All right, let's get started. Thank you, everyone, for joining this afternoon. My name is Terry Ma. I cover consumer finance here at Barclays. I'm very pleased to have on stage with me the gentlemen from Capital One. I have Rich Fairbank, CEO, and Andrew Young, CFO. Welcome.
Thanks, Terry.
Yeah, we'll jump right into it. Maybe let's just start with the state as a consumer. How do you think the consumer is positioned as we head toward the end of 2025? Can you just talk about what you're seeing across the different cohorts of your consumer base?
Okay, thank you. Thank you, Terry. Good afternoon, everyone here, and to those listening in on the webcast. As I've been saying for a long time, I still very much feel that the consumer is an anchor of strength, I think, in our current economy. There are a number of indicators that continue to be very strong. I think wage growth, low unemployment, the consumer debt burden is very comparable to pre-pandemic levels and historically at a relatively modest place. Obviously, we notice the new job creation continues to be pretty modest and maybe with some restatement of some of the numbers as well. We will certainly have to keep an eye on that, although we have not seen a corresponding thing that often comes along with that, which is waves of layoffs and things like that. We will certainly keep an eye on that.
The consumer, I think, continues to be in a strong position. We certainly see in our own metrics continued strength, and we like what we see. If we didn't read the paper every day, I think just looking at our own consumers and their performance, I think one would have a pretty positive view of where we are. Obviously, there's a lot of noise out there in the marketplace. We will continue to keep an eye on that.
Okay, great. Turning to credit, delinquencies in the domestic hard book for both legacy Capital One and legacy Discover decline for eight straight months year over year. Where are we on credit? As we look forward, how long can this improving year-over-year trajectory continue for?
Let's think about sort of the larger arc of what's happened with credit. Go back to the pandemic itself. When the pandemic came, we, all of us in the credit business, sort of braced for impact. What actually happened was extraordinary. Some of the best credit performance we had seen in the history of our industry. I think what was driving that clearly was the massive government stimulus and the very widespread forbearance on financial products and rent and things like this for consumers. During that period, not only did consumers have low credit, but they also built, you know, they saved a bunch of the excess. There was a consumer surplus that was built up as well.
At that time, while we were enjoying the good credit numbers, we were out saying there will be an echo from all of this, or in many ways, really a delayed charge-off effect that we, not just the normalization of credit back to where it was, but there's going to be what we called delayed charge-offs, which would conceptually be there are a number of consumers that were in a vulnerable situation during the pandemic. Some of them charged off, but many of them were rescued by the influx of funds that they got. For some of them, that brought them sustainably to a good place, but for others, we expected it would be a deferral of potentially a charge-off. We said, we'll never be able to measure it, but we predict there's going to be, in addition to normalization, a delayed charge-off effect.
What happened is credit normalized and sort of headed back to pre-pandemic levels and in sort of an economy that's consistent with pre-pandemic. Credit numbers, credit losses just kept on going for the industry, higher than pre-pandemic. We've been saying that, again, these things don't carry labels, so we'll never be able to quantify, but we believe this is a very natural effect of delayed charge-offs on top of normalization. At some point, that should start to ease. I think what we've seen since then is that exact effect that, as you say, Terry, just, you know, month after month, Capital One and other people in our industry have seen charge-offs, delinquencies and charge-offs turn around and improve quite a bit year over year. At Capital One, I want to talk about Capital One and Discover separately for a second. At Capital One, we certainly have seen this effect.
We're also benefited at Capital One by, when we look at our new originations and where the losses on those vintage curves, they're actually coming in even better than the vintages of the few years before that. Some of the origination choices, credit choices we're making are adding to the strong credit position that Capital One is in. If we turn to Discover, many of the same effects are going on, but a little bit on a magnified basis. Discover had significantly more worsening than we did during the normalization period. That's primarily, I think, driven by the fact that in 2022 and 2023, they ended up originating business that was a lot riskier than what they had historically originated. They peaked quite a bit higher relative to where they had been before. They started curing about a quarter or so later than Capital One.
Since then, it's really been the same effect. Both companies have seen curing on a quarter-over-quarter basis. I think it's driven in each case by the same phenomenon. Again, I think Discover has been sort of an amplified story because of the worse originations they did in the 2022 and 2023 period. Now in 2024 and continuing into 2025, they pulled quite a bit back on their credit policy. They tightened it significantly. We see the 2024 originations coming in way better than '22 and '23. I think that can help power some, you know, particularly improved performance on the Discover side. It does come with the flip side of some weakness on the growth side because Discover has just pulled back quite a bit on the originations.
One other thing I just want to say about consumer credit, I just want to just put a little flag out for student loans. Just to pull up for a moment on student lending and to share things I think most people know. There's been something like a five-year forbearance on student loans, no requirement to pay back, no reporting of delinquencies or anything. In October of, if I get my dates right, in October of 2023, the message went out.
Current job creation issues that I would hesitate to predict too much from here.
Got it. That's helpful, Carla. Maybe we'll just touch on auto for a second. Delinquencies there have been declining year over year. Capital One was one of the earlier ones that tightened. What are you seeing in auto credit now and how do you approach kind of growth and underwriting going forward? How does tariffs kind of impact your thinking on auto?
If we dial back to a few years ago, Capital One actually pulled back, I think, more than most players in the industry, pulled back on our, we tightened our underwriting and pulled back on originations. We did it for several reasons. What we saw, we saw several effects. First of all, we were very concerned about what we called credit score inflation, where all the forbearance was causing consumers' scores to look better than the underlying actual credit performance that we expected from people. In normalizing for that relative to the industry, we dialed back quite a bit there. We also saw a lot of margin compression in the business because the inflation wasn't fully being passed on into the pricing of loans.
Terry, to your other point, we were concerned about higher vehicle values and the potential sort of affordability issues that come along with that, as well as some of the risks in collateral when vehicle values start high. There could be just one way for them to go. We dialed back while the industry was leaning in. We dialed back over, you know, like two and three years ago. In the last year or so, we have found a lot of these issues sort of settling out. We find our originations are performing at a very strong level, even lower than pre-pandemic. We have been leaning in harder now, and we see good growth opportunities in the auto business.
To your question on tariffs, while tariffs affect all consumer businesses, conceptually, they can have a very big impact in the auto business because they can have a direct impact on car prices. We have an eye on that. We saw what we thought was some bringing forward of purchases before the tariffs came. The impact, if tariffs really impact the car prices, what that means for Capital One is in the short term, it actually is beneficial with respect to recovery values if we're recovering on charge-offs. More importantly, over time, it creates more risk because there are affordability issues and higher prices bring more challenges on the ability to pay and more risk to the value of the collateral.
Okay, got it. Maybe we'll switch gears and talk about the Discover acquisition. You know, the network opportunity is a key benefit of the deal. You've targeted $175 billion of debit and credit volume to kind of move over, and you've identified revenue synergies from that. Can you just update us on how that process is coming along and what is the expected completion date for that volume migration? Looking out longer term, how should investors think about the timeline to start moving over the rest of the costs, credit volumes?
Okay. At the time of the deal, we announced $175 billion. That's a sum total of debit and credit volume that we would be moving. We announced we would move our entire debit business and we would move a portion of our credit card business. Where we are on the implementation of that, we have started now migrating our debit business. In late August, it began, and it will continue on a daily basis into early next year. We will have our entire debit business on the Discover Network. The credit card migration is going to be sort of a year later. Actually, it's not going to be until early 2027 where we're going to be moving that declared portion of the credit card business.
The reason it is taking longer, there are certain infrastructural things that we need to put in place and certain testing that we want to do and make sure that on the credit side of the business that we're in really good shape. That's a 2027 migration. The other big thing going with respect to your question, how do we move more of our business over to the Discover Network? Let's talk about, first of all, why would we move more of our business to the Discover Network? A network business is not just a scale-driven business. It's an extremely scale-driven business, as you can imagine, because you have all the fixed costs of a network, and then the volume at very low marginal cost flows through there. There are a lot of benefits to move the business over there.
What lies between us and moving more business over there is we need to address what is right now the challenge, the biggest challenge that we have, which is that Discover's international acceptance. Still, it amazes me with their small scale, how much they were able to build of international acceptance. Relative to where we would want to get before we start moving more of our internationally traveling card holders over there, we want to get it to a higher level of acceptance. The good thing is that we know the playbook for how to get there because it's the same playbook Discover used to go from zero to where they are. That's through partnerships with merchant acquirers, getting individual merchants to, in some cases, to accept its network partnerships and sometimes local issuance by banks.
We will continue with that playbook and invest to build international acceptance to get it to that, you know, when you see it point, that we feel comfortable then moving more of our credit card business over there. The other thing that we need to do is we need to build the global brand of the Discover Network. It has amazing U.S. acceptance, and I'm pretty struck again by its international acceptance. As we build it to an even better place, we then, at the right time, would lean into advertising to really build the credibility and confidence in the Discover global brand.
Okay, got it. That's helpful. Let's touch on integration. There was a lot of focus on the last earnings call around the acquisition and integration expenses. If you call it out, those expenses were going to be somewhat higher than the initial $2.8 billion guide. First, any way to kind of quantify what that means? On the synergy side, you got it to $1.3 billion of operating expense synergies and $100 million of marketing synergies. How are those tracking to date?
On the integration side, there's a number of things that fall under that umbrella from the deal and transaction costs, bringing Discover onto our tech stack, bringing the other processes and teams, and bringing their compliance and risk to Capital One's standard, all while taking care of associates along the way. We made assumptions about those costs at the time we announced the deal. Now that we find ourselves on the other side of close, which I'll note was five months or so after we initially expected, which brings with it some cost in and of itself.
Now that we're on the other side, as we do more granular planning, have access to information we didn't have at the time of the deal announcement, as we look around, looking out over the next couple of years, which is what it's going to take to complete the integration, we think that it's going to be somewhat higher than the $2.8 billion. It's not any one thing in particular. It's sort of the totality of all of the factors that I just described. In terms of synergies, you highlighted, Terry, the expense synergies. Of course, we have the revenue synergies that Rich just talked about. In total, $2.5 billion of synergies that we had announced at the time of the deal, we still very much see those as being intact.
On the revenue side, like Rich said, the predominance of the revenue synergies are coming from the debit conversion, which is already in flight and we expect to complete early next year. The revenue synergies will be more front-loaded. On the expense side, just given what it takes to actually achieve those synergies in terms of bringing together applications and data and canceling third-party contracts and bringing teams together, those expenses will be, the synergies associated with the expenses are going to be more back-loaded in line with what we had included in the initial deal announcement. Overall, Terry, that's completely intact and we feel really good about our ability to achieve all of those synergies.
Okay, got it. As we look out longer term, how do we think about the cost and timeframe of the incremental investment opportunities that you, Rich, talked about on the last earnings call?
Yeah, on the earnings call, I highlighted that we see a really, I think, striking number of opportunities across our businesses. Of course, with adding Discover as well, these opportunities are really the result of years of investing and building our tech stack and investing in brand and other things to put ourselves in a position to capitalize on opportunities like these. I'm struck by the breadth and nature of these opportunities. Just to talk and highlight again what I did on the earnings call, on the Discover side, after we do the initial move of some of our business to Discover, as we announced in our deal and the synergy discussion, we do, as I talked about just a little bit earlier, see opportunity to move more of our business. It has the investment requirements we talked about just a few minutes ago.
That's the increased investment that we see on the Discover side for long-term opportunities. On the Capital One side, that's where the bulk of the opportunities are, and they really do stand on the shoulders of our 12-year technology transformation that we have done. Just to highlight some of these opportunities, our national bank, Capital One has a very differentiated strategy in building a national retail bank, which, by the way, I think is one of the retail banking along with credit cards, just two of the really incredibly great businesses right at the heart of consumers' lives and right at the heart of winning in banking. Almost all banks out there are either a branch on every corner bank or they are banks that offer savings accounts, but they don't really have full-service banking.
Capital One has built a full-service, digital-first retail bank, and we've been investing for years in building the capabilities and in growing that business. We're not on a quest to go buy banks to grow that business. We're growing it organically, but it requires marketing. Now, with the Discover deal and the collective opportunity we have across the company, we're continuing to lean into and even lean into more our growth of the national bank. We have our quest to win at the top of the market, competing against really big players who are heavily funding and investing a lot to win there. That's been a strategy we've been pursuing since 2010 when we launched our venture card. We continue to get a lot of traction and success as we move up the market.
We also look around and know that requires quite a bit of investment in customer experiences, in providing unique access, in building airport lounges, building our travel business, our digital customer experiences, and our brand. There are a very small number of players really competing to win at the very top of the market, and Capital One is one of those, but we certainly need to lean in there. We've got some young business opportunities going on at Capital One, building Capital One Shopping, Capital One Travel, and our Auto Navigator business. These, again, have been something we've been building for years, but they have very nice momentum, and we're continuing to really lean in to grow those opportunities. Of course, we have the tech opportunity itself. We have rebuilt Capital One in a modern tech stack.
There still is modernization we're doing, particularly with respect to vendor technology that we use, that we still rely on. There's continued investment there. Finally, the one everybody's talking about is AI itself. I think Capital One, our tech strategy has had as its objective function, being in a position to really capitalize on AI. As AI really takes off, that's a great thing for Capital One, but there's quite a bit to invest in to get there.
Great, helpful, Carla. Let's turn to earnings power. You had initially guided to 15% adjusted EPS accretion by 2027 when you first announced the deal. On the second quarter earnings call, you indicated the power of the combined entity is consistent with what was assumed at deal announcement. How should investors interpret those two comments and think about the earnings power of the business?
Earnings power has been a thing that we're very obsessed about at Capital One. When you think about Capital One, most banks have been around for 100 or 150 years or whatever, and they tend to do all the business. Capital One does like half the businesses of banking, but we're all in on that half, and we've built national businesses in all of those. Like I said about retail banking, the quest there, the credit card business, auto, you've seen what we do there. We have been, but we built a company that is very focused on identifying long-term opportunities and working where is winning, where are great opportunities. We work backwards from that and figure out how we get there from here. Along the way, very rigorously calculate before, during, and after how these investments are going and make sure that our investors are getting paid.
If we go back to the time of the deal, the opportunity to take the earnings power of Capital One and the really great earnings power of Discover and bring them together in a business model that still doesn't do everything banks do, but does some of the very advantaged businesses particularly well. We saw a great opportunity and great earnings power to pull these companies together because you get the earnings power of two companies with strong earnings power, plus we get synergies. Obviously, investors have noticed that's quite a bit of earnings power to work with. At the time of the deal announcement, we gave estimates for sort of what we thought the coming out the other side of integration, sort of what the financial earnings power of this business would be. Since then, a few things have happened.
A lot of things have happened, but both at Discover and at Capital One, things have moved. Some have moved positively. Some have moved a little bit backwards, but sort of collectively, I would describe the net drift in our businesses as positive. At the same time, the investment opportunities that I just described, our sort of the imperative to invest, the opportunity that is on the other side of those investments, that has also grown over the last year and a half. My comment was to sort of ground what can sound like an unbounded sort of conversation about investment is to say that these things sort of net out to where the earnings power that we saw, that we estimated coming out of the other side of integration and pulling these two companies together.
The earnings power that we estimated back then is about the same as what we see now.
Okay. Maybe this is a good point to pause for the two ARS questions I have. I think the first one's queued up already. If you can just register your responses. Capital One will earn an adjusted EPS of what in 2027? First choice, $21 to $24 per share, $24 to $27 per share, $27 to $30 per share, or $30 plus per share. Okay, 42% at $24 to $27 per share and 33% at $27 to $30 per share. Next question. Over the next year, would you expect your position in Capital One to increase, decrease, or stay the same? Pretty bullish, 50% increase, 42% stay the same. Pretty good signal. Let's talk about capital. Capital One is in a position of excess capital at 14% CET1. It's been a few months since you closed the acquisition.
Maybe Andrew, can you update us on the latest thoughts on target capital levels and timing of capital return?
Sure. As we went through the application process, as you all know, we were not operating under the SEB. We required Fed pre-approval for our actions. We are now back to operating under the SEB and have flexibility with our actions. We recently got the results from this year's CCAR. As you also saw, our SEB effective October 1 is going to be 9%. I do note that when you look over the last five years, there's been over a 300 basis point swing in our SEB from a high of 10.1% to a low of 7%. That's one of the reasons why the SEB is a consideration for us, of course, but we work back from what we determine is, you know, our internal assessment of our capital need.
In order to do that, we needed Discover's loan level data to put it through all of our models, which we got close to about four months ago. We've been working as hard as we can to do that analysis. We are getting to the final stages of that. As a result, I think we are stepping up our share repurchases in the third quarter, and we expect to have more to say about capital on the earnings call next month.
Great. That was helpful. We have about three minutes left. I'll just open it up to questions from the audience if there are any. We have one in the front over here. Mike's coming.
You talked about looking to raise international acceptance of Discover. I think domestic acceptance is 99% plus. Can you tell us where international acceptance is now and where you hope to get it in, say, three years, and how much that might cost?
I don't, even determining a number, first of all, we're not going to give out a number, but even determining the number, it turns out, you know, you can, do you just add up all the countries and all the acceptance, or to us, the most, that's sort of one way to do it, but then it can be very lopsided, very high in one country, low in another country. Is that the right thing? We also kind of are looking to take all the traveling and all the merchants that all of our customers go to around the world and what would have happened, do they accept Discover there and so on. I would describe it this way.
I'm amazed that they got it to where they've gotten it to, but to have it on a, you know, when you see it basis where we can really lean into our advertising with respect to global acceptance, we still want to get it quite a bit higher. We certainly don't need, and nobody has acceptance everywhere. This is going to be sort of a feel thing about what we're going to need. There's not going to be a declared number that we have to get to, but to me, it's more of a, you know, when you see it feel, because I always believe, I'm going to go back to my advertising philosophy, you know, Capital One's a huge advertiser.
We work hard to have fun and cool ads and that kind of thing, but underneath them, an incredibly important thing is that the reality, the story that we're telling, what's incredibly important in building a brand is that the underlying story be that reality. We have a little more work to do on the international side. We're, you know, we want to lean into that when that reality matches exactly, you know, what we're saying. That's been the journey of Capital One brand building since we started building a brand in the late 1990s. It's going to be a feel thing, but I think that, you know, we can see the playbook for getting there, and it's not going to be easy. It's going to be a lot of work.
I just wanted to, as we always do with Capital One, we, you know, we're often, unlike a lot of banks that tend to stay in their lane and keep a pretty consistent business model, we're always really trying to identify where the great opportunities are and working backwards from that. I know it's a bold quest to really take something that has got the size of Discover and make it, you know, build the network to a place where we can move a bunch more Capital One volume there. That's something that I think has a very, you know, great strategic opportunity. It's typical of us that what we do share with our investors, this is where we're going. We don't exactly quantify what it's going to take because we don't yet know, but you'll be able to watch along the way.
In the meantime, what I'm excited about is that we can take the low-hanging fruit of the Discover acquisition, go ahead and go forward and get those synergies and the benefits and start to build the network and then go from there.
Okay, I think we're right at time. Thank you.
Thank you very much.