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<s>[INST] In the fourth quarter, Capital One earned $1.2 billion or $3.03 per diluted common share. For the full year,
Capital One earned $7.4 billion or $17.91 per share. Included in the results for the fourth quarter were two adjusting items,
which collectively benefited pretax earnings by $105 million. Net of thes... |
<s>[INST] In the fourth quarter, On a linked quarter basis, period-end loans grew 3% and average loans grew 2%, driven by growth in our domestic car business. This loan growth coupled with net interest margin expansion drove revenue up 3% on a linked quarter basis, what does this sentence mean? [/INST] In the fourth qu... |
<s>[INST] In the fourth quarter, Noninterest expense grew 3% in the linked quarter, driven by an increase in marketing expenses while operating expenses were largely flat. Net of the adjustments I mentioned earlier, operating expenses were up 2.4%. Provision in the quarter – provision expense in the quarter was $2.4 bi... |
<s>[INST] In the fourth quarter,Turning to slide 4, I will cover the changes in our allowance in greater detail. The $1 billion increase in allowance in the fourth quarter brings our total company year-end allowance balance up to $13.2 billion, increasing the total company coverage ratio by 22 basis points to 4.24%. I’... |
<s>[INST] In the fourth quarter, In our Domestic Card business, the allowance balance increased by $795 million, bringing our coverage ratio to 6.97%. Three things put upward pressure on our card allowance. The first factor was the continued credit normalization in our portfolio. The second factor was a modestly worse ... |
<s>[INST] In the fourth quarter, In our Consumer Banking segment, the allowance balance increased by $129 million, driving a 20 basis-point increase in coverage to 2.8%. The build was primarily driven by continued credit normalization in our auto business, including lower recovery rates. The second factor also putting ... |
<s>[INST] In the fourth quarter, And finally, in our Commercial business, the allowance increased $73 million, resulting in a 9 basis-point increase in coverage to 1.54%. This was largely driven by reserve builds for our office portfolio. , what does this sentence mean? [/INST] In the fourth quarter, And finally, in ou... |
<s>[INST] Turning to page 6, I’ll discuss liquidity. You can see our preliminary average liquidity coverage ratio during the fourth quarter was 143%, well above the 100% regulatory requirement. Total liquidity reserves increased by $14 billion to $107 billion. Strong consumer deposit growth throughout the quarter drove... |
<s>[INST] Turning to page 7, I’ll cover our net interest margin. Our net interest margin was 6.84% in the fourth quarter, 24 basis points higher than the year-ago quarter and 4 basis points higher than the prior quarter. The 4 basis-point linked quarter increase in NIM was driven by higher asset yields and a balance sh... |
<s>[INST] Turning to slide 8, I will end by discussing our capital position. Our common equity Tier 1 capital ratio was 12.5% at the end of the fourth quarter, up about 30 basis points relative to last quarter. The $1.2 billion of net income in the quarter was partially offset by growth in risk-weighted assets, dividen... |
<s>[INST] Thank you, Andrew, and welcome, everybody. I’ll begin on slide 10 with fourth quarter results in our Credit Card business. Year-over-year growth in purchase volume and loans, coupled with strong revenue margin drove an increase in revenue compared to the fourth quarter of 2021. Credit Card segment results are... |
<s>[INST] In the fourth quarter, strong year-over-year growth in every top line metric continued in our Domestic Card business. Purchase volume for the fourth quarter was up 9% from the fourth quarter of 2021. Ending loan balances increased $22.9 billion or about 21% year-over-year. Ending loans grew 8% from the sequen... |
<s>[INST] The domestic card charge-off rate for the quarter was 3.2%, up 173 basis points year-over-year. The 30-plus delinquency rate at quarter-end was 3.43%, 121 basis points above the prior year. On a linked quarter basis, the charge-off rate was up 102 basis points and the delinquency rate was up 46 basis points. ... |
<s>[INST] Total company marketing expense was about $1.1 billion in the quarter. Our choice in domestic card marketing are the biggest driver of total company marketing. In our Domestic Card business, we continue to lean into marketing to drive resilient growth. We’re keeping a close eye on competitor actions and poten... |
<s>[INST] Slide 12 shows fourth quarter results for our Consumer Banking business. In the fourth quarter, we continued to see the effects of our choice to pull back on auto growth in response to competitive pricing dynamics that have pressured industry margins. Auto originations declined 32% year-over-year and 20% from... |
<s>[INST] Driven by the decline in auto originations, Consumer Banking loan growth continued to be slower than previous quarters. Fourth quarter ending loans grew 3% compared to the year ago quarter. On a linked-quarter basis, ending loans were down 2%. Fourth quarter ending deposits in the Consumer Bank were up 6% yea... |
<s>[INST] Consumer Banking revenue was up 10% year-over-year as growth in auto loans and deposits was partially offset by the year-over-year decline in auto margins. Noninterest expense was up 13% compared to the fourth quarter of 2021, driven by investments in the digital capabilities of our auto and retail banking bu... |
<s>[INST] The auto charge-off rate and delinquency rate continued to normalize in the fourth quarter. The charge-off rate for the fourth quarter was 1.66%, up 108 basis points year-over-year. The 30-plus delinquency rate was 5.62%, up 130 basis points year-over-year. On a linked quarter basis, the charge-off rate was u... |
<s>[INST] Slide 13 shows fourth quarter results for our Commercial Banking business. Compared to the linked quarter, fourth quarter ending loan balances were down 1% and average loans were flat. Ending deposits were down 1% from the linked quarter. Average deposits grew 7%., what does this sentence mean? [/INST] Slide ... |
<s>[INST] Fourth quarter revenue was down 23% from the linked quarter. The decline was primarily driven by an internal funds transfer pricing impact that was offset by an equivalent increase in the other category and was therefore neutral to the Company. Excluding this impact, fourth quarter commercial revenue would ha... |
<s>[INST] Noninterest expense was up 2% from the linked quarter. The Commercial Banking annualized charge-off rate was 6 basis points. The criticized performing loan rate increased 74 basis points from the linked quarter to 6.71%, and the criticized nonperforming loan rate was up 17 basis points from the linked quarter... |
<s>[INST] In closing, we continue to drive strong growth in card revenue, purchase volume and loans in the fourth quarter. Loan growth in our Consumer Banking business was slower compared to previous quarters as we continued to pull back on auto originations. Consumer deposits grew. And in our Commercial Banking busine... |
<s>[INST] Charge-off rates and delinquency rates continue to normalize across our business and were below pre-pandemic levels. Total company operating expense net of adjustments was up 2.4% from the linked quarter. Our annual operating efficiency ratio for full year 2022 was 44.5% net of adjustments, a 15 basis points ... |
<s>[INST] Pulling way up, we continue to see opportunities for resilient asset growth that can deliver sustained revenue annuities. We continue to closely monitor and assess competitive dynamics and economic uncertainty. Powered by our modern digital technology, we’re continuously improving our proprietary underwriting... |
<s>[INST] I wanted to ask about just the vintage seasoning or growth math as you talk – as I think we’ve talked about in the past. We’ve added a lot of loans here in last year. And as these loans season, I was just trying to – wonder if you could maybe talk about just how you see that flowing through into your loss rat... |
<s>[INST] Yes. Thank you. Let me just start with a reminder of what we mean by growth math. As a general rule of thumb, losses on new loans tend to ramp up over a couple of years and then peak and then gradually come down. When we accelerate growth and especially when those new loans are added to a seasoned back book w... |
<s>[INST] Given our recent rate of growth, I think it’s likely we’ll see some growth math effect again over the next few years. But I think the general normalization trend will be the bigger driver of our credit trajectory. One other thing that’s different about growth math going forward is CECL. Under the CECL account... |
<s>[INST] Okay. Thanks. And then just maybe on your reserve. Just trying to understand just some of the assumptions underlying the reserves. Maybe you could just talk about what you’re assuming for unemployment whether you have a recession built into the short term. Any additional color you can help us with there? Than... |
<s>[INST] Sure Mihir. As I said in the past, we are largely consumers of economic assumptions. In this particular case for unemployment, we are assuming something that’s a little modestly higher than consensus estimates for where we will land in the fourth quarter. I think consensus is somewhere around 4.8. We’re – our... |
<s>[INST] So Rich, maybe I can ask Mihir’s – one of Mihir’s questions in a slightly different manner. So, competitors in the industry are talking about reaching pre-pandemic loss levels by year-end or maybe even overshooting those levels. Can you maybe just talk a little bit about how you think about the pace of normal... |
<s>[INST] Okay. Thanks, Ryan. So consumer credit metrics remain strong. And of course, as we’ve seen, they’ve been normalizing steadily through 2022 and are approaching pre-pandemic levels. At first, normalization was more pronounced in some segments more than others. It was – of course – and by the way, this is always... |
<s>[INST] More recently, we’ve actually seen more uniform trend of normalization across businesses and segments, so, for example, across various FICO ranges and also across income levels. When we index them on credit metrics back to where they were before the pandemic, the sort of rest of the credit spectrum and rest o... |
<s>[INST] So, you asked various competitors are forecasting or talking about different times at which things cross 2019 levels. I think at Capital One, we’re not making specific predictions on that. But I think the key thing I would have you look at is the delinquency metrics. Delinquency metrics are the best single pr... |
<s>[INST] Got it. And then, Rich, maybe to follow up on the comments regarding the efficiency being flat to modestly down. I think last quarter, you were talking about modest efficiency improvements. There have been headlines about the firm reducing some headcount. So, I’m just curious, has anything changed in terms of... |
<s>[INST] Yes. Ryan, our efficiency outlook is exactly the same as it was last quarter. If you recall, actually, we guided to the – for full year 2022 for efficiency to be flat – basically kind of flat to 2021, and then modestly down for 2023 relative to 2021. What happened is that ‘22 came in a little bit lower. So, o... |
<s>[INST] So two questions. One, just as we think about the margin and the net interest margin, interest margin outlook, – can you give us a sense as to how you’re thinking about deposit betas and how that’s likely to grow here over the course of the year. I noticed you talked a little bit earlier about deposit growth ... |
<s>[INST] Yes. Betsy, I’ll start with your last question first, which is we are following the forward curve, assuming 50 bps here in the first quarter and holding flat throughout ‘23 before coming down in ‘24. With respect to how we’re thinking about beta and asset yields as components of NIM, as we get into the latter... |
<s>[INST] In terms of thinking about overall deposit beta and product mix, roughly 85% of our deposits are in consumer. It’s where our focus lies. And so if you just look at the cumulative deposit beta for the total company, it’s around 35%, was low-20s last quarter. But if you look at the last increasing rate cycle, I... |
<s>[INST] We talked last quarter about balance sheet mix – and we are largely back to a pre-pandemic balance sheet mix from where we were a year ago. And frankly, our NIM is roughly in a similar spot. So, I would say balance sheet mix over a multiple quarter period isn’t likely to be a big driver, unless we just see ou... |
<s>[INST] So, all of those things are – just to leave you with kind of a net impression that there are headwinds and potentially some tailwinds. But the one thing I will just note as we look ahead to the first quarter, as a reminder, in the way we calculate NIM day count has an effect. So, the one thing we know for sur... |
<s>[INST] Betsy Graseck, what does this sentence mean? [/INST] Betsy Graseck </s> |
<s>[INST] Okay. That’s super helpful color. As a follow-up, I just wanted to get a sense as to how you’re thinking about the outlook for marketing, obviously, a critical driver of growth, and I know it’s been something that you’ve been very successful with in generating that top of wallet customer. But just wanted to s... |
<s>[INST] Betsy, yes, we continue to – I feel very good about the traction that we’re getting in marketing. Of course, most of the marketing that we do is in the card business. We continue to see attractive growth opportunities across the business for new account origination. We have continued to expand our products an... |
<s>[INST] You mentioned, of course, how do we feel about leaning into this in the context of the potential looming downturn. And what we do is we just continue to look all around the edges of our originations and look for places that either we would think might be particularly likely to have a challenge or be vulnerabl... |
<s>[INST] So there’s a little bit of trimming around the edges. But really, the net impression I would lead you on the card side is we continue to lean in. Now, of course, there’s the marketing that we do just the – to originate accounts directly through all the direct marketing media. We, of course, have our continued... |
<s>[INST] So, that continues to be a good sign for us. And so, we’re leaning into that. And then the other thing on the marketing side, of course, is the national bank marketing. You’ve seen some of the success we’re having there. Everybody in banking is sort of leaning into the deposit growth side in the context of ch... |
<s>[INST] Rich, I wanted to follow up on your commentary around delinquency metrics. At the current pace of normalization, is it reasonable to expect that we could see DQs get back to pre-pandemic levels by the mid-2023 time frame? And then from there, does your outlook suggest that you expect delinquencies to flatten ... |
<s>[INST] Well, what we have said, Bill, is there are lots of metrics to look at, and I can even talk to you about a few – some of the others we’re looking at as well. But number one, that we would point our investors to look at is delinquency. And delinquency entries and individual delinquency flow rates have – we see... |
<s>[INST] So, that is a good sign. We continue to look at our payment rates, which continue to be elevated. We like elevated payment rates that we’ve assumed they’re going to normalize part of the way down to where they were before. But of course, there’s been some mix shift towards more spender within Capital One’s po... |
<s>[INST] So, these are all things that are positive indicators. But I do want to say also, again, there’s been some mix change in our own portfolio with a bit of a shift toward the heavier spenders. So, many of these metrics may not fully get back to where they were pre-pandemic. But if we pull up on this, what we see... |
<s>[INST] That’s very helpful, Rich. Thank you. If I may, as a follow-up, separate topic. Can you give us an update on Capital One’s strategy for reducing friction at checkout with different electronic consumer wallet solutions. There have been some recent press reports regarding partnerships with other digital wallet ... |
<s>[INST] So, a phrase that I’ve often used is the tip of the spear in the transformation of banking is payments, both on the consumer and the commercial side. And the reason I say this is that first of all, it’s very prone to significant changes in technology, and also, it’s not as heavily regulated a space as much of... |
<s>[INST] So, Capital One has – we continue to support the various technology players who have developed payment innovations, and we continue to develop innovations of our own. There were some news out about in the news today, in fact, about potentially a new wallet coming out. We are 1 of 7 co-owners of EWS. And we’re... |
<s>[INST] Rich, I was wondering if you can talk a little bit about your thoughts on auto credit. And then, as a follow-up, what you’re seeing on credit card spend, in particular, heavy spenders and whether or not they can sustain for travel and spend numbers., what does this sentence mean? [/INST] Rich, I was wondering... |
<s>[INST] Okay. Thank you, Don. In auto, let’s talk a little bit about the auto business and maybe a little bit of a comparison to the card business. Just to talk about – auto as many of the very same trends. It is all the same general trends going on with the consumer and the normalization that we have been talking ab... |
<s>[INST] So, we also, in terms of the credit metrics, we have seen more degradation in the very, very low and mostly below where we play in the auto business, but we have trimmed a little bit around the edges at our own low end. But basically, we continue to feel very good about our originations. From a credit point o... |
<s>[INST] Okay. And then on the credit card spend, same story. Are you seeing moderation? And can you talk about heavy spenders trends?, what does this sentence mean? [/INST] Okay. And then on the credit card spend, same story. Are you seeing moderation? And can you talk about heavy spenders trends? </s> |
<s>[INST] Yes. We – you’ll notice our own spend growth numbers moderated quite a bit this quarter. We are seeing spend per account per customer moderate across our portfolio, moderating the most at the lower end, but we see the moderation. We see it the least in the very heaviest spenders, but the moderation that you s... |
<s>[INST] Thank you. Andrew, first question for you on share repurchases. Maybe you could just help us think about the pace of share repurchases as we move forward because I know you guys slowed them down, but you’ve been building capital. Maybe you can just help us with that first., what does this sentence mean? [/INS... |
<s>[INST] Sure, Sanjay. In terms of thinking about the capital that we have moved down over the course of the last couple of years from – in the 14 to we hit a low point of 12.1, a couple quarters ago. But as we sit here today, we’re just looking at the actual and forecasted levels and the earnings and growth and in pa... |
<s>[INST] Yes. Well, we – I think we just continue to generate a lot of capital. And we – a central part of our strategy is the return of capital through share repurchases and dividends. Lately, we’ve dialed back a little bit on that just really as a measure of prudence in an unusually uncertain time like this. I think... |
<s>[INST] So, should we assume sort of the fourth quarter pace as a good run rate or just not assume anything?, what does this sentence mean? [/INST] So, should we assume sort of the fourth quarter pace as a good run rate or just not assume anything? </s> |
<s>[INST] Yes. Sanjay, we’re just going to manage it dynamically based on what we see in the marketplace and the factors that I described before. So, at this point, you’ve seen what we’ve been doing over the last handful of months, roughly $50 million a month. But again, we have flexibility, and as we have a bit more c... |
<s>[INST] Maybe you could just talk a little bit about the level of marketing growth for the year. You had a bit of a step up, I’d say, in 2022 and the growth rates there are obviously showing a lot of traction in most of your metrics. Is there essentially kind of a bit of a slowdown but still have the ability to conti... |
<s>[INST] Yes. Arren, yes, marketing – the marketing story has several components to it. One is just the – and an important part of that is the sort of real-time response to the opportunities that we see. And we continue – and especially talking about card and of course, card is where most of the marketing is. But, we ... |
<s>[INST] So that – and it’s corresponded with some expansion in opportunities that are just a byproduct of our tech transformation, and it’s just more access points, more channels, more better credit models that give a little bit deeper and wider access to opportunities and more granularity. The more granularity that ... |
<s>[INST] The second important driver, of course, is the continued traction we’re getting in our really 10-year journey to drive more and more upmarket with focus on heavy spenders. And I think back to when we launched the Venture card in 2010. And – but of course, this journey – and we’ve been declaring for years that... |
<s>[INST] That also has a significant upfront component in terms of not only the direct marketing and the brand building, but also the early spend bonuses that go right through the marketing line when we – at the early stage of these accounts. So, that’s something that we’ve been growing and sustaining over the last nu... |
<s>[INST] In other words, of all the banks our size or even smaller, the realistic path to growth is to do that through mergers and acquisitions, our path is an organic one. We’ve invested quite a bit to create full digital capabilities for almost everything you can do in a branch to be able to be done by a customer di... |
<s>[INST] Andrew, you’ve made the comment talking about the reserve rate on the card portfolio and reflecting the seasonality of the increase in spend and balances from spend-driven accounts. As we move into Q1, should we assume that with normal portfolio runoff but a mix shift that that allowance coverage ratio will a... |
<s>[INST] Well, there’s a number of factors, Rick, that will play into coverage ratio. So, why don’t I just pull up and lay out the key pieces and forecast assumptions of our allowance. And I will get to your kind of seasonal balance point in a moment. But I think it’s important to lay out all of the component parts ra... |
<s>[INST] So, the first part of the allowance is we’re using models to estimate the next 12 months of losses. And the early period of this forecast is generally more accurate because, as Rich was talking about earlier, we can look at the existing delinquency inventories and flow rates, beyond those months we incorporat... |
<s>[INST] The second factor impacting the allowances, we start from the year one exit rate for losses and then assume a reversion to a long-term average over the following 12 months. And then, the third thing is we net forecasted recoveries against the loss estimates for all of those periods. And so, on top of all of t... |
<s>[INST] The open-ended product of credit card is different than closed-end loans as we go through those mechanics because with closed-end loans, we’re reserving for estimated loss content for the account. But in a revolving product like card, we’re only able to reserve for the loss content related to the balances tha... |
<s>[INST] So all else equal, the coverage ratio in the fourth quarter has a bit of natural downward pressure from that elevated denominator as you suggest. But looking ahead, there’s a bunch of factors that can impact where the allowance goes from here beyond that single effect. In periods where future losses may incre... |
<s>[INST] As we have growth with seasonally adjusted balances, Rich mentioned this before, CECL significantly pulls forward that allowance cost of growth. And then the third factor is coming out of a period where we have unusually low losses like we’ve experienced, over the last couple of quarters, you have lower recov... |
<s>[INST] And so, I appreciate your bearing with me for a long-winded complex answer, but I think we all saw the complexity and pro-cyclicality of CECL play out during the pandemic when we had to make a bunch of assumptions as the pandemic played out, we built a sizable allowance only to release virtually all of it ove... |
<s>[INST] And I was hoping to talk a little bit about marketing. I mean, Rich, you did mention that you were primarily in card and primarily in the upscale customer. But could you just talk a little bit about, number one, what you might be doing kind of in nonprime and how we should think about whether that total marke... |
<s>[INST] Yes. So Moshe, I’m glad you asked the question because I would not want the net impression to be – I think what you were saying is that, is our marketing primarily just in the upscale customer segment? Differentially relative to years ago, we’ve certainly had a shift to the higher end in terms of our marketin... |
<s>[INST] This is – our strategy here is – well, it changes all – we tweak it around the edges all the time. We’ve been doing this for pretty much approaching three decades now, at the lower end of the market. And the marketing there is direct marketing, stimulus response, very information based. And so, the marketing ... |
<s>[INST] And I do want to say that the – we continue to get good traction in the subprime and prime parts of the marketplace, even as we certainly relative to 10 years ago, have a lot more marketing going on at the top of the market. So, there’s quite a bit going on, and we feel good about the traction there., what do... |
<s>[INST] Yes. The way this tends to happen is it happens in one little segment, one micro segment at the margin in response to things that we see going on there. I use this phrase a lot, trimming around the edges. And you’ve heard me use that for many, many years. And this is something that we always do or something w... |
<s>[INST] And then one is sort of the diagnosis of deviation. And the second thing, of course, is trying to get sort of a root cause, understanding of what may be driving that. And this is something that we continue to put a lot of energy into and it has led us to trim some – there are some things that we have seen deg... |
<s>[INST] On the – regarding the reserve build in terms of the drivers of the reserve build this quarter, I know you cited loan growth, you cited the macro backdrop, and you sited credit normalization. Is there any way to help parse out how much of the build of $1 billion is attributable to loan growth versus macro ver... |
<s>[INST] Yes. John, we don’t break out those components in part because some of them are actually related to one another. For instance, how we think about qualitative factors and how we think about our base forecast is tied into one another. And so, that’s why we just wanted to lay out that quarter-over-quarter when y... |
<s>[INST] Okay. No, I get it. That’s helpful. The normalization point, if I could just ask one more thing on that, was there anything about the normalization? And I appreciate the color you already gave. But is there anything about the normalization that you’re seeing that is kind of faster than expected, or any change... |
<s>[INST] No. And I think Rich touched on some of these in one of his earlier responses, but what we’re seeing in terms of normalization is playing out as we expect. It’s part of why I wanted to highlight the fact that the mechanics of the reserve though only take into account that 12-month model period and revert from... |
<s>[INST] ABS, What does this stands for? [/INST] Asset-backed securities </s> |
<s>[INST] ACH, What does this stands for? [/INST] Automated Clearing House </s> |
<s>[INST] ACL, What does this stands for? [/INST] Allowance for credit losses </s> |
<s>[INST] AML, What does this stands for? [/INST] Anti-money laundering </s> |
<s>[INST] AOCI, What does this stands for? [/INST] Accumulated other comprehensive income </s> |
<s>[INST] ARRC, What does this stands for? [/INST] Alternative Reference Rates Committee </s> |
<s>[INST] ASU, What does this stands for? [/INST] Accounting Standards Update </s> |
<s>[INST] ASC, What does this stands for? [/INST] Accounting Standards Codification </s> |
<s>[INST] ATM, What does this stands for? [/INST] Automated teller machine </s> |
<s>[INST] AWS, What does this stands for? [/INST] Amazon Web Services, Inc. </s> |
<s>[INST] BHC, What does this stands for? [/INST] Bank holding company </s> |
<s>[INST] bps, What does this stands for? [/INST] Basis points </s> |
<s>[INST] CAD, What does this stands for? [/INST] Canadian dollar </s> |
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