Capital One Financial Corp (COF)

• Capital One's credit performance is stabilizing, with card delinquencies improving on a seasonally adjusted basis in Q4 2024 and ending the year slightly lower on a year-over-year basis. This indicates effective credit risk management and a strong consumer base. -
• The Auto business has returned to growth, with auto delinquencies consistently below pre-pandemic levels and lower year-over-year for the past two quarters. Capital One is bullish about the Auto segment, citing positive trends in margins, credit performance, and competition, bolstered by significant investments in technology and underwriting. -
• Capital One continues to enhance operating efficiency, achieving a 700 basis point improvement since 2013 through its technology transformation. The company expects further efficiency gains, which are an important way it creates value for investors, even as it invests in new areas like the Discover acquisition. - -

• Capital One is experiencing increased credit risk as a higher proportion of customers are making only minimum payments, which is running somewhat above pre-pandemic levels. This is consistent with delinquencies running above pre-pandemic levels and could signal increased credit risk. Additionally, higher interest rates remain a source of pressure for consumers with higher debt servicing burdens. -
• The pending Discover acquisition may constrain Capital One's capital returns due to regulatory limitations until the merger is approved and completed. This could impact the company's ability to conduct share repurchases and affect shareholders' return expectations. - , -
• Capital One may face Net Interest Margin pressure due to lower asset yields and potential increases in deposit costs as deposit competition ramps up. The company is modestly asset-sensitive, and if rates continue to decrease or deposit betas are lower or slower to decrease, it could negatively impact NIM. -

1. Credit Outlook and Consumer Health
   Q: How do you view the consumer and credit trends?
   A: The U.S. consumer remains strong, with a solid labor market and growing incomes. - While we see some pockets of pressure from inflation and higher interest rates, overall delinquencies have stabilized and improved slightly. - We believe delayed charge-offs are still working through the system, but over time, credit losses should return to pre-pandemic levels. -

2. Impact of Interest Rates on Credit Losses
   Q: Will higher rates keep charge-offs elevated?
   A: If interest rates stabilize and wages keep up with inflation, we believe charge-off rates could return to historic levels even in a higher rate environment. - Higher rates increase debt servicing burdens, especially for variable-rate products like credit cards, but over time, consumers adjust. -

3. Pending Discover Acquisition
   Q: Is the Discover deal on track?
   A: The approval process is moving forward, and we've made substantial progress. - We've received necessary approvals and remain engaged with regulators, expecting to close the deal early this year. - We're excited about the strategic and financial benefits the deal will bring. -

4. Operating Efficiency Post-Deal
   Q: How will the Discover deal affect efficiency?
   A: We expect to continue improving our operating efficiency ratio over time. - While there are investment areas needing focus, such as compliance and network development, we believe the synergies from the deal will support ongoing efficiency improvements. - Discover operates with a significantly lower efficiency ratio, which is beneficial. -

5. Capital Return Plans
   Q: Will you increase share buybacks post-deal?
   A: In the near term, we're maintaining a cautious approach due to the pending deal and regulatory requirements. - After closing and assessing the combined capital needs, we'll have more flexibility to consider increasing capital return. -

6. Net Interest Margin Outlook
   Q: What are expectations for NIM in 2025?
   A: In the first quarter, NIM will decrease by about 15 basis points due to fewer days. - Longer term, factors like modest asset sensitivity, deposit betas, and card growth—which is a tailwind—will influence NIM. - Card becoming a larger part of the balance sheet supports NIM. -

7. Auto Business Growth
   Q: Will you lean into auto loan growth?
   A: Yes, we are bullish on the auto business. - Credit performance is strong, with delinquencies below pre-pandemic levels. - Margins are now more normal, and competition and other factors make this an opportune time to grow. -

8. Mix of Consumer Book
   Q: How will your customer mix evolve?
   A: We continue to serve across the credit spectrum but are seeing a gradual shift upmarket. - We're heavily investing in higher-spend customers and expect this trend to continue. - The Discover acquisition will add more prime customers to our portfolio. -

9. Reserve Levels and Expectations
   Q: How will reserve levels change moving forward?
   A: Seasonal factors will cause some upward pressure on coverage. - Future changes will depend on growth and loss forecasts. - Improved loss forecasts will eventually flow through to lower reserves as uncertainties diminish. -

10. Recent Vintage Credit Performance
    Q: How are recent credit card vintages performing?
    A: Our recent originations show stable performance, with vintages in line with pre-pandemic levels. - We adjusted for inflated credit scores, which has helped maintain credit quality. - Industry data shows higher delinquencies, but our proactive measures have mitigated this. -

11. Purchase Volume Growth
    Q: Is higher purchase volume growth sustainable?
    A: Purchase volume growth is driven by growth in our branded card customer base. - Spend per customer picked up in mid-2024 and grew further in Q4. - This positive trajectory indicates consumer confidence. -

12. Non-Prime Business Stability
    Q: What is the outlook for non-prime segments?
    A: The word is stability. - Credit performance has been stable, and originations are consistent. - We continue to lean into both card and auto in the non-prime segments due to this stability. -

13. Debit Strategy Post-Discover Deal
    Q: Will you offer debit rewards with Discover?
    A: While we haven't completed the deal, we're pleased with our current debit strategy. - Owning the Discover network enhances our ability to invest in our national banking business. - We plan to continue our approach, leveraging the network's benefits. -

14. Efficiency Ratio Guidance
    Q: Will the 42% efficiency ratio hold in 2025?
    A: While we don't provide short-term guidance, we see long-term opportunities to improve efficiency. - Factors like continued technology investment and strategic imperatives may influence the ratio year over year. -

Annual guidance for 2027:

• EPS accretion: 15%+ - (no prior guidance)
• Purchase volume: $175B - (no prior guidance)

No other metrics from Q4 2024 match those from Q3 2024, and thus there are no “raised,” “lowered,” or “no change” comparisons to report. All other items mentioned in Q4 2024 were historical or non-numeric and did not constitute forward guidance.