The operator introduces the Capital One Q4 2023 earnings call and informs participants that the call will be recorded. Jeff Norris, Senior Vice President of Finance, introduces the speakers, Chairman and CEO Richard Fairbank and CFO Andrew Young. They will discuss the results of the fourth quarter of 2023 and a presentation summarizing the results is available on Capital One's website. The presentation may contain forward-looking statements, and Capital One does not guarantee the accuracy of this information.

In the paragraph, Andrew Young discusses Capital One's fourth quarter earnings and full-year results. He mentions an accrual for the FDIC special assessment and adjusts the earnings per share accordingly. He also discusses the growth in Domestic Card business and an increase in deposits. Non-interest expense and operating expense increased, with half of the increase attributed to the FDIC special assessment. The operating efficiency ratio improved and provision expense was $2.9 billion. Young also discusses the allowance balance, which increased by $326 million and brings the total company coverage ratio to 4.77%.

In the third quarter, the allowance and coverage ratio changed due to various economic factors, with the allowance increasing in the Domestic Card business due to loan growth and remaining flat in the Consumer Banking segment. In the Commercial Banking business, the allowance decreased due to charge-offs of office real-estate loans. Liquidity reserves increased by $2.3 billion, driven by a higher market value of investment securities. The cash position decreased by $1.6 billion, resulting in a preliminary average liquidity coverage ratio of 167%. The net interest margin for the fourth quarter was 6.73%, 4 basis points higher than the previous quarter but 11 basis points lower than the same quarter last year.

The increase in net interest margin (NIM) in the fourth quarter was due to a shift towards card loans and higher asset yields, offset by higher rates paid on deposits. The common equity Tier 1 capital ratio decreased slightly due to asset growth, dividends, and share repurchases. In the credit card segment, top line growth remained strong but moderated in the fourth quarter. Purchase volume and ending loan balances increased, while the charge-off and delinquency rates also went up. However, the company believes that credit results have stabilized after a period of normalization.

The 30-plus delinquency rate has been stable for a few months now and is expected to continue into January. This indicates that charge-offs are stabilizing and will likely follow the same seasonal patterns as previous years. However, there may be other factors that could affect charge-offs in the longer term, such as economic conditions and deferred charge-offs from the pandemic. Non-interest expense increased by 11% in the fourth quarter of 2022, with the majority of the increase coming from marketing expenses in the card business.

In the fourth quarter, Capital One saw growth opportunities in their Domestic Card business due to their technology transformation and strong marketing efforts. Their consumer banking business saw a decline in auto originations and ending loans, but a strong increase in federally insured consumer deposits. Revenue was down due to lower auto loan balances and higher deposit costs, and non-interest expense decreased compared to the previous year. The auto charge-off rate also increased year-over-year.

In the fourth quarter of 2023, the 30-plus delinquency rate and charge-off rate for auto credit began to stabilize and follow normal seasonal patterns. In the Commercial Banking business, ending loan balances and deposits decreased due to credit tightening and managing down less attractive balances. This resulted in a 14 basis point improvement in the average rate paid on commercial deposits. Revenue and non-interest expense were both down 5% from the previous quarter. The annualized charge-off rate increased 28 basis points and the criticized performing loan rate increased 73 basis points. However, the criticized non-performing loan rate decreased 6 basis points. These trends were largely driven by pressure in the commercial office portfolio, which now makes up less than 1% of the total loans.

In the fourth quarter, the company saw growth in various areas, such as card revenue, purchase volume, and loans. Delinquency rates were stable and the company maintained a strong balance sheet. They also focused on improving operating efficiency and investing in technology for long-term growth. They expect a flat to slightly lower operating efficiency ratio in 2024, taking into account potential regulatory changes. They are confident in their ability to create value for shareholders and adapt to different economic conditions. A Q&A session will now take place.

The speaker is addressing a question from an investor about the company's charge-offs and potential future improvements. They mention that the charge-offs are stabilizing and could potentially benefit from factors such as inflation declining, real income growth resuming, and interest rates coming down. They also note that the first half of the year typically has higher losses, but the economy is currently strong and unemployment is low, which could have a positive impact. However, the speaker does not provide specific guidance for the future and acknowledges that there are unknown factors that could affect the company's performance.

The delayed charge-off effect from the pandemic has been a major factor in the normalization of credit, with some charge-offs being permanently averted but others being delayed. Recoveries have also been impacted, with inventories starting to increase as credit normalizes. The company's origination strategy and underwriting choices are consistent with lower long-term losses. The reserve rate may stabilize or come down in the future, and the NIM will be addressed separately.

The speaker discusses the coverage ratio in the fourth quarter and how it is affected by seasonal balances. They also mention that projected losses are the main driver of coverage and that delinquencies are a leading indicator. The speaker explains how they calculate reserves and how economic assumptions play a role. They also mention that NIM is affected by various factors and will be impacted by one fewer day in the first quarter.

The paragraph discusses the potential tailwinds and headwinds that could impact the net interest margin (NIM) of the company. On the tailwind side, there is expected growth in card balances and a decrease in cash balances, which could positively impact NIM. However, on the headwind side, there is uncertainty around deposit betas and potential regulatory changes, as well as the impact of credit losses on NIM. Overall, it is difficult to predict the near-term direction of NIM, but the company's balance sheet is not expected to undergo any major structural changes that would significantly affect NIM in the long term.

During a conference call, Ryan Nash from Goldman Sachs asked about Capital One's marketing expenses and growth opportunities. CEO Richard Fairbank responded by saying that they are leaning in and seeing strong growth opportunities in the marketplace, especially in the card business. They have made adjustments in the past, but now they are in a stable place and able to capitalize on their technology transformation to identify better investment opportunities and create customized solutions for customers. Overall, the opportunities for growth are strong.

The company is investing heavily in marketing to attract heavy spenders and win at the top of the market. They are focusing on flagship products, digital customer experiences, elite customer servicing, and advanced fraud defense. They are also offering exclusive services and experiences, such as airport lounges and access to select properties. Additionally, they are investing in technology, digital experiences, and brand and marketing to build their National Bank. The company is pleased with the results and sees many opportunities for growth.

The speaker, Rich, discusses the company's consistent focus on improving efficiency through technology and customer experiences. He believes that this will continue to be a key driver of the company's success. He also addresses the potential impact of the CFPB's late fee proposal, which could reduce late fees by 75% and may face industry litigation.

The company is facing delays in implementing a new rule, which will have a significant impact on their P&L. They are working on mitigating actions to resolve this impact, which will take place before and after the rule change goes into effect. The company has been cautious in the auto business due to various headwinds, including margin pressure, credit normalization, and affordability pressures. They remain disciplined in their originations and do not work backward from growth targets.

The company has taken steps to manage the resilience of its lending, resulting in lower originations but better credit performance. The risk on recent originations is below pre-pandemic levels and remains stable. The company is adjusting strategies for growth and emerging risks, and the headwinds are easing. The CEO has a more bullish outlook with a note of caution. In response to a question about charge-offs, the CEO mentions that delinquencies have increased year-over-year, but the increase has slowed. This suggests that charge-offs will continue to rise in the first half of the year.

The speaker is discussing the stability of delinquencies and charge-offs for the second half of the year. They mention that delinquencies have been tracking with normal seasonality and are above pre-pandemic levels, but have stabilized. Charge-offs have also been catching up to this trend and are now leveling off. However, there is more volatility in charge-offs compared to delinquencies. Overall, the speaker feels confident in declaring that delinquencies and charge-offs have stabilized.

The paragraph discusses the stability of net charge-offs in the fourth quarter of 2019 and compares it to previous years. The company believes that 2018 is a better benchmark for charge-offs and predicts that they will stabilize at 15% above 2019 levels. This stability is attributed to the company's actions in response to the pandemic, including tightening underwriting standards. Despite the fluctuations and noise in recent years, the company's originations have shown consistent and stable performance.

The stability of the company's portfolio has greatly improved over time, leading to a decrease in charge-offs and an increase in recovery rates. This has contributed to the company's confidence that their overall loss trends have stabilized. The company has benchmarked their current performance against stable years in the past, 2018 and 2019, to determine where things are settling.

Richard Fairbank, CEO of Capital One, discusses the stability of the company in 2024 and how they have benchmarked their progress based on previous years. He also mentions their success in the subprime credit card market and their focus on resilience and profitability in this segment. Fairbank emphasizes the importance of deep investment in information-based underwriting and tailored product structures to serve this market. He also notes the consistency of their strategy over the years, including during the Great Recession.

The speaker discusses the lower end of the marketplace and how Capital One serves it. They mention that there has been solid curing in this market and that the stabilization seen in the overall portfolio is across the board. They also mention the success of their vintages and the decrease in competition from Fintechs. The speaker believes there are opportunities in this market and that they will lean into them. The speaker also addresses the impact of late fees and their deterrent effect, as well as their potential impact on the company's efficiency ratio. They believe they can maintain or improve the ratio even with the late fee, but it would require significant cost-cutting measures.

Capital One has a strategy of offering simple products to the marketplace, with no minimum balance requirements, membership fees, or overdraft fees. However, they believe the late fee is an important deterrent for consumers and compare it to a speeding ticket. They have been active in giving alerts to customers to improve their payment performance. They are concerned about the impact of the CFPB rule on credit performance and the financial impact of late fees on their P&L. They have taken various actions to mitigate this impact.

The speaker mentions that some things are underway and will have an impact on the efficiency ratio, with the biggest effect coming in the fourth quarter. They also mention that there will be progress on the efficiency ratio despite the flat to modestly down guidance. The next question asks about marketing expenses and the speaker explains that they don't give full-year guidance, as it depends on opportunities. They also mention some lumpy losses and pressure in commercial real estate office CRE.

The speaker responds to Ryan Nash's question by expressing positivity about the real-time numbers and structural investments in the business. They also discuss the office side and how it is property-specific. They saw $80 million of losses tied to office loans in the quarter and continue to not originate there. The speaker mentions that they have made progress on heavy spenders and that it will be a continuing quest to win in that market.

The speaker discusses the growth and investment in the credit business, noting that the growth rates are faster for higher spenders. They are pleased with the traction and continue to invest. The next question is about the current economic environment and its potential impact on growth, as well as an update on capital return plans.

The company is uncertain about the impact of upcoming regulatory changes and CCAR scenarios, as well as the economy's potential for a soft landing. Despite this uncertainty, the company plans to continue leaning in and investing in growth, given the strength of the US consumer and labor market.

The paragraph discusses the current state of consumer debt and its impact on the overall economy. Despite rising interest rates, debt servicing burdens remain low and home prices are near all-time highs. Consumers have excess savings from the pandemic and inflation has moderated, leading to growth in real wages. The resumption of student loan repayments and a new repayment plan for lower-income borrowers have also improved the financial situation for consumers. The company's portfolio has seen higher average payments compared to 2019, and the marketplace is competitive but stable. The company's vintages continue to perform well, and the charge-off levels have stabilized.

The speaker is discussing the success of their business and how it has been affected by lower recoveries and the pandemic. They feel good about their current position and believe they have had a "soft landing" relative to their competitors. They also mention the success of their brand, customized customer experiences, and reaching new marketing channels. The speaker feels this is a good time for their company compared to previous times.

Richard Fairbank, CEO of Capital One, believes that the current credit situation is similar to pre-pandemic levels. This is evident in the stabilized net charge-off rate, which is 15% above 2019 levels. Capital One has made efforts to adjust their credit models to account for the temporary effects of stimulus and forbearance on credit scores. However, the recoveries effect, which is lower due to less charge-off inventory, should improve over time.

The speaker discusses the effects of the pandemic on the company's charge-offs and credit metrics. They mention a delayed charge-off effect and lower recoveries, but believe that the underlying credit dynamics are similar to before the pandemic. They state that the company feels stable and has a positive outlook for the future.

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