Capital One Financial (COF) Q3 2024 Earnings Call Transcript

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Capital One Financial (COF -0.64%)
Q3 2024 Earnings Call
Oct 24, 2024, 5:00 p.m. ET

Contents:

• Prepared Remarks
• Questions and Answers
• Call Participants

Prepared Remarks:

Operator

Good day, and thank you for standing by. Welcome to the Capital One Q3 2024 earnings call. Please be advised that today’s conference is being recorded. I would now like to hand the conference over to your speaker today, Jeff Norris, senior vice president of finance.

Jeff Norris — Senior Vice President, Global Finance

Thanks very much, Josh, and welcome, everyone. We’re webcasting live over the Internet as usual and to access the call on the Internet, please log on to Capital One’s website at capitalone.com and follow the links from there. In addition to the press release and the financials, we have included a presentation summarizing our third quarter 2021 results. With me today are Mr.

Richard Fairbank, Capital One’s chairman and chief executive officer; and Mr. Andrew Young, Capital One’s chief financial officer. Rich and Andrew will walk you through this presentation. To access the of presentation in the 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. 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 in the earnings release presentation in the Risk Factors section of our annual and quarterly reports accessible at Capital One’s website and filed with the SEC. Now, I’ll turn the call over to Mr. Young. Andrew?

Andrew M. Young — Chief Financial Officer

Thanks, and good afternoon, everyone. I will start on Slide 3 of tonight’s presentation. In the third quarter, Capital One earned $1.8 billion or $4.41 per diluted common share. Included in the results for the quarter were adjusting items related to Discover integration costs and a small downward revision to our FDIC special assessment estimate.

Net of these adjusting items, third-quarter earnings per share were $4.51. Pre-provision earnings in the third quarter increased 3% from the second quarter to $4.7 billion. Revenue in the linked quarter increased 5%, driven by higher net interest income. Noninterest expense increased 7%, driven by increases in both operating expense and marketing spend.

Provision for credit losses was $2.5 billion in the quarter, down $1.4 billion relative to the prior quarter. The quarterly decrease was primarily driven by the absence of the second quarter’s one-time allowance build for the termination of the Walmart partnership, a decline in the coverage ratio in card, and a $40 million decrease in net charge-offs. Turning to Slide 4, I will cover the allowance in greater detail — leased $134 million in allowance this quarter, and our allowance balance now stands at $16.5 billion. Our total portfolio coverage ratio decreased seven basis points to 5.16%.

The decrease in this quarter’s allowance and coverage ratio was largely driven by allowance releases in our card and consumer banking segments. I’ll cover the drivers of the changes in allowance and coverage ratio by segment on Slide 5. In our Domestic Card business, we released $66 million of allowance, which decreased coverage by 18 basis points to 8.36%. Our credit outlook has improved slightly as our confidence in the stability of underlying credit trends has grown, driving a modest release and allowance.

In our Consumer Banking segment, we released $50 million in allowance, resulting in a 10-basis-point decrease to our coverage ratio. The release was driven by strong credit performance and increasing recoveries in our auto business. And finally, our commercial banking allowance increased by $14 million, resulting in the coverage ratio remaining essentially flat at 1.76%. Turning to Page 6.

I’ll now discuss liquidity. Total liquidity reserves in the quarter increased about $9 billion to approximately $132 billion. Our cash position ended the quarter at approximately $49 billion, up about $4 billion from the prior quarter, driven primarily by continued strong deposit growth. Our preliminary average liquidity coverage ratio during the third quarter was 163%, up from 155% in the second quarter.

Turning to Page 7. I’ll cover our net interest margin. Our third-quarter net interest margin was 7.11%, 41 basis points higher than last quarter and 42 basis points higher than the year-ago quarter. The sequential increase in NIM was largely the result of three factors.

First, we had higher card and auto yields. As a reminder, the card yield benefited from a full quarter impact of the termination of the revenue-sharing agreement with Walmart. The removal of revenue sharing increased the total company NIM and by 12 basis points quarter over quarter and 22 basis points relative to the year-ago quarter. Second, there was one additional day in the third quarter.

And finally, we had a higher mix of card loans on the balance sheet. Turning to Slide 8. I will end by discussing our capital position. Our common equity Tier 1 capital ratio ended the quarter at 13.6%, 40 basis points higher than the prior quarter.

Higher net income in the quarter was partially offset by the impact of dividends, loan growth, and $150 million of share repurchases. As a reminder, the announcement of the acquisition of Discover constituted a material business change. 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 D. Fairbank — Chairman and Chief Executive Officer

Thank you, Andrew, and good evening, everyone. Slide 10 shows third-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 third quarter, our Domestic Card business delivered another quarter of top-line growth, strong margins, and stable credit.

Year-over-year purchase volume growth for the quarter was 5%. Ending loan balances increased $9.1 billion or about 6% year over year. Average loans increased about 7%, and third-quarter revenue was up 10% driven by the growth in purchase volume and loans. Revenue margin for the quarter increased 43 basis points year over year to 18.7%.

The full quarter effect of the end of the Walmart revenue sharing agreement drove a 51-basis-point year-over-year increase. Excluding this impact, the revenue margin would have been about 18.2%. The charge-off rate for the quarter was 5.61%. The full-quarter impact of the end of the Walmart loss-sharing agreement increased the quarterly charge-off rate by 38 basis points.

Excluding this impact, the charge-off rate for the quarter would have been 5.23%, up 83 basis points year over year. The 30-plus delinquency rate at quarter-end was 4.53%, up 22 basis points from the prior year. As a reminder, the end of the Walmart loss-sharing agreement did not have a meaningful impact on the delinquency rate. The pace of year-over-year increases in both the charge-off rate and the delinquency rate have been steadily declining for several quarters and continued to shrink in the third quarter.

On a sequential-quarter basis, the charge-off rate, excluding the Walmart impact, was down 63 basis points, and the 30-plus delinquency rate was up 39 basis points, both sequential quarter trends are consistent with seasonal expectations. Domestic Card noninterest expense was up 12% compared to the third quarter of 2023 primarily driven by higher marketing expense. Total company marketing expense in the quarter was $1.1 billion, up 15% 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 compared to the third quarter of 2023. Domestic Card marketing in the quarter included increased marketing to grow originations at the top of the market, higher media spend, and increased investment in differentiated customer experiences like our travel airport lounges and Capital One shopping. Slide 12 shows third-quarter results in our Consumer Banking business.

Auto originations were up 23% year over year in the third quarter. Our stable credit performance, which is the result of choices we’ve made over the past couple of years puts us in a strong position to lean into current origination opportunities in the marketplace. Consumer Banking ending loans were essentially flat year over year, and average loans were down 1%. On a linked-quarter basis, ending loans and average loans were both up 1%.

Compared to the year-ago quarter, both ending and average consumer deposits were up about 6%. Consumer Banking revenue for the quarter was down about 3% year over year, largely driven by higher deposit costs compared to the prior-year quarter. Noninterest expense was up about 5% compared to the third quarter of 2023, driven largely by continued technology investments and increased auto originations. The auto charge-off rate for the quarter was 2.05%, up 28 basis points year over year.

The 30-plus delinquency rate was 5.61%, down three 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. Slide 13 shows third-quarter results for our Commercial Banking business. Compared to the linked quarter ending loan balances decreased about 2%. Average loans were down about 1%, and the modest declines are largely the result of choices we made in 2023 to tighten credit.

Ending deposits were up about 5% from the linked quarter. Average deposits were down about 1%. We continue to manage down selected less attractive commercial deposit balances. Third quarter was up 1% from the linked quarter and noninterest expense was up by about 2%.

The commercial banking annualized net charge-off rate for the third quarter increased seven basis points from the sequential quarter to 0.22%. The commercial banking criticized performing loan rate was 7.66%, down 96 basis points compared to the linked quarter. The criticized nonperforming loan rate increased nine basis points to 1.55%. In closing, we continued to post strong results in the third quarter.

We delivered another quarter of top-line growth in Domestic Card loans, purchase volume, and revenue. In the auto business, we saw year-over-year growth in originations for the third consecutive quarter. and consumer credit trends remained stable. Our year-to-date operating efficiency ratio net of adjustments through September was 41.7%.

We had guided to 2024 annual operating efficiency ratio net of adjustments to be modestly down compared to the 43.5% we posted in 2023. Our view included the positive impact from the end of the revenue sharing related to the Walmart partnership and assumed the CFPB late fee rule would take effect in October. Looking forward, we now expect the full-year 2024 annual operating efficiency ratio net of adjustments to be in the low 42s. We expect a sequential-quarter increase in operating expense in the fourth quarter that will be roughly in line with historical patterns as we continue to invest in our technology transformation.

And we are no longer assuming that the CFPB late fee rule will be implemented in 2024, given ongoing uncertainty around industry litigation. Our view of 2024 marketing has not changed. We continue to lean into marketing to grow and to further strengthen our franchise. In the Domestic Card business, we continue to get traction in originations across our products and channels.

In consumer banking, we’re leaning into marketing to grow our digital-first national banking franchise. We continue to expect total company marketing in the second half of 2024 to be meaningfully higher than in the first half, similar to the pattern we saw last year, and that includes the much higher marketing levels that we typically see in the fourth quarter. And turning to the Discover acquisition. We’re working closely with the regulators as our applications continue to work their way through the regulatory approval process.

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