Q1 2024 Earnings Summary
- Strong Growth in Auto Lending and Card Businesses: Capital One is "leaning in" across the board, with Auto origination volumes up 20% year-over-year in Q1 2024. In the Card business, they are experiencing "strong new account growth" and leveraging their technology transformation to enhance capabilities and customer experiences.
- Confidence in Credit Quality and Consumer Health: Despite economic uncertainties, Capital One continues to "feel very good about really the full spectrum of our customers" and is confident in their credit performance, enabling them to "lean into growth opportunities".
- Strategic Benefits from Proposed Discover Acquisition: The acquisition of Discover is expected to "increase competition among banks, credit card issuers and payment networks and provide significant benefits for consumers, merchants and the communities that we serve". Capital One believes the merger will be approved and enhance their position in the market.
- Lower and later tax refunds in 2024 are causing higher charge-off rates than expected, which could negatively impact near-term credit performance.
- Inflation and high interest rates may be stretching some consumers financially, potentially leading to worse credit performance among lower-income and subprime customers.
- Capital returns, such as share repurchases, may be limited in the near term due to blackout restrictions and regulatory processes related to the Discover acquisition, possibly affecting shareholder value.
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Discover Acquisition and Regulatory Approval
Q: Any update on the Discover acquisition and antitrust concerns?
A: We have filed our merger applications with the Fed and OCC and are engaged with the DOJ. We believe the merger will increase competition among banks, credit card issuers, and payment networks, benefiting consumers and merchants. While some have raised concerns about competition, we feel the facts support approval. The deal is still expected to close in late 2024 or early 2025, and we continue to have the same views about the timing. The extension of the comment period by the Fed is standard practice and doesn't signal any issues. -
Credit Performance and Outlook
Q: How is the consumer credit outlook affecting charge-offs?
A: The U.S. consumer remains strong, with resilient labor markets and higher bank balances than before the pandemic. We see credit performance settling out and believe charge-offs may be about 15% above 2019 levels in the near term. However, tax refunds are lower and later than historical patterns, which may affect near-term credit performance. We haven't provided full-year guidance but continue to feel good about credit across the spectrum. -
Impact of CFPB's Late Fee Rule
Q: How will the CFPB's late fee rule affect financials?
A: The CFPB's rule on late fees is scheduled to take effect on May 14. We are prepared to implement the rule if necessary, but ongoing litigation creates uncertainty. When implemented, it will have a significant impact on our P&L. We expect this impact to gradually resolve within a couple of years through mitigating actions, including changes to policies, products, and investment choices. -
Capital Return and Buybacks
Q: Will you continue share buybacks amid the Discover deal?
A: The agreement with Discover does not prohibit us from buying shares. We were blacked out for a period leading up to the deal, and SEC rules limit repurchases immediately after the announcement. In Q1, our buyback pace was less than recent quarters due to these limitations. Outside of blackouts, we're able to continue repurchasing shares. We're submitting a new capital plan; once approved, we'll have unlimited capacity relative to our SCB. -
Card Business Growth and Strategy
Q: Are you leaning into growth in the card business?
A: Yes, we're leaning in across the board in the card business. We're seeing strong account originations and purchase volumes. Continued investments to win at the top of the market and our technology transformation are powering success. We're not altering our origination strategy due to the Discover deal. -
Auto Lending Outlook
Q: What's your strategy in auto lending given market conditions?
A: We feel very good about the auto business. Q1 origination volumes were up 20% year-over-year and quarter-over-quarter. While affordability remains a concern due to high interest rates and car prices, we've tightened credit since 2022, and recent originations are performing better than pre-pandemic. As margins have recovered somewhat, we're seeing an opportunity to lean back in. -
Allowance for Loan Losses
Q: What drives your outlook for loan loss allowances?
A: A host of factors, including projected loss rates and growth, drive the allowance. Delinquencies are the best leading indicator. Even if projected losses decline, the coverage ratio may remain flat due to uncertainties. Seasonal balances affect the coverage ratio, which is largely in line with preceding quarters. -
Subprime Consumer Performance
Q: How are subprime consumers affecting credit expectations?
A: Subprime performance has been strong and settled out earlier than the rest of our portfolio. Based on current performance, we feel good across the credit spectrum and continue to lean into growth opportunities. While we watch inflation closely, we're not seeing signs that change our outlook. -
Small Business Card Strategy
Q: Can you discuss your new Venture X business card?
A: We launched the Venture X business card broadly in Q3 last year and are pleased with the market response. It offers business owners no preset spending limit, great travel benefits, and elevated earn rates. This launch builds on our investments to win at the top of the market in small business. -
Regulatory Preparedness (Category 2)
Q: Are you prepared for potential Category 2 regulatory requirements?
A: We'll be below the $700 billion threshold at closing, and the trigger is based on a four-quarter average. The key differences between Category 2 and 3 involve liquidity requirements and capital calculations. We feel well-prepared for all implications of either Category 2 or the proposed Basel III endgame rules.