Capital One(US:COF)2023-07-21 01:30Financial Data and Key Metrics Changes - In Q2 2023, Capital One earned $1.4 billion, or $3.52 per diluted common share, with pre-provision earnings of $4.2 billion, up 7% from the previous quarter and 16% year-over-year [7] - Period-end and average loans held for investment increased by 1% compared to the prior quarter, driven by growth in the Domestic Card business [7] - Period-end deposits declined by 2% in the quarter, largely due to tax-related outflows, while the percentage of FDIC insured deposits grew to 79% of total deposits [7] - Revenue increased by 1% from the linked quarter, driven by non-interest income, while non-interest expense decreased by 3% [8] - Provision expense was $2.5 billion, with net charge-offs of $2.2 billion and an allowance build of $318 million, bringing the total allowance balance to $14.6 billion [8][9] Business Line Data and Key Metrics Changes Domestic Card Business - The Domestic Card business saw ending loan balances increase by $21 billion or about 18% year-over-year, with purchase volume up 7% [14] - Revenue for the Domestic Card business was also up 18% year-over-year, although revenue margin declined by 40 basis points to 17.76% [14] - The charge-off rate for Domestic Card increased to 4.38%, with a 30-plus delinquency rate of 3.74% [15] Consumer Banking - Auto originations declined by 31% year-over-year, leading to a 5% year-over-year decrease in ending loans [17] - Ending deposits in Consumer Banking were up about $30 billion or 12% year-over-year, although down 2% sequentially due to seasonal tax outflows [17][18] - Consumer Banking revenue increased by 8% year-over-year, driven by deposit growth [18] Commercial Banking - Ending loan balances in Commercial Banking decreased by 2% from the linked quarter, with average loans down 1% [19] - Revenue was up 3% from the linked quarter, while non-interest expense decreased by about 9% [20] Market Data and Key Metrics Changes - The preliminary average liquidity coverage ratio during Q2 was 150%, up from 148% last quarter [10] - The net interest margin for Q2 was 6.48%, a decline of 12 basis points from the previous quarter [11] Company Strategy and Development Direction - The company continues to focus on the Domestic Card business, leveraging technology transformation to enhance marketing and drive growth [16][21] - Capital One is investing in modern technology infrastructure to position itself advantageously as banking becomes increasingly digital [21] - The company aims to maintain a flat to modestly down annual operating efficiency ratio compared to 2022 [21] Management's Comments on Operating Environment and Future Outlook - Management expressed confidence in the health of the consumer and the competitive environment in the card business, despite rising credit losses [39][40] - The company is closely monitoring credit performance and expects charge-off rates to normalize in the coming months [30][32] - Management highlighted the importance of marketing investments to drive growth, particularly in the card business and the National Digital Bank [50][51] Other Important Information - The company reported unrealized losses in AOCI from its AFS investment portfolio amounting to $7.6 billion [12] - The preliminary Stress Capital Buffer requirement effective October 1, 2023, is 4.8%, resulting in a total Fed capital requirement of 9.3% [13] Q&A Session Summary Question: Margin Outlook - Management discussed the pressures on net interest margin (NIM) due to rising deposit costs and provided insights on deposit betas, which are currently in the 52% range [24][25] Question: Consumer Credit and Delinquencies - Management noted that domestic card delinquencies are about 10% higher than in 2019, with expectations for charge-offs to reach 2019 levels soon [30] Question: Strategic Optimism - Management expressed the greatest strategic optimism in the card business, citing strong consumer health and rational competition [37][39] Question: Expense Management - Management clarified that the decrease in expenses was largely due to seasonal effects rather than a fundamental shift in strategy [44][45] Question: Marketing Strategy - Management emphasized the importance of marketing investments to drive growth, particularly focusing on heavy spenders and the National Retail Bank [50][51] Question: Credit Cycle Insights - Management discussed the predictability of the credit cycle and emphasized the importance of monitoring credit performance metrics [73][74]