Capital One Financial Q4 2024 Earnings Report

Capital One Financial EPS Results

• Actual EPS: $3.09
• Consensus EPS: $2.78
• Beat/Miss: Beat by +$0.31
• One Year Ago EPS: $2.81

Capital One Financial Revenue Results

• Actual Revenue: $10.19 billion
• Expected Revenue: $10.22 billion
• Beat/Miss: Missed by -$30.68 million
• YoY Revenue Growth: +7.20%

Capital One Financial Announcement Details

• Quarter: Q4 2024
• Date: 1/21/2025
• Time: After Market Closes
• Conference Call Date: Tuesday, January 21, 2025
• Conference Call Time: 5:00PM ET

Capital One Financial (NYSE:COF) was founded in 1988 with the goal of revolutionizing the credit card industry. The company’s ground-breaking services were data-driven, opened the doors of credit to millions of people, and today Capital One is one of the world’s largest banks.

The company’s commitment to connecting people with responsible credit helped to rank it 10th in the US in regard to total assets and 72nd globally. The company has nearly $400 billion in assets in late 2022 and operated a network of subsidiary institutions including Capital One bank. Capital One Financial Corporation is headquartered in McLean, Virginia, and operates a network of branches and offices throughout the US, Canada, and the UK.

Capital One Financial Corporation is the holding company for Capital One Bank (USA), National Association; and Capital One, National Association, which provides various financial products and services in the United States, Canada, and the United Kingdom.

Capital One Financial Corporation operates in three segments: Credit Card, Consumer Banking, and Commercial Banking. The Credit Card segment operates a wide range of revolving consumer credit cards while the Consumer Banking segment offers a range of traditional banking and investment products including auto and home loans, savings, and certificates of deposit. The Commercial segment offers business accounts, financing, commercial and multifamily real estate, and commercial and industrial loans.

In the US, the company serves its clients through digital channels, branches, cafés, and other distribution channels located in New York, Louisiana, Texas, Maryland, Virginia, New Jersey, and California. Digital services include online accounts, account services, loan applications, and investments. Among the many features of banking with Capital One are fee-free checking accounts, cloud-based financial tracking services, and Capital One Cafes. The company operates more than 40 cafes across the US where anyone, not just account holders, can get a coffee or snack as well as improve their financial education. The cafes are equipped with ample public space, nooks for private work, and even event space for meetings.

Capital One continues to advance the digital financial industry to this day. The company was among the first to move its operations to the cloud, doing so in 2012, and it is now developing machine learning, open source, and cloud technology applications to help detect and prevent fraud, secure accounts, and improve banking services.

Capital One is committed to aiding the world’s fight against climate change. To that end, it is pursuing several avenues that include influencing its value chain, fostering a sustainable office culture that is in sync with its surroundings, promoting and financing sustainable energy projects, and transparency in regard to its climate goals.

 

Capital One Financial Q4 2024 Earnings Call Transcript

Presentation

[Operator]

Good day and thank you for standing by. Welcome to the Capital One Q4 2024 Earnings Call. Please be advised that today's conference is being recorded. After the speakers' presentation, there will be a question and answer session. I would now like to hand the conference over to your speaker today, Jeff Norris, Senior Vice President of Finance.

[Operator]

Please go ahead.

[Jeff Norris, Senior Vice President of Finance at Capital One Financial]

Thanks, Josh, and welcome, everyone. Just as a reminder, as always, we are webcasting live over the Internet. And to access call on the Internet, please log on to Capital One's website, capitalone.com and follow the links from there. In addition to the press release and financials, we have included a presentation summarizing our Q4 2024 results. With me this evening are Mr.

[Jeff Norris, Senior Vice President of Finance at Capital One Financial]

Richard Fairbank, Capital One's Chairman and Chief Executive Officer and Mr. Andrew Young, Capital One's Chief Financial Officer. Rich and Andrew are going to walk you through this presentation. To access a copy of the presentation and press release, please go to Capital One's website, click on Investors, then click on Financials, and then click on Quarterly Earnings Release. Please note that this presentation may contain forward looking statements.

[Jeff Norris, Senior Vice President of Finance at Capital One Financial]

Information regarding Capital One's financial performance and any forward looking statements contained in today's discussion and the materials speak only as of the particular date or dates indicated in the materials. Capital One does not undertake any obligation to update or revise any of this information, whether as a result of new information, future events or otherwise. Numerous factors could cause our actual results to differ materially from those described in forward looking statements. And for more information on these factors, please see the section titled Forward Looking Information the earnings release presentation and the Risk Factors section in our annual and quarterly reports that are accessible at Capital One's website filed with the SEC. Now I'll turn the call over to Mr.

[Jeff Norris, Senior Vice President of Finance at Capital One Financial]

Young. Andrew?

[Andrew Young, Chief Financial Officer at Capital One Financial]

Thanks, Jeff, and good afternoon, everyone. I will start on Slide 3 of tonight's presentation. In the Q4, Capital One earned $1,100,000,000

[Andrew Young, Chief Financial Officer at Capital One Financial]

or

[Andrew Young, Chief Financial Officer at Capital One Financial]

$2.67 per diluted common share. For the full year, Capital One earned $4,800,000,000 or $11.59

[Andrew Young, Chief Financial Officer at Capital One Financial]

per share.

[Andrew Young, Chief Financial Officer at Capital One Financial]

Included in the results for the Q4 were adjusting items related to Discover integration costs and a legal reserve build. Net of these adjusting items, 4th quarter earnings per share were $3.09 Full year adjusted earnings per share were $13.96 We also had one notable item in the quarter, which was $100,000,000 of accelerated philanthropy contributions. Pre provision earnings of $4,100,000,000 in the 4th quarter were down 13% from the 3rd quarter driven by higher non interest expense. The linked quarter increase in non interest expense was driven by increases in both operating expense and marketing spend. Revenue in the linked quarter increased 2% driven by higher non interest income.

[Andrew Young, Chief Financial Officer at Capital One Financial]

Provision for credit losses was $2,600,000,000 in the quarter, up about $160,000,000 relative to the prior quarter. The quarterly increase in provision was driven by higher net charge offs, partially offset by a larger allowance release. Turning to slide 4, I will cover the allowance in greater detail.

[Andrew Young, Chief Financial Officer at Capital One Financial]

We released $245,000,000

[Andrew Young, Chief Financial Officer at Capital One Financial]

in allowance this quarter and our allowance balance now stands at $16,300,000,000 The decrease in this quarter's allowance was driven by releases in our Commercial Banking and Commercial segments. Our total portfolio coverage ratio decreased 20 basis points to 4.96%. I'll cover the drivers of the changes in allowance and coverage ratio by segment on slide 5. The allowance balance in our domestic card business was flat. The coverage ratio declined 33 basis points primarily driven by seasonal balances as well as favorable near term credit trends.

[Andrew Young, Chief Financial Officer at Capital One Financial]

In our Consumer Banking segment, we released $131,000,000 in allowance, resulting in a 22 basis point decrease to the coverage ratio. Vehicle values were stable in the quarter, resulting in an improvement improved recoveries outlook which drove the release. And finally, our commercial banking allowance decreased by $130,000,000 resulting in a 15 basis point decrease to the coverage ratio. The release was primarily driven by the reduction in criticized loans and to a lesser extent by charge offs in the quarter. Turning to page 6, I'll now discuss liquidity.

[Andrew Young, Chief Financial Officer at Capital One Financial]

Total liquidity reserves in the quarter decreased by about $8,000,000,000 to approximately 124,000,000,000 dollars Our cash position ended the quarter at approximately $43,000,000,000 down about $6,000,000,000 from the prior quarter. The decline in cash was largely driven by seasonally higher card loans and funding maturities, which were partially offset by continued strong growth in our Consumer Banking business deposits. Our preliminary average liquidity coverage ratio during the Q4 was 155%. Turning to page 7, I'll cover our net interest margin. Our 4th quarter net interest margin was 7.03%, 8 basis points lower than last quarter and 30 basis points higher than the year ago quarter.

[Andrew Young, Chief Financial Officer at Capital One Financial]

The linked quarter decrease in NIM was primarily driven by lower asset yields, which were only partially offset by lower deposit and wholesale funding costs. Turning to slide 8, I will end by discussing our capital position. Our common equity Tier 1 capital ratio ended the quarter at 13.5%, 10 basis points lower than the prior quarter. Net income in the quarter was more than offset by the impact of loan growth, dividends and $150,000,000 of share repurchases. As a reminder, the announcement of the acquisition of Discover constituted a material business change.

[Andrew Young, Chief Financial Officer at Capital One Financial]

Therefore, we continue to be subject to the Federal Reserve's pre approval of our capital actions until the merger approval process has concluded. With that, I will turn the call over to Rich. Rich?

[Richard Fairbank, Founder, Chairman, CEO & President at Capital One Financial]

Thanks, Andrew, and good evening, everyone. Slide 10 shows 4th quarter results in our credit card business. Credit card segment results are largely a function of our domestic card results and trends, which are shown on Slide 11. In the Q4, our domestic card business delivered another quarter of steady top line growth, strong margins and stable credit. Year over year purchase volume growth for the quarter was 7%.

[Richard Fairbank, Founder, Chairman, CEO & President at Capital One Financial]

Ending loan balances increased $8,000,000,000 or about 5% year over year. Average loans increased about 6% and 4th quarter revenue was up 9% from the Q4 of 2023, driven by the growth in purchase volume and loans. Revenue margin for the quarter increased 55 basis points from the prior year quarter to 18.6%, largely driven by the impact of the end of the Walmart revenue sharing agreement. The charge off rate for the quarter was 6.06%. The impact of the end of the Walmart loss sharing agreement increased the 4th quarter charge off rate by roughly 40 basis points.

[Richard Fairbank, Founder, Chairman, CEO & President at Capital One Financial]

Excluding this impact, the charge off rate for the quarter would have been 5.66%, up 31 basis points year over year. And after 20 consecutive months of second derivative improvement, the 30 plus delinquency rate crossed into actual year over year improvement. The 30 plus delinquency rate at the end of December was 4.53%, down 8 basis points from the prior year. As a reminder, the end of the Walmart loss sharing agreement did not have a meaningful impact on delinquency rate. On a sequential quarter basis, the charge off rate was up 45 basis points.

[Richard Fairbank, Founder, Chairman, CEO & President at Capital One Financial]

The 30 plus delinquency rate was flat compared to the linked quarter. Domestic card non interest expense was up 13% compared to the Q4 of 2023. Operating expense and marketing both increased year over year. Total company marketing expense in the quarter was $1,400,000,000 up 10% year over year. Our choices in domestic card are the biggest driver of total company marketing.

[Richard Fairbank, Founder, Chairman, CEO & President at Capital One Financial]

We continue to see compelling growth opportunities in our domestic card business. Our marketing continues to deliver strong new account growth across the domestic card business. Compared to the Q4 of 2023, domestic card marketing in the quarter included higher media spend and increased investment in premium benefits and differentiated customer experiences like our travel portal, airport lounges and Capital One Shopping. Slide 12 shows 4th quarter results in our consumer banking business. Auto originations were up 53% from the prior year quarter.

[Richard Fairbank, Founder, Chairman, CEO & President at Capital One Financial]

A portion of this growth can be attributed to overall market growth, while the remainder is the result of our strong position to pursue resilient growth in the current marketplace. As a reminder, our choices to tighten credit and pull back in anticipation of credit score inflation and declining vehicle values were still in effect in the Q4 of 2023 resulting in relatively low originations. These choices also drove out really basically they drove strong and stable credit performance that positioned us to lean into current marketplace opportunities and return to originations growth in 2024. With 4 consecutive quarters of originations growth in 2024, consumer banking loan balances returned to growth in the 4th quarter. Ending loans increased $2,700,000,000 or about 4% year over year and average loans were up 1%.

[Richard Fairbank, Founder, Chairman, CEO & President at Capital One Financial]

On a linked quarter basis, ending loans were up 2% and average loans were up 1%. Compared to the year ago quarter, ending consumer deposits grew about 7% and average consumer deposits were up about 8%. Consumer banking revenue for the quarter was up about 1% year over year. Growth in loans and deposits was partially offset by a higher year over year average deposit interest rate. Non interest expense was up about 10% compared to the Q4 of 2023, driven largely by the unique 4th quarter items Andrew discussed as well as increased auto originations and continued technology investments.

[Richard Fairbank, Founder, Chairman, CEO & President at Capital One Financial]

The auto charge off rate for the quarter was 2.32%, up 13 basis points year over year. The 30 plus delinquency rate was 5.95%, down 39 basis points year over year, Largely as the result of our choice to tighten credit and pull back in 2022, auto charge offs have been strong and stable on a seasonally adjusted basis. Slide 13 shows 4th quarter results for our commercial banking business. Compared to the linked quarter, ending loan balances were essentially flat. Average loans were down about 1%.

[Richard Fairbank, Founder, Chairman, CEO & President at Capital One Financial]

Both ending and average deposits were up about 4% from the linked quarter. 4th quarter revenue was up 7% from the linked quarter and non interest expense was up by about 5%. The commercial banking annualized net charge off rate for the 4th quarter increased 4 basis points from the sequential quarter to 0.26%. The commercial criticized performing loan rate was 6.35 percent, down 131 basis points compared to the linked quarter. The criticized non performing loan rate decreased 16 basis points to 1.39%.

[Richard Fairbank, Founder, Chairman, CEO & President at Capital One Financial]

In closing, we continued to post strong and steady results in the 4th quarter. We delivered another quarter of top line growth in domestic card loans, purchase volume and revenue. In the auto business, we posted growth in originations for the 4th consecutive quarter and a return to year over year growth in loan balances and consumer credit trends remained stable. Our full year operating efficiency ratio net of adjustments was 42.35 percent consistent with our guidance of the low 42s even after incurring $100,000,000 in accelerated philanthropy contributions. And turning to the Discover acquisition.

[Richard Fairbank, Founder, Chairman, CEO & President at Capital One Financial]

The shareholder votes are scheduled for February 18, and we continue to work closely with the Federal Reserve, the OCC and the Department of Justice as our applications continue to work their way through the regulatory approval process. We remain well positioned to complete the acquisition early in 2025 subject to regulatory and shareholder approval. Pulling WayUp, the acquisition of Discover is a singular opportunity. It will create a consumer banking and global payments platform with unique capabilities, modern technology, powerful brands and a franchise of more than 100,000,000 customers. It delivers compelling financial results and offers the potential to enhance competition and create significant value for merchants and customers.

[Richard Fairbank, Founder, Chairman, CEO & President at Capital One Financial]

And now we'll be happy to answer your questions. Jeff?

[Jeff Norris, Senior Vice President of Finance at Capital One Financial]

Thank you, Rich. We will now start the Q and A session. Remember, as a courtesy to other investors and analysts who may wish to ask a question, please limit yourself to 1 question plus a single follow-up. And if you have any follow-up questions after the Q and A session, the Investor Relations team will be available after the call. Josh, please start the Q and A.

[Operator]

Thank you. And our first question comes from Ryan Nash with Goldman Sachs. You may proceed.

[Ryan Nash, Managing Director - Equity Research at Goldman Sachs]

Hey, good afternoon, everyone.

[Richard Fairbank, Founder, Chairman, CEO & President at Capital One Financial]

Hey, Ryan. Hey, Ryan. Hey, Ryan.

[Ryan Nash, Managing Director - Equity Research at Goldman Sachs]

So, Rich, delinquencies have been in line or better for 9 straight months losses and you talked about delinquencies now being down on a year over year basis and losses have sort of followed suit, but at a little bit of a slower pace. And you've outlined a lot of the reasons, deferred charge offs, the press recoveries. But when you think about credit from here, just broadly, what are you seeing from the consumer? And how are you thinking about loss performance as well as any other factors that could be impacting losses? And do you think we're on a downward trajectory from here?

[Ryan Nash, Managing Director - Equity Research at Goldman Sachs]

Thank you. And I have a follow-up.

[Richard Fairbank, Founder, Chairman, CEO & President at Capital One Financial]

Thank you, Ryan. So let me start by just talking about the health of the consumer and then maybe I'll turn and talk about the credit performance at Capital One. So the U. S. Consumer continues to be a source of strength in the overall economy.

[Richard Fairbank, Founder, Chairman, CEO & President at Capital One Financial]

The labor market remains strong and we saw signs of softening in the first half of 2024, but in the second half of the year, the unemployment rate has been stable and job creation data has shown renewed strength. Incomes are growing steadily in real terms as inflation settles out a bit. Consumer debt servicing burdens are stable near pre pandemic levels. Consumers have higher bank account balances than before the pandemic. Now of course, the circumstances of individual consumers and households are highly variable.

[Richard Fairbank, Founder, Chairman, CEO & President at Capital One Financial]

And so talking in averages doesn't always fully cover what's going on. We do see some pockets, as I've been saying for some time now, we do see some pockets of pressure related to the cumulative effects of inflation and elevated interest rates among consumers whose incomes have not kept up with inflation or who have high debt servicing burdens. Of course, there's still some inflation pressure and longer term interest rates strikingly have increased since the Fed started lowering rates in September. So we do see a bit of a disconnect between the average consumer and the folks closer to the margin. And you can see that, for example, in payment rates in our card business.

[Richard Fairbank, Founder, Chairman, CEO & President at Capital One Financial]

On the one hand, card payment rates remain on average meaningfully above pre pandemic levels. And this is true overall and within each of our major customer segments. On the other hand, the proportion of customers making just the minimum payment is also running somewhat above pre pandemic levels, which is consistent with our card delinquencies running above pre pandemic levels. Now I should add that we're seeing this minimum payment effect across this credit spectrum. I'm not making a point here about the low end of the market or even about subprime.

[Richard Fairbank, Founder, Chairman, CEO & President at Capital One Financial]

In fact, if anything, the lower end appears to be doing relatively better at the moment. So just pulling up, I believe we're almost certainly still seeing some pandemic related effects like delayed charge offs from the period of unprecedented stimulus and forbearance in 2020 and 2021 and 2022. This effect is impossible to isolate, but we can infer it from our own credit trends and industry credit trends over the past several years. But sort of pulling up on the consumer, I think consumers are in good shape compared to most historical benchmarks. There are as we've been saying for some time, there are pockets of pressure that have to work their way through before levels can get down credit loss levels can get down to sort of pre pandemic levels.

[Richard Fairbank, Founder, Chairman, CEO & President at Capital One Financial]

But I think the consumer story is very consistent with what I've been saying for a number of quarters and it is very solid. So let me turn to Capital One Credit. Over the course of 2024, our card delinquencies have moved in line with normal seasonality with losses following about a quarter behind. As a reminder, earlier this year, we flagged that changes in the level and timing of tax refunds due to tax law changes we're probably changing seasonal credit patterns in our card business. We derived new seasonality benchmarks for card delinquencies based on post pandemic performance and those benchmarks have less amplitude in both directions than in the past.

[Richard Fairbank, Founder, Chairman, CEO & President at Capital One Financial]

So we've now had a full year to look at what we were hypothesizing as the new seasonality benchmark. And as we now look at the whole year, this experience is very confirmatory and we very much sort of believe that we've got the benchmark right. And when we first saw delinquencies settling out, it is clear that really for the whole year now, we've been calling stabilization. We've not been declaring a peak or declaring that credit would improve from here, but we can now look at the whole year and see a really nice stabilization. In the Q4, and again you saw this in the month we just reported, we saw our delinquencies improve on a seasonally adjusted basis in the quarter for the first time since normalization began.

[Richard Fairbank, Founder, Chairman, CEO & President at Capital One Financial]

And they ended the year slightly lower on a year over year basis. So that's certainly an encouraging sign. Looking ahead, we're not giving guidance on future credit, but over time there are a number of forces that play out. Our recoveries inventory will will continue to rebuild and that should be a gradual tailwind to our losses over time, all else equal. Still high interest rates will probably remain a source of pressure for some consumers, especially those with higher debt servicing burdens.

[Richard Fairbank, Founder, Chairman, CEO & President at Capital One Financial]

And there still is, we believe, the phenomenon of delayed charge offs. And of course, this effect is hard to measure and certainly hard to forecast. But over time, it should play through. But how long it plays out, that's just something that is just a matter of speculation. I think we will eventually get back to the place where traditional labor market indicators are the main drivers of change in consumer credit, but that will still take some time.

[Richard Fairbank, Founder, Chairman, CEO & President at Capital One Financial]

And finally, as we move into the New Year, we'll keep an eye on the level and timing of tax refunds since we know these can materially affect seasonal movements in card credits.

[Ryan Nash, Managing Director - Equity Research at Goldman Sachs]

Got it. Thanks for the color. If I can throw in one high level follow-up. So Rich, efficiency improvement has been a hallmark of Capital One for the last 7 or 8 years ex a small period during COVID. You recently talked about investments you wanted to make in the network once the deal hopefully closes at some point in the Q1.

[Ryan Nash, Managing Director - Equity Research at Goldman Sachs]

I guess the question is, do you expect to continue to be on an efficiency journey fully recognizing that the cost saves obviously make it easier? But just curious how you're thinking about efficiency for the consolidated company over the medium term, fully recognizing that there's going to be a lot of noise in the results?

[Richard Fairbank, Founder, Chairman, CEO & President at Capital One Financial]

So, we look forward to the completion of our deal and actually really getting inside the financials and the performance and all the details of the business. The business is at this rather remarkable company, Discover. But as we've talked about, when we look still from the outside, we see just a great opportunity there. And of course, we have said there are 3 areas that are going to need continued investment. When we think about virtually anything that all the strategic upside of this Discover deal, it's sort of all roads lead through 3 areas, kind of obvious areas of continued investment.

[Richard Fairbank, Founder, Chairman, CEO & President at Capital One Financial]

And the first of course is compliance and risk management and Discover has really been leaning into that and we of course are doing everything we can to prepare to continue to lean into that and we'll do whatever it takes on that front. Obviously, that's an investment. The second is network acceptance. We've talked about how struck we are and how struck we were to find out and confirm just how good the acceptance is in the United States for Discover. You can see in fact they've been putting some ads on TV sort of touting that and it's a very good story.

[Richard Fairbank, Founder, Chairman, CEO & President at Capital One Financial]

And internationally, they've been investing there and focusing on where their customers travel and they've made a lot of progress there. When we look at our customer base at Capital One and where we would love to be over time in terms of being in a position to add more and more volume onto the Discover network, we think an incredibly important objective is to increase the depth and breadth of acceptance internationally, sloping the work, of course, working backwards from where our customers and discovers travel. So that's going to be a multi year thing that's a very important strategic imperative, I think, for us. And then the third one will be building the network brand. We plan to keep the name Discover for the network.

[Richard Fairbank, Founder, Chairman, CEO & President at Capital One Financial]

We think it's a great brand. And we're really happy with the underlying reality of where acceptance is. We know there are challenges in terms of consumer perception relative to those realities. And we know also we need to, in fact, build the international reality and then the brand perception that follows that. So those are the 3 strategic the kind of obvious and strategic investment areas that we've been identifying really since the start of the deal.

[Richard Fairbank, Founder, Chairman, CEO & President at Capital One Financial]

And back to your question about how do we think that fits in relative to efficiency ratio, we of course on the Capital One side have had a long decade long journey of continuing to improve operating efficiency ratio and it's striking that that improvement has come even as we have continued to really ramp up investment in technology. Now the way that paradox works is the technology is we're also investing more in technology and at the same time getting all the benefits on the efficiency side both in terms of growth and in terms of cost that come from such an investment in technology. So the engine that drives operating efficiency ratio strategically will continue at Capital One and it should continue with the combined institution as well. Now, then you ask will the big three investment areas that we talk about, what will that do to operating? I think we always at Capital One have strategic imperatives that we're investing in.

[Richard Fairbank, Founder, Chairman, CEO & President at Capital One Financial]

I think the overall picture of how Capital One's tech journey helps pay one of the important ways investors get paid is through operating efficiency improvement. I think that story to me stays strategically intact even as we have new investment areas because we'll also have new areas to capture synergy and growth opportunities and things that really wouldn't have been possible for either of our companies alone. So, thanks for the question. Operating efficiency is a really important way that we create values for investors. And in the long run, we continue to really see increased opportunities there.

[Jeff Norris, Senior Vice President of Finance at Capital One Financial]

Next question, please.

[Operator]

Thank you. Our next question comes from Terry Ma with Barclays. You may proceed.

[Terry Ma, Senior Equity Research Analyst at Barclays Capital]

Hi, thank you. Good evening. I wanted to follow-up on credit first. It seems the trend that we've seen for the second derivative suggests there's room for that to continue to go lower. Is there some sort of framework to think about how much lower DQs can go can trend going forward?

[Terry Ma, Senior Equity Research Analyst at Barclays Capital]

And is there anything in the near term that can cause the second derivative to inflect higher again? And I have a follow-up.

[Richard Fairbank, Founder, Chairman, CEO & President at Capital One Financial]

So, Terry, yes. So thank you for the question. Obviously, well, since the founding of the company, we've always had our microscopes out looking at delinquencies because they're the single best predictor of credit of all the metrics. There are many metrics we watch, but that certainly is at the top of the list. And it is, I think, a really important it's certainly a gratifying milestone to where finally the second derivative crossed the horizontal axis effectively and we certainly note that milestone.

[Richard Fairbank, Founder, Chairman, CEO & President at Capital One Financial]

The first thing I would say about as we all get our microscopes out to look at trends on a monthly basis is to just talk about seasonality itself. And we don't publish a seasonality curve per se because there's no precise benchmark with which to do it, but we certainly like to guide our investors about how we think about that. Seasonality for Capital One has tended to have more amplitude up and down over the course of a year than most other card players. And one might ask, why is that? We believe that the biggest driver of seasonality, while there are several, the biggest driver of seasonality is tax refunds.

[Richard Fairbank, Founder, Chairman, CEO & President at Capital One Financial]

And since we have a larger subprime book than most other players who really don't do subprime, Those customers do tend to have higher seasonality in their credit performance than folks higher up market. So I think that's why Capital One has a greater seasonality effect. And for these customers in particular, tax refunds certainly in terms of the monthly flow of cash can end up creating something very nice that comes seasonally and some of that makes its way into payments. Now the changes in the tax withholding rules a few years ago led to fewer tax refunds and lower average refund payments And the IRS was also paying certain refunds later than before. So that created a lot of noise.

[Richard Fairbank, Founder, Chairman, CEO & President at Capital One Financial]

As I've been saying on recent calls, you'd think it would be easy to reestablish a seasonality curve, but while credit was normalizing so dramatically, it was sometimes swamping the seasonality effect. But we created sort of this de trended seasonal curve from 2023 to the best we could and that turned out to really be right on for 2024. If I were to pull up and kind of summarize what we saw in 2024, 2024 settled out with fewer refunds paid than before the pandemic and about 25% lower total refund volume in real terms. Delinquencies moved with our new post pandemic seasonality benchmarks, which have similar timing, but if I were to summarize what this new curve versus the one we've had for many years, it appears to have about 35% to 40% less amplitude in both directions than in the past. By the way, just a note for a second on auto, all of this also happens in auto seasonality, but in an even faster and more concentrated way.

[Richard Fairbank, Founder, Chairman, CEO & President at Capital One Financial]

We tend to see auto delinquencies at their seasonal low in Q1 and losses in Q2. And this year, that seasonal improvement was delayed a bit. So that's the backdrop for now talking about the credit performance that we see. If you start, Terry, with the sort of foundation that the consumer is in very good shape, the economy is in quite good shape overall, one would certainly feel there's sort of a gravitational pull toward even better credit in the business that is helped by the math associated with recoveries that our recoveries rate has been very constant, but the recovery inventory that we have had to collect on got very small during the pandemic and that has been replenishing. And so there's sort of a good guy gradually coming as recoveries fully restore.

[Richard Fairbank, Founder, Chairman, CEO & President at Capital One Financial]

And then that really gets us to whatever effects there are of inflation, whatever effects there are on the consumers on the tails that are not in as good shape as sort of the averages that we all look at. And that's and what we see there is probably the way actually that the delayed charge offs are actually playing out. They're probably playing out exactly through these consumers on the tail that are not they're still struggling at the margin. So the credit metrics are looking great. We have more solid benchmarks, Terry.

[Richard Fairbank, Founder, Chairman, CEO & President at Capital One Financial]

The consumer is in a great place. But I think the sort of bigger picture phenomenon of delayed charge offs that still has intuitively to play out And sort of these effects going on at the tail puts us in a position not to be declaring that things are headed down from here, but it's certainly positive indicators that we see at the margin.

[Terry Ma, Senior Equity Research Analyst at Barclays Capital]

Got it. That's helpful. Maybe just to talk about the auto business. You called out the loan book returned to growth this quarter. So we expect you to lean into that and see loan growth accelerate.

[Terry Ma, Senior Equity Research Analyst at Barclays Capital]

And maybe can you just talk about the overall profitability of the loans you're booking today versus what you've seen historically? Thank you.

[Richard Fairbank, Founder, Chairman, CEO & President at Capital One Financial]

So

[Richard Fairbank, Founder, Chairman, CEO & President at Capital One Financial]

we feel very good about the auto business. The credit performance is really striking. And in fact, let's just savor something that is, I think an outlier relative to the industry. But, our auto delinquencies have remained consistently below pre pandemic levels, and they've been lower on a year over year basis for the past two quarters. And so the auto business is there are many similar things about our card business and the auto business, but if you were to compare the 2, the degree with which we sort of intervened in the business and trim credit around the edges, it might have been even more dramatic than the term around the edges, what we did in the auto business over the last few years when we were worried about margin pressures in the business as prices were not being sort of passed inflation pressures were not being passed through.

[Richard Fairbank, Founder, Chairman, CEO & President at Capital One Financial]

So there were margin pressures, there were declining vehicle values and there was inflation of credit scores. So all of that led us to pull back. And each of those have sort of have been resolving themselves. You asked about margins. The margins are sort of much more sort of normal in the business right now.

[Richard Fairbank, Founder, Chairman, CEO & President at Capital One Financial]

The grade inflation on credit scores is resolving itself as credit normalizes. Vehicle values, we'll have to continue to keep an eye on those. But pulling way up on the shoulders of a lot of the changes that

[Richard Fairbank, Founder, Chairman, CEO & President at Capital One Financial]

we have made and the technology that we

[Richard Fairbank, Founder, Chairman, CEO & President at Capital One Financial]

have massively invested in this business in underwriting and in originations and in our Auto Navigator platform. All of those put us in a position to feel bullish about leaning into auto. And I think we all the trends that we see on margins, credit and competition, we feel good about and that lines up to a story of leaning in on the auto

[Richard Fairbank, Founder, Chairman, CEO & President at Capital One Financial]

business.

[Jeff Norris, Senior Vice President of Finance at Capital One Financial]

Next question please.

[Operator]

Thank you. Our next question comes from Rick Shane with JPMorgan. You may proceed.

[Richard Shane, Analyst at JP Morgan]

Thanks for taking my question. Hey, Rich, you did a great job laying out the factors that have caused the historical relationship between labor and credit to weaken. And one of the factors you mentioned was the impact of rates and that makes sense. Credit cards are one of the 2 largest classes of floating rate consumer debt. As we think about reversion to historical norms, should we expect charge off rates to be structurally higher as long as interest rates are structurally higher?

[Richard Shane, Analyst at JP Morgan]

Or is it possible to get back to historic loss rates in a high interest rate environment?

[Richard Fairbank, Founder, Chairman, CEO & President at Capital One Financial]

It's a great question. It's interesting how all of us some of us were around doing similar things back when in well, Capital One, we hadn't even come up with the idea for Capital One back when inflation was really raging the last time around. So I think we would be speculating there. But I think, Rick, if we pull up and think about interest rates and their impact, we think about how higher rates as a thing affect consumer credit. So debt servicing burdens for consumers of course can get affected.

[Richard Fairbank, Founder, Chairman, CEO & President at Capital One Financial]

The higher rates as they work their way through consumer products gradually, but not immediately sort of make their way into higher debt burdens. So you have mortgages that tend to have fixed rates, auto loans have fixed rates. So you have time delays before interest rates make their way to more pressure on consumers, but still that effect obviously can continue. Most credit cards have variable APRs, so rising interest rates have tended to lead to somewhat higher minimum payments for consumers overall. But if we pull up, I think that if wages, if things stabilize and wages tend to keep up with inflation, I would think on the credit card side, there's it is plausible that charge off rates could be very consistent with what they've been in a lower ambient rate environment.

[Richard Fairbank, Founder, Chairman, CEO & President at Capital One Financial]

I think it gets very challenging when they're suddenly in motion up. But if they stabilize, I'm just speculating here at a moderate level that's higher than they were for the last couple of decades. I think, as wages sort of stabilize to make real incomes move the way they should, I would think that credit numbers could be very consistent with historical patterns. I think the biggest driver of why they're not right now, if I were to speculate, probably number 1 on my list is really the just unprecedented number of years, of which charge offs with all the government stimulus and the forbearance that so many consumers got a lifeline that those for whom that lifeline was a little more temporary in its benefit. Some of those issues are still resolving themselves in terms of current charge offs.

[Richard Fairbank, Founder, Chairman, CEO & President at Capital One Financial]

It's always an interesting thing to just take a look at the area under the curve in credit losses for if we look back over the last number of years and look at where credit losses would typically have been versus where they were and you look at the area under the curve and ask yourself, well, what if all of that were delayed charge offs? You still have a majority of that area under the curve that would still have to play out in terms of delayed charge offs. Now we don't believe that anything close to all of the area under the curve would need to come on the other side. But I think a one sentence sound bite to me of why in such a benign environment credit losses in businesses like credit cards are running higher than pre pandemic. It is the delayed charge off effect.

[Richard Fairbank, Founder, Chairman, CEO & President at Capital One Financial]

And time should be our friend there. That should resolve itself over time. And there are a lot of positive factors behind that, that are putting sort of good gravitational pull in the right direction in this industry.

[Richard Shane, Analyst at JP Morgan]

Thank you very much, Rich.

[Jeff Norris, Senior Vice President of Finance at Capital One Financial]

Next question please.

[Operator]

Thank you. Our next question comes from John Pancari with Evercore ISI. You may proceed.

[John Pancari, Senior managing director and senior research analyst at Evercore]

Good evening.

[John Pancari, Senior managing director and senior research analyst at Evercore]

Just on the efficiency side, just a follow-up to Ryan's line of questioning. I know you've guided to an operating efficiency ratio in the low 42% range for 2024. Does this 42% range remain the case as you look at 2025? Or do you see a change to the upside or the downside off of this level? Thanks.

[Richard Fairbank, Founder, Chairman, CEO & President at Capital One Financial]

So, we I think the operating efficiency ratio has really been hopefully our investors share our excitement that this 700 basis point improvement that has happened since we began our tech transformation in 2013 has been a guide or multiple things behind that. But the biggest driver is the technology transformation. And even as we invest a lot, there are also ways to create savings, savings through reduced vendor costs, that really high cost of a lot of legacy technology, the benefits on the cloud and really the ability to then on the other side of the technology transformation sort of rebuild the company and how it operates on a foundation of modern technology. And so that's a journey that continues. And so we see benefits there.

[Richard Fairbank, Founder, Chairman, CEO & President at Capital One Financial]

I do want to say though also you have, we've had a lot of beneficial increase in the ratio in the last couple of years. And I wouldn't want people to just draw take the curve and say, wow, that thing almost looks like it's accelerating down. And we don't give guidance in the short term. There are a lot of things that very important investments we're making in the business. But what I like to do is really just point out that when we stand back over a longer time frame and look at the journey of Capital One, this has been a journey for which the efficiency was never the objective function.

[Richard Fairbank, Founder, Chairman, CEO & President at Capital One Financial]

It was one of the many benefits of a tech transformation, but it's very gratifying to see that continue. But I think the extrapolation from any 1 year to the next is not something that we would recommend. And so, but it's a great long term story.

[John Pancari, Senior managing director and senior research analyst at Evercore]

Got

[John Pancari, Senior managing director and senior research analyst at Evercore]

it. Okay. Thanks, Rich. And then one quick second one, I assume this will be a pretty quick answer, but would be helpful if there's any have you made any changes to your expected deal metrics tied to the Discover deal, either the 15% or greater EPS accretion in 27% or the expense efficiencies or the timing of adding the $175,000,000,000 in purchase volume to the network? Thanks.

[Andrew Young, Chief Financial Officer at Capital One Financial]

Hey, John. What I'll say is, it's 2 independent public companies. We still are operating separately at this point and there are a number of variables that have moved and will continue to move between now and legal day 1. And so I'm not going to specifically comment on how any one of those variables or metrics are changing since the deal model. What I will say is we considered a wide range of outcomes across each of the line items and we continue to be comfortable with the estimates that we included in the deal model.

[Andrew Young, Chief Financial Officer at Capital One Financial]

We feel very good both strategically and financially about the deal today as we did nearly a year ago when we announced it. And so, as we get to legal day 1 and put the marks on the balance sheet, we'll provide updates on the relevant metrics at that point.

[Jeff Norris, Senior Vice President of Finance at Capital One Financial]

Next question, please.

[Operator]

Our next question comes from Mihir Bhatia with Bank of America. You may proceed.

[Mihir Bhatia, Analyst at Bank of America]

Good afternoon and thank you for taking my questions. I wanted to start first by just talking about NIM a little bit. You called out the Walmart impact this quarter. Any other callouts for the quarter? It just feels banks have been quite disciplined about lowering saving accounts interest rates as the Fed has reduced rates.

[Mihir Bhatia, Analyst at Bank of America]

Do you think that continues? Or are you starting to see some demand for deposits or deposit competition ramping as we start contemplating loan growth here into 2025? I guess just related to that, if you could just talk about some of the puts and takes on NIM in 2025, that'd be great. Thank you.

[Andrew Young, Chief Financial Officer at Capital One Financial]

Sure, Mihir. Let me start with just reminding everyone that the one thing for sure we know is that in the Q1, we have 2 fewer days and so that will drive a 15 basis point roughly decrease in NIM. But if I kind of pull up and think beyond day count and look at a longer term the longer term, a lot of the same forces that I've been describing for the last number of quarters as potential headwinds and tailwinds still exist today. So if you think about the headwinds, 1st of all, were very modestly asset sensitive. And so you'd see a small decrease in NIM if rates continue to decrease and you saw a little bit of that effect here in this quarter.

[Andrew Young, Chief Financial Officer at Capital One Financial]

The other one you bring up deposit beta, of course, in our rate risk modeling, we make assumptions around deposit betas. So, to the extent that betas are lower or slower on the way down, we would be a little bit more asset sensitive in that scenario. So, those could be headwinds. But on the tailwind side, the steepening yield curve relative to forwards would be a good guy if that persists. But then probably the single biggest factor and we've seen this play out over the last number of quarters is the card growth and card becoming a bigger percentage of our balance sheet all else equal is a pretty meaningful tailwind to NIM.

[Andrew Young, Chief Financial Officer at Capital One Financial]

So those are really the forces at play that I would highlight for you.

[Mihir Bhatia, Analyst at Bank of America]

Got it. Thank you. And then maybe just turning quickly to capital return. You've been doing $150,000,000 in buybacks last few quarters. Your CET1 is up to 13.5 You understand with the deal, you have to get approval, right, for any capital actions.

[Mihir Bhatia, Analyst at Bank of America]

But the question is a 2 part question is, a, is that approval keeping you a little conservative right now? And 2, once the deal is approved, should we assume you'll be pretty aggressive in getting that down? Or would it probably fair to assume it stays elevated for a little bit even post deal as you get through the integration?

[Andrew Young, Chief Financial Officer at Capital One Financial]

Yes. I'll wrap my answer to both of those questions into one for you, Mihir. First of all, just go without saying, but I will say it, which is we clearly recognize that over the longer term, capital return is a key component of shareholder value creation. And you've seen in prior periods, we've executed substantial share repurchases. But in the near term, our pending deal is certainly influencing our approach to capital in a few ways.

[Andrew Young, Chief Financial Officer at Capital One Financial]

As you said, we're still under regulatory preapproval rules for each of our capital actions. And second, we will need to run our own bottoms up analyses as a combined company to just assess our view of the combined capital need and we continue to be 2 separate companies and therefore don't have the ability to do that analysis until after close. And then third, we will need the Fed's approval to go back to operating under the SCB framework. So if I pull up from there and put all of those together, I think it's likely we're going to stay at a slower repurchase pace until we resolve these factors. But after that, we'll have more flexibility.

[Jeff Norris, Senior Vice President of Finance at Capital One Financial]

Next question please.

[Operator]

Our next question comes from Bill Carcache with Wolfe Research Securities. You may proceed.

[Bill Carcache, Equity Research Analyst at Wolfe Research]

Thank you. Good evening, Rich and Andrew. It was good to hear all the references to the Capital One arena around the inauguration. I wanted to ask about your ability to better compete against the big banks in debit, assuming the Discover transaction closes as you expect. We know debit rewards for Visa, Mastercard issuers essentially went away after the forced reduction in interchange under Dodd Frank.

[Bill Carcache, Equity Research Analyst at Wolfe Research]

But would reintroducing debit rewards be something that you'd consider given the greater flexibility that owning the Discover network will afford you?

[Richard Fairbank, Founder, Chairman, CEO & President at Capital One Financial]

Hey, Bill. So obviously, a really key part of the deal is our excitement about getting the network and being able to add such a key dimension in vertically integrating our business. And we talk so much about credit cards all the time. The debit business is a really important one. And on little cat feet, Capital One has really been investing in our national banking business.

[Richard Fairbank, Founder, Chairman, CEO & President at Capital One Financial]

So, I and by the way, having our own network will be valuable there and we'll be able to enjoy the vertically integrated economics of owning a network and the scale that comes, of course, from pulling Discover and a bunch of Capital One's volume together. Now, I just want to pull back and just talk a little bit about Capital One's consumer banking strategy and therefore and debit is of course right in the transaction business right at the heart of that. If you pull way up and think about consumer banking, way back to when banks began, you had banks with branches on every corner. And then in the last 15 or 20 years, there have been the evolution of direct banks and they have been savings only, offering higher rates and they have no physical distribution whatsoever. And we, of course, also through our acquisitions have acquired several banks with branches on every corner and we also acquired the nation's largest direct bank and I announced at the time of that acquisition, this is a great financial trade, but it is also a strategic game changer for Capital One.

[Richard Fairbank, Founder, Chairman, CEO & President at Capital One Financial]

That was back like 12 years ago. So since then, we have been very steadily, systematically, relentlessly and patiently, if I could put so many adjectives on adverbs on that, pursuing a business model that actually doesn't really exist right now because we have those 2 endpoints. But what we're really trying to do is build in a sense the bank of the future. And we believe that bank of the future is not just a direct bank, it's also not a bank with a branch on every corner. It is a bank with thin physical distribution.

[Richard Fairbank, Founder, Chairman, CEO & President at Capital One Financial]

For us, we've got branches, but then also in major metropolitan areas, we have put in cafes that are really basically less about coffee, but really more about being sort of a hybrid of a branch and a showroom for Capital One and a place people can go and understand Capital One is there to help them and get a sense for really what this company is about and how it may be able to help them live their life more effectively. So as we've been so this strategy has been about if we work backwards from what we believe is the bank of the future, from a distribution point of view, that's thin physical distribution and highlighted by these cafe showrooms. It also a very central part of that is digital capabilities that enable something that's a very, very difficult thing to do, which is to take just about everything that can be done in a branch and make it available digitally. Now there are some things like safe deposit boxes. We haven't figured out how to create a digital safe deposit box for your valuables.

[Richard Fairbank, Founder, Chairman, CEO & President at Capital One Financial]

And there are a few things that just you can't get there on a digital basis. But as we've looked at this, we said just pretty much virtually all the activities that people go to branches for, we want to be able to deliver to them through our thin physical distribution plus massive full service digital capability. And that's what we've been building over these years. Additionally, it requires in order to generate business, we need great products and we've been the only major bank out there with no fees, no minimums and even a recent move of no overdraft fees. And those better deals come from having built the, in a sense, superior economics that come from this sort of physical distribution light model.

[Richard Fairbank, Founder, Chairman, CEO & President at Capital One Financial]

Now then you asked the question, so what will be our debit card strategy? We haven't completed the deal. We haven't fully gone in on the other side of exactly seeing how things are working on the Discover side. But we are very pleased with the results that we're having with our current strategy, including our current debit card strategy. And we are investing heavily to continue to grow that business.

[Richard Fairbank, Founder, Chairman, CEO & President at Capital One Financial]

You look at the significant increase in marketing over the years. One of the drivers of this is that Capital One is building a national bank organically without a lot of physical distribution and to get there it takes a lot of marketing. So I think the best way to think about it is Discover gives a shot in the arm and a boost to a strategy we've been pursuing for more than a decade. And the best way to think about it, I think, is picture just more of the same from Capital One with a little bit of an accelerator.

[Bill Carcache, Equity Research Analyst at Wolfe Research]

I appreciate all the details, Rich. Thank you.

[Jeff Norris, Senior Vice President of Finance at Capital One Financial]

Next question, please.

[Operator]

Our next question comes from Moshe Orenbuch with TD Cowen. You may proceed.

[Moshe Orenbuch, Managing Director at TD Cowen]

Great, thanks. Rich, you talked about better growth in auto and card, talked about the high end card. Can you talk about the non prime businesses in both card and auto, given the improved credit, how you're thinking about growth in those businesses in the coming quarters?

[Richard Fairbank, Founder, Chairman, CEO & President at Capital One Financial]

Moshe, the word that I would use at the lower end of the business, obviously there are parts of the market below where we play, but if we sort of loosely call it at the lower end of the non prime or subprime part of the marketplace, the word that I would use to describe it is stability. And stability of let's look at the key aspects of that. On the consumer credit side, actually the first part of our business to normalize, really to settle out with respect to credit was the lower end of the market. That's been very stable. Our originations in that segment and really pretty much across our business.

[Richard Fairbank, Founder, Chairman, CEO & President at Capital One Financial]

The originations are coming in on top of each other for years, so that has a stability there as well. Competitively, it's a very competitive part it's a very competitive part of the business that has many in addition to regular card players, many non traditional players as well. So the competitive intensity is high, but we watch it very carefully. And so with the stability of performance and the strength of the consumer, we in both the card and the auto side of the business continue to lean in, in a very similar way that we have well, for card, it's just been very consistent for years. With auto, we kind of pulled back quite a bit in that part of the business and we're leaning in as we often have done historically.

[Richard Fairbank, Founder, Chairman, CEO & President at Capital One Financial]

So we're leaning into both of them and we're really pleased with the stability and strength of the metrics that underlie those businesses.

[Moshe Orenbuch, Managing Director at TD Cowen]

Got it. Thanks. And maybe just as a follow-up, when you think about reserve levels, given that you are seeing or likely to see some improvement in credit losses kind of on a core basis or like for like. And it sounds like the growth is probably growth that you have in the balance sheet is probably going to come in your lower loss categories, not the higher ones. Thoughts about the reserve level as we move forward?

[Andrew Young, Chief Financial Officer at Capital One Financial]

Sure, Moshe. So what's going to happen in future quarters starts with what happened this quarter. So I just want to reiterate a couple of the drivers of this quarter as a jumping off point. As I said in the prepared remarks, coverage was down 33 basis points by 2 things, the bigger effect being that we typically have seasonally higher balances in the Q4 that require very low levels of coverage and that denominator effect from those balances put downward pressure on coverage. The other effect was that the allowance we needed for what I'll call non seasonal growth was offset by favorable observed credit performance.

[Andrew Young, Chief Financial Officer at Capital One Financial]

And so, we added 0 dollars of allowance balance to the numerator, but the non seasonal growth impacted the denominator. And so, in the Q1, I just wanted to provide that backdrop to say the seasonal balances will run off. And so, there will be a corresponding upward pressure on coverage all else equal from that effect. But beyond that, it's really going to come down to growth and our loss forecast and loss forecast specifically for the coverage. And to the extent that loss forecast improves, changes in coverage could be modest in the near term as we just reflect the uncertainty of our projections in the allowance.

[Andrew Young, Chief Financial Officer at Capital One Financial]

But eventually, the improved loss forecast is going to flow through the allowance and continue to bring the coverage ratio down as uncertainties become more certain. And so, while the direction of travel would be down, the pace and timing is going to depend on a variety of factors, one of which will include the mix of businesses, as you say. But when it's denominated to the whole portfolio, the relative growth of different forecasted loss portions of the book aren't going to have material impact to coverage just given that the new originations as a percentage of the overall book in any given quarter is relatively small. And then the only thing I also want to remind you of is, I know our investors look at history as a potential guide for levels of coverage. And I just want to remind you that we called out the roughly 50 basis points of impact to coverage from the termination of the loss sharing agreement with Walmart.

[Andrew Young, Chief Financial Officer at Capital One Financial]

So that created a step function change in coverage relative to our prior history as well.

[Jeff Norris, Senior Vice President of Finance at Capital One Financial]

Next question please.

[Operator]

Our next question comes from Don Fandetti with Wells Fargo. You may proceed.

[Donald Fandetti, Managing Director at Wells Fargo]

Yes, Rich, your credit card purchase volume growth on a like account basis has picked up. Just trying to get a sense if this is a Q4 blip or are you thinking that the consumer is actually more confident here after the election? Are you seeing that same improvement in consumer and small business as well?

[Richard Fairbank, Founder, Chairman, CEO & President at Capital One Financial]

Well, we have if we think about our purchase volume, our growth in overall purchase volume continues to be driven by growth in our branded card customer base and the branded card includes both our consumer and our small business. The growth that you see and that we've seen for several years now is certainly a thing powering it has been strength in originations and some strength in originations at the higher end of the market. But the other way to think about your question is at a customer level, what on a per customer basis, what's been happening to spend growth. And even as our spend metrics were growing overall, the spend growth per customer in our consumer business have been largely they had been largely flat through 2023 and really the first half of twenty twenty four. And then they started to pick up midway through last year and they grew further in Q4.

[Richard Fairbank, Founder, Chairman, CEO & President at Capital One Financial]

And, I don't have in front of me the small business card numbers. They're embedded in the numbers that I gave you. So the fact that we have seen spend per customer finally pick up here is striking. Whether it will continue and exactly what's driving it is hard to say. But I did want to point out that positive trajectory as the year finished off.

[Donald Fandetti, Managing Director at Wells Fargo]

Got it. And Andrew, you touched on this, but your 2024 vintage, can you talk a little bit about how you're feeling, how you're seeing that shape up in terms of credit performance? I've seen some industry data that shows delinquencies are still pretty high for 2024.

[Richard Fairbank, Founder, Chairman, CEO & President at Capital One Financial]

Yes. Don, why don't I take that? So, recent originations in our card business, we continue to see stability in the performance of our originations. It's really striking here. We've been calling this out consistently over the past few years.

[Richard Fairbank, Founder, Chairman, CEO & President at Capital One Financial]

Vintage over vintage, we're seeing mostly stable risk levels over time. And also striking is our overall front book of new origination vintages continues to perform in line with pre pandemic vintages. Now when you compare with pre pandemic vintages, you can't look at 2019 because 2019 very quickly got sort of corrupted by the pandemic. So we're looking at 2017 2018 when we make these comparisons. But so from a Capital One point of view, I think this is this stability in origination performance and quarter over quarter and the consistency with pre pandemic is the result of our intervention to deal with inflated credit scores and the high level of industry supplies that were flooding, particularly the subprime marketplace back there.

[Richard Fairbank, Founder, Chairman, CEO & President at Capital One Financial]

So we trimmed around the edges and continued to very closely watch the origination vintages and that has led to a sustained stability on the part of Capital One and some of our most recent vintages. Now again, we're still looking you've got to look like 6 months in the rearview mirror to see much, but we continue to see some very positive results there. We also have looked at industry data that shows some gapping out in vintages over the last couple of years. So I think the industry effect is not probably consistent with what we have described. And if I were to explain why, because I think they're very capable companies doing this.

[Richard Fairbank, Founder, Chairman, CEO & President at Capital One Financial]

I think the I'm not sure that most of the industry adjusted for inflated credit scores. And we intervened on our models with a belief that the university was suddenly giving out As that should be Bs basically. And so we intervened and then kept validating along the way. But for a while, we didn't have validation. We just intervened because we believed it was the right thing to do.

[Richard Fairbank, Founder, Chairman, CEO & President at Capital One Financial]

So I think what we had what has been seen if you look at just overall industry originations is, as you say, some gapping out. And I think that would be the biggest driver.

[Jeff Norris, Senior Vice President of Finance at Capital One Financial]

Next question, please.

[Operator]

Our next question comes from Sanjay Sakhrani with KBW. You may proceed.

[Sanjay Sakhrani, Managing Director at Keefe, Bruyette & Woods (KBW)]

Thank you. I guess, Rich, just one more on the deal. Given the timeline that you've outlined early this year, is it fair to assume like everything is going pretty smoothly in terms of the regulatory approval process and there hasn't been any surprises? I'm also wondering sort of where you guys are in terms of the integration efforts and how much work has been done there?

[Richard Fairbank, Founder, Chairman, CEO & President at Capital One Financial]

Okay. Yes. So, no, the approval process continues to move forward. We've made substantial process in the recent months. We remain actively engaged with the Fed and the OCC about our merger applications.

[Richard Fairbank, Founder, Chairman, CEO & President at Capital One Financial]

And it is the Fed and the OCC who ultimately decide on our merger application. Late last year, we received approval from the Delaware State Bank Commissioner, which we needed because Discover is a state chartered bank. We of course had the big public hearing in July and that went very well we feel. Earlier this month, of course, we finalized a joint proxy statement with the SEC setting up the February 18 shareholder vote. So that was good progress finally there.

[Richard Fairbank, Founder, Chairman, CEO & President at Capital One Financial]

We are also engaged with the Justice Department as they play a key role in advising the Fed and the OCC on the competitive aspects of the deal. And we continue to believe that this transaction is both pro competitive and pro consumer, bringing our best in class products and services to a broader set of consumers and small businesses and really enhancing opportunities and benefits for merchants as well. So pulling way up, it's certainly the deal process is a long labor, but we remain well positioned to get approval of the deal early this year. And we are really proud of the work everyone is doing here and we look forward to getting this over the goal line.

[Sanjay Sakhrani, Managing Director at Keefe, Bruyette & Woods (KBW)]

Okay. Just to follow-up on a question Ryan asked some time ago on sort of when you put the companies together and the efficiencies and sort of the investments that need to be made. I guess when you put the 2 companies together, the efficiency ratio actually goes down. And obviously, there's a lot of synergies, both on revenues and expenses. Do you think those are sufficient enough to sort of accomplish I'm just trying the question again.

[Sanjay Sakhrani, Managing Director at Keefe, Bruyette & Woods (KBW)]

Do you think those are sufficient enough to make all of the investments that you sort of outlined? Or do you think that there's others that you might have to make as you peel the onion a little bit when you have the company?

[Richard Fairbank, Founder, Chairman, CEO & President at Capital One Financial]

So I don't think we're in a position to it's not just because we want to be coy about it. We're not in a different place than we were at the time we announced the deal. And we should point out that we are working really hard preparing for integration, but we are still separate companies and Discover is working incredibly hard and working on their compliance. And I know they're doing preparations for integration as well. And we certainly are.

[Richard Fairbank, Founder, Chairman, CEO & President at Capital One Financial]

We're not getting an inside view of their numbers, their performance, their business model. So we're mostly sort of where we were at the outset. But if we pull up to your point, so Discover operates with a significantly lower operating efficiency ratio than Capital One. That's certainly a good thing for the combined company. I think it is also the case that the I think Discover has had a heritage of probably less investment in certain areas than Capital One.

[Richard Fairbank, Founder, Chairman, CEO & President at Capital One Financial]

And in a few cases, they're sort of making up for lost time there. But I think having not seen on the other side, we assume that there are some areas that we will and we've assumed this from the beginning. We're going to need to step up the investments and obviously on the risk management side, there's a lot of investment to be done, whether it is how what ultimately needs to be done compares with what they're investing and all of that remains to be seen. We obviously had assumptions in our deal model about leaning in on that. But what we get so there's going to be a lot of effects that are all pretty significant that just go in different directions.

[Richard Fairbank, Founder, Chairman, CEO & President at Capital One Financial]

A company with an amazing efficiency ratio, a company that's probably under invested in a number of areas that relative to Capital One and we would shore up some of those investments. We also get a lot of synergy that comes from bringing overlapping businesses together. That's a very strong effect. And then these 3 investment areas, the 3 that we're pointing out, we are talking about investing in those at a level that's a lot different than what Discover has done traditionally. Obviously, the risk management one, we've all talked about that and they're leaning in hard now.

[Richard Fairbank, Founder, Chairman, CEO & President at Capital One Financial]

On international acceptance, they certainly, again, I'm amazed with their not that great scale what they've done, but we would expect to invest at a higher level than they have there. And in terms of the Network brand relative to I wanted to make a comment about the network brand and some of this other investment. It is we have sloped we have taken our card business and sloped the business that we think most naturally and easily can go to the Discover network and it involves folks that aren't big international travelers, for example. So we've sloped the work. There is we think it's very straightforward to move this business front book and back book business to Discover.

[Richard Fairbank, Founder, Chairman, CEO & President at Capital One Financial]

And some of these investments that I'm talking about leaning into are particularly important for the longer term opportunity of being able to move more business than what we put into our deal model. And again, in doing that, we sloped we took our whole customer base and imagine sort of sloping it in terms of what part of the business fits most naturally within the context of the capabilities and the brand of Discover's network. And then as we want to move more, we're going to need the bar to be raised relative to acceptance and brand. And that's why I think these other investments we're talking about will be multi year, they'll be over time and there'll be things that help make the deal pay off even more so in the longer

[Richard Fairbank, Founder, Chairman, CEO & President at Capital One Financial]

term.

[Jeff Norris, Senior Vice President of Finance at Capital One Financial]

Next question please.

[Operator]

And our final question comes from John Hecht with Jefferies. You may proceed.

[John Hecht, Managing Director at Jefferies Financial Group]

Good afternoon guys and thanks for fitting me in here. First question, just thinking about the mix of the overall consumer book. I mean, you've got some new cards like the Venture 1 and Quicksilver. And some of those are attractive to different demographic groups. And then you've got the subprime mix and then you've got auto.

[John Hecht, Managing Director at Jefferies Financial Group]

Where do we see just given kind of inbound customer mix, where do we see that going this year as a standalone business? And then Rich, do you have any comments of what the total portfolio might look like assuming the combination with Discover?

[Richard Fairbank, Founder, Chairman, CEO & President at Capital One Financial]

Yes. So thank you, John. So So let me take Discover just in a minute. So if you pull way up on Capital One for a long, long time, Capital One has been a sort of a full spectrum player. We have had for several decades, we have had a subprime business that is tailor made for the information based strategy we have because it's all about surviving and winning on the credit side of the business.

[Richard Fairbank, Founder, Chairman, CEO & President at Capital One Financial]

But also in that business, we've also very, very much focused relative to others who play in the space to do we have exceptionally good deals. It's not just about sort of surviving on the credit side, but really giving great deals, helping people use credit wisely. And in fact, really I think the deals that we're offering are very, very simple and profoundly better than a lot of the deals that are available in the marketplace. And so that business has is a very stable part of what we do at Capital One and we continue to lean into that. Probably the most dramatic thing that's been happening in the last decade in Capital One's card business is, as you referenced, the quest toward the top of the market.

[Richard Fairbank, Founder, Chairman, CEO & President at Capital One Financial]

And that is a journey that as far out as we can see, we will continue to lean into that because there is so much opportunity at the top of the market. And obviously, it takes a lot of investment, but the key indicator to us that when we stratify out the segments of our business by spend levels, the part that's growing the fastest consistently year after year at Capital One is the heaviest spenders. And there's just so much upside north of where we are, we will continue to invest in that. Now if you stand back, just think about our card business, while our subprime business has been going along and we keep leaning into that, there has been a gradual mix shift up market for the company. And even within each segment, within the sort of the subprime book, the sort of the prime book and certainly the top of the market, there has been a gradual mix change with a spender first philosophy that permeates our business.

[Richard Fairbank, Founder, Chairman, CEO & President at Capital One Financial]

So that and some of that you can see and just some of the structural changes in the payment rates at Capital One. So I believe that what you see and what you have seen for a number of for many years is a good prognosticator of probably out of the future of legacy Capital One would likely go meaning continued leaning in across the spectrum, but differentially an awful lot of investment toward the top of the market and the most growth opportunity there. Now let me turn to Discover. Discover interestingly has taken a very different approach than Capital One. While we have taken a very broad approach playing in all parts of the market, Discover has had a very focused strategy on the prime part of the business and they've done a very, very good job there and we certainly always admired them from the outside.

[Richard Fairbank, Founder, Chairman, CEO & President at Capital One Financial]

So we will be bringing into our company a significant increase in that portion of the market, which probably differentially got a little less emphasis, if anything. It's not like we weren't playing there, but if anything, we had a greater emphasis, probably north and south of that part of the business. But so from a mix point of view, we certainly we will be bringing in a business that's very homogeneous relative to the very heterogeneous business that we have. And then on the other side of all of that, I think that we will if I were to summarize our strategy, it will be to continue everything we were doing is Capital One because we're getting a lot of traction in that. And then making very sure that we don't crush the butterfly of this beautiful business model that Discover has in the prime part of the market, but that we go in there and while yes, integrating things like technology and some of the risk management processes and a lot of things, do everything that we can to make sure that we don't directly or even unwittingly sort of crush the really nice butterfly of what they do.

[Richard Fairbank, Founder, Chairman, CEO & President at Capital One Financial]

And in that way, we hope to bring in a growth business that Discover has and add it to the very complementary growth businesses that Capital One has and collectively continue to try to get the best of both worlds, bringing along the way some better efficiencies and really bringing top technology to all aspects of the business.

[John Hecht, Managing Director at Jefferies Financial Group]

Great. Very much appreciate it. Thanks.

[Jeff Norris, Senior Vice President of Finance at Capital One Financial]

Well, thank you everyone for joining us on the conference call today and thank you for your continuing interest in Capital One. Have a great night everybody.

[Richard Fairbank, Founder, Chairman, CEO & President at Capital One Financial]

Thanks everybody.

[Operator]

This concludes today's conference call. Thank you for your participation. You may now disconnect.

Participants

Executives

• Jeff Norris, Senior Vice President of Finance
• Andrew Young, Chief Financial Officer
• Richard Fairbank, Founder, Chairman, CEO & President

Analysts

• Ryan Nash, Managing Director - Equity Research at Goldman Sachs
• Terry Ma, Senior Equity Research Analyst at Barclays Capital
• Richard Shane, Analyst at JP Morgan
• John Pancari, Senior managing director and senior research analyst at Evercore
• Mihir Bhatia, Analyst at Bank of America
• Bill Carcache, Equity Research Analyst at Wolfe Research
• Moshe Orenbuch, Managing Director at TD Cowen
• Donald Fandetti, Managing Director at Wells Fargo
• Sanjay Sakhrani, Managing Director at Keefe, Bruyette & Woods (KBW)
• John Hecht, Managing Director at Jefferies Financial Group