Capital One Financial Corporation — 2024 Q1

Thank you, Ryan. Look, I think that the story continues to be one of -- well, in terms of -- there's sort of the consumer itself. Let's just talk about the consumer for a second and then let's talk about Capital One's credit performance but just the health of the consumer. I think the U.S. consumer remains a source of strength in the economy. The labor market remains strikingly resilient. Rising incomes have kept consumer debt servicing burdens relatively low by historical standards. And when we look at our customers, we see that they have higher bank balances than before the pandemic, and this is true across income levels.

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.

Next question, please.

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, we are leaning in pretty much across the board in the card business, powered by a healthy consumer and the traction that we're getting in our business, we are really all parts of the card business are seeing very nice account originations, seeing good traction on the purchase volume side. And -- so it's very much a positive time for leaning in, as you see reflected in our marketing, as you see reflected in some of the growth numbers, and as I see in numbers behind the numbers that you see, just a lot of traction. And just -- let's just savor for a second, some of the things that are powering that are 2 things that I would flag is: one, the continued investment that we are making to win at the top of the market. And I think that not only affects our success at the top of the market but I really believe there's a lifting of all boats from those investments and that traction there.

Next question, please.

So Rick, there's a lot. First of all, let me clarify some of the things that you were saying weren't exactly I think as we intended to state them. So let me just -- so we talked about -- so yes, we talked about credit. We're saying credit settling out. We said in the very near term, where charge-offs are tend to be higher in the first half of the year. In the near term, based on extrapolation from delinquency buckets and roll rates we would expect them to settle out at 15% higher than pre-pandemic. That was a near-term forecast. That was not an annual forecast. And then you -- just to clarify your comments that, and over time, it will converge back to slightly above 2018 and 2019. I just want to say those are your words, not ours. We have not given guidance on full year charge-offs. We tend not generally to give guidance on full year charge-offs. But we very much like to give you the feel of how things are going.

Next question, please.

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.

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.

Next question please.

Moshe, so our -- I think what you're partly getting at is because we have -- part of our portfolio is subprime consumers, how do we feel about how they're performing and sort of in the context of an environment of higher inflation and so on. Let me just comment a little bit about the subprime consumer. In the global financial crisis, we observed that credit metrics in subprime moved earlier in both directions, subprime -- we saw that, but then we saw sort of everything move proportionately, in fact, subprime moved frankly, somewhat less proportionately than prime as a multiple, but obviously, all portfolios worsened quite a bit during the global financial crisis in the pandemic, subprime credit improved more and more quickly than prime but it also began to normalize more quickly, too. And of course, that's in the context of lower income consumers seeing disproportionate benefits of government aid and then unwinding that over time.

Okay. Thanks, Moshe. So let's just pull up and reflect on the fact that the CFPB's rule on late fees is scheduled to take effect on May 14. We are prepared to implement the rule on this time line, if necessary, but ongoing litigation efforts continue to create uncertainty on the ultimate outcome and the timing of the rule. As we've said before, when the rule is implemented, there will be significant impact to our P&L. We expect that this impact will gradually resolve itself within a couple of years from the implementation of our mitigating actions. These mitigating actions include changes to our policies, products and investment choices. Some of these mitigating actions have already been implemented and are underway. We are planning on additional actions once we learn more about where the litigation settles out. Ultimately, these mitigating actions will play through different line items in the P&L and will mitigate the impact of the late fee rule on our P&L within a couple of years of their implementation.

Next question, please.

Yes. So we're feeling very good about the Auto business. So let's just pull way up. Auto industry margins have recovered somewhat over the past few quarters. Our origination volumes in Q1 were up 20% on a year-over-year basis and a quarter-over-quarter basis, and we're pleased with that growth. Now there are still headwinds to the auto business. Affordability remains a concern due to the combined effects of high interest rates and still high car prices. And even as car prices have normalized significantly from their peaks, they haven't yet reached a new equilibrium.

Next question, please.

Yes. So I can see that you're a student of tax refunds. Just think of all the areas of expertise that you've developed over the years trying to really get your head around this credit card business, things that neither you nor I thought we would really have to learn. Let me make a couple of comments here. So a key question is what are we benchmarking things too. So relative to -- if we talk about relative to last year, the things were even lagging relative to last year, and they've actually crossed over very, very recently crossed over the curve from last year, which I think you're referring to. But then last year really was somewhat of an outlier relative to pre-pandemic.

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.

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.

Next question, please.

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

Competitive dynamics in auto. Here my observation about the auto business is that it's still a very competitive marketplace. But when we see our opportunities to grow, we tend to zig a little bit while others zag. And so we sort of pulled back for a little while and others leaned in. And my point is really now I think we're leaning in and others are pulling back a little bit more. I hadn't really sort of analyzed it in terms of really capital choices really as much as just the very natural rhythms of the marketplace and some of the advantages that Capital One has by virtue of our choices that we made over the last couple of years. But we'll have to think about that. But I just think this is just very much sort of as you've seen numerous times in the past where there's a little bit of an inflection point for Capital One at a time that's a little different and occasionally in a different direction than the inflection points of others.

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.

Next question, please.

Thanks, Jeff. We -- the trimming around the edges is, of course, what we do all the time and reactively to not only what we observe in the marketplace but what we think may be coming in the marketplace. We are very much sort of in the same place we were three months ago when we've been talking about this. In other words, the trimming around the edges and the dialing back was a little bit more pronounced in the quarters during the big credit normalization than it has been as we see things settling out. And the drivers of that continue to be -- probably -- in addition to what I said about the consumer, very much also the -- observing our credit performance, not only just the overall portfolio performance but very much the performance of our originations.

Okay. Yes, Jeff. So we launched the Venture X business card, broadly in the third quarter of last year, and we're pleased with the market response and the customer engagement so far. So Venture X business, much like our Spark cash plus card was developed to help business owners run and invest in their business with no preset spending limit, great travel benefits and elevated earn everywhere. And it's a great example of our business is leveraging each other's innovations because we've taken many of the industry-leading travel features of our consumer Venture X product and combine them with the business-grade capabilities of our small business offerings, including the flexible spending capacity that is designed for larger businesses.

Thanks, Rich and Andrew. Thanks, everybody, for joining us this evening and for your continuing interest in Capital One. Have a great evening.