing trends. In our Domestic Card business, we continue to lean into marketing to drive resilient growth. We’re keeping a close eye on competitor actions and potential marketplace risks. We’re seeing the success of our marketing and strong growth in purchase volume, new accounts and loans across our Domestic Card business. And strong momentum in our decade-long focus on heavy spenders continued in the third quarter. Heavy spender marketing includes early spend bonuses driven by continued strong account growth and spending as well as investments in franchise enhancements like our travel portal and airport lounges. In the third quarter, our marketing continued to drive strong growth in heavy spender accounts and strong engagement and spend behaviors with both new and existing customers. Our decade-long quest to build our heavy spender franchise has brought with it significantly increased levels of marketing. But the sustained revenue, credit, resilience, and capital benefits of this enduring franchise are compelling, and they’re growing. Slide 12 shows third quarter results for our Consumer Banking business. In the third quarter, we continued to pull back on growth in auto in response to competitive pricing dynamics. Many auto lenders appear to have reflected rising interest rates in their marginal pricing decisions, but others have not, and they have gained market share and pressured industry margins. We chose to pull back on auto originations, which declined 28% year-over-year and 20% from the linked quarter. Driven by the decline in originations, Consumer Banking loan growth is slower than previous quarters. Third quarter ending loans grew 5% to the year ago quarter. On a linked-quarter basis, ending loans were essentially flat. Third quarter ending deposits in the Consumer Bank were up 2% year-over-year. Consumer Banking deposits were flat compared to the sequential quarter. Consumer Banking revenue was up 7% year-over-year as growth in auto loans was partially offset by the year-over-year decline in auto margins and the effects of our decision to completely eliminate overdraft fees. Non-interest expense was up 13% compared to the third quarter of 2021, driven by continuing investments in the digital capabilities of our auto and retail banking businesses and the increased marketing for our digital national bank. The auto charge-off rate and delinquency rate continued to normalize in the third quarter. The charge-off rate for the third quarter was 1.05%, up 87 basis points year-over-year. The 30-plus delinquency rate was 4.85%, up 120 basis points year-over-year. On a linked quarter basis, the charge-off rate was up 44 basis points, and the 30-plus delinquency rate was up 38 basis points. Slide 13 shows third quarter results for our Commercial Banking business. Third quarter ending loan balances were up 2% from the sequential quarter, driven by growth in selected industry specialties. Average loans were up 7% in the quarter. Ending deposits were up 6% from the second quarter. Average deposits were down 2% in the quarter. Third quarter revenue was up 12% from the linked quarter. Non-interest expense was also up 12%. Commercial Banking credit remained strong in the third quarter. The Commercial Banking annualized charge-off rate was 5 basis points. The criticized performing loan rate was 5.97%, and the criticized non-performing loan rate was 0.57%. In closing, we continued to drive strong growth in card revenue, purchase volume and loans in the third quarter. Loan growth in our Consumer Banking business was slower compared to previous quarters as we pulled back on auto originations, and our Commercial Banking business posted another growth – another quarter of strong revenue growth. Credit results remain strong across our businesses. Charge-off rates and delinquency rates are below pre-pandemic levels and credit continues to normalize. We typically see an increase in operating expense over the second half of the year – of any year. This year, the timing of some of our investment opportunities drove a larger than usual third quarter increase in operating expense, which was up 11% from the second quarter. We expect that this year’s linked quarter increase in fourth quarter operating expense will be smaller than the approximately 7% linked quarter increase we’ve seen on average over the last five years. Turning to operating efficiency ratio. Relative to full year 2021, we expect annual operating efficiency ratio to be roughly flat in 2022 and modestly down in 2023. As usual, our operating expense and efficiency expectations exclude any potential adjusting items. Pulling way up, we’re in a strong position to deliver compelling long-term shareholder value as modern digital technology continues to transform banking. We continue to see opportunities to lean into marketing and resilient asset growth that can deliver sustained revenue annuities. Our growth opportunities are enhanced by our digital transformation. We continue to closely monitor and assess competitive dynamics and economic uncertainty. Powered by our modern digital technology, we’re continuously improving our proprietary underwriting, marketing and product capabilities. And we’re managing capital prudently to put ourselves in a position to thrive in a broad range of possible economic scenarios. And now, we’ll be happy to answer your questions. Jeff?

Operator:

[Operator Instructions] Our first question comes from the line of Kevin Barker with Piper Sandler. Your line is now open.

Richard Fairbank:

Yes, Kevin, so thank you for your question. Let me just pull up and just comment on normalization. First of all, the context of where we are because consumer credit remain strong, as you can see from the metrics. And our Domestic Card losses in the third quarter were about half of pre-pandemic levels. And our delinquencies are – and we’ve often said this, unmistakably normalizing. But right now, they remain about 20% below pre-pandemic level. There is not a certain point where we – we don’t look out there and say if the rate of growth of delinquencies exceeds a certain number, then we will pull back. But let me comment, first of all, that we’ve said for a long time, Kevin, and I know you know this that normalization is bound to happen. It would be shocking if it didn’t happen. And we’ve been talking for a bunch of quarters now saying it started you needed a magnifying glass to see it and we talked about that. And now, of course, you can see it in the numbers, and it’s definitely normalizing. What – the rate at which it’s normalizing is, frankly, more gradual than we generally expected, but we didn’t really have a road map to know exactly what pace it would normalize, we just believe so strongly that it would. So what we do with – rather than say there’s a certain number that would lead us to make a certain decision, we, of course, look at this with what’s happening with every segment and micro segment of our business and how it’s performing. We look for starters at the back book, and that is normalizing as – well, frankly, like everything here, more gradually than expected, but still the back book is clearly normalizing as well. We then look for other patterns of normalization. And here are some of the patterns that we see, Kevin. It’s more pronounced in the front book of new originations than in the existing back book. And by the way, it would be – that would be shocking if it weren’t the case because 100% of the time in our history, front books normalize faster during periods of change. And we – so that – but we confirm again that front books are normalizing faster. It also seems that normalization is more pronounced at the lower end of the market. And of course, those are the populations that improve more and more quickly earlier in the pandemic. Lower income consumers may also be feeling more pressure from inflation. So these trends shouldn’t be surprising. But at the – at kind of a high level, what we see is very normal and is – and basically, the way we’re leaning into the marketplace is very consistent with what we’ve been saying for a bunch of quarters now. But what we do at the micro level, at the segment level and the sub-segment level is look at the various metrics, both on the back book and on the front book to see what the patterns are, and we’re comfortable with what we see in terms of front book vintage curves as a general point and across a vast majority of all the segments that we operate in. We have – around the edges, we’ve done a little bit of dialing back in particular pockets where metrics are normalizing a little bit faster. We also sort of pull up and say, what are the kinds of – what are the risks that we would expect to see at a time like this with orthogonal looks through our book. And we brainstorm on what all the risk we could see, we go hunt for them. And in a couple of places, we have seen effects that caused a little bit of trimming around the edges, but the collective amount of trimming in the card business is pretty small relative to the overall scale of our growth. As you know, the – in the auto business, we have pulled back. At the very same time, we’re leaning into the card business, we’re pulling back in the auto business, but maybe I’ll save that for another question.

Richard Fairbank:

Sorry, the changes in the corporate – can you repeat that last part, changes in corporate outlook.

Richard Fairbank:

Well, the – we, of course, at the whole time, we’re doing the micro examination of one segment at a time. We are looking at the macro trends. It’s really striking the level of inflation. And as I’ve often said, we collectively, everybody on this call, none of us – and – nobody across the business world has really lived something like this since the early ‘80s. So we’re especially looking for effects that might be different this time, Kevin, with respect to inflation and the – how that can play out. But – so we’re always on the lookout, but the net impression, I would want to leave here is very much the same impression that I’ve left with you the last many quarters here.

Operator:

Our next question comes from Ryan Nash with Goldman Sachs. Your line is now open.

Richard Fairbank:

Hey, Ryan.

Richard Fairbank:

So I don’t think we’re here to declare a – I want to make a comment about marketing seasonality. It’s not as – that’s not as much of a physics kind of thing as certain things like credit and delinquency seasonality with consumers. I think – so I’m not here to declare changes in the pattern of seasonality and marketing. The big driver of our marketing is the opportunities that we see as well as the investment in building businesses like our heavy spender business and our national bank. With respect to the drivers of operating efficiency improvement, just kind of pulling up on the journey that you mentioned. We’ve been focused about this and talking with investors about operating efficiency for years. And we’ve achieved a 440 basis point improvement from 2013 through 2021 even as we have invested in a comprehensive transformation of our technology over that same period of time. And we know that investing in technology modernization and driving for efficiency improvements are on a shared path. Technology investment helps our revenue growth and helps drive productivity improvements. And beneath the surface of the high level of investment has been significant productivity gains from modernizing our tech stack, eliminating legacy vendor costs, driving customers to digital and driving more automation in the company. And at the same time, of course, we have continued to lean into this technology journey and the opportunities that it generates. And the – so it’s a very shared path. And I think that our guidance for modest improvement in 2023 is a reflection of continued traction in growth and operating productivity while also continuing to invest in future opportunities.

Andrew Young:

Sure, Ryan. Recall, it’s probably helpful to start with a little bit of history here. And you’ll recall, our NIM was compressed during the pandemic, largely driven by a balance sheet that was skewed much more towards cash and securities than card loans. And as we progressed over the course of the pandemic, you saw that begin to normalize. And so just by way of evidence, a year ago, our NIM was, I think, 6.35%. I had said in my prepared remarks. And at that point, card was closer to 27%. I think of our interest-earning assets and cash and securities was something like 33%. Cards now shifted to be just over 30% and cash and securities are down to 27%. So I share that to say we’re now operating much closer to our pre-pandemic balance sheet mix. And our NIM is roughly in a similar spot to where it was before the pandemic. So to your question then about rate risk, you can see in our Q, our rate risk disclosures, we’re really only slightly asset sensitive at this point. And keep in mind that’s relative to forwards. So the 150 basis point projected moves over the next couple of months are already sort of embedded in that neutral baseline. And so as I think about the future, there’s a number of things that can impact NIM, not to mention seasonality, but the credit impacts on revenue, competitive pressure on loan margins and deposit pricing. But as we sit here today, I think a lot of the things that we pointed to in the past in terms of balance sheet mix at least have largely run their course. So hopefully, this gives you some sense of the primary forces that play with NIM.

Operator:

Our next question comes from Betsy Graseck with Morgan Stanley. Your line is now open.

Richard Fairbank:

Hey, Betsy.

Andrew Young:

Okay. I’ll take, I think, what I heard is the first two questions there, Betsy, in NIM and funding, and then I’ll turn it over to Rich to talk about buyback. So on the NIM side and the asset portion of that, I just want to clarify what will drive it from here. I do think if you look back historically, cash and securities were roughly 25% of our balance sheet. We’re a little bit above that. But given our needs for liquidity and how we use the investment portfolio, I would think that something in that 25% range of the size of the balance sheet is a reasonable assumption for that. Then on the loan side, it really becomes a matter of just marketplace dynamics, what we see as opportunities for growth. And so whether card is growing more quickly than, say, auto or commercial, its percentage of the rest of the balance sheet could drift up. But I don’t want to give any indication of how we think that’s playing out, and there’s certainly not a target that we have in terms of the asset side of the balance sheet. On the funding side, we aim to have a diversified mix of funding that’s largely skewed to retail deposits, which, again, historically has been something, I think, around 70% of our overall funding, and we have commercial deposits and brokered CDs and then securitization and wholesale funding – other sources of wholesale funding. And so again, I would say if you look back to pre-pandemic levels over history compared to where we are today, we’re kind of back in a relatively similar place there. So I think I heard in your question, not just mix, but how do we fund growth from here in making marginal decisions for funding incremental loan growth. We’re going to weigh a variety of factors, our customers’ appetite for different deposit products and our ability to build customer relationships with them, the economics of different funding instruments, the duration of funding or liquidity needs. So we’re going to throw all of that into our decision-making process to figure out how to fund. But I also think it’s important to think about those funding choices at the margin. It’s not just about the liability side. We also have asset growth choices at the margin, too. So we’re just going to look at the total integrated economics of both sides of the balance sheet to make those choices. And I’ll hand it over to Rich to talk about buybacks.

Jeff Norris:

Next question, please.

Sanjay Sakhrani:

Thanks. Rich, you mentioned you’re keeping an eye on your competitors. I’m just wondering if you could just drill down a little bit on that given you’ve had a lot of fintechs in the space growing. And obviously, it’s a very unpredictable next 12 months to 18 months. So maybe you could just talk about domestic card and auto as well because you mentioned a number of different variables there? Thanks.

Sanjay Sakhrani:

I guess, competition, but also how it might have an impact on credit as we look forward because you’ve had some new players underwriting as well.

Sanjay Sakhrani:

Great. Thanks very much.

Operator:

Our next question comes from Moshe Orenbuch with Credit Suisse. Your line is now open.

Richard Fairbank:

Well, Moshe, as usual, that’s a very insightful question. Let me just comment a little bit on – just a little bit of a calibration of how we think about credit in the card and auto businesses. The first point would be, it’s normalizing in both places. But overall, credit has been strong in both our card and our auto business. But there are three effects that are driving faster normalization of auto losses, then of card losses. And the first is that normalization tends to be more pronounced in the front book of new originations. That’s a universal thing that applies across our consumer businesses. But because the front book – in auto, the front book replaces the portfolio much more quickly. Then in card, overall portfolio losses should normalize more quickly in the auto business. The second is that recovery rates are much higher in auto than in card. Now recoveries tend to be lagged relative to charge-offs. But – so some of the exceptionally strong performance we saw in auto, including the quarter where we actually had negative charge-offs, that was boosted by higher recoveries from earlier charge-offs. Now that we’ve seen low charge-offs for an extended period in auto, the raw material for future recoveries is coming down, even if the recovery rate stays strong, and this will have a bigger impact in auto than in card. But it will be an effect in both businesses, and it’s not something that I think gets a lot of airtime out there, but recoveries are definitionally about what’s happening with , if you will, the back book of recoveries. And in both of our businesses, the back book, which has been the byproduct of the great news over the last few years in terms of credit to back book, there’s just less to work with, but it’s especially an effect in auto. And finally, auto vehicle values are now normalizing, which is a headwind relative to a year ago and contributes to the pace of credit normalization in that business. And given where used car prices have been going to sort of record levels over the past year, the general direction of that is much more likely to be down rather than up so that also contributes to a difference between those two businesses.

Andrew Young:

Moshe, let me take the first part of that, and then I’ll hand it over to Rich in terms of asset sensitivity. You can see last quarter’s Q, and I would expect it will be a fairly similar number this quarter, an up 100 basis point shock. Last quarter was 70 basis point impact to 12-month NII, which is something like a couple of $100 million of NII. And again, that’s a shock relative to forwards. So, I just want to clarify that when you talk about us being asset sensitive, we’ve already baked into our baseline the anticipated, call it, 150 basis points of additional Fed moves over the next couple of quarters. So achieving what I just described suggests the shock beyond that. But I think you should walk around with at this point, we are pretty neutral from an asset sensitivity. So, I just wanted to clarify that before Rich provides the broader answer.

Jeff Norris:

Next question please.

Arren Cyganovich:

Thanks. I was hoping you could talk a little bit about the card acquisitions that you’re having today and you’re a full spectrum lender, but your, I guess – I would characterize, I guess, newer in the heavy spend section and with your Venture X card. Are you acquiring more of that segment? And then also have you been pulling back at all in maybe revolver nonprime segment recently?

Arren Cyganovich:

Thank you.

Operator:

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

Richard Fairbank:

Yes. Well, Don, we feel great about our move to the public cloud. It’s a central part of our technology transformation. Probably the most salient part of it, but certainly not the only part. But this transformation has involved – a transformation in terms of the tech talent within the company, bringing lots of thousands of engineers in-house, bringing more of the tech investment inside the company as opposed to reliance on vendors, so many of them industrywide who are old school legacy vendors and quite expensive. Is that – at that it’s involving – involved transforming how we build software. It’s involved going to the cloud, it’s involved transforming our data ecosystem. It’s involved modernizing all of the applications on which the company is built. So there’s been a lot to this journey and we’re a decade into it. The benefits are all around us and it really starts in many ways with benefits in the tech business itself, where our technology teams are moving faster, getting products to market sooner. And our software engineers are just way more modern tech stack to work with and automated software delivery methods and can also to your cloud point benefit by the tremendous, not just, well, the tremendous and continuing innovations that are happening on the cloud. Our customer experiences to continue to get more and more just better and better. And some of the – we notice it in net promoter scores and occasional awards that Capital One wins. The new products we’ve been able to innovate things like Capital One Shopping, virtual cards, dealer navigator, instant issuance. Many things have been very benefited there. I mentioned earlier the ability to get some transformational improvements on underwriting, fraud management, and a lot of things behind the scenes that leverage the power of big data and machine learning in real time. That has been very beneficial. Our transformation also is changing how we work inside Capital One, our new marketing platforms. Part of the reason that we’re investing more these days in marketing is really the power of mass customized machine learning driven marketing. So that’s – it’s been a good thing. And it’s also, as I mentioned earlier had a bunch of benefits in terms of enhancing productivity of the business. And the final thing I would say there Don, is that the tech transformation is really helping us get more of the thing we needed to start with to make it happen and that was talent. The biggest elephant in the room for corporate America who sit on legacy tech stacks is you need lots and lots of very modern, best-in-class tech talent in order to drive that transformation in a world where the scarcest, the tightest and most competitive labor market I’ve seen in the history of building Capital One is the competition for really modern tech talent. The transformation requires so much of that talent. And one of our rewards is now as we get on the other side of the canyon and really have a tech stack build like the very modern tech companies, the ability to attract talent is accelerating. And that’s part of a virtuous cycle. That is why we did it, is why we went on this journey, and it’s something that we see to this very day, and it’s also why we continue to invest more in the opportunities that we see.

Operator:

Our next question comes from Rick Shane with JPMorgan. Your line is now open.

Andrew Young:

Sure, Rick. Well, let me just start by talking about the inputs to the allowance. I just think it’s important to sort of ground on the mechanics, the entirety of the mechanics, not just the piece that you called out. So, the first factor of course is just the size of the balance sheet. The second is really aligned to what you were just talking about, but it’s kind of a combination of factors, and that is really our outlook for future losses, net of recoveries against that balance sheet. So that starts from a place of looking at what is in the delinquency buckets today, which gives us a really good view of how the next, say six months or so of losses are going to play out. And then after that period, we have an assumption of continued normalization from those unusually strong levels. And then beyond that horizon, as I think, under CECL, there’s just an assumption of a gradual revision to historical averages. And then the third point is we apply qualitative factors against all of those expectations to account for uncertainties around economic downsides and inflation related risks. And so when we think about the allowance going forward, yes, I mean, today’s allowance of course does incorporate in what is in the delinquency bucket today and what that implies. But as we go forward, the allowance is really going to primarily be determined by just the growth in the balance sheet. And we saw that impact the allowance this quarter. But then secondly, every quarter we continue to normalize, we are going to be replacing lower loss content of the current quarter with higher loss content of future quarters, which again, will be informed by how the delinquencies are playing through each successive quarter. So there’s a number of other modest considerations, but that’s really the two big forces at play. And hopefully that gets to kind of the nature of your question.

Andrew Young:

Well, you’re going to follow along that path because then when we get to a quarter from now, we’re going to apply all of those same factors to the allowance at a quarter from now. And the change in the allowance is just going to be the quantum of allowance we have today compared to the quantum of allowance that we would have doing those exact same things a quarter from now.

Operator:

Our next question comes from Bill Carcache with Wolfe Research. Your line is now open.

Andrew Young:

Why don’t I take the first one, and I must admit, I’m not quite sure I followed the second. So I’ll see if Rich followed that. Otherwise we’ll come back to you for clarification. But in terms of unemployment, I’m not going to provide specific metrics or economic assumptions. I will say though, Bill, we are generally consumers of like industry forecast as opposed to developing our own. So I think you could look at general consensus expectations for all of the key economic variables and assume that kind of roughly approximates what underlies our economic views on those variables. And I’m looking at Rich to see if he followed the second part of your question.

Bill Carcache:

Okay.

Bill Carcache:

Yes.

Jeff Norris:

Next question, please.

Mihir Bhatia:

Hi, thank you. I think just – follow. But I wanted to ask about the – I appreciate your comments earlier about you’re enthusiastic about all of card lending so full spectrum. But just given the recent focus on the higher spend and the more transactor-type customers, I was wondering if you think that growing that portion a little bit, maybe that portion has been growing at an outsized rate, how is that growth of that subsegment potentially change the card portfolio’s performance through the cycle or in a downturn?

Mihir Bhatia:

Thank you. And then just if I could ask just about the tech investments that you’ve been making. Can you talk about just how do they improve your ability to flex expenses as the competitive or macro environment changes? Thanks.

Jeff Norris:

Next question, please.

Dominick Gabriele:

Hey, can you hear me? This is Dominick from Oppenheimer.

Andrew Young:

Yes.

Richard Fairbank:

Dominick, that’s a great question. I can only sort of speculate here, but the most striking thing about the global financial crisis and Great Recession that – from a payment hierarchy point of view is what we saw with people literally walking away from their mortgages and what was really high on the payment hierarchy was auto loans. And we – and that may be a kind of a more universal resilience point on the auto side because people still have to drive to work. And so that’s probably more of a sustaining insight. I think that the, we got to look at student loans and think about where – I think we’ve already observed that’s pretty low in the payment hierarchy and trends these days and forgiveness and various things there would probably ensure that’s on the lower end. Another one that I would probably just speculate to add to the hierarchy this year is this time around is fintechs. And I think the fintechs who don’t report to the credit bureaus may have enjoyed their stealth opportunity to grow, but that’s probably not lost on the consumers. And so I think one of the reasons, we’ve really leaned harder into having spending be the anchor part of a consumer credit card relationship is that it’s not only a healthier place to be from the consumer point of view. But I think, counting on that credit card and making sure that you’ve got that in a downturn, that helps from a payment hierarchy point of view.

Richard Fairbank:

Thank you, Dominick. These are all great questions. We – in case you haven’t noticed, I have a pretty deep conviction about the benefit of these tech investments, and that’s not just how I feel, that’s how all of us collectively feel here at Capital One. And the benefits of that tech investment are so comprehensive, although the company inside this company, we can see them everywhere. And they do so enhance how we work, the ability to manage risk, the ability to serve customers, the ability to create new products, the ability to grow. And so we do – and because we see such benefits, we are continuing to lean into tech investments. And as I mentioned earlier, there’s sort of under the surface quite a bit of productivity gain coming from the tech investment. But on the other hand, at the same time, we’re leaning in pretty hard into tech investments such that it’s – the effects are not that dramatic. In fact, over close to a decade, there’s been a more gradual kind of improvement in operating efficiency. We – there’s always the opportunity if times get really tough to pull back on tech investments, but we are not viewing these like luxury investments and just what to do on a sunny day because they are very materially transforming the opportunities of this company and the ability to manage risk and the ability to weather the very downturn that might motivate that reduction in investment.

Operator:

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

Danielle Dietz:

Thank you very much, Melinda, and welcome, everyone, to Capital One's second quarter 2022 earnings conference call. As usual, we are webcasting live tonight over the Internet. To access the call, please log on to Capital One's website at capitalone.com and follow the links from there. In addition to the press release and financials, we have included a presentation summarizing our second quarter 2022 results. With me today are Mr. Richard Fairbank, Capital One's Chairman and Chief Executive Officer; and Mr. Andrew Young, Capital One's Chief Financial Officer. Rich and Andrew will walk you through this presentation. To access a copy of the presentation and press release, please go to Capital One's website, click on Investors, then click on Quarterly Earnings Release. Please note that this presentation may contain forward-looking statements. Information regarding Capital One's financial performance and any forward-looking statements contained in today's discussion and the materials speak only as of the particular date or dates indicated in the materials. Capital One does not undertake any obligation to update or revise any of this information whether as a result of new information, future events or otherwise. Numerous factors could cause our actual results to differ materially from those described in forward-looking statements. For more information on these factors, please see the section titled Forward-Looking Information in the earnings release presentation and the Risk Factors section in our annual and quarterly reports, both accessible at the Capital One website and filed with the SEC. Now I'll turn the call over to Andrew.

Richard Fairbank:

Thank you, Andrew, and good evening, everyone. I'll begin on slide 10 with second quarter results in our Credit Card business. Year-over-year growth in purchase volume and loans, coupled with strong revenue margin, drove an increase in revenue compared to the second quarter of 2021. Credit Card segment results are largely a function of our Domestic card results which are shown on slide 11. Our Domestic Card business posted another quarter of strong year-over-year growth in every top line metrics. Purchase volume for the second quarter was up 18% year-over-year and up 48% compared to the second quarter of 2019. Ending loan balances increased $19.7 billion or about 21% year-over-year. Ending loans grew 6% from the sequential quarter, and revenue was up 21% year-over-year, driven by the growth in purchase volume and loans, as well as strong revenue margin. Strong credit results continued in the quarter. Both the charge-off rate and the delinquency rate continued to gradually normalize, but remain well below pre-pandemic levels. The Domestic Card charge-off rate for the quarter was 2.26%, a 2 basis point improvement year-over-year. The 30-plus delinquency rate at quarter end was 2.35%, 67 basis points above the prior year. On a linked quarter basis, the charge-off rate was up 14 basis points, roughly in line with normal seasonal patterns. The delinquency rate was up 3 basis points from the linked quarter, which we -- when we typically see modest seasonal improvement. Non-interest expense was up 28% from the second quarter of 2021, driven by an increase in marketing. Total company marketing expense was about $1 billion in the quarter. Our choices in Domestic Card marketing are the biggest, but not the only driver of total company marketing trends. The primary non-card driver of increased marketing is in our Consumer Banking business, where we're marketing to drive deposit growth and build customer franchise in our digital-first national banking strategy. In our Domestic Card business, we continue to see opportunities to book accounts and loans that can generate resilient and attractive returns. And we continue to lean into marketing to drive growth and build a franchise across our Domestic Card businesses. We're keeping a close eye on competitor actions and potential marketplace risk. And as always, we underwrite to a worsening scenario, even as we lean into marketing. We're seeing the success of our marketing and strong growth in purchase volume, new accounts and loans across our Domestic Card business. And we continue to gain traction in our decade-long focus on heavy spenders. In the second quarter, heavy spender marketing includes increased early spend bonuses driven by strong first quarter account growth and spending as well as investments in franchise enhancements like our travel portal and airport lounges. As a result of our marketing, we posted strong growth in heavy spender accounts and strong engagement and spend behaviors with new and existing customers. We're gaining share and building a long-term franchise with heavy spenders at the top of the market. Pulling up, our heavy spender franchise has a different economic mix than some of our other card businesses. It has significantly higher upfront costs of brand building, marketing and promotions and investments in high-end experiences. However, the long-term economics are compelling. And as our heavy spender franchise has grown significantly in recent years, its impact has quietly and gradually changed several Domestic Card metrics and financial results. Heavy spender credit losses are low, which lowers overall Domestic Card loss rates, all other things being equal. Naturally high heavy spender payment behaviors are a key driver of our long-term trend of increasing domestic card payment rates, and high payment rates go hand-in-hand with strong credit performance. Heavy spender attrition is very low, and that's been a factor in our strong Domestic Card loan growth. Heavy spenders have a particularly large impact on increasing purchase volume and have been a major driver of strong Domestic Card purchase volume growth that has generally exceeded loan growth over time. This spend velocity has driven increases in net interchange revenue in absolute terms and as a percentage of total revenue. And these interchange fee revenues -- revenue annuities are strong and sustained over very long-term customer relationships. Our heavy spender franchise generates financial results that are attractive, less volatile and very resilient. As a result, the heavy spender business requires less capital and delivers strong long-term returns on capital. Pulling way up, our 10-year quest to build our heavy spender franchise has brought with it significantly increased levels of marketing, but the sustained revenue, credit resilience and capital benefits of this enduring franchise are compelling, and they're growing. Slide 12 shows second quarter results for our Consumer Banking business. In the second quarter, choices we made in our auto business impacted several Consumer Banking trends. We pulled back on growth in auto in response to competitive pricing dynamics. As you'd expect, many auto lenders have raised pricing as rising interest rates drove higher marginal funding costs, but some others have kept pricing relatively flat. These competitors have gained market share and pressured industry margins. We chose to pull back on auto originations, which declined 20% year-over-year and 12% from the linked quarter. As we pulled back on originations, the year-over-year growth of ending loans in the Consumer Banking business decelerated to 9% in the second quarter. On a linked quarter basis, ending loans were up 1%. Second quarter ending deposits in the Consumer Bank were up 2% year-over-year, aided in part by the transfer of a small portfolio of deposits from our commercial bank. Consumer Banking deposits declined 1% from the sequential quarter. Consumer Banking revenue was essentially flat compared to the prior year quarter as growth in auto loans was offset by the effects of our decision to completely eliminate overdraft fees and the year-over-year decline in auto margins. Auto margin compression was primarily driven by the increase in our marginal funding costs, resulting from rapid interest rate increases and the aggressive competitor pricing that, I just discussed. Noninterest expense was up 15% compared to the second quarter of 2021, driven by the increased marketing for our digital national bank and continuing investments in the digital capabilities of our auto and retail banking businesses. Second quarter provision for credit losses swung from a net benefit of $306 million in the second quarter of 2021 to a net expense of $281 million. We added to the allowance for credit losses in our auto business in the quarter compared to an allowance release in the year ago quarter. The auto charge-off rate and delinquency rate continue to gradually normalize, but we remain well below pre-pandemic levels. The charge-off rate for the second quarter was 0.61%, up 73 basis points from the unsustainably low, in fact, negative quarterly charge-off rate a year ago. The 30-plus delinquency rate was 4.47%, up 121 basis points year-over-year. On a linked quarter basis, the charge-off rate was down 5 basis points, and the 30-plus delinquency rate was up 62 basis points. Slide 13 shows second quarter results for our Commercial Banking business, which delivered strong growth in loans and revenue in the quarter. Second quarter ending loan balances were up 9% from the sequential quarter. Average loans increased 5%. Growth in selected industry specialties drove our growth. Ending deposits were down 14% from the first quarter and down 10% year-over-year, driven in part by the transfer of a small portfolio of deposits to our retail bank that I mentioned a few moments ago, as well as rate-driven runoff as some customers withdrew deposits in search of higher returns. In the second quarter, deposit balances were also impacted by seasonal outflows. Second quarter revenue was up 3% from the linked quarter and 26% from the prior year quarter. Non-interest expense was down modestly from the linked quarter and up 16% year-over-year. Provision for credit losses increased $214 million from the first quarter, largely driven by a build in the allowance for credit losses. Commercial Banking credit remained strong in the second quarter. The Commercial Banking annualized charge-off rate was 14 basis points. The criticized performing loan rate was 5.3%, and the criticized non-performing loan rate was 0.7%. In closing, we continued to drive good growth in card revenue, purchase volume and loans in the second quarter. Consumer Banking loan growth continued, albeit at a slower pace. And our Commercial Banking business posted strong growth in loans and revenue. Credit results remain across our businesses, with charge-off rates and delinquency rates well below pre-pandemic levels even as credit continues to gradually normalize. And we continued to return capital to our shareholders. For more than three decades, we have hardwired resilience into every underwriting and growth choice we make in good times and bad. And we've steadfastly focused on building an enduring franchise. Sticking to these core tenets, we've demonstrated resilience through several cycles. We've been in a strong position to seize opportunities as markets evolve and as cycles played out. And we've delivered significant value over the long-term. And we're living by these same core tenets today. We continue to see opportunities to lean into marketing and resilient asset growth that can deliver sustained revenue annuities long after the normalization trends and cyclical credit pressures play out. We're confident in the choices we're making. As we continue to closely monitor and assess competitive dynamics and increasing economic uncertainty, our credit results remain strong. We're staying focused on the most resilient businesses and sub-segments. And we're continuing to hone the proprietary underwriting and product structures that have driven our resilience through prior cycles. All of these growth in credit risk management choices are enhanced by our technology transformation. We're managing costs tightly even as we continue to invest in transforming our technology and digital capabilities that are the engine of future growth and efficiency. While the imperatives and marketplace opportunities and risks impact the timing, we remain focused on delivering operating leverage over the long-term powered by growth and digital productivity gains. And we're managing capital prudently to put ourselves in a strong position to weather a broad range of possible economic scenarios and to emerge in a strong position to capitalize on opportunities that are often generated as cycles play out. Pulling way up, we believe that our long-standing core tenets and the choices they drive today are putting us in a strong position to continue to deliver resilience and compelling long-term shareholder value as the sweeping digital transformation of banking continues. And now we'll be happy to answer your questions. Danielle?

Operator:

Thank you. And we'll go first to Ryan Nash of Goldman Sachs.

Richard Fairbank:

Good evening Ryan.

Richard Fairbank:

Ryan, we -- on the early bonuses, I mean, that's really tied to how hard we lean into Venture X, for example. I mean we have early spend bonuses pretty much across our rewards business. So, let me separate a little bit. So, we have the launch of Venture X, and some companies launches are sort of a quarter long kind of thing. We continue to lean into that. You've seen our national advertising continue on that. So, the early spend bonuses continue as part of that and then also their early spend bonuses at a stable rate for the -- some of our other rewards products as well. With respect to the economy, we -- it's not lost on us that there's a lot of noise out there in the economy. And we -- every day, we talk about this and there's always uncertainty. There's probably, I think, more uncertainty at the moment and probably on average, and that's not lost on us. We -- so we don't make a top-of-the-house decision that says we're going to spend this much on marketing because these decisions are very -- decisions at the margin based on models and estimated loss rates and putting resilience factors in there and response rates and a lot of things. There has been some trimming around the edges in card quite a bit more so in auto, by the way, as I talked about just a few minutes ago. But staying with card for a minute, there has been some trimming around the edges. But generally, the kind of core target segments that we've been going after, we are continuing to feel good about and lean into. So, I think your net impression should be that while we have a very watchful eye on the economy and obsess about it every day, our underwriting decisions underwrite systematically. At Capital One, we underwrite to a worsening scenario. And so we feel good about our originations. And -- but one thing about our tech transformation that has really been good also is it allows us to move and adapt much more quickly. In most -- in companies and frankly, in some of our past years, when we decided to turn, it sometimes took quite a bit of time to move the whole machine. We've been able to create a much more adaptive and responsive infrastructure at Capital One. And so that's also helpful in a time of uncertainty. But net-net, we feel good about the opportunities, and we're leaning into them.

Operator:

Thank you. Next, we'll hear from Kevin Barker of Piper Sandler.

Danielle Dietz:

Rich, I think you need to unmute yourself.

Operator:

Next, we'll hear from Bill Carcache of Wolfe Research.

Richard Fairbank:

Okay. So -- well, thanks. Let's just kind of pull up and talk about inflation. We haven't seen sustained inflation in the US in many decades, but it's been running above 5% for over a year now, and it reached, I think, 9.1% in June. And producer prices are increasing even faster. And of course, the Fed has started raising rates in response, and the market expects further increases. So what I want to do is maybe list some of the potential impacts to our business of sustained inflation, and it's mostly negative. So if the economy suffers as a result of efforts to slow inflation, we will certainly feel that. And the biggest way that we would feel that would be in consumer credit losses. Consumers also were already starting to feel the impact of price inflation outpacing wage growth. Also in our lending business, higher cost of funds could put pressure on our margins, especially if lenders don't adjust pricing in response. And we're already seeing that in the auto business. By the way, in the card business, just as a comparison, I've been struck by generally the responsiveness of the pricing in the card business to be responsively adaptive to interest rates. I mean it's a variable rate product, but also just in terms of offered rate by competitors, that seems to have moved much more dynamically than what we've seen selectively in auto. Then other things about the impact of interest rate increases, let me think. We've got – you can sometimes see lower demand for credit products just because headline pricing seems higher even if real pricing isn't. And in our underwriting – well, let me just say one thing, and you put your finger on it. Well, a striking thing right now is, how low the unemployment rate is. And we have certainly seen in our modeling of credit over all the decades, we've been doing this at Capital One. From a macroeconomic point of view, the biggest direct driver of credit losses is unemployment. And so, we start in a very strong position now. But to your point, there's irony in the strength of this position, and it could contribute to some of the affects you identified. I do want to also just -- while we're on the subject of inflation, though, just highlight a few favorable effects of inflation as well. Existing debt levels will decrease in real terms in a period of sustained inflation. High vehicle values, which support auto credit, may be more sustainable in a high inflation environment. But in total, I think the effects tilt definitely in the negative direction. So, it's a tough thing to model collectively all these things, but what we do is we start with sort of a general theory of how this stuff works. We try to incorporate it into the decision-making that we do. And then like a hawk, we look for these various effects to happen and are prepared to be responsive. And in fact, just the one last thing I want to say is, I've always felt that it's very hard to predict economic cycles. I don't think Capital One is in a better position than anyone else to predict economic cycles. Sometimes you've seen us weigh in, in predicting credit cycles, which can be correlated, but not the same thing as that. But the most important thing that -- what I take away from years of doing this is, it's very hard to predict these cycles. The key thing is to underwrite to a resilience level to make it very successfully through cycles, and that's been a cornerstone of our strategy, actually since the founding day of Capital One.

Danielle Dietz:

Great. Next question, please?

Rick Shane:

Thanks for taking my question. Hey, Rich, when I sort of piece together everything that I'm hearing and looking at the numbers, if we particularly focus on the growth and the reserve movements at the consumer lending business, the Credit Card business and the commercial lending business, it kind of feels like you are diverging in your outlook in terms of the Credit Card business outperforming the other businesses likely from a cost perspective. Is that because of competitive pressures, or is there something in line that you're seeing that would cause that divergence?

Rick Shane:

Thank you.

Operator:

Thank you. Next, we'll hear from Sanjay Sakhrani from KBW.

Andrew Young:

Sure, Sanjay. Why don't I start with beta and just give a little bit of detail there and then feather it into the broader NIM question you asked. And so when you look at our deposits, roughly 15% are a combination of commercial and brokered, which have higher betas, but really the 800-pound gorilla is the -- something like 85% of the deposits that are in retail. So, I'll focus mostly there. And I think looking back on history as a guide is a bit of a challenge in this cycle. So we've already seen 150 bps of move in the first six months. We're expecting another 200 or so over the next. And in the last rising cycle, it took three and a half years to just get to 200 in that first year. We moved 50 in total versus the 350 we might see this year. And so I share that context to say the faster and larger set of moves, coupled with quantitative tightening and the possibility of some competitors being a bit more aggressive to fund their loan growth, all will play into how competitors behave and the overall level of deposits. And so if I look at the last rising cycle, we were at something like 40%. And the last falling cycle, we were around 50. But given the factors that I described a moment ago, it's hard to really pinpoint exactly what's going to transpire looking ahead, but I would think our cumulative beta could be around or slightly above the last rising cycle. And so in line with what you've seen historically, beta moves pretty slowly in the beginning to the first set of hikes. And so this quarter, you saw that we were high single-digits, but the planned rate hikes for the second half of the year are likely going to pressure that beta up. And so, when I take that and factor it into our NIM outside, obviously, of the quarterly day count effects, the tailwinds to our NIM are going to be the asset mix moving towards higher yielding assets like card. And what we saw in this quarter, by the way, ending card loans grew faster than average, so the more that card is growing relative to other asset classes and the cash and investment portfolio and then just the broader asset yield increases from the higher interest rates. Those are things that are going to be tailwinds. The headwinds are going to be the deposit costs, not only from the rising deposit betas that I just described, but also wholesale funding costs to the extent that we do more of that and depending on credit spreads in the marketplace. But there isn't one dominant force in those factors from where we stand today. So I think they're all going to be pushing against one another and we're going to see where that nets out in the coming quarters.

A – Richard Fairbank:

Thanks, Sanjay. Capital One, we've said for a number of years that unlike most banks, we're not on a quest to go buy other banks and build our national banking franchise that way. So -- and that really where we would do acquisitions, it would really be of -- either basically of tech companies themselves that bring a tech capability or fintechs that bring a tech-based capability right in our business sweet spot. So we have -- for that reason, plus our great interest in learning from fintechs, we have been very keen observers of that marketplace. We -- you haven't seen much in the way of acquisitions from Capital One, because of the breathtaking pricing that fintechs have had. But certainly, to your point, as the pricing has crashed in that marketplace, we continue to watch the market carefully. And our strategy remains the same that we believe that Capital One is kind of an ideal buyer for fintechs, because we have a modern tech stack and we built a company that feels very much like a tech company and I think is very well suited to acquire and assimilate and provide opportunity to the talent that comes in a tech acquisition. So that's sort of the principle behind it. So we continue to look in the marketplace, and that's the primary acquisition interest that Capital One has, which is kind of different from, I think, most banking institutions.

Operator:

Thank you. Next, we'll hear from Don Fandetti of Wells Fargo.

Richard Fairbank:

So Don, thank you for that. Let's start by just talking about the consumer. Certainly, I'm certainly struck by the starting point of where the consumer is because the US consumer remains quite healthy. We see sustained improvements in consumer balance sheets coming out of the pandemic. Let's see. Debt servicing burdens remain near like mutli decade lows. The savings rate has dipped below pre-pandemic levels over the past few months, but cumulative savings over the last two years remain a significant positive still for consumers on average. We see higher bank account balances and higher household net worth across the income spectrum. Labor market demand remains exceptionally strong with record numbers of job openings and solid wage growth. And in our own portfolio, we see continuing strength in our delinquency roll rates and recovery rates. Despite times of credit normalization, our credit metrics remain strikingly strong by any standard -- any historical standards. So that is the context that we see. But to your point, the big headwinds for consumers are price inflation and higher interest rates. And inflation could erode the excess savings consumers accumulated through the pandemic, especially if price increases continue to run ahead of wage growth. Higher interest rates could push up debt servicing burdens, although this effect is muted by the fact that most existing household debt is in fixed rate mortgages and auto loans. So I'm struck by, though, the strong starting point for consumers as we look into the potential -- the headwinds of inflation and more economic trouble. And I would contrast this, of course, to the Great Recession or the global financial crisis, which -- where the consumer was in a much weaker position going into that. Now the strength of the consumer is pretty much across the board -- across the -- from the top of the market into sub-prime. And so I think the thing most striking is how sort of universal it is. But it is also the case that normalization is a bit more pronounced in sub-prime than it is higher in the market. But these – these populations, though, Also more and more quickly earlier in the pandemic. So, I think these trends shouldn't be surprising. So, I think certainly – now FICO score and income are not the same thing. But a lot of times, people tend to state them in the same breadth. Our subprime business is definitionally about people with FICO scores below a certain level. But I think that the consumer starts in a strong place, then we should probably expect normalization to be a little faster on the lower end. And interestingly, if you switch to kind of income, which is a different cut than FICO certainly, and income, I'm struck by the fact that consumers – the wage growth for the lower income consumers is -- they're kind of the one category, the lower income consumers, where their wage growth has been keeping up with inflation, but that won't necessarily continue, but that's also a position of strength. But pulling way up, I think we could see normalization a little faster in subprime. I think, in fact, we already can see very modestly that effect. But of course, in our underwriting and the whole business model of Capital One, that's also where we have built in kind of the biggest buffers of resilience. So, we feel good about that part of the marketplace. We feel good really across the credit spectrum and to lean into our marketing opportunity.

A – Danielle Dietz:

Great. Next question, please.

Moshe Orenbuch:

Great, thanks. Rich, you had mentioned that you saw good kind of increases in prices for new accounts across the spectrum. But at the same time, I guess, rewards and upfront bonuses have also been very high. Can you just talk about how you're seeing the kind of competitive environment, particularly for the higher-end consumer where you're spending a lot of that effort?

Moshe Orenbuch:

And maybe just as a follow-up. The yield for the last four quarters in your card business has been pretty flat both the yield on the loans up a little bit this quarter, I guess, with the rate increases that you talked about. But what is it really going to take to get that to be a higher number? Is it -- are you going to see more revolving from some of your high-end consumers? Is it -- what is it going to -- to get that -- the level of revenue growth and profitability enhanced?

Moshe Orenbuch:

Thanks very much.

Operator:

Our next question comes from Arren Cyganovich of Citi.

Andrew Young:

Well, Arren, it depends a bit on the degree to which they're revolving versus just pure transacting. But if they're transacting, they're bringing quite a bit of interchange and relatively low outstandings over time. So, that very well could prove to be a net positive and not create the downward pressure that you just described. And not to mention the fact that in doing so, it creates less of a capital need. And so it ends up being over time at least a pretty capital-efficient business, which is one of the reasons why we've been on this decade-long journey to build that franchise.

Andrew Young:

Well, I'm not going to comment specifically on what we see so far this quarter. But let's take a step back and think about the industry context and then talk a little bit about our strategy there. As you look at the industry, you brought up, at least in retail, the tax outflow phenomenon that happened in the second quarter, and we certainly felt a little bit of that. But where industry deposit balances go from here, first thing is at least history, whether it repeats itself, would indicate that the rate of deposit growth drops in rising rate environment. And in this particular cycle, the Fed fund rates, as I mentioned to Sanjay's question, are both larger and faster than previous ones, and the Fed shrinking its balance sheet. So who knows? I guess this is good as yours, but I think we could see a scenario where industry-wide deposits are flattish to down in the near-term. And so what we choose to do there is really trying to optimize our balance sheet across a number of different dynamics of liquidity and funding and tenor and pricing. And so we feel like we're in a great position to compete in that industry backdrop with simple straightforward competitive products that have a great user experience. But where our deposits ultimately go from here in the context of that industry will be a function of our deposit needs and competitive dynamics.

Danielle Dietz:

Next question, please.

Betsy Graseck:

Hi. Good evening.

Betsy Graseck:

Andrew, just wanted to double-click on the comments that you're making around the high transaction -- high transactors having lower capital intensity, and that's a function of them just being higher credit quality, shorter duration on the book? Is that basically what it's about, or is there something more there?

Betsy Graseck:

Yes. Okay. And then when you were going through the deck on the capital slide, I think you mentioned 11% is your CET1 target. And so, given that there is such demand for spend and borrow right now, should we take your comments to mean that it's unlikely that you'll be doing buybacks in the near future while this high loan growth period is upon us?

Betsy Graseck:

Okay. Thank you.

Operator:

Our next question comes from Dominick Gabriele of Oppenheimer.

Danielle Dietz:

Rich, you need to unmute, please.

Dominick Gabriele:

Great. And then maybe just as a follow-up. Given – just to take some of the conversation one step further around deposits and funding, given the amount of card growth that you're seeing and building out this franchise, but the slowing deposit growth, is it reasonable to assume that as a management team, you would really look to focus on growing this business first, regardless of perhaps the funding cost, trade-off between deposits and non-deposit funding because really, you're just gaining more customers within your card franchise and you would make that trade? Thanks so much.

Danielle Dietz:

Great. Well, thank you, everyone, for joining us on this conference call today, and thank you for your interest in Capital One. The Investor Relations team will be here this evening to answer your questions, if you have any, and have a great evening.

Operator:

And that does conclude today's conference. We do thank you for your participation. You may now disconnect.

Jeff Norris:

Thanks very much, Keith. And welcome everybody to Capital One’s first quarter 2022 earnings conference call. As usual, we are webcasting live over the Internet. To access the call on the Internet, please log on to Capital One’s website at capitalone.com and follow the links from there. In addition to the press release and financials we have included a presentation summarizing our first quarter 2022 results. With me this evening are Mr. Richard Fairbank, Capital One’s Chairman and Chief Executive Officer; and Mr. Andrew Young, Capital One’s Chief Financial Officer. Rich and Andrew are going to walk you through this presentation. To access a copy of the presentation and press release, please go to Capital One’s website, click on Investors, then click on Quarterly Earnings Release. Please note that this presentation may contain forward-looking statements. Information regarding Capital One’s financial performance and any other forward-looking statements contained in today’s discussion and the materials speak only as of the particular date or dates indicated in the materials. Capital One does not undertake any obligation to update or revise any of this information, whether as a result of new information, future events or otherwise. Numerous factors could cause our actual results to differ materially from those described in forward-looking statements and for more information on those factors, please see the section titled Forward-Looking Information in the earnings release presentation and the Risk Factors section in our annual and quarterly reports, accessible at the Capital One website and filed with the SEC. Now, I will turn the call over to Mr. Young. Andrew?

Richard Fairbank:

Thank you, Andrew, and good evening, everyone. I will begin on slide 10 with our Credit Card business. Year-over-year growth in purchase volume and loans coupled with strong revenue margin drove an increase in revenue compared to the first quarter of 2021. Credit Card segment results are largely a function of our Domestic Card results and trends, which are shown on slide 11. Our Domestic Card business posted strong year-over-year growth in every topline metric in the first quarter, as we continued our longstanding strategic focus on winning with heavy spenders and building a franchise across the business. Purchase volume for the first quarter was up 26% year-over-year and up 47% compared to the first quarter of 2019. The rebound in loan growth accelerated with ending loan balances up $16.9 billion or about 19% year-over-year. Ending loans were down just 1% from the sequential quarter, better than the typical seasonal decline of around 7% and revenue was up 20% year-over-year, driven by the growth in purchase volume and loans, as well as strong revenue margin. Domestic Card revenue margin for the first quarter was 18.3%. Revenue margin continued to benefit from spend velocity, which is the purchase volume and net interchange growth outpacing loan growth. Spend velocity is driven by the traction we are getting with heavy spenders. The margin also includes a gain from a Card partnership portfolio sale in the quarter. Credit results remain strikingly strong. The Domestic Card charge-off rate for the quarter was 2.12%, a 42 basis point improvement year-over-year. The 30-plus delinquency rate at quarter end was 2.32%, 8 basis points above the prior year. Gradual credit normalization continued in the first quarter. On a linked-quarter basis, the charge-off rate was up 63 basis points and the delinquency rate was up 10 basis points. Non-interest expense was up 33% from the first quarter of 2021, driven by an increase in marketing. Total company marketing expense was $918 million in the quarter. Our choices in Domestic Card marketing are the biggest, but of course, not the only driver of total company marketing trends. We continue to see opportunities to book Domestic Card accounts and loans that can generate resilient and attractive returns and we continued to lean into marketing to drive growth and build our Domestic Card franchise. Consumer balance sheets and labor markets are strong, and in our own portfolio, credit results continued to be well below pre-pandemic levels and they are normalizing gradually. We are keeping a close eye on competitor actions and potential marketplace risks. And as always, we are underwriting to worsening scenarios, even as we lean into marketing. Our Domestic Card marketing is evolving and increasing as our decade long focus on heavy spenders continues to gain traction. We increased marketing to grow the heavy spender franchise and drive the successful launch of Venture X. Growth in new accounts and robust customer spending drove an increase in early spend bonuses, which show up in our marketing expense and part of our marketing is focused on strengthening our heavy spender franchise with investments in our new travel portal and airport lounges. And looking across the whole company, our digital transformation is generating new business opportunities like Capital One Shopping in our Card business and Auto Navigator in our Auto business. And modern technology infrastructure and capabilities are driving our digital first National Direct Banking strategy in Consumer Banking. We are marketing to continue to propel these growing digital businesses. Our marketing is paying-off across these opportunities. We posted very strong growth in Domestic Card purchase volume, new accounts and loans. We are gaining share and building a long-term franchise with heavy spenders. And away from the Card business, we are growing auto originations and deepening dealer relationships with Auto Navigator and our National Direct Banking business is winning with customers and driving growth. Speaking of our Auto and Retail Banking businesses, let’s move to slide 12, which shows that strong loan growth in our Consumer Banking business continued in the first quarter. Driven by auto, first quarter ending loans increased 14% year-over-year in the Consumer Banking business. Average loans also grew 14%. First quarter auto originations were up 33% year-over-year. On a linked-quarter basis, auto originations were up 20%. Our digital capabilities and deep dealer relationship strategy continued to drive year-over-year growth in our Auto business. We continue to closely monitor competitive and credit dynamics in the auto marketplace. First quarter ending deposits in the Consumer Bank were up $4.4 billion or 2% year-over-year. Average deposits were also up 2% year-over-year. Consumer Banking revenue grew 2% from the prior year quarter, driven by growth in auto loans, partially offset by declining auto loan yields and the early effects of our decision to completely eliminate overdraft fees. The year-over-year decrease in auto loan yields was driven by a mix shift toward prime loans and our focus on booking higher quality loans within credit segment. Across the auto lending industry, the pace of price increases has not kept up with the pace of rising interest rates. The decline in loan yields coupled with the pace of pricing changes has compressed margins in our Auto business. First quarter provision for credit losses swung from a net benefit of $126 million in the first quarter of 2021 to a net expense of $130 million. The allowance for credit losses in our Auto business was flat in the quarter compared to an allowance release in the year ago quarter. The auto charge-off rate and delinquency rate are gradually normalizing, and remain strong and well below pre-pandemic levels. The charge-off rate for the first quarter was 0.66%, up 19 basis points year-over-year. The 30-plus delinquency rate was 3.85%, up 73 basis points year-over-year. On a linked-quarter basis, the charge-off rate was up 8 basis points and the 30-plus delinquency rate was down 47 basis points. Slide 13 shows first quarter results for our Commercial Banking business, which delivered strong growth in loans, deposits and revenue in the quarter. First quarter ending loan balances were up 17% year-over-year, driven by growth in selected industry specialties and increasing utilization. Average loans were up 15%. Ending deposits grew 9% from the first year, excuse me, from the first quarter of 2021, as middle market and government customers continued to hold elevated levels of liquidity. Quarterly average deposits increased 12% year-over-year. First quarter revenue was up 16% from the prior year quarter. Non-interest expense was also up 16%. Commercial Credit performance remains strong. In the first quarter, the Commercial Banking annualized charge-off rate was 6 basis points. The criticized performing loan rate was 5.7% and the criticized non-performing loan rate was 0.8%. In closing, we continued to drive strong growth in Domestic Card revenue, purchase volume and loans in the first quarter. We also posted strong Auto and Commercial growth. Credit is gradually normalizing and remains strikingly strong across our businesses and we continue to return capital to our shareholders. Pulling way up, we are well-positioned to capitalize on the accelerating digital revolution in banking. Our modern technology stack is powering our performance and our growth opportunity and it’s the engine of enduring value creation over the long-term. And now, we will be happy to answer your questions. Jeff?

Operator:

Thank you. We will take our first question from Sanjay Sakhrani with KBW. Please go ahead.

Richard Fairbank:

Okay. Hey, Sanjay. Yeah. So let’s just talk about the health of the consumer. I think the U.S. consumer continues to be strong. While the savings rate has reverted back to pre-pandemic levels, the cumulative impact of savings over the last two years is still a significant positive. We see this in higher bank account balances and higher household net worth and it is true across the income spectrum. Now, of course, the bulk of government stimulus is now behind us and most industry forbearance programs are winding down. But I think we will see some sustained benefits from consumer deleveraging through the pandemic. Debt servicing burdens are lower than they have been in decades, supported both by deleveraging and by low interest rates. On the other side of the consumer balance sheet, labor market demand remained strong. So in our own portfolio, Sanjay, we see continuing strength in roll rates, cure rates and recovery rates, and even as we see signs of normalization, our credit metrics remain strikingly strong by any historical standard. There are emerging headwinds as well, for example, high price inflation. The inflation has the potential to erode the excess savings, consumers accumulated through the pandemic, especially of price increases continue to run ahead of wage growth and also higher interest rates would push debt servicing burdens back up. But if we pull up on the whole, I’d say consumers are in good shape coming out of the pandemic relative to most historical benchmarks. In fact, the -- I am just learned over the years that, I have got a lot of confidence in how -- what consumers learn from downturns and scares that they have and the choices that they make and I think we are just seeing very rational behavior by consumers. I worry more about markets and how competitors operate and lending practices and things like that, we can save that for another question. But we still feel good about the consumer and look it is a natural thing, it would be an unnatural thing for credit to stay where it is. And so, normalization, the root word in normalization is nor, and there is quite a journey to really sort of an equilibrium place for credit performance. And one of the reasons that we are still leaning pretty hard into our growth opportunities is our confidence in the consumer and our read of the marketplace at this time.

Richard Fairbank:

Yeah. Well, Sanjay, we as a company have been very focused on minimizing fees, just in general for our consumers. Obviously the overdraft announcement was a pretty dramatic case in point there. But even in the Card business, when you look, we really what Capital One has is an APR and a late fee and in some cases a cash advance fee, both of those fees are really to discourage certain behaviors that we don’t think are in the interest of the consumer. So, yes, so our strategy has been to have pricing be upfront and have -- it be clear and very simple. Now late fees or something that we have continued to have late fees, because we wouldn’t want our loved ones ending up paying late on their bill, so just late fee, I think is one of the natural fees that probably makes sense to have on a product. The fed is created a Safe Harbor with respect to late fees, maybe the industry well, that will be revisited and obviously we will watch that as we continue our business.

Operator:

We will take our next question from Rick Shane with JPMorgan. Please go ahead.

Andrew Young:

Yeah. Rick, it’s Andrew. I mean, we disclosed the overall gains between the two portfolios of $192 million. The two portfolios combined, you saw probably last year when they got marked held for sale were roughly $4 billion, but below the surface there we are not going to get into specifically the run rate of revenue or the expenses associated with that in part, because we are growing the rest of the portfolio and you are going to see partnership businesses come in and out over time.

Jeff Norris:

Next question please.

Bill Carcache:

Thank you. Good afternoon. Rich and Andrew, you have unique insight into consumers at both ends of the credit spectrum. Could you parse out for us in a little bit more detail, just following up on Sanjay’s question? Specifically at what kinds of credit normalization trends you are seeing at both the high end and the low end of the credit spectrum, if you could sort of juxtapose those for us and maybe call out any differences? And then, perhaps, any possibility of that inflationary pressures could lead to a bit faster normalization at any -- at the lower end?

Bill Carcache:

Thank you, Richard. It’s really helpful. If I may ask a related follow-up, maybe could you discuss the extent to which positive credit migration fueled by pandemic stimulus, that perhaps may have led you to increase line sizes and then now the extent to which we could sort of see a reversal in that and perhaps as credit normalizes, would you expect negative credit migration to ultimately lead to a reversal of those line sizes or is that not how it worked?

Jeff Norris:

Next question please.

John Pancari:

Good evening. On the -- regarding the credit on the reserve front, I know you had released an incremental $190 million and you indicated that you do have additional qualitative reserves aside. I know your reserve ratio right now was a near your day one CECL level. How should we think about the potential for incremental reserve releases from here? Do you think that we stabilize at this level of the reserve ratio or do you think there is incremental room to release?

John Pancari:

Got it. Okay, Andrew. Thank you. And then my follow-up question is just around consumer spend behavior and volumes. On behavior, are you seeing any shifts in spending on discretionary towards -- shifting towards non-discretionary? And then, secondly, are you -- on the volume side, do you forecast a slowdown in Card spend volume overall as the fed hikes and aims at slowing the economy? Thanks.

Jeff Norris:

Next question please.

Ryan Nash:

Hey. Good evening, everyone.

Richard Fairbank:

Hey, Ryan.

Richard Fairbank:

Okay. Ryan, I do have a smile at your comment, because often we have zagged while -- zig while others zag and we have -- you and I in fact have chatted about that and the reason sometimes behind it. Because it’s not just an accident that sometimes has been our pattern, because part of what we are reading is the competitive marketplace and that has impact on the opportunity and on credit performance and selection dynamics and a lot of things. So your question is a great one, but I think a lot of companies out there to see the strength of the consumer. They are sort of feeling the consumer, sort of roaring back with respect to more normal activities. And I think people are leaning into to take advantage of that and certainly we are. But we -- let me talk a little bit just about the competition in the Card business. We certainly know that there is elevated marketing. All the companies are pretty much coming out and showing more marketing, talking about more marketing, so that is happening and we have a careful eye to see what that does to the opportunity that we are experiencing. But I will kind of come back to our opportunity there, but certainly marketing levels are elevated. Competition in the rewards space is probably a notch more intense than pre-pandemic levels, but it’s pretty stable in recent quarters and not what I would call irrational. Certainly incredibly good players at the top of the market and there is a lot of competition there, but that hasn’t really altered our view of the opportunity, either APRs generally been stable. Turning to the fintechs for a second, obviously we have seen a lot of, buy now pay later activity. I think that we should note that the fintechs who are in the lending business have been lending in the greatest rearview mirror of credit -- industry credit performance that you could ever imagine. And businesses like instalment lending based businesses sometimes are pretty sensitive in that environment. So I -- but we continue to see quite a bit of activity on fintechs as well. But on the Card side, before I turn to Auto, all -- we have an eye on the competition, I think generally the competition while intense is not unreasonable, we have not seen the big changes in people’s underwriting policy, the kinds of things that -- we haven’t seen dramatic changes in pricing. So I think it’s more, I would label it at the intense level that we would expect that a time like this, but not unreasonable and not something that would cause us to move off our pretty strong lean into the growth opportunity. So in the Auto business, let me just talk a little bit about this. The competition in the Auto business continues to remain intense. It’s showing up across the Board from credit unions, big banks and small independent lenders, and it’s playing out across all Credit segments. And you just kind of double-click into that for a second, credit unions that have been wash with deposits, they have been gaining significant share, consistent with what we have observed during prior cycles and especially as interest rates go up a little bit. And let’s talk in fact about rising interest rates. I think it’s almost always the case in business that when in a sense a cost of goods sold rises, there typically is a lag and how that makes it way into consumer pricing. What we have -- as I mentioned in the earlier comments, we have not seen the marketplace, the auto marketplace yet respond in terms of pricing relative to what’s actually happening to interest rates, so there is a some compression there. I think typically what we have seen in the past is competitors respond with differing speeds to interest rate increases. So sometimes players like credit unions tend to and maybe they have different FTP methodologies or whatever it tend to be sort of the slowest to respond, but we -- so we will have to keep an eye on that. But I think that, we are really excited about our opportunity in the Auto business. The technology products that we have out there are really cutting edge and getting a huge amount of traction. Our -- I is just very careful on the pricing out there and also just whether there is an over exuberance relative to the number of planets that are aligned in the auto lending business, particularly what sort of happened to used car values and is -- and in fact that still there, just keep an eye on whether that industry can remain as rational as it’s been in the last couple of years.

Andrew Young:

Yeah. I recall that in January, we did not have an active program at the time, so our Board authorized $5 billion and capital levels were even higher than they are today at that point. And so earlier this month in conjunction with the approval of the capital plan in our CCAR submission they authorized an additional $5 billion, which coincides with the capital plan and therefore would be available at the start of the third quarter. But in terms of the pace of that activity, it feels a little bit different than it did when we were at 14.5% over a year ago. To your point like asymptotically we are sort of heading towards 11% and so the pace of repurchases is as always is going to be dependent on our primary use of capital for loan growth and then the dividends. But beyond that, we are going to keep a really close eye on just the level of capital and earnings and growth and end market dynamics and take advantage of the fact that we are able to operate under the SCB framework and maintain that flexibility. So nothing specific in terms of the timeline there, but just wanted to be clear about the approvals when we announced it a few weeks ago.

Operator:

We will take our next question from Betsy Graseck with Morgan Stanley. Please go ahead.

Andrew Young:

Hi, Betsy.

Betsy Graseck:

I guess, just switching gears a little bit. I wanted to ask a little bit about what you are seeing with regard to payment rates and is there any differentiation amongst the customer base as to how that’s been projecting?

Betsy Graseck:

Got it. And then just as a follow-up on the marketing piece, I know we spoke about a little bit earlier in the call. But as we are thinking through the opportunities that we have, do you feel like there is an opportunity to lean into marketing kind of Q-by-Q-by-Q to a greater degree. So we should build half off of 1Q, such that our marketing is higher year-on-year, full year and that’s what I am getting from the conversation earlier, but I just want to make sure it’s the right takeaway?

Jeff Norris:

Next question please.

Moshe Orenbuch:

Great. Thanks. Rich, just wondering, what would it take to see both kind of -- you talked about some of the potential pressures particularly for the lower end consumer in terms of inflation and other sorts of things. What would it take to actually start to see you pulled back both at the lower end consumer and for the higher spenders, like what sort of -- what will be the warning signs?

Moshe Orenbuch:

Great. Thanks, Rich. And as -- maybe as a follow up, could you talk a little bit about where you see the industry and Capital One in terms of the deposit price competition is now starting to see a deposit betas as we are now starting to see interest rates moving up?

Jeff Norris:

Next question please.

Don Fandetti:

Quick question on the outlook for the adjusted efficiency ratio from Q1 levels, and then, Rich, on Commercial Card issuing, can you talk about that business and I know it’s -- you have been marketing I know in that small business Card, which has been sort of tough for banks to rollout?

Andrew Young:

Don, what was your question on Commercial?

Richard Fairbank:

Oh! Sorry. Sorry.

Richard Fairbank:

You wanted to...