The operator welcomes participants to the Capital One Q3 2023 earnings call and introduces the speakers, Jeff Norris (Senior Vice President of Finance), Richard Fairbank (Chairman and CEO), and Andrew Young (CFO). The call is being recorded and a presentation summarizing the third quarter results is available on the company's website. The presentation may contain forward-looking statements and Capital One does not guarantee the accuracy of this information.

Capital One reported strong earnings in the third quarter, with an increase in pre-provision earnings and loan and deposit growth. Revenue also increased, driven by higher net interest and noninterest income. Non-interest expense and provision expense also increased, but the company's allowance balance and coverage ratio improved. The company's assumptions for key economic variables have also improved, but they continue to assume some variables may worsen in the future.

The allowance balance in the Domestic Card business increased by $349 million due to loan growth, but the coverage ratio remained flat. The Consumer Banking segment saw a decline in the allowance balance due to an improved economic outlook and lower loan balances, while the Commercial Banking business saw an increase in the allowance due to rising interest rates and other factors. The liquidity coverage ratio increased to 155% and total liquidity reserves remained flat at $118 billion. The cash position increased by $3 billion. The net interest margin for the quarter was 6.69%, 21 basis points higher than the previous quarter but 11 basis points lower than the same quarter last year.

The increase in NIM in the third quarter was due to higher card yields, a shift towards card loans, and one additional day in the quarter. The common equity Tier 1 capital ratio also increased by 30 basis points. In the credit card business, domestic card results showed strong top line growth with an increase in purchase volume and loans. However, revenue margin declined due to loans growing faster than purchase volume and an increase in charge-offs. On a linked quarter basis, revenue margin increased by 48 basis points, but results are still normalizing from the strong performance during the pandemic.

The charge-off rate and delinquency rate for the quarter increased compared to the prior year, but remained relatively flat compared to the previous quarter. Marketing expenses for the company were also relatively flat compared to the previous year, with a focus on driving growth in the domestic card business. In the Consumer Banking business, auto originations declined and ending loans decreased, but there was strong growth in retail deposits.

The company's average deposits increased by 12% year-over-year and 1% from the previous quarter, driven by their digital-first national direct banking strategy. However, Consumer Banking revenue was down 7% due to higher rates on deposits and lower auto loan balances and margins. Non-interest expenses decreased by 6%, but marketing expenses increased to support the National Digital Bank. The auto charge-off rate and 30 plus delinquency rate increased compared to the previous year, but the increases from the linked quarter were better than expected. In Commercial Banking, loan balances and deposits were down 2% from the linked quarter, and revenue and non-interest expenses increased. The commercial banking charge-off rate declined from the second quarter due to the sale of a portfolio of commercial office loans.

The paragraph discusses the third quarter 2023 results presentation, highlighting the remaining commercial office portfolio and the performance of the Commercial Banking sector. It also mentions the company's strong top line growth, consumer and total deposits, and its focus on modern technology capabilities. The Q&A session with analysts is also mentioned.

In the third quarter, Capital One's domestic card charge-off rate and 30 plus delinquency rate increased slightly but are still below pre-pandemic levels. The trend of normalization in credit metrics appears to be slowing, with delinquencies and new delinquency entries stabilizing in line with normal seasonal patterns. Charge-offs are a lagging metric, but the recovery rate has also stabilized after falling for several years due to low charge-off levels during the pandemic. This has had a larger effect on Capital One due to their higher recovery rates compared to industry averages.

The recovery rates for Capital One have stabilized after a period of low levels due to the pandemic. This is due to the gradual improvement of the economy and the stability of credit performance in recent origination vintages. The company remains focused on resilience in their underwriting and building it into their choices. The domestic card allowance has remained relatively stable, with factors such as unemployment rate being considered. The company expects the unemployment rate to worsen in the coming year but remains optimistic about loan growth and allowance build.

The article discusses the factors that influence credit performance, including unemployment rates and the allowance calculation. The projected loss rates are the biggest driver, and delinquencies are a leading indicator. The allowance framework considers a range of outcomes and uncertainties, which can affect the coverage ratio. The health of the consumer is also mentioned, with a question about trends between higher and lower FICO scores in credit performance and spending during the recovery.

The trend of credit normalization was more prominent at the low end of the market, but is now becoming more broad-based. Capital One's delinquencies in lower market segments have stabilized, while the upmarket segments are slightly behind. This is due to underwriting changes made in response to anticipated credit score inflation from FinTech companies. Spend per customer has also moderated after a surge following the pandemic.

The company's year-over-year spend growth per customer has remained steady, with new account origination driving the overall growth. The lower end of the market has seen the most moderation in spend growth. As for NIM, the company expects beta to continue to increase due to product mix and competitive pricing factors. There has also been a slight increase in wholesale funding costs, and credit could potentially impact revenue suppression.

The speaker discusses potential headwinds and tailwinds affecting net interest margin. They mention that card and revolving card balances have seen growth, while cash balances may settle at a higher level than pre-pandemic but lower than current levels. They also mention that card loan yields have expanded, with higher revolve rates and seasonality being the primary factors. The other speaker adds that revolve rates in the Domestic Card business are similar to pre-pandemic levels.

The company's third quarter 2023 revolve rates are similar to those in third quarter 2019, but vary across different segments. The partnerships business, particularly the Walmart portfolio, has higher revolve rates compared to the branded book. Overall, the branded book has lower revolve rates, but the partnerships have offset this. Marketing expenses were up 10% compared to the previous quarter, but flat year-over-year. The company is seeing opportunities in expanding channels, leveraging technology, and targeting heavy spenders, which is reflected in their marketing spend.

Capital One has been strategically targeting heavy spenders since 2010 with the launch of their Venture card. This involves not only offering attractive products, but also investing in customer service, marketing, and brand building. The company's sustained investment in this market has resulted in strong growth and revenue, as well as a positive impact on their overall brand. Additionally, Capital One is also investing in their National Bank through modern technology, digital experiences, and marketing efforts.

Capital One is seeing strong growth in their depository franchise, particularly on the deposit side. They have a competitive advantage due to their strategic approach of looking at market trends and leveraging technology. The company's founding idea is to discern where winning will be in the future and they have focused on transforming their balance sheet to be more reliant on insured deposits. This strategy has been successful and has contributed to their strong performance in the retail banking sector.

The speaker discusses their vision for the future of retail banking, which involves a shift towards digital interaction and customization. They highlight the importance of branches, but also emphasize the need to digitize the customer experience. This has been their focus in building a national savings business and a full service digital bank.

Capital One has leveraged its customer base and national brand to build a successful national bank. They continue to focus on this strategy and avoid acquiring branch-based banks. Despite the volatility of the auto lending business, they are always looking for opportunities to grow and make objective decisions based on market conditions. They are particularly sensitive to the credit and underwriting choices of their competitors in this auction-based environment.

The speaker discusses the stability of their business and the importance of one-on-one relationships with customers. They mention their growth in the auto business and how they have invested in technology and relationships with dealers. They also mention concerns about margins and credit performance, and how they have proactively made adjustments. Overall, they are pleased with their performance but not predicting any major acceleration.

Sanjay Sakhrani from KBW asks about the company's adjusted operating efficiency rate and if it can be sustained into the next year. CEO Richard Fairbank responds that they are pleased with the progress made in this area due to investments in technology, but there may be fluctuations in the numbers. He also mentions that the company is still investing in technology for future growth opportunities.

Capital One is seeing growth across all segments, and their loan numbers have surpassed pre-pandemic levels. This is due to a combination of new account growth, lower payment rates, and potential inflation effects.

The speaker discusses the strength of the company and the industry, specifically in regards to delinquencies and charge-offs in the credit card sector. They note that delinquencies are a good indicator of future charge-offs, but the exact timing can vary. The question is re-asked about the lag time between delinquencies and charge-offs.

The speaker addresses a question about net charge-offs and the potential impact on credit-sensitive financials. They mention the stability of credit performance and the seasonality of delinquencies and losses in the credit card and auto industry. They note that delinquencies tend to improve around tax refund season and worsen throughout the year, while losses lag behind. They also mention that delinquencies increased in the third quarter, which is typically the highest point of the year, and that this is higher than the expected seasonal increase.

The company has observed an increase in business activity, which may indicate a stabilization in the trend of normalization. However, they need more data to be fully confident. Charge-offs may not immediately reflect this stabilization and the company is cautious about making predictions.

Dominick Gabriele asks Andrew Young about the impact of Basel end game and unused lines on capital ratios and ROTCE target. Young explains that their strategy of starting with smaller lines and allowing them to grow will not change solely for the purpose of risk-weighted assets. He also mentions that the overall risk-weighting impact on their asset side is largely neutral, but they will be affected by operational risk RWA. Gabriele then asks if holding more capital against unused lines will affect their capital ratio and ROTCE, to which Young asks for clarification and does not provide a response.

The CFPB is expected to publish a proposal soon to reduce late fees by 75%. However, this may be delayed due to potential industry litigation, and if implemented, it will have a significant impact on the company's P&L in the near future.

The company has a plan to mitigate the impact of a new rule that will take effect in a couple of years. This includes making changes to policies, products, and investments. Some of these actions will happen before the rule takes effect, while others will happen after. The next question is about the increase in domestic card yield in the third quarter, which is partly due to seasonality and rate hikes. The company had one more day in the third quarter, which also contributed to the increase. The call concludes with a thank you to participants for their interest in Capital One.

The Investor Relations team will be available to answer questions later in the evening. The conference call is now ending and the operator thanks everyone for participating. They can now disconnect.

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