All right, everybody, we're gonna get started. Before we get started, I'm just gonna read some disclosures. For important disclosures, see the Morgan Stanley Research Disclosure website at morganstanley.com/researchdisclosure. The taking of photographs and use of recording devices is not allowed. If you have any questions, please reach out to your Morgan Stanley sales representative. Very excited to have Rich Fairbank and Jeff Norris from Capital One join us today. Let's get it underway. Big question on everybody's mind, Rich. You just closed the Discover deal three weeks ago. Now that you've been able to finally dig in, are you as excited as you were when you first announced the deal about 16 months ago? Maybe you can give us an update on the strategic vision of the combined companies and how that looks as you sit here today.
Okay. Thank you, Jeff. Thanks, everybody, for being here in the room and on the webcast today. Yes, we're very excited. It was a long journey to get here, but to get the deal approval and to get it closed is a very big moment for Capital One and for our investors. We're only a few weeks into literally having, you know, being inside the company, but, and so, like, I just wanna say that our enthusiasm continues. I'm really struck, even though all along the way we've learned more, really where we were at the time of the deal announcement and the vision that we expressed, is very much where we are today and the level of enthusiasm and the sense of possibility.
Also, by the way, of course, you know, some of the challenges along the way in pulling everything off is very consistent with our expectations. We're excited. Just to talk a little bit about the opportunity here. You know, it's interesting, and it's ironic to say what I'm gonna say when we're celebrating closing the biggest bank deal since the global financial crisis. Capital One is really not on a quest to go out and buy lots of banks. The way most banks grow is to buy other banks. We had a period in our life where we bought banks because we wanted to transform the balance sheet of Capital One away from capital markets funding to, you know, FDIC-insured deposits. That phase is over.
The Discover acquisition really is a unique opportunity for us to continue in what I would much more describe as an organic growth path for Capital One. The Discover opportunity is so unique because we'll start with kind of the obvious things, the ability to generate, you know, get a lot more scale in a scale-sensitive business like credit cards. That is certainly very helpful. On the credit card side, Discover has a beloved customer franchise. We always, from afar, knew that and admired that. It's very complementary to our credit card business. We're basically gonna take what they have done so well, and it'll fit very nicely into the broad set of things that I think we do well at Capital One. You know, they have a student business. We've always admired that one.
We're gonna just picture we're gonna take what they do well and, and try to very much continue and invest in those things. There's the obvious ability to generate, you know, synergy and to make an integration work better by virtue of the fact that we can move onto our modern technology platforms and so on. That's gonna be a nice opportunity in this deal. This also allows us to continue to get thrust in our building of a national bank, bringing the network in, bringing some of Discover's own banking business in just adds thrust to a very important part of our journey, which is to organically build a national bank, something that's different from what direct banks do and different from branch on the corner banks, which the rest of the banking industry has. That's very beneficial.
Finally, the network, bringing a, you know, being able to have this rare and valuable asset of a network, enables several things to happen. First of all, if you think about Capital One, what is our business? We're basically a very large payments company. It has always been striking to me that as a very large payments company, there is one part of the value chain where we do not really participate. Obviously, that is in the network. To be able to vertically integrate allows us to capture the economics of vertical integration in a business where every basis point really, really matters. It allows us to go direct to, to take our huge customer franchise and go direct to merchants. Merchants want to drive more volume. Our customers want better deals. There is a tremendous opportunity to leverage data and merchant relationships, a strategy we have already had independent of this deal.
This thing accelerates that in the direct-to-merchant strategy. The network also, owning a network, also very much helps us build some insurance against one of the risks that we face, which is the reliance on other networks and some of the pressures those networks are under. It's, you know, it's hard to quantify that benefit to me, but to be able to have some insurance and resilience against some of the pressures they're under and therefore indirectly we would be under is also part of this. At the end of the day, there's a lot to like here. It's a unique acquisition, and I think it will change the future prospects of our company.
Still excited about the deal. Synergies are still on track here. Any sort of early learnings as you looked under the hood here?
As it relates to your network aspirations, the debit side makes a lot of sense, but you've also said you wanna be more surgical on the credit card and international side. What's your strategic approach going to look like on the international side? What's the timeline to think about and how much investment spend or how should we be thinking about the spend that's required to do that?
Yeah. The great thing is that we are able to have a network, which is a very rare thing for a bank to own. The challenge is that, in an industry, the network business is a very, very scale-driven business. And of the major networks, Discover, the major card networks, Discover is by far the smallest.
They have done an amazing job in their subscale position, building acceptance, virtually universal acceptance domestically. They have gone a long way internationally where they have really nice baseline acceptance. What is very clear is there is quite a gap between where they are and where we feel our traveling customers would really expect, for us to seriously look at putting, you know, the volume of people that do a lot of international travel on a network like this. What we announced in our deal is we're gonna move our entire debit card business and a small portion of our credit card business, $175 billion in total, in effectively moving not very heavy internationally traveling components and, you know, get the flywheel turning, get more scale in there.
When we look at whatever we wanna do down the road with the network, all lead to we've got to build more international acceptance. That is what we're going to do. Now, when I compare it to a lot of quests we've done over the years at Capital One, sometimes we set out on quests that no other company has done. It is a bit of a lonely journey. You say, maybe there's a reason others haven't done this. In this case, the playbook is very clear. Discover already has built from their subscale position good baseline international acceptance. It is really a combination. It is really through partnerships, blocking and tackling, boots on the ground, partnerships with merchant acquirers, other international networks, financial institutions in various countries who might wanna issue a Discover card, and finally, big individual merchants themselves. We see the playbook.
We see what Discover has done. The difference between their approach and our approach is now, with more scale and bigger aspirations, we're gonna really lean into taking that international acceptance. We're not gonna rest until we get to this, to a place where, on a, you know it when you see it basis, we are where people are really gonna be shopping internationally. It's not a number. I can't tell you exactly what that is. But, you know, that's what we're, that's what we're driving toward. As we get there, we're also going to lean into brand advertising, network brand advertising with a real sort of global feel to it and a top-of-the-market feel. I think that will be the next phase of the transformation of this opportunity.
All along the way, by the way, I wanna make clear, Visa and MasterCard will be, as far out as we can see, very important partners with us. A lot of our customers are doing great things on that network. We're gonna build the capabilities of this one so that over time we have the chance to move more volume.
As it relates to, you know, moving away from the network side, as it relates to the card issuance side, you talked about wanting to retain Discover as a brand here. How are you thinking about potentially repositioning that, that product, that marketing, the go-to-market there? How do we think about the overlap between your existing base?
We, for years and years, of course, have studied the national brand power of the major financial institutions in the United States. It's really striking how few banks, or, you know, basically how few banking institutions really have national brands. What a luxury to be in the position of Capital One that is there and to be able to bring into the family another player who is there. Discover has, you know, very, very high awareness. Their own customers have a tremendous reverence for Discover. We have two really strong brands. What a luxury. Now, one thing has to obviously change, and that is that Discover is not gonna continue to be the brand of a corporation. It will be a very important brand for us.
What we're going to do is move from a brand of a corporation to something that has two aspects to it. It will always, as far out as we can see, be a network brand. We're going to be really branding this as the Discover Network, not just Discover, but the Discover Network so that there's a little bit of separation between maybe a Discover-branded card. Anyway, in the meantime, on the side, Discover will move to be a product brand. Picture product brands at Capital One Venture, how much we've invested in Venture, and then Venture X and all of this.
If you picture it as that and sort of how much Capital One has leaned into the building of the Venture brand, we're bringing this amazing brand name, Discover, and we will build it as a product brand. You can think of it as just, you know, there's Venture, there's Quicksilver, kind of thing. There's Spark. And a lot of leaning into this amazing product brand. Along the way, we will continue Discover's flagship product, their 5% rotating categories product. We will continue things like their student credit card activities and a lot of other good things they do under that brand.
One area you've been able to make strong inroads in recently is premium card, you know, top-of-the-market credit card. How do you do so well compared to the competition making inroads there? How does owning a network maybe accelerate that journey from here?
You know, I love that question because when I think about all the quests of Capital One, including the founding of the company in the first place, there's a common element to all of it. So, Jeff, let me just start with the common element, which is really standing back and saying, where is the world going and where do we think winning is in terms of the best industry structure, winning with customers and winning economically? And from the founding idea of the company all the way to today, all of our quests are working backwards from identifying those unique places where we really think winning is. The good news, bad news is kind of like, you know, we say, great news, we figured out where winning is. What's the bad news? It's way over there.
What we have done with Capital One over the years is being very careful about what hills we are going to take. We then declare we are going to take them, and then we know it is a long journey to get there, usually measured in more than a decade. In some ways, some of these are lifelong journeys. We are very careful with the strategy, and then we lean in to do what it takes to get there. The quest to win at the top of the market is no exception to that. We believe, and I bet you every person here, who, many of you are the kind of customers exactly that we are talking about, it is an amazing place to be with incredibly attractive customers, very low losses, very low attrition, and a gateway into broader relationships and very good economics.
It's easy to see how you'd wanna get there, but wanna be there. How does one get there? What we felt, and we watched a lot of attempts by other banks over the years to try to get up to win at the top of the market. What we saw is it's not about just putting some ads on TV. It's not about cobbling a few vendor-related products together and coming out and declaring great things. It's about systematically building the end-to-end capabilities to truly win in a differentiated way against very, very successful players at the top of the market.
Including high-end servicing experiences, digital experiences, then, of course, the product offerings themselves where, you know, we put a lot of work into creating, and in Capital One's case, really quite differentiated product offerings versus what the competitors have to offer. It does not stop there. Building the travel ecosystem causes people not to just purchase tickets on your cards, but to be the path to our travel ecosystem as a gateway into their travel experiences. We reward them for doing that. That is a whole critical part of the equation. There are lounges. You know, let's pause and talk about lounges for a second. I'm sure virtually everybody here in the room has intimate experiences with lounges. Lounges, lounges, it's very clear they're a very important part of what matters to high-end customers.
Capital One is on a quest to build out our own lounges and, of course, partner with other lounge networks. It also involves building high-end. It's not just about products, you know, having a great product and even lounges, being able to provide access to things that people can't normally get into. Obviously, Capital One has the Taylor Swift relationship, for example. Creating unique experiences and access, that's all part of it. Finally, on top of all of that is building a brand. I savor that only because I don't think there's a shortcut to winning at the top of the market. In 2010, we declared, we're gonna go to the top of the market. In 2010, we launched our Venture product.
If you look at Capital One's purchase volume, historically, you can almost go bowling on that purchase volume trajectory until 2010. Since then, it's been going straight up over this period of time. It's a quest that is sustained involving a lot of investment. Along the way, we validate that it's working. We validate the economics. What we've found is that this path to making sure everything we do is truly a differentiated great experience, we've been rewarded with a lot of success, and we see so much opportunity ahead of us.
That's great. I mean, I think we could spend the entire time talking about the deal here and the benefits. Maybe let's switch a little bit and focus on the consumer here. About a year and a half ago, you were one of the first to call out stabilizing consumer credit trends. More recently, this trend has turned into outright improvement. We've heard more recently of some uncertainty out there in the confidence data. You have tariffs out there. Can you maybe just tie it all together and talk about what you're seeing from the consumer?
Mm-hmm. Starting with sort of the health of the consumer, I think there, look, there's noise all over the place. You know, who knows exactly where tariffs and all these things are gonna go. If you just separate what you read in the news for a minute, just with sort of what we observe in terms of the economy itself, unemployment is in a very strong place, job growth, wage, real wage growth, it's in a good place. Consumer debt, consumer indebtedness, consumer debt burden is very consistent with pre-pandemic and at a good place relative to historical levels. The consumer is in a very strong place.
We then look at our own metrics and, you know, we flagged for a long time that, you know, the period of amazingly low charge-offs was going to be followed by credit normalization that would not just necessarily get back to sort of where it was, but would likely go above that because you have deferred charge-offs from the great government stimulus and everything that at some point are going to play out. I think what we are seeing, what we have seen in the normalization of credit, is that it has shot kind of past the sort of credit card normal levels in a non-surprising way, because of the deferred charge-off effect.
Since the fourth quarter of last year with respect to Capital One, we have seen our credit metrics, most importantly headlined by our delinquencies, actually on a seasonally adjusted basis, getting steadily better. We see that in, you know, other metrics. It is very clear that there is a, you know, a general trend of things settling out. What we are probably seeing is some running the course of those delayed charge-offs that we are playing out. We continue to see good things. By the way, despite all the noise out there and the tariff news and everything, even when we look at the most, the very latest daily data on things like spending data, or anything related to sort of the consumer behavior, we just do not see an effect.
It's as if our consumers aren't really reading the same newspapers that we are. You know, I'm cautiously optimistic about what I see.
One other topic on tariffs is auto and used car pricing. You talked last quarter about a pull forward in auto purchases here as consumers are trying to get ahead of that. That is also a meaningful benefit to your backbone. How do we balance that against maybe the affordability impacts and the forward look, and how that is driving your decision to lean in here?
Yeah. Jeff, great question. Let's just pull up a little bit, and I wanna just talk about how we have viewed the auto finance business over the last 3 or 4 years. First of all, in both credit cards and auto lending, but basically in all consumer lending, we flagged years ago that while charge-offs, while it's amazing how low charge-offs are in the industry across every product, we really need to be careful that not only will things kind of normalize, but we could really be, we could all be fooling ourselves with the data that we're looking at. Because when we are modeling consumer credit and we are building all these highly sophisticated credit scores, we're looking at consumers who had received this massive injection of government stimulus, forbearance on financial products and various things.
We declared we think there is a very significant grade inflation going on that is going to, that requires intervention to intervene on our models, to take that grade inflation away. That caused Capital One in both credit cards and auto some years ago, a few years ago, to pull back relative to the industry on certain things. We have since then, I think, seen the benefits, and Capital One's credit metrics in some ways have sort of turned and maybe moved a little more positive than others. We are seeing the delayed benefits of those choices. If we look at the, so that is across card and auto. In the auto business, there are several things that have really gone on that have driven our pulling back and are now informing our leaning in.
In addition to the credit score inflation that caused us to be very cautious a few years ago, the margins were compressing because of interest rates and the difficulty of passing it on through into lending pricing. To your specific question, Jeff, vehicle pricing continued to be high. We worried about that. We pulled back. Now things are settling out. I'll come back to vehicle prices in a second. The margins in the business have, inflation has more made its way into the pricing and everything. Now you have this thing that we really got to watch out for, which is inflated vehicle values. How does that impact Capital One? Our existing book of business is benefited by inflated vehicle values because consumers have more equity in their car. If we need to repossess the car, it has more value.
On the front book of new originations, there are several things to really kind of watch out for. A higher vehicle price, especially if we feel it is inflated relative to maybe what it should be, means the consumer is gonna have higher payments. It is already in the context of higher interest rates, and the car has some risk of value decline over time. We incorporate all of these things into our decision-making. When you net them all out, we who pulled back a few years ago are actually net-net, despite what I just said, more in leaning in mode. When you see some of the recent numbers that we posted in the auto business, we actually see some nice growth opportunities here. We will have to keep an eye out, especially on those vehicle values.
Okay. Great. Maybe we can get Jeff involved a little bit here. Stress tests are coming out in a few weeks. Can you talk a little bit more about the submission you've made? Was that pro-forma for the deal? And how should we be thinking about the opportunity to return capital? Is your right target capital level 11% CET1? What's the timeline, etc., to get down there?
Sure. A couple of things. Our most recent CCAR submission was done as of the end of 2024, so we were still a standalone company. We did provide a scenario as a combined company using publicly available data on Discover. You know, we'll have to see, you know, what the Fed does in terms of processing that. Whatever they are going to do, we'll get our grade, if you will, our answer in June, I think, just like everybody else. When we got regulatory approval for the deal, that sort of formally ended the period of time where we needed to seek prior approval for all our capital choices. The thing that I think needs to get done to unlock a different view of capital is what is underway right now.
We're doing an internal bottoms-up stress test, separate a little bit from the CCAR process to sort of come to our own view kind of on an economic basis where we think our capital targets need to be over the long term, which has traditionally been declared at about 11% CET1. Importantly, over the sort of near to intermediate term, right? While we've had a deal pending, we've felt it prudent to operate above that long-term target and have a fairly measured pace of share repurchases as a result of that. We've been pretty clear that, you know, we're probably gonna wanna have some buffer above that while the integration is still going on and there's lots of moving pieces. However, we're, you know, we're gonna, sometime in the second half of this year have completed our internal look.
We'll have received our new stress capital buffer from the Fed. You know, I think when we've found ourselves in a position to sort of make our own capital decisions that we see prudent and we've had a lot of capital, our actions would say that, you know, we behave in a way that recognizes the importance of capital return as an important part of how shareholders get paid. I think sometime in the next couple of quarters, second half of the year, we'll be finding our way to that position. It's not gonna be a race to the target. We'll always manage capital prudently, but I think we'll be in a pretty good capital position.
Okay. Great. Very clear. And Rich, one last question for you. Technology, AI, I know this is near and dear to your heart. So how important is AI as a part of the Capital One culture? What use cases of AI have you implemented so far internally? Can you give us any examples, you know, of how your advanced tech is giving you, you know, an edge in real-time credit monitoring, things like that?
Yeah, you know that this is near and dear to my heart. I, I, if we pull up on AI and, you know, everybody's talking about AI, AI, it's the rage of the age. I think that there's gonna be sort of two very different impacts of AI in the context of companies in America, and banks would follow that same pattern. The first transformation, which is more of a horizontal transformation across all companies and all industries, is a transformation in how work is done. This will mostly be driven by outside vendor products, and it will, you know, companies will adopt them. The first wave is they will adopt them and just bring them in.
The second wave will be taking some of their own internal data and, you know, exposing these models to that so that it can be more customized for how work is done there. This is very clearly a revolution that's gonna happen across, you know, language-related activities driven by sort of chatbots, workplace, productivity. For example, at Capital One, we have, we're just implementing across through all, all of our sort of workplace tools, you know, external capabilities with generative AI and stuff like that. A very big impact across industries is gonna be in software development. Capital One is, you know, way down that path of providing leverage for our software developers through these kind of tools, obviously things like graphics and video related things. There is sort of a whole transformation there.
All of that is a transformation in how work is done. It's, it's, the more modern companies will be able to get more leverage out of it than those that are not, but this will happen horizontally. There's another huge transformation that will happen in business within industries. That and, and ultimately transform how industries work, but that's gonna not be driven mostly by external tools because it so much really gets to the heart of how a company actually works on the inside. In 2013, Capital One, you know, we looked at where the whole world is going. We really watched the, the collective impact of the cloud, smartphone, and the AI machine learning/AI revolution that was really enabled by the cloud. We saw that thing I call the triple revolution was transforming everything about where winning was.
We declared in 2013 our technology transformation. Two things about that is, one, it was gonna be a transformation from the bottom of the tech stack up 'cause it would take a lot of years 'cause we got to rebuild the company and fully modern technology. What are we working backwards from? We're working backwards from where winning in it is gonna be in the world, which is all about big data and machine learning/AI in real time, bringing customized solutions to individuals again, in their context. That's like, that's where the world's going. That's how every industry is being transformed, one industry at a time.
In order to get there, modern, external tools are not gonna allow companies, enable companies to get there because it's about building a company from the bottom of the tech stack up and how the company works, the ecosystem works, the talent, the tech talent, the AI talent, the data ecosystem, how every application on which the company sits, how that is built, being in the cloud, the whole thing, that is what I call building a modern, tech company. On that map, you know, but everything we've been building is working backwards from this real-time AI destination. Along comes AI. We didn't predict generative AI would necessarily come, but it's just the next evolution in the journey.
And just to wrap it up, to just give you a window of it's not just transforming customer experiences, but also it will transform how a bank or a company works on the inside. Take one example, monitoring. How do we monitor today? You don't hear CEOs coming up talking about, "I'm gonna tell you all about monitoring." By the way, monitoring matters massively. How do we monitor? How do companies monitor today? They do it manually with a sample on a batch basis, and they use it to detect, is there an issue? What's a real-time modern AI-driven solution for monitoring? It's automated. It's full file. It's real time. And it's diagnostic. Not only there's an issue, but I'll tell you the root cause.
That's just a little example of how inside a company, never to be seen by consumers, not a consumer experience thing, inside a company, you can transform how a company works. The only way to get there is build the company with a modern tech stack where everything works backwards from this destination. Sorry, I ran a little over time. I'm so sorry.
Rich, we could talk all day about AI, but I think we have to end it here. So thank you for joining us.
Yeah. Sorry.
Rich and Jeff. Appreciate it.
Thank you.