The speaker, Jeff Norris, welcomes everyone to Capital One's Q2 2024 earnings call and introduces the other speakers, Richard Fairbank and Andrew Young. He mentions that the call is being recorded and can be accessed through Capital One's website. He also notes that the presentation may contain forward-looking statements and reminds listeners to refer to the Risk Factors section for more information. He then hands the call over to Andrew Young.

In the second quarter, Capital One's earnings per share were $1.38, but after adjusting for certain items, it was $3.14. Loans and deposits were relatively flat compared to the previous quarter, and the percentage of FDIC insured deposits increased. Pre-provision earnings increased by 7%, and revenue increased by 1%. The provision for credit losses was $3.9 billion, with the majority of the increase coming from higher allowance. The total allowance balance is now $16.6 billion, with a coverage ratio of 5.23%. The increase in allowance and coverage ratio was mainly driven by the card segment. The drivers of the changes in allowance and coverage ratio by segment will be discussed in more detail on the next slide.

The allowance coverage ratio for domestic card business increased by 69 basis points due to the termination of the Walmart loss sharing agreement. In the Consumer Banking segment, the allowance decreased by $23 million, resulting in a 5 basis point decrease in coverage ratio. The commercial banking allowance increased by $6 million, with a relatively flat coverage ratio. Total liquidity reserves decreased by $5 billion, primarily due to wholesale funding maturities and declines in commercial deposits. The net interest margin for the second quarter was relatively flat, with the termination of the revenue sharing agreement with Walmart and higher yields in the auto business being offset by seasonal effects and a slight increase in the rate paid on retail deposits. The common equity Tier 1 capital ratio ended the quarter at 13.2%, 10 basis points higher than the previous quarter, with net income being partially offset by dividends and share repurchases.

The Federal Reserve released the results of their stress test during the quarter, leading to a preliminary stress capital buffer requirement of 5.5% and a CET1 requirement of 10%. However, the announcement of the acquisition of Discover resulted in the need for pre-approval from the Federal Reserve for any capital actions until the merger process is completed. Turning to credit card business results, the domestic card business showed strong performance with 5% purchase volume growth and an 8% increase in loan balances. Revenue was up 9%, driven by growth in purchase volume and loans, and the revenue margin remained strong at 17.9%. The charge-off rate for the quarter was 6.05%, with the end of the Walmart revenue sharing agreement having a positive impact of 18 basis points. Excluding this impact, the charge-off rate 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, but the end of the Walmart agreement did not have a significant impact on delinquency rates.

The charge-off and delinquency rates for domestic card business have been decreasing, and marketing expenses have increased by 5%. The company sees growth opportunities in this business and has invested in marketing for new accounts and customer experiences. In the Consumer Banking business, auto originations have increased by 18%, while loans and revenue have decreased. Ending consumer deposits have increased by 7% compared to the previous year. Non-interest expense has also increased, mainly due to marketing for the national digital bank.

In the second quarter, the auto charge-off rate and 30 plus delinquency rate increased due to the company's decision to tighten credit in 2022. The commercial banking business saw a decrease in loan and deposit balances, but revenue remained flat and expenses decreased. The net charge-off rate and criticized performing and non-performing loan rates increased. Overall, the company delivered strong results and is on track to meet their annual operating efficiency ratio guidance, with the potential for improvement if the CFPB late fee rule is delayed.

The company's partnership with Walmart has ended, which will impact charge-off rates but improve operating efficiency. They are focusing on marketing to drive growth and strengthen their franchise, especially in the domestic card business and at the top end of the market. They are also investing in technology to enhance their marketing capabilities. In consumer banking, they are leveraging their digital capabilities to grow their national checking franchise. Marketing is a key driver of growth and value creation for the company, and they are increasing their marketing investments. They are also working towards completing the Discover acquisition.

The company is in the process of obtaining regulatory approval for their acquisition of Discover and expects to complete it later this year or early next year. The combination of Capital One and Discover will create strategic opportunities and a more diversified global payments platform. The company plans to leverage technology and scale to benefit all businesses and the network. The acquisition of Discover is seen as a unique opportunity that will create value for customers and merchants. A Q&A session will follow the presentation.

In the article, Andrew Young discusses the credit metrics and reserve rate for the company. He mentions that there has been an improvement in most segments, including a positive trend in the U.S. card segment. However, the reserve rate went higher in the current quarter, mainly due to the impact of Walmart and the growth seen in the quarter. Looking ahead, Young states that the coverage ratio may remain flat for some time as they incorporate uncertainties in future projections, but it is unlikely to be symmetric on the way down.

The speaker discusses the projected stabilizing and lower losses that will flow through the allowance in the future, but does not provide a specific timeline for when this will occur. They then mention that the US consumer remains a source of strength in the economy, with a resilient labor market and rising incomes. However, inflation has decreased real incomes and the high interest rate environment may be stretching some consumers financially. Overall, the credit performance in the quarter was satisfactory.

The speaker discusses the seasonality of the business and mentions that things are settling out nicely in the card business and are strong in the auto business. The next question is about NIM (net interest margin) and the current backdrop for deposit competition. The speaker mentions that they have seen growth in deposit balances despite the usual decline in this quarter. They are pleased with their deposit franchise and are benefiting from it. The speaker then talks about the beta in the upcycle and how it may change in the future cycle depending on market dynamics and competitive pricing actions. They mention that the pace of declines in deposit costs and betas is hard to predict, but the beta in the upcycle (62%) gives a good indication of their pricing and mix.

The speaker is asked about the health of their customer base and whether they are seeing any changes in spending patterns. They respond by saying that they are not seeing any significant changes and that their spend per customer remains stable. They also mention their strategy of gradually transitioning their portfolio to focus on higher income customers, which they have been doing for the past 14 years.

The company has been successful in targeting higher-income customers and increasing purchase volume. As a result, payment rates have gone up, but this has not had a significant impact on outstanding balances. The company has seen a mix shift towards more spenders, but overall, outstanding balances are driven by the mass market segment. There have been reports of a slowdown in spending for lower-income consumers, but the company has not seen a significant impact on their business.

Richard Fairbank discusses the performance of subprime consumers during the pandemic and how it has differed from the global financial crisis. He notes that subprime credit metrics moved more quickly and normalized sooner, likely due to government aid and forbearance. He also mentions the impact of fintech competition on subprime credit supply, but overall, subprime credit performance has been strong. Fairbank also mentions that lower income consumers have seen higher income growth in recent years, which is different from the trend seen during the global financial crisis.

The author discusses the differences in cycles for subprime and lower income consumers, noting that they tend to move earlier but not necessarily more than the overall market. They also mention that payment rates have decreased from pandemic highs but are still above pre-pandemic levels, likely due to a mix effect in their portfolio. Additionally, the percentage of customers paying minimum payments has also increased, suggesting a natural normalization process.

The delayed charge-off effect in consumer credit has resulted in a higher settlement rate and healthier payment rates, but there is a tail of consumers paying a higher percentage on minimum payments and going through charge-offs that would have happened earlier. In the second half, the company plans to spend around $2.6 billion on marketing, with some of the increase being driven by competition pushing up costs to acquire customers. However, the company may be pulling back in certain areas to cover the increased costs.

The card business is highly competitive, with a recent increase in competition for rewards. This is especially noticeable at the top of the market, where competitors are investing more in lounges, experiences, and marketing. However, the company remains confident in their marketing strategies, driven by their technology transformation which allows for more targeted and personalized solutions for customers.

The company is focusing on marketing to drive growth, especially in the top of the market where they have had success in attracting high-spending customers. This requires a significant investment in building the brand and offering exclusive services and experiences. While competition is increasing, the company does not feel the need to constantly increase marketing efforts just to maintain their position.

Capital One is facing increased competition in the credit card industry, but they are confident in their investments at the top of the market. They are also focused on building a national bank through their acquisition of ING Direct in 2012. This digital-first bank relies heavily on their cafe network and digital experiences, and marketing and brand play a central role in its growth and success. The recent merger with Discover will further expand their opportunities in the national banking space.

The company is confident about their marketing growth opportunities and is increasing their investment in marketing for the rest of the year. The second half of the year typically has more marketing than the first half. The company expects to see peak charge-offs in the second half of the year, and their credit outlook has improved but is still influenced by qualitative factors. The pace of buybacks for the rest of the year will depend on Fed approval due to the pending acquisition. The CEO also makes a joke about answering his own question.

Last quarter, we discussed the possibility of a new seasonality pattern emerging in tax refund trends, which could affect credit patterns. This is due to the higher subprime component in our portfolio, which is more linked to tax refund seasonality. Typically, the second quarter is the seasonal low point for delinquencies, while the fourth quarter is the high point. Tax refunds play a significant role in driving these seasonal trends, with a decrease in delinquent payments in February and March leading to lower delinquencies and charge-offs in April and May. However, the pandemic and changes in tax withholding rules have made it difficult to accurately assess the impact of tax refunds on seasonality.

The company has been analyzing the seasonal patterns of credit metrics and has found that there is a new seasonality due to changes in consumer behavior. This has resulted in a decrease in the amplitude of high and low points during the tax season. The company believes that this new seasonality will continue in the future and will lead to a decrease in delinquencies in the back half of the year. The company is pleased with the recent performance of credit metrics and believes that things will continue to settle out according to the new seasonality curve.

The speaker discusses the company's credit performance and expectations for the future. They mention that they are not giving forward guidance about peak declarations, but that things should head down in Q3 and then pop up in October. They also mention that their recoveries inventory is starting to rebuild, which will be a gradual tailwind to their losses. The speaker notes that the size of the delayed charge-off effect from the pandemic will also impact credit performance in the next few years. In response to a question about repurchases, the speaker states that they are not prohibited from buying shares, but are subject to Fed pre-approval until the merger approval process has concluded.

Don Fandetti from Wells Fargo asks about loan growth and potential yield compression in the auto business. Richard Fairbank, CEO of Capital One, responds by saying that they have seen success in the auto business and have experienced 21% growth in originations in Q1. They have also adjusted for credit score inflation during the pandemic and are satisfied with the performance of their portfolio. However, they are facing headwinds such as high interest rates and used car prices, which may gradually decrease. Fairbank also mentions that competitors have not passed on the higher interest rates to the cost of auto loans.

The speaker discusses the improvement in margins in the auto business and the return to previous levels after a period of decline. They also mention the increase in the reserve rate but state that there has not been a significant shift in receivables mix. The speaker also addresses the unique situation with the Walmart partnership and the impact it will have on loss rates. They do not see this as indicative of other partnerships.

The speaker discusses the importance of partnerships in the credit card business and how they evaluate potential partnerships. They look for healthy companies and partners who prioritize the partnership as a means to build a franchise rather than just for profit. They have walked away from partnerships that were too profit-driven.

The speaker discusses the patterns and exceptions in the card partnership business and emphasizes the importance of being selective and willing to walk away when the price is right. They thank everyone for joining the conference call and express their appreciation for the continued interest in Capital One. The call is now concluded.

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