Capital One Financial Corporation Price & Performance (COF)

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, for more information on these factors, please see the section titled Forward Looking Information in the Earnings Release Presentation the Risk Factors section of our annual and quarterly reports accessible at Capital One's website and filed with the SEC. And now I'll turn the call over to Mr. Yano. Andrew? Thanks, Jeff, and good afternoon, everyone. I will start on slide three of tonight's presentation. In the first quarter, Capital One earned $1,400,000,000 or $3.45 per diluted common share. Included in the results for the quarter were adjusting items for legal reserve activities and Discover integration expenses. Net of these adjusting items, first quarter earnings per share were $4.06 Pre provision earnings in the first quarter were largely flat to the fourth quarter at $4,100,000,000 On an adjusted basis, pre provision earnings increased 2% from the fourth quarter. Revenue in the linked quarter declined 2% driven by two fewer days in the quarter. Non interest expense decreased 5% on an adjusted basis driven by declines in both marketing and operating expenses.

Our provision for credit losses was $2,400,000,000 in the quarter a decrease of $273,000,000 compared to the prior quarter. The decrease was driven by $148,000,000 lower net charge offs and 123,000,000 larger reserve release. Turning to slide four, I will cover the allowance in greater detail. We released $368,000,000 in allowance this quarter. Bringing the allowance balance to 15,900,000,000.0 Our total portfolio coverage ratio decreased five basis points to 4.91%. I'll cover the drivers of the changes in allowance and coverage ratio by segment, on slide five. Our domestic card business, we released $458,000,000 in allowance. The allowance release was driven by continued favorable credit performance in the quarter, partially offset by higher consideration to our downside economic scenario and increased qualitative factors, to account for heightened uncertainty.

The coverage ratio remained largely flat as the impact of the allowance release was offset by the denominator effect from the pay down of seasonal balances. As a reminder, our domestic card coverage ratio is about 100 basis points above CECL day one, after taking into account the impact of the termination of the Walmart agreement. The allowance balance in our Consumer Banking segment was largely flat at $1,900,000,000 Observed credit favorability and the impact of stable auction prices was largely offset by growth in the auto business. The coverage ratio decreased by four basis points. And finally, our commercial banking allowance increased by $117,000,000 The build in allowance was driven by increased qualitative factors to account for heightened uncertainty, as well as specific reserves for a small number of individual credits. Coverage ratio increased by 12 basis points to 1.73%. Turning to page six, I'll now discuss liquidity. Total liquidity reserves in the quarter increased to $131,000,000,000 about $7,000,000,000 higher than last quarter. Our cash position ended the quarter at approximately $49,000,000,000 up $5,000,000,000 from the prior quarter. The increase was driven by continued strong deposit growth in our retail banking business, and the pay down of seasonal card balances.

Our preliminary average liquidity coverage ratio during the first quarter was 152%. Turning to page seven, I'll cover our net interest margin. Our first quarter net interest margin was 6.93%. 10 basis points lower than last quarter. The quarter over quarter decrease was driven by the 15 basis point impact of having two fewer days in the quarter. Beyond day count, NIM increased five basis points as the beneficial impact of the reduction in the rate paid on our deposits was only partially offset by the seasonal impact of lower average card loans and higher cash. On a year over year basis, NIM increased 24 basis points. Driven by a favorable mix towards card loan and the termination of the revenue sharing agreement with Walmart. Partially offset by one fewer day relative to last year's leap year. Turning to slide eight, I will end by discussing our capital position. Our Common Equity Tier one capital ratio ended the quarter at 13.6%. Approximately 10 basis points higher than the prior quarter. Net income in the quarter and the impact of seasonal loan declines were largely offset by the impact of the final CECL phase in dividends, $150,000,000 of share repurchases. [indiscernible] Looking ahead, we expect the record date for the second quarter dividend for both Discover and Capital One to be after the May 18 closing date.

As a result, we expect current Discover shareholders will be shareholders of Capital One's common stock as of the expected record date, and will therefore receive Capital One's $0.60 second quarter dividend subject to Board approval. With that, I will turn the call over to Rich. Rich? Thanks, Andrew, and good evening, everyone.

Slide 10 shows first 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 first quarter, our domestic card business delivered another quarter of top line growth, strong margins and improving credit.

Year over year purchase volume growth for the quarter was 5%. The first quarter of twenty twenty four had an extra day since it was a leap year.

Adjusting for this leap year effect, year over year purchase volume growth was about 6%.

Ending loan balances increased $6,400,000,000 or about 4% year over year. Average loans increased about 5%. And revenue was up 7% from the first quarter of twenty twenty four driven by the growth in purchase volume and loans.

Revenue margin for the quarter increased 37 basis points from the prior year quarter to 18.2% primarily driven by the impact of the end of Walmart revenue sharing agreement.

The charge off rate for the quarter was 6.19% up 25 basis points year over year. The The impact of the end of the Walmart loss sharing agreement increased the first quarter charge off rate by 42 basis points.

Excluding this impact, the charge off rate for the quarter would have been 5.77%. A year over year improvement of 17 basis points. Our delinquencies have been improving steadily for several quarters on a seasonally adjusted basis.

The 30 plus delinquency rate at the end of the first quarter was down 4.25%, down 23 basis points from the prior year. Domestic card noninterest expense was up 13% compared to the first quarter of twenty twenty four. Operating expense and marketing both increased year over year. Total company marketing expense in the quarter was $1,200,000,000 up 19% year over year. Our choices in domestic card are the biggest driver of total company marketing. 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 and build an enduring franchise with heavy spenders at the top of the marketplace. Compared to the first quarter of twenty twenty four, domestic card marketing in the quarter included higher direct response marketing, higher media spend and increased investment in premium benefits and differentiated customer experiences like our travel portal, airline lounges, and Capital One Shopping. As always, all of our marketing and origination choices are informed by our continuous monitoring of portfolio trends market conditions, and consumer and competitor behaviors. Slide 12 shows first quarter results in our consumer banking business. Auto originations were up 22% from the prior year quarter, driven by overall market growth and our strong position to pursue resilient growth in the current marketplace.

Consumer banking ending loan balances increased $3,800,000,000 or about 5% year over year. Average loans were also up 5%. Compared to the year ago quarter, ending consumer deposits grew about 8% and average consumer deposits were up about 9%. Our digital first national consumer banking business continues to grow and gain traction powered by our technology transformation and our compelling no fees, no minimums, and no overdraft fees, customer value proposition. Consumer banking revenue for the quarter was down about 2% year over year driven by margin compression in retail banking. Partially offset by growth in auto loans and retail deposits. Non interest expense was up about 27% compared to the first quarter of twenty twenty four, driven largely by the first quarter adjusting item Andrew discussed as well as increased auto originations higher marketing, to drive growth in our national consumer banking business, and continued technology investments. The auto charge off rate for the quarter was 1.55% down 44 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 a strong and stable contributor on a seasonally adjusted adjusted basis. The 30 plus delinquency rate was 4.93%, down 35 basis points year over year. Slide 13 shows first quarter results for our commercial banking business. Compared to the linked quarter, both ending and average loan balances were essentially flat. Ending deposits were down about 5% from the linked quarter. Average deposits were roughly flat. Continue to manage down select less attractive commercial deposit balances. First quarter revenue was down 7% from the linked quarter and non interest expense was down by about 6%. The commercial banking annualized net charge off rate for the first quarter declined 15 basis points from the sequential quarter to 0.11%. The commercial criticized performing loan rate was 6.41% up six basis points compared to the linked quarter. The criticized nonperforming loan rate was essentially flat at 1.4%. In closing, we continued to post strong and steady results in the first 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 and loan balances.

Our national consumer banking business continued to deliver strong year over year growth and consumer credit continued to improve. Looking forward, we're very excited to move forward with our acquisition of Discover. Last week, we received regulatory approval for our acquisition of Discover and were fully mobilized to complete the transaction on May 18. Until we close, we are still separate public companies so we have limited access to Discover's information. Based on our due diligence and integration planning, we continue to expect that we will achieve the synergies we estimated when we announced the deal enabled by the integration costs we estimated at the announcement. And we continue to believe that we'll achieve the synergies run rate about twenty four months following the May 18 closing date. And also, just a reminder, our network synergy estimate assumed the implementation of lower debit interchange rates proposed by the Fed under Reg II in October. 2023. Those proposed rates are still pending because of various lawsuits. If there is ultimately no reduction to the current debit interchange fee levels, it would lower our debit network synergy because it would increase the baseline to which we are comparing. By about $170,000,000 But it would have no impact on our company's future revenue because, of course, the debit business will be on the Discover network.

Pulling way up, the acquisition of Discover is a singular opportunity. The combination of Capital One and Discover will create a leading consumer banking and payments platform with unique capabilities, modern technology, powerful brands, and a customer franchise of over 100,000,000 customers that spans the marketplace. It combines proven and complementary banking and credit card businesses with a global payments network. It leverages Capital One's technology transformation and digital capabilities across a significantly larger customer franchise. It delivers compelling financial results and offers the potential to enhance competition and create significant value for merchants and customers. And it enables and drives significant strategic and economic upside over the long term. And now we'll be happy to answer your questions. [indiscernible] Thank you, Rich. We'll 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 one question plus a single follow-up. If you have follow-up questions after the session is over, the Investor Relations team will be available to answer them. Josh, please start the Q and A. Thank you. To withdraw your question, please press 11 again. Our first question comes from Nash with Goldman Sachs.

You may proceed.

Hey, good evening, Rich. Good evening, Andrew.

Hey, Ryan. Good evening. Rich, obviously, a lot of concerns in the market regarding tariffs and the state of the consumer. It's hard to see those concerns in the results given better than expected credit in the reserve release. So maybe just talk a little bit about what you are seeing in the data within Capital One? What gave you the confidence to release reserves? And then for Andrew, you mentioned some of the drivers, favorable credit, higher allocation to the downside. Maybe just remind us what's included for the within the allowance for both unemployment and the overall economy? Thank you.

Great. Thanks, Ryan. Let me take your question about what we're seeing in the data Let me start with a more macro discussion of the health of the consumer and how our major metrics credit metrics are performing. And then, let me just kind of double click into the data that we're seeing on the spending side over the last couple of weeks because, of course, everybody's watching that so closely. But first, pulling kind of way up on the consumer. The US consumer remains a source of strength in the economy. That's true for almost any metric that we look at. The unemployment rate is low and stable. Job creation remains healthy. Real wages are growing. Consumer debt servicing burdens remain stable near pre pandemic levels. In our card portfolio, we're seeing improving rates lower delinquency entries. And payment rates are improving on a year over year basis. Now, of course, the circumstances of individual consumers and how households will vary as they always do. [indiscernible] what we look at often with national metrics is averages. And as we've discussed before, some pockets of consumers are feeling pressure from the cumulative effects of inflation and higher interest rates. And we're still seeing delayed charge off effects from the pandemic although our improving delinquencies suggest that this effect may be moderating.

But on the whole, I'd say The US consumer is in good shape. And, you know, we watch we always watch all the sort of leading indicator credit metrics to have a view of where credit is headed. So, let me just take a look at those and then I'll come back to the sort of last couple of weeks of spend data.

So, when we look inside our portfolio, of course, delinquency is the best leading indicator. [indiscernible] our delinquencies were stable on a seasonally adjusted basis throughout most of 2024 and as I mentioned, they improved relative to our seasonal expectation over the last six months. So that's obviously very good news there. Looking at other metrics. Payment rates, we've seen card payment rates increase year over year for the last two And this improvement is coincident with the improvements that we're seeing in our delinquency rate. Now, of course, increasing payment rates sort of slow down loan growth rate, but it's a trade we're always happy to make. Because of the flip side of the coin of the better credit performance. Now, underneath the surface of this average improvement in payments, we are also seeing the portion of customers making just the minimum payment running somewhat above pre pandemic levels. So, while the average customer is doing well, some customers at the margin are likely feeling stress.

From inflation and elevated interest rates. Revolve rates. Let me turn to look at that. Revolve rates have stabilized over the past year, but remain below pre pandemic levels for our major products. And segments. So, that again is another healthy indicator. Healthy indicator. Now, none of these observations are conclusive on their own, but I think they are collectively collectively helpful at giving us insight into credit and economic trends.

Now, there's another thing, Ryan, that we look at of course, is new account originations. And when we look at our new originations, we see early performance that is consistent with our expectations It's stable and even improving a bit vintage over vintage. And consistent with pre pandemic levels.

Now, this might be less of that observation maybe more of a Capital One effect specifically because much of this stability comes from decisions we made starting back in 2020 to account for inflated bureau scores and competitive dynamics and the flood of FinTech supply. And so, you know, I think our our interpretation is our active management is probably offset some underlying worsening that has happened in the marketplace. The other metric we look at is recoveries and our recoveries inventory continues to rebuild of course, from the prior normalization of charge offs. That should be a gradual tailwind to our losses over time all else being equal.

So, that's the the strong credit situation that we see and of course we especially in the current uncertain environment, we're monitoring that very, carefully. Let me turn and just talk about the latest in terms of spend trends. In our card business and in auto. So, me start with card. The spend trends were largely stable through the end of the first quarter. In recent weeks, we've started to see an uptick in spend growth per customer relative to this time last year across our consumer segments. I would note we haven't observed this more recent trend in our smart small business card portfolio. Now, some of this uptick is likely driven by the timing of the Easter holiday which fell in April versus March. So we maybe should discount that a little bit We've also seen a recent increase in retail spending, particularly electronics in the in the past few weeks. Maybe that's pulling forward of purchases. In light of the tariffs we'll have to see over time At the same time, we've seen some easing in the T and E growth and airfare in particular. [indiscernible] final thing I want to do is just talk about the auto patterns that we're seeing.

While it's early, when we look at industry data, there are appears to be a bit of a pull forward in auto purchases likely as consumers are trying to get ahead of tariff impacts. And we continue to monitor our application and origination [indiscernible] think also there is some early indication that auction prices are increasing more than seasonal norms. All of this is very early, but that would be what we see, right? At the margin. So, with that, I'll turn it over to Andrew for your other questions.

Yeah, Ryan, a few factors at play with respect to the allowance. Why don't I just start with our baseline forecast and then I'll touch on broader considerations. So for the baseline forecast, as Rich just talked about, our seasonally adjusted delinquency delinquency rates have been improving on a year over year basis since about October of last year and charge offs have been improving for the last few months after you account for Walmart. And so, when we take those observed credit results and then we take our baseline forecast Our baseline forecast at the March, we use consensus estimates. So, estimates at that point looked quite similar to consensus estimates at the December. Unemployment was peaking in the 4.3 range and GDP growth around two and inflation in the high two's coming down from there. And so, if we take our observed credit results with that baseline forecast, what's baking in the oven resulted in an allowance release that would have been quite a bit larger than what we actually released this quarter. And so, the effect of tamping down the magnitude of that allowance release was really our consideration to the downside economic risk and greater uncertainty, that really itself in the final days of the quarter.

And so we more heavily considered our downside scenario which includes more severe rising unemployment and renewed inflation relative to the downside scenario we had a quarter ago. And the favorable trends that I described then were partially offset by that greater consideration of the downside as well as the uncertainties around the forecast. And all of that ultimately led to the roughly $450,000,000 release you saw in the quarter.

Next question, please.

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

Rich, Andrew, Rich, you mentioned you're fully mobilized to integrate. I'm just curious, how we should think about the timing in terms of some of the milestones to the synergies?

For example, how long would it take for the debit conversion to happen? And maybe similar point on expenses?

Yes, Sanjay. As you said, we're still in the mid of doing our planning. But what I would highlight for you is based on what we know today, our assumption is that we're essentially just picking up all of the assumptions that we provided fourteen months ago at deal announcement and pushing it back by a little less than six months. Because you'll recall, we assumed the transaction would close when we did the announcement in late Q4, early Q1, so a center date there of January 1. Now we're closing on May 18. I would point you back to timing that we included in the announcement and just shift all of that back to correspond to the later closing date. [indiscernible] Great.

And then maybe follow-up on capital return. Obviously, you guys are well above the CET1 target, I think Discover is as well. You've talked about sort of a phased migration back towards your target.

Could you just discuss how we should think about it going forward in terms of when you might be able to start sort of elevating the amount of capital return? Thanks. [indiscernible] still operating as two independent companies, Sanjay. So at this point, our access to a lot of the more proprietary and confidential data has been limited. And after we close the transaction, we'll have access to the data we need to do the analysis to determine what we believe is the capital need of the combined company And in addition, we're in the midst of this year CCAR and we'll get our new SEB in June. And so as a result of that, I'd say at least for the second quarter, it's reasonable to assume we'll likely maintain the pace we've been on until we get to the other side of close and do that analysis. But once we've completed that work, we understand the importance of returning excess capital to shareholders and we intend to do so. [indiscernible] Our next question comes from Terry Ma with Barclays. You may proceed. Hey, thank you. Good evening. So you called out marketing was up 19% year over year. It seems like you're still seeing some compelling opportunities and are leaning in So maybe just talk about where you're seeing the best opportunities right now.

And then also, how are you thinking about balancing that investment for growth versus risk management, particularly in subprime? Thank you. Yes.

Terry. Thank you and good evening.

So, Our marketing investment continues to power the future growth of the company. As we capitalize on opportunities that have become available from many of the choices we've made over the past years but especially on the shoulders of our technology transformation. So, our marketing investments generally fall into three categories. First is our investments to fuel customer growth and we remain really excited about the opportunities that marketing is providing especially in our card business. The tech transformation has allowed us to leverage much more data and also more advanced modeling techniques leveraging machine learning and AI. And the insights that we get from all of these advancements allow us to create more and more tailored solutions for customers providing them with the right products and services when they need them. Another thing that's been going on is we've continued to expand the channels and the sources for generating new accounts. So, that's kind of the basic right down the fairway marketing, very stimulus response kind of driven side of the business. Second is our continued investment to win at the top of the market with heavy spenders. And this has been a quest that we have been on for years of course and spent a lot of time talking about this.

Our growth in heavy spenders provides long term benefits to our business not only in generating a lot of spend, growth, but also because of what comes with the franchise, very low losses, low attrition and the lifting of the brand and really the lifting of, I think, all of our franchises across company.

So, of course, these customers is expensive and requires a number of sustained investments in order to attract and retain them. So, significant marketing investment significant upfront early spend bonuses, Also, of course, we continue to invest in the experiences that we're offering our high end customers, including exclusive access and experiences that aren't available in the general marketplace like lounge access, our full service travel portal, and access to unique properties and events. And of course, we have the continued investment in brand. So, we believe this opportunity is very big. This is a long term quest we've been on for over a decade. [indiscernible] And you know, while all the players in the card business do some effort to win at the top of the market, I think it's a much smaller number of players that are really leaning in and focused and doing the investments to put themselves in a position to win there. By the way, it's not lost on us that that small list of most aggressive competitors at the top of the market is really leaning in to their marketing investments and their experiences. So, the bar of competition is high, but I think the payoff is very large over the long run.

The third area of marketing investment for Capital One is building our national bank. And we declared really over a decade ago that we were gonna build a digital first full service national bank.

And this, of course, involves thin physical distribution across the nation in terms of branches in some markets and cash cafes in leading metropolitan areas. We've had a big investment in the digital capabilities for full service banking on a remote basis. And for most banks that are building full service, most full service banks, virtually all full service banks, their marketing statement is their branches themselves. Capital One, by organically building digital first full service bank the role that marketing plays relative to physical distribution is just a different ratio there and so we're leaning very heavily into that But we are really pleased with the momentum we have there. [indiscernible] we're excited by the combination with Discover. Will give us more scale and more momentum in that space. So, those are the three sort of big areas that we're leaning into in marketing and the investments are significant. We're putting a lot of energy of course, leveraging all of our we spent so many years building measurement infrastructure to be able to measure before, during, and after how various investments are doing but pulling way up This is really the engine that is driving a lot of the future growth of our company.

And as you can see from some of the numbers that we're posting and some of the investment dollars we're putting into this, we are feeling very optimistic about our prospects. Next question. He also asked just what about the growth versus risk management in the and with the eye toward subprime. I think the consumer is in a good place. We are leaning into our marketing across the spectrum. The subprime consumer actually has had a a little bit of a faster rate of sort of curing post normalization of even relative to the rest of the spectrum as we've seen. So, we continue to feel very good there. We're leaning into that. Now, of course, we know that the uncertainty out there, the tariff prospects and everything has us very, very vigilant because if there's a shock to the system, we would expect that that could hit harder at that part of the market. So, But I would leave you with the following impression. We're still leaning in but we're very, very vigilant. Watching every day for early indicators of problems.

Next question, please.

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

Rich. You in the last answer mentioned that the, you know, the Discover transaction, is going to kinda help advance kind of the national banking franchise and was hoping maybe you could kind of drill into that is, you know, when you think about the elements that either discover brings or things you'd like to add to your national banking products? I mean, is rewards checking among them? Like, what are the things that you think Capital One needs to do better to enhance that? As you think about it going forward?

So Moshe, if we pull way up on our national banking strategy, it's very, very differentiated from most banks. Obviously, most banks have a branch, to overstate it a little bit, a branch on every corner kind of thing, not really every corner these days. But it's it's physical distribution one, two, and three, all about physical distribution. And then creating the customer experiences to go along with that. And of course, also their strategies [indiscernible] regional banks are out there trying to build national banks. And the way they're going to get there is through acquisition. Now, it's ironic I'm going to make the comment I'm going to in the wake of few days ago announcing the regulators approved a major acquisition.

But But it's not the regular buying of a full service branch bank based bank. So, our national bank doesn't have as in its growth agenda buying other sort of regional and local banks. Our business model in building a national bank is one that doesn't we haven't really seen an example in nature here in America of doing that. But the key there is [indiscernible] have 're trying to build a bank with leaner economics. That comes from not having branches all over the place And also to be very very modern in its technology and its digital experiences And in terms of the customer base that we attract, to self select to a more digitally first kind of experience. And with that with that business model, comes less expensive economics And then what we've done is to pass the better economics onto the consumer in the form of very aggressive pricing with no fees no minimums, and no overdraft fees. So, it is a streamlined economics thin margin, aggressively priced, business model. The benefit of the Discover acquisition relative to that, even though paradoxically it's a bit of a paradox there because, of course, we're buying especially a credit card business is that the benefit of vertical integration with the network allows our thin margin business to strengthen its margins and allows us to lean in harder and invest even more building organically this national bank, which has never really been done before.

But that's the key way that the Discover acquisition is going to help turbocharge our national bank. Got it. Thanks. Maybe just keeping on theme with Discover, recognizing that, obviously, you don't run the company yet and haven't been inside. Just from what you know about the card business and its focus and what it's done and the fact that it's probably been less aggressively managed over the last somewhere between a year and two years, depending on, you know, when you start that. What do you think are the things that need to be done? And does that portfolio shrink before it grows? Any thoughts as to the Discover market and how to how to think about, you know, what you'd like to do with it.

Well, Moshe, we are very struck at how complementary their business model is relative to ours. So, we have stretched across the credit spectrum to the tippy top down into subprime. They, of course, have much more stuck to their knitting right in the prime part of the marketplace. They have spent years and years optimizing that business model in a way that I have great respect for relative to how to target the customers they want and the marketing and the message and the experience. We've also really come to appreciate just how exceptional some of their customer experiences are. That you've seen seen I don't know of any other card issuer that goes on TV and does a lot of advertising about about their servicing experience. I mean, not that we don't have great stories to tell too, but I've always been struck, wow, they're on TV talking about this thing. Well, when we look at just data that we've collected over time and we've collected a lot of it lately, data as an outsider looking at what people think about their customer experience, their servicing experience, some of their product experiences, they get very high marks. So, we feel that one of the most striking things about Discover is [indiscernible] focus on the customer, they're sticking to the knitting in their kind of one or a couple of sort of big segments [indiscernible] having everything work backwards from winning in that space.

So, what we're going to do, even as we integrate and generate, of course, efficiencies and the benefits of leveraging Capital One technology, Capital One's risk management capabilities, and a lot of things is very much have a great reverence and respect for the business model they've created and making sure to preserve some of those really, really key success factors there. And so, we're excited to jump in and do that. Of course, still two separate companies, so we're going to learn a lot more in the next few weeks. But this is going to be and a lot of acquisitions are just the goal of the acquisitions is to just to take two companies, squash them together, and rip out the costs. I think that Discover represents brings us a growth platform both on the network side and with respect to their card franchise that allows us to preserve the best of what they do, leverage a lot of Capital One's capabilities that we bring and and build something really special.

Next question, please.

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

Hey, guys. Thanks for taking my questions this afternoon.

Look, I think one thing that is pretty clear over the last few years is there's been a significant divergence in technology investment between Capital One and Discover. Obviously, are very interested in the synergies I'm curious as you've gone through your due diligence process, how the technology stacks compare for each company. Is this going to be an easy transition to get the Discover systems onto the Capital One Or is it going to be sort of the equivalent of you're looking for folks who can code COBOLD or something antiquated because of the more limited investment.

So, we we are very benefited by the now twelve year technology transformation that we have had at Capital One. And that includes a tremendous investment tremendous starting at the bottom of the tech stack up in building core infrastructure. And we're talking about going to the cloud, of course, applications that modernizing all of the 1,300 applications on which Capital One is built. Doing a transformation of our data ecosystem and so on. The bottom of the tech stack investments that we have made are just ideally suited for doing an acquisition. Of course, especially in a a credit card company [indiscernible] Discover will be able to step right in on the shoulders of our own technology transformation and we can generate a lot of both cost savings but even more importantly help them leverage a more modern tech stack along the way. Now, are a mainframe. They have data centers and mainframes even as they've also taken some of their business to the cloud. So, we will be going back into the world of data centers. We've been there, done that, and [indiscernible] have a lot of experience with respect to managing those environments, but also over time moving those environments to the cloud.

The new thing for Capital One from a technology point of view, of course, is going to be the network. And Running a global network is a really very complex and very high stakes activity. And we think Discover has done that very well. The Capital One way is to lean into technology and I'm sure that we will together go on a great journey with their network to help over time take strong network that they built and modernize it over time. But we should note that this will be a return for a number of years for Capital One into the world of data centers but we don't think this is step into the past. What we do think is an ability to leverage the scale and stand on the shoulders of what we have built and to take a really extraordinary company and bring it onto more modern technology and generate even better experiences and economics.

Got it. But it sounds like you will be on their tech stack for a couple of years and in their data center still?

Well, on the network side, [indiscernible] we have on credit card side, we have a whole roadmap of how we're going to take their credit card business and move it onto our tech stack.

On the network side, given that we don't have the equivalent on our side, we We don't have a roadmap of a different destination. What we want to do is go in there and see what they've got and and take and we would expect to take that on the same journey that we've taken all the rest of Capital One. But I think this is going to be measured in a whole bunch of years because they have built a global network [indiscernible] that's not gonna be a quick kind of transformation to put that thing. In the cloud.

Next question, please.

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

Good evening.

I appreciate that you cited no change to the discover synergies or integration I also know you indicated you don't own the company yet, so it's tough to completely look under the hood. Is there anything about the backdrop today, the regulatory developments, the competitive backdrop or anything that you see today that you think could lead to a revision to those synergies once you close the deal in May? And then separately, you didn't mention the 15% EPS accretion, the 27 or the 14% CET1 on close. Just wondering if there's any change there?

Thanks.

John, to the last point in terms of the assumptions of the metric. First of all, with CET1, again, that was just what we assumed at the time of the announcement. Where both companies would be combined for CET1. And so, you can look. Haven't yet seen Discover's results for Q1, but you'll be able to do that math quite easily of where the combined CET1 will be. And then I'd refer you back to the earlier question in terms of our capital plans from there. With respect to metrics like EPS accretion or ROIC, a number of things have changed over the course of the last year, not the least of which is the denominator. There. And so as we just take a step back [indiscernible] look at the overall numbers and the moving parts, I would just say the strategic and financial benefits that we assumed fourteen months ago remain fully intact. And we're just excited today as we were at the the time of the announcement. And then with respect to the environment and backdrop, I would sort of lump that in with a number of things have changed over the course of the last fourteen months, but nothing that we are specifically pointing to in terms of strategic implications at all to the deal.

John, let me just also just say a few things. And, of course, we're still separate public companies, so we won't have full access to Discover's information until after we close the acquisition. [indiscernible] [indiscernible] we continue to expect that we'll achieve the synergies that we estimated we announced the deal. Based on the integration budget that we estimated at the announcement.

So, And on the risk management side, to Andrew's point, we've always said, look, we believe that's gonna be a big investment. [indiscernible] continue to believe it's going to be a big investment there well down that path. We haven't from afar, haven't seen anything to change our estimate for what that will take. But of course, we'll do whatever it takes to get there, but but we have a similar view of the magnitude of what the undertaking is as we had before. I want to also just make a comment about sort of long term opportunity. When we announced the deal, we also said that we saw potentially significant long term strategic economic opportunities that we did not include in our synergy estimates or the deal model. And this would involve moving even more of our business onto the Discover network than what we put into the deal model.

The path to get there is to build international acceptance of the Discover network and to enhance and elevate the Discover global network brand.

And the more we've thought about that, we believe that brand investment is better made as the international acceptance gets to, I'd say, the good place, but as it gets to an even better place, that's probably more when we would lean into really building the sort of global network brand. But like many investments we've made over the years, we believe that these investments are longer term in nature and will generate significant benefits that will grow and accumulate over time. So, what we're saying here is we had a deal model for very kind of close in benefits that we saw and the associated costs and that's very much what we see. And then, in addition, additionally, we are excited about longer term possibilities That's a longer term quest that's investments over a more extended period of time with benefits that would transcend things that we put into the deal model.

Next question, please.

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

Hi, and good afternoon. Thank you for taking my question here. Just wanted to talk a little bit about, you know, just the uncertain macro. Maybe Rich, it's been a while since we've had you would call maybe a normal recession. Obviously, we had COVID a few years back, but just wondering if you could talk a little bit about just the recession resiliency at cap [indiscernible] Maybe some of the factors or some of the levers that you can pull if you start seeing the macro [indiscernible] And just how is it different now than the last time, you know, between ten, fifteen years since we had one? So just how how is Capital One different between the mix changing as you leaned into higher spending improvements in technology? Just how is Capital One different from a recession resiliency point of view? Thank you.

Thank you, Mihir. So it's interesting you used the word normal recession and of course, I smile as I say that because because you're right. Certainly COVID, it's hard to learn much of anything in COVID, well, given that, by the way, credit exploded to the best place it's ever been, we'll start with that anomaly. But [indiscernible] of course, our whole business model works backwards. From resilience.

That's what it's all about and every underwriting decision we underwrite to something quite a bit more stressed than the current environment So we look in the rearview mirror to see results and then we stress it in every underwriting decision that we make. I think the whole stress testing exercise that the Fed has led has really, I think, helped push all institutions to get more rigorous in their modeling in that. We put a lot of energy into that, but I tip my hat to to the I think, of the resilience modeling that all banks are encouraged to do. And it's And so, one needs significant buffers on the capital side, buffers in terms of margins, and then buffers in terms of flexibility as well.

So, one of the the real benefits of having a credit card business Well, one of the sort of striking things about a credit card business in a let's call it a normal recession, Mahir. Is that spending tends to and consumers tend to pull back And so, you actually get some relief some relief on the balance sheet side Fed does not model it that way because they insist that companies continue to lean in and crank up the growth even though empirically we have never done that in recessions and so on. So, you've got the flexibility with respect to [indiscernible] There's balance sheet flexibility. The marketing course, we have a very big marketing budget. There is recession flexibility there. I would note that some of our marketing investments, things like lounges, some of the investments investments at the top of the market are a little more fixed in nature than one might just think about because when you're sending out solicitations, you can just stop doing that or do a lot less of it. So, there is flexibility on the marketing side. As a percent of the entire marketing budget, it's probably a little less sort of instantly flexible than it once was but you have that as well.

There are levers within the business on product structures and so on that are additional flexibility. One thing I would point out in the last normal recession which Capital One I think, had a pretty great performance during, I would point out for all of us card players we had a majority of our balance sheet of our card balance sheet was off, our card assets were off balance sheet, and so next time around we won't have some of the benefits that we had in terms of the balance sheet pressures there. We're under CECL, of course, as well. But if I pull way up on this, your question goes near and dear to what we talk about every day. To take our business model distress it as we underwrite it, to stress it as we manage it, every choice that we make, And And I think that paradoxically, the unsecured the unsecured credit card business I think has really great resilience to it and I say paradoxically because people love to have assets that are collateral, but if you look at most of the bad things that have happened in the world of banking, They happen that the collateral has a collapse in value.

And so, the business becomes a lot more unsecured than than one thinks. The reality of a card business it's unsecured to start with. And we underwrite it in in full knowledge of that and build in the buffers and flexibility to be resilient when really bad times come. Rich, just in the spirit of what's different this time than the last time, maybe a word about we're in a really different place in the technology world. And the capabilities that that gives us to sort of look at way more data and way more algorithms in our underwriting and fine tune things around the edges. That's also a big change. Well, the ability, we can certainly move quite a bit faster than ever before It's one thing to decide on credit policy changes. It's another thing for any company to be able to implement it right away. So, with the ability to move quickly, the ability to gather data at an incredibly granular level, across so many different slices of the business is very valuable. The ability to leverage machine learning and AI to diagnose help us see variances and aberrations that might take humans some precious months to sort of identify.

So, I think that one of the big benefits of our tech transformation is the ability to have way better granularity and monitoring and the monitoring has the opportunity to be full file real time and diagnostic in its nature and these things can really help [indiscernible] when the economy turns.

Got it. Thank you.

Thanks, Mahir. Next question, please.

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

Rich, I was wondering if you could talk a little bit about the auto lending business in terms of how you're thinking about loan growth. You've got a lot of different dynamics like tariffs, going on. Are you still leaning in And do you think that there'll be the demand to support that growth?

So, what we feel we feel certainly great about the auto business. You've seen the [indiscernible] delinquency and loss performance in the auto business and it's really quite striking how strong it is. Our auto credit performance has been consistently strong and it's the result of the proactive choices we made over the past several years. Where we trimmed around the edges in card we trimmed around the edges, but in auto we did even more We pulled back sharply in 2022 and 2023 in response to the combination of margin pressure, normalizing credit, and inflated vehicle values.

But that's put us in really strong position now with respect to the auto credit performance that you see. Now, from a growth point of view, over the past year we've leaned into the growth to take advantage of the opportunities that we see in the market You've seen our origination volumes. I think they were like 22% higher. On a year over year basis in the first quarter. And outstandings have now finally moved and we're up, I think, 5% year over year. We have We have invested very heavily in technology, in the auto business, both in terms of credit underwriting, but also in terms of building our navigator platform to allow customers and dealers to use the platform to help for a customer to be able to see what the financing on any vehicle on in any lot in America in a fraction of a second what the financing for that individual would be. And so, from a customer point of view and then a dealer point of view in terms of helping the customer get to the right place with their financing. This platform has also been beneficial respect to generating good volumes and helping customers both consumers and the dealers.

So, we have a lot of momentum in the business. So, now you ask about tariffs. Certainly, think if tariffs are if the tariff wars sort of really continue on, the The auto business is I think, might be really quite impacted. Because the immediate effect would be in almost certain increase in vehicle prices. And that would have sort of mixed effects on auto credit I think [indiscernible] with production costs rising, supply chain costs rising, you could just really end up with vehicle value [indiscernible] In the business. And then we kind of say, well, how would how would higher vehicle prices what would be the impact on our auto business it would actually support the credit performance of our back book by improving equity positions for borrowers and increasing the recovery rates. But for new originations, higher vehicle prices would be a headwind both in terms of consumer demand and in terms of credit So, And just one other thing to just keep in mind, [indiscernible] there is tariffs that might gyrate quite a bit, Even in the case where tariffs are abruptly removed, some point, you can see vehicle values drop abruptly which can sort of adversely affect credit.

In a business like this one. So, basically pulling way up we feel great about our auto business, great about the position we're in and the traction that we're getting. We feel good about the consumer right now. And so we are still leaning in it's with a very watchful eye with respect to this uncertain economy.

Thank you.

Next question, please.

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

Thank you. Good evening, Rich and Andrew.

Following up on your expense commentary and the choices you're making, do you think, Rich, may be necessary to adjust your investment priorities as you continue to build out your various businesses? Well, now I'll allocating capital to the build out of the network business? And if you could speak more broadly to how focused you are on managing expenses for the revenue environment and generating positive operating leverage along the way as you make these investments?

Thanks so much, Bill. You know, we've been focused on operating efficiency improvement for years, as you know. And we like to go back to 2013 because that's when we began our technology transformation and started really leaning into investments in technology from that point all the way to today. Over that time, we've driven about 700 basis points of improvement even as we've continued to make significant investments in technology. And this improvement was driven by significant revenue growth powered by marketing and credit breakthroughs enabled by the technology transformation as well as expense efficiency from process automation analog cost savings and reduction in legacy tech vendor costs. So, it's not an accident that operating efficiency ratio improvements and significant tech investments have been traveling companions. And that's because technology investments and efficiency improvement are on a shared path. As modern technology is the engine of sustained revenue growth and digital productivity gains.

Now, '23 and 2024 witnessed quite a big improvement in the efficiency ratio. I do want to point out that with the late fee risk hanging over the last couple of years, There was some deferral of investments So, with that risk effectively off the table, there's a little catch up there that you see in our numbers. Now. But our story on efficiency continues to be the same. And We continue to have our eyes very focused on the longer term where operating efficiency continues to be an important way that we generate returns. To your point about priorities, it is not lost on us that we have a lot of opportunities that we are blessed with. We have all the opportunities that come from moving up the tech stack and the more we move up the tech stack, the more there are sort of direct benefits to the business in the form of better customer experiences, more opportunities, better leveraging of data to create marketing and credit opportunities and things like that. And we have the Discover deal and I've talked many times about there's the sort of immediate opportunity that we capture in our deal model. But then there's the longer term opportunity that comes from really investing in the network, especially internationally.

Investing in the brand, and then really being able to put more business on the network. So, in that environment, we spend a lot of time on prioritization and it's a good good problem to have to have as many opportunities as we do. But to the point of your question, we very much keep our big picture in mind and the measuring stick associated with our journey and a very important one of those is our efficiency journey.

Thank you.

Next question, please.

Our next question comes from John Hecht with Jefferies. You may proceed.

Afternoon. Thanks for taking my question.

I guess my question is around marketing synergies. On one hand, it seems that the amount of media advertising maybe the physical mailings to the customers and mean, plus one is not going equal two, I think, those endeavors. But on the other hand, Rich, I think you're interested in really focusing on continued brand development, particularly on the the global network. So how do we think about the kind of puts and takes of the opportunities for synergies versus desire to spend and invest in the the brand? [indiscernible] Discover and are you referring to the Discover brand, the Capital One brand? Are you referring to both there as your particularly at Discover Point and the synergies associated with Discover? Correct.

Yeah. So, it's a real blessing have the opportunity in this acquisition bring on board a company with a rare, well recognized very strong brand.

And So, we now have two companies with very strong brands. So, what we plan to do is we plan to continue, of course I shouldn't say of course because all of this you know, we've done a lot of thinking about, but we're very strong in our views that the Discover brand is absolutely the right brand for the network and we will continue to invest in that brand and especially build the credibility and the capabilities globally with respect to the brand. We will also continue the Discover brand on the credit card side. It will be more of a really powerful product Obviously, it's not going to be a corporation brand anymore, but but we intend to have it as a strong product brand and it goes back to what I think is the collective you know, the combination of the business model they've created that has generated such amazing results over the year which the brand plays an important role there. So, we will continue to invest in that. Now, are some savings around the edges that we can do in our collective marketing campaigns, I am sure. So, there's some benefit there. And I want to make one other comment about investing in the Network brand.

That is something that we don't plan to come roaring out of this acquisition on national TV, really leaning in the network brand. What we much more plan to do is we believe that the synergies and the whole moves that we have talked about at the time we announced our deal of moving our entire debit business and a portion of our credit card business onto the network we believe that can be done within the context of the current brand and the acceptance and the capabilities that Discover has built so skillfully. What we What we need to do in order to generate longer term opportunity is to is build acceptance internationally up to a sort of you know it when you see it point when it's the right time to lean into brand development of a global brand. A global acceptance brand. So, that in terms of the brand spend there, that's more of a delayed thing. It It is something that we certainly plan to lean into over time, but that would come as we see it today. That would come after we have gotten the international acceptance to sort of when you see it point that it's ready to really take this story on TV.

Next question, please.

Our next question comes from Erika Najarian with UBS. You may proceed.

Yes, good evening. Just two quick follow-up questions.

First is for you, Andrew. I'm just going all the way back to Ryan's question on ACO. Is there any way to have a neat answer on what the weighted average unemployment rate would be if we took into account the heavier weighting on the downside scenario. And as we look forward for Capital One standalone, how should we think about the ACL ratio given improved credit performance relative to the heightened macro uncertainty. I did have a follow-up.

Yeah, in terms of the weighted average, Erica, our process is one where we take the baseline and then apply various considerations. To the downside scenario and uncertainty. It's not a formulaic multiple scenarios with multiple probabilities that allow us to give you a weighted average. Number, which is why we kind of give the qualitative description there. Then in terms of how we think about things looking ahead with the allowance, If we continue to see near term favorability in our credit performance, that's going to bring down coverage all else equal, over time. If we see a meaningful worsening in economic outlooks or changes in consumer credit behavior from what we see today that could put upward pressure on our coverage and just given the heightened uncertainty in which we're living at this point. I want to try to project where that's going to land a quarter from now. And so we'll go through our full process at the end of in the second quarter and we'll see where the allowance ultimately lands.

Got it. And just my follow-up question Implicit in your response to John Pancari's question, are you also affirming the purchase accounting assumptions from February of twenty twenty four and just confirming that if there are any adjustments to be made given the heightened uncertainty to the Discover portfolio in terms of credit going forward. It would be on the day two provision, of course, not the purchase credit impaired mark.

Right. Well, we're going to segment their portfolio for PCD and non PCD and part of that obviously would run through the balance sheet and part of that would would run through the P and L on day two. With respect to affirming balance sheet marks, I'll explicitly not affirm the balance sheet marks given that rates and credit and the stock price and a number of other variables have moved. And so we need to get to day one and do all of our analysis on those marks and we'll provide the relevant updates at the appropriate time after we get to the other side of close.

Next question, please.

Our next question comes from Brian Ferran with Truist. You may proceed.

Hi.

I had one on spend and one on the network. On spend, you know, in prior quarters, you've given us a high end versus low end kind of updating commentary. Was wondering if you could give us that and maybe specifically on the tariff reaction, any differences you're observing in high end versus low end or is it about the same? So Brian, [indiscernible] relative to the tariffs and any early impact that we have seen We have not seen that a big difference between high end versus low end there. Again, these are very early observations. Spend has [indiscernible] picked up a little bit in the last week or two. Whether that is a pull forward or whether that's some other effect remains to be seen, but we haven't seen a striking difference on where on the spectrum that falls.

And then on the network, and and I apologize. I feel like I'm gonna oversimplify this. [indiscernible] ask this in a dumb way, but when I talk to people I think everyone sees the value of a globally competitive network.

We can just look at the multiples Visa, MasterCard, trade at It also seems like a very long and expensive journey. I'm just trying to unpack what you're signaling. Is it Is it incrementally each year investing in the network? Or is it like and again, I know I'm oversimplifying this. I'm not trying to put words in your mouth, but, like, is there some signaling that, like, hey, guys, we might reset the expense outlook take on Visa and Mastercard? Full stop.

Yeah, so well, I'm glad you asked that question. We aren't on a quest to replicate Visa and MasterCard's model It's an extraordinary model they have and on behalf of really all the banks in The United States. Almost all of them, they are the intermediary between all the banks and the merchants and, of course, they get paid a few basis points here and there times the trillions of dollars of transactions It's an amazing business model. [indiscernible] By the way, just with respect to that, it is the case that Discover does have on the debit side [indiscernible] they are a network provider for several thousand banks so I don't want to diminish that particular business model. It's a great thing. It came from their acquisition in 02/2005 of the Pulse Network. And it's a very nice business model and we would love to grow that. So, I do think that being a network for other financial institutions would be part of the business model over the years. That like most other things, the road to significantly change the game there probably again goes through that same path of building greater global network. Acceptance and and the brand credibility sort of for the network that goes along with that.

But anyway, but the biggest opportunity for Capital One beyond the the sort of direct opportunity that we identified with the amount of volume that we moved [indiscernible] to be able to put more of our volume on the network.

And it is our view that as we look to do more of that, we, you know, again, roads lead to because lots of people, you know, so many of our customers are international travelers. And, again, it did discover for a company of their size, I marvel at what they've built. Globally. Now, The United States, it's virtual, it's basically accepted everywhere. In The United States. Internationally, no one is accepted everywhere, but they've gotten a great head start on that. But we believe that in order to really capitalize on the network and to give the network the scale that in this profoundly scale driven business the scale that would really help it and sort of getting the flywheel of scale in this network effect business. All roads lead through building more international acceptance and then really leaning into the global brand associated with that network. But as we look at it, the primary payoff of that would be just putting more volume on the business. In a very scale driven business and then over time, we could also look at other opportunities such as being a network for other financial institutions.

Next question, please.

And our final question comes from the line of Robert Wildhack with Autonomous Research. You may proceed. Hi, guys. Rich, you've hit on the international acceptance theme quite a bit this evening. And there internationally, It seems like that's more of a chicken and egg problem where you have to kind of build and catalyze acceptance. I'm wondering if you could share your thoughts on the specific investments strategies and or levers you might have to solve that chicken and egg dilemma internationally and ultimately close the acceptance gap? Thanks.

If you look at how any of the big networks have built their business, including how Discover has built international acceptance, It's really [indiscernible] really cobbling together a variety of solutions internationally really through partnerships.

You know, in Discover's case certainly and this would be where the leverage is. To partner with networks to partner to go through merchant acquirers who can weigh more than one retailer at a time, more at scale create acceptance. [indiscernible] partner with financial institutions, basically card issuing banks in different countries, and finally to go directly to merchants. They have gotten to their pretty striking levels of through a combination of those four. And it's a boots on the ground roll up your sleeves, do something, but what I'm comfortable is this is something they've already done. And it's just something that we will lean into, we'll and probably lean into it more than they were able to because of the the opportunity and the prize that we see on the other end of this [indiscernible] the combined scale that we have. To your point, it is a chicken and egg problem. And when you show up, they want to know how much volume you're bringing and And as we get people and as we sign up customers, they want to know how much acceptance we have. So, it's a classic chicken and egg thing, but it's not starting at zero.

It's starting at a at a pretty striking level of acceptance They've sloped the work that they work backwards from where Americans travel. And so, the playbook is there. We would lean into this playbook and then I think the opportunities also are outside of what we've sort of modeled in terms of the benefits in our deal model.

Well, concludes our Q and A it.

Thanks.

Concludes our Q and A session. Thank you all for joining us on the conference call today, and thank you for your continuing interest in Capital One. Have a great evening, everybody.

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