All right. Good afternoon, everyone. Thanks for joining us. We're very pleased to have Capital One with us. As everyone knows, they're a leader in the credit card business, both for brand and private label cards and auto finance, as well as digital banking. I think Cap One's biggest success has been able to grow rapidly when competition is low and moderating that growth when it intensifies, something that they've done in the past year, kind of in the auto finance business. We're very pleased to have with us Rich Fairbank, CEO and Founder, and Jeff Norris, Head of Strategic Planning and Investor Relations. Maybe we'll start off talking about the credit card business. You and many in the industry are marketing at or close to peak levels.
you know, clearly, there have been signs of, you know, stress to the consumer. There's been signs of, you know, health of the consumer. How do you think about that, you know, your marketing strategy in that context, you know?
Thank you, Moshe. Thanks for being here. I don't know how many years you and I have been doing this together, but it's many. Good afternoon, everyone. When we think about the card business and how much to lean into the opportunity in that business, we kind of start with where the consumer is, which I think is in quite a strong place. The consumer, obviously generated, for a variety of reasons, quite a bit of savings during the pandemic. Those savings are running down, of course. The consumer starts in a good place with a low debt burden relative to really the last 30 or 40 years. I think the consumer also is a little scarred from both the global financial crisis and the pandemic.
I just see a lot of rationality in how the consumer thinks about credit. We look at the marketplace. I think there's a stability in the credit card marketplace, a competitive environment where we see opportunities. Most importantly, we look at our own credit results. When we look at how our originations are performing, we see, you know, good solid performance there and a stability in that performance that has this even in the context of course, a really quite uncertain economic environment. I think we see good resilience, good opportunity, and good demonstrated performance of our own various programs. We're leaning into this. Moshe, you commented that we often zig while others zag.
I think several players in the card business probably are zigging at the same time, but this is an opportunity that we're leaning into. It's striking at the, you know, it's the same company and a lot of the same people. We're actually have been kind of pulling back in the auto business, so we have both gears sort of engaged at the same time.
As you kind of think about, you know, a lot of the spending that you're doing on marketing in the card business comes at the higher end of the credit spectrum because those customers get a, you know, big rewards, you know, bonus up front, which you expense, obviously. Can you talk a little bit about, you know, what the state of that competition is? Is it gonna be those upfront bonuses? Is it gonna be the other things, the benefits you're adding to the card? You know, how confident are you that you're gonna be able to keep those customers in order to generate those returns over a long period of time?
Well, you know, a lot of our spending is going right after the top of the market. Although again, we do invest a lot in marketing across the whole credit spectrum. Certainly, there's a lot of it going in our quest to more and more move up to the very top of the market, our strategy for going after heavy spenders. It is a business that is very hard for a bank to go in and out of to sort of get a flavor of the month and lean into it and try it for a little while, because this isn't just about a product that you throw out there or put on national television. It's really about working backwards from what it takes to win with very heavy spenders who aren't necessarily inclined to go switch their providers.
It's across a whole spectrum of product and really high-end customer experience, digital experiences, and then, you know, real-life experiences in their own life events, like travel associated with, you know, the entire life cycle of going on a trip, from planning it, to booking it, to taking it, all the experiences along the way. It's about access that you can't sort of otherwise get in life. It's about we declared some years ago that, you know, we were gonna go after that space. We were gonna do it on a sustained basis, but we weren't gonna just declare it and close our eyes.
We are very vigilant looking at the performance of what we are booking and what's the nature of the franchise we're building and the brand that we're building. The one of the, you know, best things that we are seeing. Well, we're very pleased with what's happening in that business. The nature of these annuities, how low the attrition is, the first in-wallet rate, which is really strong. What we see reinforces our belief that we can win in this business and that we're getting a lot of traction building the capabilities and the brand that we have at Capital One.
It is a very expensive upfront business because not only does it take quite a bit of marketing, but as you said, Moshe, the upfront early spend bonuses, you know, we take these, and we book them at the time that we originate them. It's a lot of cost up front for a really great, high engagement, high spend, low loss, low attrition franchise. We're very happy with our results. You also commented about, or maybe I'll just make a comment about the industry competitive dynamics right now. It's very competitive, but it's strikingly stable at the moment. I think early spend bonuses are flat to down over the last year or so. Again, I think every one of our competitors, certainly those at the very top of the market are, you know, leaning in hard. I still see collectively a stability in that marketplace and a rationality to the choices being made that I think reinforces the opportunity that we see.
You are by far the most balanced and broad-based, you know, kind of credit card issuer out there. Talk a little bit about, you know, your non-prime business. You know, you know, where are you in that, and how do you Do you think differently about the economic situation for that customer base, and what is it gonna take to drive growth there?
You know, we founded our company on what we call an information-based strategy that we said increasingly credit cards and really financial services in general are gonna be about technology and data and analytics and in many ways, sort of scientific testing, statistical modeling, and being able to take one size fits all industries and drive highly customized solutions based on deep analytics. That was the founding idea of the company. Here we are more than three decades later, and we're still, you know, on the very same path. Analytics are valuable at the very high end of the market with spenders, for example.
Where the lower you go in the credit spectrum, the greater the value and the leverage is there because it becomes more and more about, can you know, live to tell about it from a credit point of view. That is why it's not an accident that Capital One has, for really three decades, set our sights on winning at the, in addition to our quest higher in the marketplace to win with, in the subprime marketplace. You know, it first and foremost is about, you know, gathering a lot of data and doing a lot of testing and building models that demonstrate their resilience over time.
What I'm struck by really in the three decades we've been going after that part of the marketplace is the stability and consistency with our own strategy there and the resiliency of the results. Here we are now at a time when the consumer, as I said, is in a strong place, but the economy is, of course, has a lot of uncertainty around it. We, we go back to our basic playbook here that we, you know, test very rigorously. We use a strategy of low lines and having customers prove themselves. We look very carefully at the results every month of what is happening, and we continue to see solid results in that segment.
The subprime consumer for a while, in our public announcements, we were saying the subprime customer is normalizing faster than folks that are higher up on the credit spectrum. Strikingly actually in the last two or three months, If you take any sort of income level or credit segment and compare where, say, delinquencies are right now compared to pre-pandemic, pretty much every income segment and every credit segment is about the same percentage normalized at this point, which really means that the normalization began with subprime, but it's actually the rest of the marketplace is catching up, so this is a broad-based normalization.
As you think about managing the portfolio in that context, like, what changes have you made over time? You know, Also, what should we be looking at to, you know, to, you know, to get sort of comfort that that's, that process is working the way you expect?
Well, we continue to look at the business in segments and micro segments and do our testing and our monitoring at that level. We don't just look at the data, we also look at the marketplace and intuitively try to identify where we think the risks are, we check the data and so on. It's a combination of a very analytically driven process and a sort of intuitive behavioral explanation. We try to do both of those at the same time. Over the last year and a half, as we were projecting normalization would begin, It pretty much had to go. We also very closely looked for things that were unusually. That might be diverging from a normal path of normalization.
Using machine learning-driven, monitoring models that are looking at a lot of variables, we were able to identify in our card business, certain subsegments that were gapping out well beyond what was normal. We immediately kind of closed those down. We also looked for sort of the behavioral explanations that would make it help us understand logically why that segment, in particular, was challenged. This is a phenomenon we call trimming around the edges, and we have been trimming around the edges all along, this journey of normalization. It's, and it's, been an important factor in why our vintage curve performance continues to be strong because some of the things that we did clip away from the edges, in fact, ended up gapping out quite a bit.
Wouldn't be able to miss having some discussion of the whole late fee situation. You know, I know that there's a lot that's still unknown, but, you know, how are you approaching it from kind of a management standpoint at this stage? You know, what are your thoughts as the right way to move forward?
The CFPB, in going after late fees, it's not just an ordinary fee. This is a fee that is very much tied to a consumer behavior, and the fee serves as a deterrent to folks getting themselves in trouble by not paying on time. You know, we wanna all watch carefully what happens in the context of significant change in that fee. One thing, you know, no one knows for sure, but we'll have to keep an eye on whether that, in fact, alters consumer behavior, which would be an unfortunate thing. You know, late fees are important source of revenue for Capital One and, if the Consumer Financial Protection Bureau proposed rules go in, that's going to have a sizable impact on that revenue stream. We are looking at the various choices that we have to respond to that. Over this year, since the implementation would be next year, over this year, we're gonna be testing a variety of things that would be part of our response from a revenue point of view. These are very early days, but, this will be a year of testing.
Talk a little about the auto finance business. I mean, you alluded to it before. You know, you've talked publicly about, kind of retreating from the subprime auto space. Is there something that you might see at some point, or what would you be looking for to see to kind of go back into that space? You know, is it, you know, used car values? Is it employment? What are the indicators that you need?
Yeah. Well, first of all, we have not pulled out of the auto business. We just pulled back from... You know, in the years prior, we were leaning quite a bit into that. Our originations and our overall portfolio grew a lot. On a relative basis, we're kind of dialed back, but I wanna start by saying we're certainly not out of any you know, any important part of that business. The... Let me talk about the credit side of the auto business and the marketplace/pricing side of the business. Part of our dial back, a smaller part, but still important part of our dial back came on the credit side of the business, where we saw in the lowest end of the subprime that we would originate.
The lowest end was having significantly more normalization than the whole rest of our auto book. You know, sometime like a year ago or so, we dialed back quite a bit at the very bottom of the marketplace, which would be the top or middle of the marketplace for a number of other subprime players. You know, with those dial backs, actually, our auto originations have come in with, you know, very solid credit performance, obviously normalizing. But, you know, we feel good, and we like the stability of what we're seeing on the origination side, having trimmed around the edges, and in fact trimmed more on a relative basis than we did in card.
The second part of the conversation and the bigger reason for our pullbacks is on the pricing side. Of course, when interest rates went up dramatically, one would expect in any lending business that over time the pricing would reflect the increase in the cost of funds. In the card business, these changes happened more quickly. In the auto business, the money center banks and Capital One essentially reflected in our pricing our increase in cost of funds. We were struck that outside of the money center banks and Capital One, we didn't see much movement in pricing, which meant that, you know, margins were compressed. Now I wanna draw a distinction between the card business and the auto business.
In the card business, we can make choices about what we do and what we price and different things. It might affect our volume a little bit here or there, but we're very much, sort of, you know, it's kind of us and our decisions. In the auto business, you have a dealer in the middle of the, you know, the buying decision. The dealers put a lot of pressure on lenders with respect to what their product pricing is and so on. What happens is, if you price, you know, changes in price being off of the prevailing rates can cause a significant impact in volume, much more than on the card side in the short term. Therefore, we were not immune from the pricing impacts that happened to the marketplace.
When we looked at it, we saw that our pricing and really our margins, and therefore our resilience, was going down in the auto business. We didn't just totally pull back, but around the edges, the sort of, lowest resilient, lowest margin stuff we pulled back on. That's why collectively in the auto business, even as our card business, we've been leaning into the auto business, has been in pullback mode. I will say that in the last few months we have seen significant progress on the pricing side in the marketplace. It's the kind of thing that one would expect would resolve itself faster than where you see credit disequilibrium.
Gotcha. It's interesting and very good to hear about that. Cap One has always been very intent on managing, you know, to a low loan to value as part of the auto business. You know, so therefore, you know, the potential for weakness in used car price is not as big a deal, but you have thoughts as to how that's impacted both yourselves and the industry?
You know, in the short run, in the auto business, when used car prices go up, it's a very good thing because what happens is, you know, our customers tend to pay more on time 'cause they have more equity in the vehicles. If they don't pay on time, we will end up with more equity, you know, in those vehicles. That's a good thing, but be careful what you wish for. The problem with high used car pricing is when it becomes the new kind of normal for the industry, the concern is that the market clearing lending price is underwriting to higher used car prices, and they might have only one way to go, which could be down and down a lot. What we do is that we ourselves assume significant reductions in used car prices. I do, you know, I do feel that, you know, in general there's higher risk in the industry, in this marketplace when used car prices just are at the higher levels that we see now.
Got it. let's talk a little bit about deposit growth. I mean, you're somewhat of a unique situation in that you did really transition from, you know, your deposit base into a, you know, an increasingly digital deposit base. can you talk about where you are in that process and how you think about, you know, competition for online deposits today.
Why don't I jump in.
Okay.
give Rich a chance to
Sure.
catch his breath.
Go ahead, Jeff.
You know, a couple things. We've enjoyed a couple quarters of, you know, pretty sizable and good deposit growth. That's on the back of our, you know, national direct franchise, which is in turn on the back of the digital capabilities that we've built. We're kind of unique in driving a growth strategy in deposits that's, you know, aiming to be a national bank without the physical distribution, without acquiring or building branches. We've gotten a lot of really good traction with a strategy that leverages our brand, our digital capabilities and a simple digital customer experience to really aim for primary banking relationships in addition to liquid savings. We're getting some good traction there.
you know, our strategy on the pricing front is to have a compelling rate, but not the market-leading rate, because we don't wanna attract those higher dollar value deposits that are kinda rate hopping. we've been able to affect that strategy with some success. it does mean that we have higher marketing costs and higher rate paid, but with much lower branch and infrastructure costs, the economics of the franchise make a lot of sense. over and above the customer franchise and the ability to grow customer relationships and build franchise, it's also the primary source of funding. you know, you see about 75% or 80% of our funding structure in core deposits.
In a rising rate cycle, the cost of those funds does go up, but the overall economics still make a lot of sense to us. We've seen our cumulative beta through the end of 2022 rise to about 35. I note that in the last rising rate cycle, our cumulative beta, by the end of it, was kind of around 40. It looks like we're headed to a place a little bit higher than that this time, which you'd expect given the differences in this rising rate cycle compared to the past.
You know, the other sort of permanent part of our funding structure is our capital markets access, which we use to term out some of the funding, to maintain a diversified source of funding, to make sure that we're gonna, you know, be fortified on our liquidity, you know, coverage ratio and similar measures of liquidity. You know, in times where deposit pricing is higher or growth opportunities are lower, we might leverage that capital markets channel more. I think as a sustained proposition, I would expect our funding mix to be about where it is today.
Noted that you've used, securitization a little bit more recently. Did an auto deal, some other things.
Right.
Yeah.
Yeah.
good. Thanks, Jeff. In terms of, you've generally maintained that you're relatively neutral as to interest rates. Any thoughts about whether that's gonna shift in the future or just that's where you wanna be?
I think it's a long-standing sort of, you know, philosophy of the company, that we feel like we have some competitive advantages in pricing and underwriting credit risk. We don't necessarily feel like we have any particular competitive advantage in, you know, playing the curve, so we try not to. I think that will continue and it will maintain We're naturally asset sensitive, but we work pretty hard to bring that closer to neutral.
The, you know, I guess given where we are, Fed recently released CCAR scenarios. Can you talk a little bit about your capital planning and how you think about capital return? You had, you know, kind of returned a big chunk of capital, gotten closer to your targets and, you know, and now moderated that. Could you talk a little bit about that and certainly in the context of the regulatory and economic environment.
You know, the generation of capital and the return of capital is an important part of the value proposition of Capital One to investors. Over the last couple of years, we have returned $12 billion to investors, and we have gone from a CET1 ratio of in the high 14s down to around 12.5. It's certainly been a really nice run of capital generation and return. We also lately have dialed back quite a bit in terms of the share buybacks, really just more out of a sense of caution or conservatism at a time when there's so much uncertainty in the marketplace. There's asymmetrical benefits to having a lot of capital, in downturns, so it's really more just of a pause, just reflecting sort of where the marketplace is. But it's not a change in the overall philosophy or, the, you know, trajectory of how this company generates value.
One of the, one of the targets that you have put out there is, you know, a improvement in the efficiency ratio over the course of 2023. You're, you know, could you talk a little bit about what, you know, what it's gonna take to get there and what, you know, what could happen that would make it, you know, kind of potentially better or, you know, what things would happen that would, you know, cause you to not be able to get there?
We have had our eyes very focused on another on efficiency. The improvement in our operating efficiency ratio is another very important way of driving returns and value to shareholders. Really if you go back to 2013, you can see kind of a steady improvement in operating efficiency ratio. We had sort of a step back during the pandemic, both because revenues stepped back and there were sort of a number of things and investments that sort of happened at that time. So that while there was a little bit of a step back, the story and the trajectory to me, is very much the same.
The reason that we are leaning hard into improving operating efficiency is that I think it can come as one of the many benefits of our technology transformation. We're in the 11th year of our technology transformation. While we've invested a lot in technology, which of course shows up directly in operating costs, underneath the surface, there've also been a number of really important efficiency gains. The ability to, you know, modernizing technology and moving out of legacy technology. Here's another big one, moving away from expensive old school vendor technology. That can be a whopping price tag for banks. Generating a lot of efficiency benefit through driving customers to digital, and the better our customer experience is, the more we're able to really drive them there, and that's been really valuable.
Even in our retail bank, for example, building a national bank with a full service digital capability on the checking side, not just a, you know, a direct bank that is selling savings products. We're talking over the years investing to digitize almost everything that you can do in a bank branch. We still haven't figured out how to digitize a safe deposit box. Almost everything else to be able to make it available digitally. While this is a lot of work and a lot of investment, it also has allowed us to have an origination machine beyond the branches and to create efficiency there and a lower cost model. There is going to the cloud, of course, getting out of data centers. Really what's the...
There's things that move sort of in opposite directions, but it's really the same story. We're, this, through our technology transformation, we see, you know, the opportunity to over the years, have significant revenue growth, which can of course be an important driver of efficiency. Also along the way, to garner actual efficiencies through, more digitization, more automation, and gradually changing the underlying operating model of the company. Along the way, in order to get there, we're investing a lot in that transformation, in moving up the tech stack, building these capabilities. That's a, that's a view, under the surface of this journey that's very important to us.
Probably should have talked about this when I asked about capital management and capital return. As you look out, are there any areas in which you would, you know, wanna expend capital kind of externally to buy either portfolios or, you know, small, you know, business type, you know, kind of adjacencies things, capabilities that you don't currently have? If you could talk about that for a moment.
Most banks around our size, their most fundamental growth model is acquisitions of other banks. In our journey, we've had, we bought a few banks, basically four banks in our past. That was very much to transform the funding model of the company to really transform the balance sheet of the business. We are not on a quest to keep growing through bank acquisitions. We have very purposely built a company that is wired for organic growth, and it is trying to build the digital. We are building the digital bank of the future, and we're trying to do what no company has done before, which is to basically organically build a national like retail bank. You know, we have a lot of trajectory there, a lot of success.
Obviously, a long way to go, but, you know. That is and also an important part of this journey. While we're not out looking to acquire banks, the kind of acquisitions that we have done and make a lot of sense within this model is buying little tech companies with capabilities, buying fintechs with obviously financial tech capabilities. Buying individual businesses, lending businesses, deposit business, you know, various things that are would be consistent with that. I think it's more of the kind of acquisition model on the tech side of the business instead of where other banks are going.
With that, we are basically out of time. Please join me in thanking Rich and Jeff for their time today. Thanks to Capital One. Thank you.
Thank you. Very nice.