CAPITAL ONE FINANCIAL CORP Q3 FY2024 earnings call

Management Statement and Operational Highlights

• Financial Results: Capital One earned $1.8 billion ($4.41 per diluted common share) in Q3. Net of adjusting items, EPS was $4.51. Pre-provision earnings increased 3% Q/Q to $4.7 billion. Revenue up 5% Q/Q. Non-interest expense up 7% Q/Q. Provision for credit losses $2.5 billion (down $1.4 billion Q/Q).
• Allowance and Coverage: Released $134 million in allowance, allowance balance $16.5 billion. Coverage ratio 5.16% (7bps Q/Q down). Domestic Card released $66 million, coverage 8.36% (18bps Q/Q down). Consumer Banking released $50 million, coverage ratio down 10bps. Commercial Banking allowance down $14 million, coverage flat at 1.76%.
• Liquidity: Total liquidity reserves up ~$9 billion to ~$132 billion. Cash position ~$49 billion (up ~$4 billion Q/Q). Liquidity coverage ratio 163% (up from 155% Q/Q).
• Net Interest Margin: 7.11% (41bps Q/Q and 42bps Y/Y increase) due to higher card and auto yields, one additional day in Q3, and higher mix of card loans.
• Capital Position: Common equity Tier 1 ratio 13.6% (40bps Q/Q up).
• Discover Acquisition: Working with regulators, expect to mail joint proxy and schedule shareholder vote early next year. Aim to complete acquisition early 2025 subject to regulatory and shareholder approval.

Segment Performance

• Domestic Card: Year-over-year purchase volume growth 5%. Ending loan balances increased $9.1 billion (6% YOY). Average loans up ~7%. Third quarter revenue up 10%. Revenue margin 18.7% (43bps Y/Y, 51bps from Walmart revenue sharing agreement impact). Charge-off rate 5.61% (38bps Y/Y from Walmart loss-sharing agreement impact). 30+ delinquency rate 4.53% (22bps Y/Y up).
• Consumer Banking: Auto originations up 23% YOY. Ending loans flat YOY, average loans down 1%. Consumer deposits up ~6% YOY. Revenue down ~3% YOY. Auto charge-off rate 2.05% (28bps Y/Y up). 30+ delinquency rate 5.61% (3bps Y/Y down).
• Commercial Banking: Ending loan balances down ~2%, average loans down ~1%. Ending deposits up ~5% Q/Q, average deposits down ~1%. Revenue up 1% Q/Q. Non-interest expense up ~2%. Annualized net charge-off rate 0.22% (7bps Q/Q increase). Criticized performing loan rate 7.66% (96bps Q/Q down). Criticized non-performing loan rate 1.55% (9bps Q/Q up).

Guidance

• Full year 2024 annual operating efficiency ratio net of adjustments expected in the low 42s. Sequential Q4 operating expense increase in line with historical patterns. No longer assuming CFPB late fee rule in 2024. Continue to lean into marketing to grow franchises. Expect second half 2024 marketing meaningfully higher than first half.

Risks

• Factors causing actual results to differ from forward-looking statements, including those in forward-looking information and risk factors sections. Uncertainty around implementation of CFPB late fee rule due to industry litigation. Macro-economic uncertainty and impact of the Discover acquisition on capital management and regulatory approvals.

Question and Answer

• Q: Ryan Nash asks about consumer credit across cohorts and margin expectations.

A: Richard Fairbank and Andrew Young discuss consumer health, Capital One's credit performance, NIM drivers and expectations.

• Q: Sanjay Sakhrani asks about credit normalization and reserve rate.

A: Richard Fairbank and Andrew Young talk about credit settling out, seasonality effects, and allowance coverage.

• Q: Terry Ma asks about auto business competitive environment.

A: Richard Fairbank discusses auto originations, credit performance, and growth strategy.

• Q: Bill Carcache asks about NIM and reserve release.

A: Andrew Young talks about NIM drivers and reserve release reasons.

• Q: Don Fandetti asks about Discover merger regulatory approval.

A: Richard Fairbank discusses the merger's pro-competitive aspects.

• Q: John Heck asks about spend trends.

A: Richard Fairbank talks about spend growth, stabilization, and macro tailwinds.

• Q: Mihir Bhatia asks about Venture X portfolio.

A: Ime Archibong discusses Venture X launch, market response, and performance.

• Q: John Pancari asks about CET1 ratio and loan yield.

A: Andrew Young talks about capital management and loan yield drivers.

• Q: Jeff Adelson asks about CFPB late fee rule.

A: Andrew Young discusses uncertainty around the rule and preparation.