This paragraph introduces the Capital One Q2 2023 Earnings Call, and outlines the speakers and webcasting details. It also explains that the presentation may contain forward-looking statements, and that Capital One does not guarantee the accuracy of any of the information.

In the second quarter, Capital One earned $1.4 billion and pre-provision earnings increased 7% compared to the prior quarter. Period-end deposits declined 2%, largely due to tax-related outflows, and revenue increased 1%. Provision expense was $2.5 billion, with $2.2 billion of net charge-offs and an allowance build of $318 million. In the Domestic Card business, the allowance balance increased by $544 million, increasing the coverage ratio by 12 basis points to 7.78%. Factors impacting the allowance in the quarter included additional information found in the earnings release presentation and the Risk Factors section of the Capital One website.

In the second quarter, Domestic Card loans grew by approximately $5 billion, which was the predominant factor in growth. This was offset by an improvement in the economic outlook and a decrease in the allowance balance in the Consumer Banking segment by $20 million. In the Commercial Banking business, the allowance decreased by $218 million due to the movement of $900 million of loans to held for sale and the recognition of charge-offs. The liquidity coverage ratio increased to 150%, and total liquidity reserves decreased by $9 billion to $118 billion.

Andrew discussed the company's Net Stable Funding Ratio, which was 134%, above the regulatory minimum of 100%. He then discussed the Net Interest Margin, which was 6.48%, 12 basis points lower than the previous quarter and 6 basis points lower than the same quarter the previous year. He then discussed the company's capital position, which had a Common Equity Tier 1 capital ratio of 12.7%. If the full impact of unrealized losses were included, the CET1 ratio would have been 10.4%. Finally, he discussed the Domestic Card business, which posted 7% growth in purchase volume and 18% growth in ending loan balances year-over-year.

In the second quarter of 2023, revenue was up 18% year-over-year, driven by the growth in purchase volume and loans, and revenue margin remained strong at 17.76%. The charge-off rate increased 212 basis points from the prior year to 4.38%, and the 30-plus delinquency rate increased 139 basis points to 3.74%. Non-interest expense was up 8% from the second quarter of 2022, driven by higher operating expense. Total company marketing expense was down 12% year-over-year in the second quarter, and Domestic Card is the biggest driver of total company marketing. The company is continuing to lean into marketing to drive resilient growth and enhance the Domestic Card franchise.

In the second quarter, the Consumer Banking business saw a decline in auto originations and ending loans, but posted strong year-over-year retail deposit growth. The auto charge-off rate was 1.40% and the 30-plus delinquency rate was 5.38%. Meanwhile, the Commercial Banking business saw a decline in ending loan balances and average loans, largely due to choices to tighten credit and loans moved to held for sale.

Capital One saw declines in ending deposits and average deposits in the second quarter, but revenue was up 3% compared to the linked quarter. Non-interest expense was down 9%. The commercial credit trends were largely driven by the commercial office portfolio, and the annualized charge-off rate increased to 1.62%. Capital One is investing in modern technology capabilities to generate opportunities across its business.

Andrew Young answers Ryan Nash's question about the trajectory of the margin and deposit betas. He explains that the deposit beta is affected by product mix, competitive dynamics, how quickly the Fed has moved, and quantitative tightening.

The speaker discusses the various factors that are influencing deposit pricing and net interest margin (NIM), such as the need to grow customer relationships, the lag in deposit pricing, and wider wholesale funding spreads. They also mention a few tailwinds that could help NIM, such as seasonal lower card revolve rate, elevated cash levels, and an extra day in the quarter.

Capital One's domestic card delinquencies in the second quarter were 10% higher than the same quarter of 2019, and their charge-offs are still a bit below their 2019 levels. However, Capital One is facing a larger headwind than most other lenders due to their recovery rates, which are unusually low in the short to medium term. This is because they have experienced three years of very low charge-offs, and their recoveries come in over time, rather than all at once. Additionally, the credit performance over the past three years was unprecedented.

Rich just described the dynamics that are at play with the outlook for quarter losses, which will have the biggest impact on the allowance going forward. This outlook is affected by the deferred charge-off effect, which is the reverse of the effect seen in the global financial crisis, as well as the outlook for loss rates a year out. Despite this, the team is feeling good about the credit performance and continues to lean into their growth opportunities.

Richard Fairbank states that Capital One has always had a strategic optimism and that their greatest optimism lies in the card business. He notes that the consumer credit market is in a strong place and that the competition in the card business is intense but rational. He believes that this creates a good foundation for the card business in the current economy.

Capital One has been delivering credit to consumers, and their metrics on recent originations and back book performance are strong. They have been leaning into card and have had their foot on the brake for the auto business due to difficulty in passing through cost of funds. Used car prices have been elevated, but there is an opportunity to lean in a bit more on the commercial side. Capital One takes a different path than many other banks when assessing the credit environment, and they are seeing credit worsening in certain sectors.

Andrew Young answers a question about expenses, which were lower than expected in the quarter. He explains that Capital One has pulled back on originations and sold several billion dollars of loans over the past few years. He also explains that Capital One's foot is on the brake for some of their businesses, but they are leaning in the hardest on the card side. He finishes by saying that they typically slow down on growth investments and buybacks when it comes to expenses.

Richard Fairbank and Andrew Young discussed the impact of seasonal effects on Capital One's NIM, and Richard noted that there is nothing fundamentally different across their book. Jeff Norris then invited the next question from Betsy Graseck, who asked about the expected seasonality of Capital One's marketing efforts this year. Richard noted that they are expecting it to ramp up in the second half.

Richard Fairbank discusses the marketing strategy for the company, which is flat compared to the prior quarter and down 12% year-over-year. However, he notes that this should not be taken as a strong conclusion since some of the marketing was delayed. He explains that they are investing heavily in marketing due to attractive growth opportunities across their business, which are enhanced by their technology transformation. This technology enables them to access more channels and leverage machine learning models to provide customized solutions, which continue to generate good performance.

Capital One has been heavily investing in marketing since 2010 in order to focus on heavy spenders and build their National Retail Bank. This has resulted in higher marketing levels than years prior, as well as higher purchase volume growth at the higher-end than the average. The investments are in digital experience, servicing experience, lifestyle and product experiences, as well as modern technology and a compelling digital experience.

Richard Fairbank explains that the company is not providing a growth outlook, but that their focus on marketing is driving new accounts which will eventually lead to balance and purchase volume growth. He emphasizes that the company is focused on building an organic growth engine and leveraging technology and analytical capabilities.

Andrew Young discusses the unemployment rate assumptions for the current forecast, which are increasing from 3.6% to 4.3% by the end of the year and staying in the 4%s through 2024. He notes that the models tend to use the change in unemployment rate or the rate of job creation, rather than the level of unemployment. He explains that the allowance will move quarter-to-quarter based on assumptions looking many quarters into the future, and advises to focus on delinquencies as the leading indicator to charge-off, as the economics are felt there.

Richard Fairbank outlines the risks of the current economic climate, such as credit normalization and a competitive market, but also highlights the relative strength of the U.S. consumer. Despite rising interest rates, debt servicing burdens remain low. Home prices have started to increase again and many consumers have used their excess savings built up during the pandemic.

Capital One has seen an increase in payment rates across the industry during the pandemic and their trust metrics show a high payment rate. They also look at delinquencies, charge-offs, payment rates, and revolve rates to assess risk. The performance of their newest monthly vintages of originations is consistent with pre-pandemic risk levels.

Rich is discussing the risk levels of vintage performance and how they have remained relatively stable over time. He explains that there are two ways this can happen, either unmanaged or managed. He then goes on to explain that recent originations have worse credit than those from years ago, but they have been managed proactively and reactively to trim around the edges. Rich concludes by saying that while most of the industry is leaning in, they will be watching it carefully and remain optimistic.

Richard Fairbank of Capital One reported a 7% year-over-year increase in domestic card purchase volume, but this was mainly due to customer growth. When looking at spending per customer, it has moderated and is now generally flat from a year ago. This moderation is seen across income bands and card segments, as well as discretionary and non-discretionary categories. Fairbank believes this is a sign of rational and healthy behavior on the part of the consumer. Payment and revolve rates are still not at pre-pandemic levels, indicating underlying strength.

Richard Fairbank discusses the credit cycle and how it is different from the economy. He warns that lenders and investors should be careful with the high returns they have been enjoying during the pandemic, as they will have to pay the price when the cycle turns. He explains that the behavior of lenders is more important than the behavior of consumers, and that during the most extreme periods of the pandemic, alarming things were happening.

FinTech lending saw a big surge in supply, particularly to subprime customers, which was alarming. This was because the models were based on the greatest credit economy in the history of lending, and credit scores had drifted dramatically. To combat this, lenders could intervene in their own modeling and rely on data and modeling from the last few decades. Additionally, marketing was being deployed with extra earnings.

The CFPB's proposed reduction of late fees by 75% is concerning to the credit industry, as it could reduce access to credit and make it more expensive, as late fees are an important way to price for risk. This has caused the major players in the credit card industry to become more cautious in their credit choices. Overall, the normalization of the industry has been a healthy development.

Rich is discussing the potential impact of the CFPB proposal, which could become law early next year, on Capital One's revenue. He notes that the late fee has been an important part of their product structure, but if the proposed rule is implemented, there will be a significant impact. He shares how they are planning to mitigate the impact, but acknowledges that it will take several years. Dominick then asks a question about professional services and fees, to which Rich explains that they have brought some of those services in-house.

Richard Fairbank discussed how the company had invested in technology and used their recruiting brand to bring in talent, which helped reduce costs. He also noted that agency income in the Commercial business had increased in the quarter, which was the main driver of the increase in other non-interest income. The Q&A session concluded with Jeff Norris thanking everyone for joining the conference call and the Investor Relations team being available to answer any further questions.

This summary was generated with AI and may contain some inaccuracies.