- Net Income: $597 million, or $1.38 per diluted common share.
- Adjusted Earnings per Share: $3.14, net of adjusting items.
- Period-End Loans Held for Investment: Increased 1% from the prior quarter.
- Ending Deposits: Flat versus last quarter.
- Pre-Provision Earnings: Increased 7% from the first quarter.
- Revenue: Increased 1% from the linked quarter.
- Non-Interest Expense: Decreased 4% from the linked quarter.
- Provision for Credit Losses: $3.9 billion, with a $1.2 billion increase from the prior quarter.
- Allowance Balance: $16.6 billion, with a $1.3 billion build this quarter.
- Total Liquidity Reserves: Approximately $123 billion, down about $5 billion from the prior quarter.
- Cash Position: Approximately $45 billion, down about $6 billion from the prior quarter.
- Net Interest Margin (NIM): 6.7%, up 1 basis point from last quarter.
- Common Equity Tier 1 Capital Ratio: 13.2%, up 10 basis points from the prior quarter.
- Credit Card Purchase Volume Growth: 5% year-over-year.
- Credit Card Ending Loan Balances: Increased $11.1 billion or about 8% year-over-year.
- Credit Card Revenue: Up 9% year-over-year.
- Credit Card Revenue Margin: 17.9% for the quarter.
- Credit Card Charge-Off Rate: 6.05% for the quarter.
- Credit Card 30-Plus Delinquency Rate: 4.14% at quarter end.
- Domestic Card Non-Interest Expense: Up 5% year-over-year.
- Total Company Marketing Expense: $1.1 billion, up 20% year-over-year.
- Auto Originations: Up 18% year-over-year.
- Consumer Banking Ending Loans: Down $1.6 billion or 2% year-over-year.
- Consumer Banking Revenue: Down about 9% year-over-year.
- Auto Charge-Off Rate: 1.81%, up 41 basis points year-over-year.
- Commercial Banking Ending Loan Balances: Decreased about 1% from the linked quarter.
- Commercial Banking Ending Deposits: Down about 6% from the linked quarter.
- Commercial Banking Net Charge-Off Rate: 0.15%, up 2 basis points from the sequential quarter.
Release Date: July 23, 2024
For the complete transcript of the earnings call, please refer to the full earnings call transcript.
Positive Points
- Capital One Financial Corp (COF, Financial) reported second-quarter earnings per share of $3.14, excluding adjusting items.
- Pre-provision earnings increased by 7% from the first quarter, driven by higher net and non-interest income.
- The domestic card business showed strong results with a 5% year-over-year purchase volume growth and an 8% increase in ending loan balances.
- The company's common equity Tier 1 capital ratio ended the quarter at 13.2%, indicating a strong capital position.
- Marketing investments are delivering strong new account growth, particularly in the domestic card business and national digital bank.
Negative Points
- The provision for credit losses increased by $1.2 billion from the prior quarter, driven by higher allowance and the termination of the Walmart partnership.
- Total liquidity reserves decreased by approximately $5 billion to $123 billion, with a significant drop in the cash position.
- The charge-off rate for the domestic card business increased to 6.05%, partly due to the end of the Walmart loss sharing agreement.
- Consumer banking revenue decreased by 9% year-over-year, largely due to higher deposit costs and lower average loans.
- The commercial banking segment saw a 6% decline in ending deposits and a slight increase in criticized performing and non-performing loan rates.
Q & A Highlights
Q: Rich, Andrew, just looking at the credit metrics, as Rich mentioned, it seems like the trends are pretty favorable. I mean, in most segments, things are improving, if not stable. And then in US card, there's an improving trend in that second derivative. I'm just curious how we should think about reserve rate going forward, because I think even excluding the Walmart impact, the reserve rate went higher?
A: Sure, Sanjay. Well, let me start by covering this quarter's allowance, and then I'll talk about the future. So in the quarter, as you said, first, we had effective of Walmart, the $826 million build that we spelled out as an adjusting item. We also reserved for the growth we saw in the quarter. Beyond that, coverage in card as you referenced through -- I think it was just over 10 basis points, which is a little over 1% of the allowance balance. And so as part of that process each quarter, not only are we rolling forward our baseline for forecast, but we're also looking at a range of macroeconomic and consumer behavior uncertainties, including things like the changing seasonal customer behavior we've talked about last quarter. And so as a result, in this quarter, we increased the qualitative factors to reflect those uncertainties. And that's what drove the modest increase in coverage this quarter. As I look ahead -- and talking conceptually here -- but in a period where projected loss rates in future quarters are projected to stabilize and ultimately decline and might indicate a decline in the coverage ratio, I would say you could very well see a coverage ratio that remains flat for some period of time as we incorporate the uncertainty of those future projections into the allowance. In a period where forecasted losses are rising, we're quick to incorporate those higher forecasted losses and also potentially add qualitative factors for uncertainty like you saw early in the pandemic, but I would say it is unlikely to be symmetric on that way down. And so eventually, the projected stabilizing and ultimately, lower losses will flow through the allowance, particularly as the uncertainties around that forecast become more certain. But at this point, I'm not going to be in the business of forecasting when that's actually going to take place for us.
Q: Rich, maybe you could just talk about the consumer and sort of the uncertainties there. Is there any discernible change that you've seen since last quarter in terms of the state of the consumer? We've obviously seen the spending trends sort of slow somewhat across the industry, but anything else to sort of point out?
A: Sanjay, I think what we see is something that's very stable. The US consumer remains a source of strength in the overall economy. Of course, the labor market remains strikingly resilience. Rising incomes have kept consumer debt servicing burdens relatively low by historical standards despite high interest rate. When we look at our customers, we see that on average, they have higher bank balances than before the pandemic, and this is a true across income levels. On the other hand, inflation shrank real incomes for almost two years, and we've only recently seen real wage growth turn positive again. And in this high interest rate environment, the cost of new borrowing has gone up in every major asset class -- mortgages, auto loans, and credit cards. So we'll obviously keep an eye on that. And I think at the margin, these effects are almost certainly stretching some consumers financially. But on the whole, I'd say consumers are in reasonably good shape relative to most historical benchmarks. And as our credit numbers came on in (technical difficulty) I'm sorry. Can you hear me? Can you still hear me? You can hear me okay. I just had some cross message coming in on my phone. But with respect to credit, we were very pleased with the credit performance in the quarter. We had talked a bit about the seasonality. Maybe people want to ask question about that. But we saw it -- basically pulling up, we see things settling out nicely in the card business, and things are very strong in the auto business.
Q: Maybe just turning to NIM for a second. With the Fed -- or at least expectations for rate cuts coming into view, can you just comment on the current backdrop for deposit competition? And how do you expect deposit betas to trend during the early stages of the Fed rate cutting side?
A: Sure, Mihir. What we've seen at least within our walls -- and you saw evidence of it this quarter -- in a quarter where seasonally, you typically see a decline in deposit balances looking at H8 data, we saw a few -- I think it was $4 billion of growth. We've been quite pleased over the course of the last couple of years with all of the investments we've made over many years in building a deposit franchise and are certainly benefiting from that. And so with respect to the beta going forward, first, looking at what we saw in the upcycle here -- the total cumulative beta that we've seen in this cycle, this quarter, I think, cumulatively was 62%. And so assuming that the Fed's next move is to bring rates down, it's hard to precisely predict what's going to happen to deposit costs and therefore betas, and in particular the pace of those declines because market dynamics, competitive pricing actions and other actions related to companies looking to potentially preserve NIM -- that's going to drive betas in the future cycle. But I think you get a pretty good sense for our pricing and mix based on what you saw in the upcycle and within that backdrop that I just described that's going to influence what happens to our beta on the way down.
Q: If you look across your portfolio, you know, we've heard a little bit of talk about people pulling back, particularly on discretionary spend and low-income cohorts, et cetera. Is that a dynamic you also seeing when you look at your customer base? And then relatedly, Rich mentioned how pleased he is with the progress you're making on the higher income side, if you will, in that high-end transact of our own sites. I was just wondering how does that change your portfolio as you think about it like over the next few years, like as you grow that book further?
A: Yes. Well, thank you so much. Just with respect to spending, we see pretty proportional movements in discretionary versus non-discretionary spending. Nothing really striking there when we look at the portfolio spending metrics. The spend per customer is really pretty flat. When you see spend growth at a company like Capital One, the purchase volume growth is really being driven by the new accounts. So things are really pretty stable -- flat and stable, healthy, but pretty flat on a per-customer basis. With respect to the question about the gradual transition of our portfolio to a higher-end customer, let me just pull up and talk about that. We have, for decades, been a company that sort of serves the mass market really from the top of the credit spectrum through to -- even down to some subprime customers. And we have continued very consistently with this strategy. Probably, the most striking thing, though, that happened over the last 10 or 14
For the complete transcript of the earnings call, please refer to the full earnings call transcript.
