Right. Good afternoon, everyone. Thank you for being here. This afternoon, we're gonna kick off with Capital One and a familiar face to most of you, Jeff Norris. We're just pleased to have you here, Jeff. Thank you. I know you've been in a lot of meetings this morning, and I hope you're not talked out.
Not yet.
Not yet. Okay. Well, let's just start with the question that you always get to lead things off. Give us the Jeff Norris Capital One view of what you're seeing on the economy and what you're seeing for the consumer.
Sure. Happy to do it. Let me add my thanks for everybody who's here and everybody who's listening on the webcast. You know, in general, when we start the description with the health of the consumer, the consumer still feels like they're in a really pretty strong place. Labor markets are, you know, still really robust, which is one of the biggest macro drivers of consumer health.
Debt burdens are still low, even in a rising rate environment. I think, you know, we still see some accumulated savings that were built through the pandemic. Although inflation is, you know, kind of eating away at that. There's still some of that, you know, left in the picture. We're seeing, you know, relative conservatism from consumers, which is what we expect to see through economic cycles. Consumers are often the most rational player, you know. You know, we're seeing a little bit of a deceleration in spending, which you'd expect to see as they're, you know, dealing with uncertainties on the horizon. They start from being in a pretty good place.
In our own credit metrics, we're seeing the thing that we've dubbed normalization, the rising delinquencies and charge-offs that are now approaching their pre-pandemic levels after being unsustainably strong through the pandemic. I think in our card business, we're probably at about 85% of pre-pandemic delinquency levels, maybe a little closer than that in auto. We had noted earlier that we had seen that normalization trend more pronounced in the subprime or lower income demographic segments, but over the last two or three months, it's really become a more portfolio-wide, business-wide observation as we've seen the other segments you know, kind of catch up on that trend. Which is aligned with what we would have expected.
I'll just finish by saying the normalization of credit in our consumer businesses has probably happened at a pace that was a little more slow and gradual than we would have expected. We would have expected a faster and steeper move in the subprime or low income segments because they're generally first movers.
Mm-hmm
Both on the improvement and the normalization front. Things are pretty much consistent with what we would have expected, maybe have been slightly better up to now.
Mm-hmm.
You know, I think we're still in a place where we see good growth opportunities in card and continue to lean in there. A little more cautious on auto for a number of reasons that I think we'll get to.
Yeah
You know, maybe later. That's the state of the world as we see it.
Okay. Why do you think it was slower for the subprime or lower income consumer to normalize?
Well, they've normalized faster.
Okay.
The overall normalization has been a little bit more gradual.
I see.
There's a number of things that could explain that. For example, it's reasonable to believe that there was maybe a little bit more scar tissue left from people who had experienced the Great Recession and pandemic.
Mm-hmm.
Which has made them a little bit more cautious in managing their finances. There's the ongoing support that was provided, you know, through stimulus and widespread forbearance and things like rent moratoriums.
Mm-hmm.
...and student loan moratoriums, that as they expire and move a little bit more to the rearview mirror, you know, we could see some distress manifest itself now that was prevented by some of those interventions.
That could be accelerating the normalization trend across the segments. I'm not sure there's a definitive explanation. We're just. You know, when a trend of rising delinquencies and losses happens more gradually than you'd expect, that's a good thing, and.
Yeah.
...we don't try too hard to, you know, parse it out.
Yeah. Anything else that's been surprising in terms of the normalization trends?
No, I don't think so.
Just follows your typical pattern that you would expect to see?
Well, I'm not sure there is a typical pattern.
Okay.
Every economic cycle, every credit cycle plays out a little bit differently.
Mm-hmm.
We, you know, kind of establish a range of expectations. What we've seen here on a segment by segment basis and on a total portfolio basis is either aligned with or a little better than what we would have expected. I don't know that that changes, you know, the ultimate destination. Like all things in the credit risk management business, it's evolving as the world evolves. Our, you know, we update our view fairly frequently based on actual performance and trends.
Okay. As always, like all of these sessions, we encourage questions. If any of you have questions, put your hand up and we'll get to you as well. You talked about leaning in on card.
Mm-hmm.
What are some of the opportunities you see there, and why is it attractive today to do that? What drives that view?
You know, our view is to assess market opportunities on a fairly, you know, continuous basis, and we continue to see really good, strong opportunities to grow resilient and profitable loans. Basically in the places where we've been emphasizing for years in that business. At the upper end of subprime and in through prime with customers who revolve but are not high balance revolvers, not the more heavily indebted folks. What we've talked about a lot is the heavy spender segment at the very top of the card marketplace, where we've had a focused strategy to pursue growth and share gains in that space over the last decade or more.
We just, in the last year or two, have made some particular traction, with, you know, earning our way into the space and, you know, building credible and compelling product structures. We're able to launch into the super premium space, if you will, with a Venture X card.
Mm-hmm.
That's got a lot of traction. The best opportunities we're seeing are, you know, kind of in the lanes that we've been running in for quite some time now.
Mm-hmm.
You know, they continue to look attractive.
What would change your approach on that?
Well, I think, you know, the obvious thing that we have our eye on the most is credit trends.
Mm-hmm.
both the actual credit trends in our portfolio and the implications of, you know, call it high or maybe even rising uncertainty in terms of the macroeconomic picture.
Mm-hmm.
If our projection of credit cost rises, that would sort of tend to naturally limit the size of the marketable universe that we'd be, you know, looking to make offers to. You know, I think there's nothing new or unusual in that approach. You know, I think as the trends that are afoot today are gradual. The great thing about the card business is you have some front-loaded costs in terms of customer acquisition-
Mm-hmm.
... and, you know, the front-loaded sort of credit cost. You, you create a revenue annuity that lasts for years and years.
Mm-hmm.
That makes it an attractive economic proposition. Attractive not only from a profitability standpoint but from the opportunity to build resilient economic flows. I don't think you know, the attractiveness of that opportunity is particularly high at certain points in the cycle and then wanes a little bit as a cycle or a downturn, you know, plays out. You know, we don't have a, you know, prediction about whether we're headed to a soft landing or a hard landing.
Uh-huh.
... or, you know, wherever it may be. We, you know, monitor the performance of our portfolio continuously and in real time on the other side of our digital transformation and, you know, watch for things in the trends that might change our view. So far, we haven't seen them.
Okay. Ultra-competitive still? Or has the competition eased or intensified at all?
I think, you know, the interesting thing about the credit card market is it's a mature market, with six or seven sort of big players. That makes it, on the one hand, intensely competitive because all the competitors are highly capable, well-funded-.
Rational
... lots of experience. It also tends to make the competitive environment rational.
Mm-hmm.
You don't get a lot of, sort of one-off craziness, you know, that you see in some smaller lending markets. We like that relative stability, and the cost of that relative stability is, you know, being up against some pretty tough competitors.
Yeah. Okay. All right. Auto. A lot of us can't make a lot of sense of what's really happening in auto across the industry, some of these values seem to just defy logic. What is your view on auto at this point? You're leaning out a bit, but maybe leaning in as well. Talk a little bit about how you're feeling there.
you know, it's a really interesting contrast where, you know, in the card marketplace that I've just been talking about, we still see really good opportunities and continue to lean in. We're almost making the opposite choice in auto, but maybe for some reasons that are a little bit surprising. We first pulled back on originations a couple quarters ago, and that was a decision driven by margins in the industry.
Mm-hmm.
Where we had noted, some, fairly large competitive blocks, which in our view, were not fully reflecting the rising cost of funds-
Mm-hmm
... in their marginal pricing. That sort of... You know, the way things work in the auto business, if a competitor does something that sort of cuts price in card, that'll have an impact on our origination flow, that's sort of modest to moderate. In the auto business, if a set of competitors is offering a much lower price because of the auction that a dealer holds to originate a loan, all of the loans tend to immediately and swiftly flow to, you know, the competitors that are being more aggressive on the pricing front, as the case may be. there's you know, there's a natural pullback in originations.
The other thing about margins is, that's an important aspect of our view of resilience of a consumer loan, that you have sufficient margin to absorb the potential unanticipated increase in credit losses. When the margins were a little thinner than we were comfortable with, we pulled back.
Mm-hmm.
Now that sort of funding cost finding its way into the pricing is a temporal thing. It's kind of a lag that you see sometimes as opposed to a permanent condition.
Mm-hmm.
We had always expected that that would sort of resolve itself over time. I think we're seeing some signs, that it is resolving itself. In the meantime, we've also observed some, you know, delinquency and credit loss increases at the part of the subprime auto business that's kind of below where we originate.
Mm-hmm.
in response to that and, you know, out of a view of caution, we're tightening our credit box a little bit. I won't make a prediction about if and when we'd sort of return to more of a growth posture, but it's become, you know, multiple variables as opposed to just the margin.
Mm-hmm.
You know, we'll watch these trends play out.
But pricing helps certainly, right?
It helps a little, yeah.
Yeah. Yeah. Been surprised by the resiliency in used car values?
I'm not sure.
Maybe recent.
Yeah. You know, we still have an expectation that the price of used vehicles will, you know, eventually fall from their heights.
Mm-hmm.
Even though we've had a couple of strong data points, you know, recently. We assume in our underwriting, a sharper and faster decline. As part of that's another key aspect of our view of how to build resilience into our originations, is to assume that variable in auto and a number of variables across our underwriting decisions across our businesses will actually worsen more than actual trends would predict. We, you know, build that assumption in so that we'll have a little bit of buffer in our originations.
Mm-hmm
... to absorb things if they actually turn out to be worse than we had originally modeled.
Okay. I just had a used car I was trying to sell during the pandemic, and I think it was the best performing asset in my portfolio. I just hung on to the very end.
That's funny.
It was fantastic, Jeff. Commercial business. I don't wanna say it's overlooked, but it's certainly less attention than card. What's going on in commercial? I'm curious on commercial real estate as well, how you're feeling about that.
Sure.
Yeah.
Our commercial bank is in the beginning of 2022 was on a fairly high growth trajectory relative to regional peers. I think, although credit remains, if you look at the charge-off rate, and the delinquencies in our, in our commercial book, the credit is still you know, quite attractive and resilient. We are seeing some risk migration and some rising trends in non-performing loan metrics.
Mm-hmm.
As a result of that, and out of an abundance of caution, we've been slowing down the trajectory of loan growth in commercial to the point where from Q3 to Q4 it was, you know, kind of approaching sort of roughly flat. I think we're, you know, we're comfortable with our positioning and our posture in commercial at the moment. We, you know, we tend to approach the market less through geographies and more through industry verticals. The thing we have our eye on the most right now is probably the office portfolio in commercial real estate. That's not a surprise.
Right
... everybody would say the same thing given the change in how we work. We don't have an outsized exposure there, and we're just, you know, keeping an eye on things and, you know, managing that credit risk, you know, to the best of our ability. We're. Away from that, there's, you know, no news, I think.
Okay. The Capital One adjective would be leaning out a little bit on commercial.
Well, I'm gonna sort of reject that premise.
Okay
Say we're leaning in on card.
Yep.
There's kinda no lean one way or the other. We're, you know, leaning in is a little bit of a term of art, but, you know, our posture in auto is to be more in pullback mode.
Yep
... until we see some of these trends sort of normalize and heal. In commercial, I think we're, you know. I think it would be an overstatement to say we're leaning out.
Okay.
We've moderated the growth somewhat.
Yeah. Okay. Okay. Yeah, one second here. Just I wanna talk about funding-
Mm-hmm
... before we get to this. There's a lot of focus on deposit betas.
Mm-hmm
... the commercial banks. It's not as much in consumer finance, but it's everything in the commercial banks at this point. You're, you're somewhat in between.
Mm-hmm.
A little bit of both. How are you feeling about your deposit gathering ability? How are you feeling about deposit pricing in general?
We feel great about our retail bank franchise and our commercial deposit franchise. you know, just pulling up and looking at the funding picture of Capital One, we're about 80% core deposit funded and about 20% from a variety of capital market sources.
Mm-hmm.
That's a ratio that I expect to sustain over some time. We're very comfortable in that range. We've seen some pretty good deposit growth actually, relative to peers, even over the last couple quarters. You know, we're meeting our customers where they are in our branch footprint, which covers about 20% of the U.S., and we love that deposit franchise. In 80% of the U.S. where we don't have branch infrastructure, we have a great growth strategy that's built on the back of the old ING Direct, you know, direct-to-consumer book.
What we've done there is we've developed and executed a strategy where as opposed to solely focusing on funding and, you know, liquid savings products, we're really building a digital bank of the future that has very light distribution in the form of Capital One Cafés, which are very different than, you know, branches. Think of them more as like digital showrooms, physical showrooms for our digital capabilities. We've developed, you know, products and product structures that replicate the vast majority of things you can do in a bank branch. You know, we're seeing some growth in checking products in addition to the savings growth.
That is at a little bit higher rate pay versus a branch-based deposit and at a little bit higher marketing cost because you invest in marketing to drive customers to that digital bank. Much lower in terms of fixed infrastructure and branch costs. We believe that, we're building a franchise based on a great digital customer experience and a brand and not just the rate paid. That's a sustainable franchise that will provide funding benefits, but also, you know, deep and compelling customer relationships.
Mm-hmm.
that we can, you know, benefit from that customer franchise over time as well.
Mm-hmm.
We're liking the deposit business quite a bit these days.
Okay.
Just touching again on follow-up on the Cafe strategy. Is that one that you're leaning into? I know some of your peers have had success opening, like, de novo branches in certain regions. Do you expect the Cafe to be a, you know, meaningful part of your business and a share gainer?
I wanna be a little bit careful on how I answer the question because I wanna really distinguish between the expansion of Café locations versus de novo branch expansion. I can't emphasize enough that a Café is way different than a branch.
Mm-hmm.
You don't really measure the success of a Café by sort of product sales and throughput. It's a carrier of the brand. It's a showroom for digital experiences. It's a community gathering place. You need far fewer locations to be on an expansion strategy, you know, kind of in a national deposit business. There's an order of magnitude fewer Cafés on our, you know, planning horizon than there would be if we were building, you know, branches. I do think that our Café locations are. We expect to be building more.
Mm-hmm.
in the coming years
How about some of the bigger banks that are opening branches in Denver, Minneapolis, Charlotte, all in a way almost mimicking your strategy? It may not be only retail, but do you view that as a competitive threat or is it a form of flattery?
I think we for all our years in the business, I think we view everything as a potential competitive threat.
Mm-hmm.
You know, take all of that very seriously. I don't, I don't have any real specific comment on that.
Okay. It's as easy as picking Charles Barkley for pickup basketball, right?
Slash to be in your garage band.
That's right. That's right. Plenty of other things to ask, but go ahead. Yeah. I enjoyed the commercials, by the way.
I thank you. maybe just one more on deposits and funding. again, to make that comparison with bigger commercial banks. A bunch of them have a ton of consumer-facing deposits at 0 or extremely low rates. You and a cohort of online banks have sort of taken rates up. I don't know if you feel like that divergence between big money center retail, physical presence banks, and the rates offered in those direct channels enables you to gather deposits, enables you to not have to pass the next wave of rate increases along. Thank you.
Again, just to generalize about our sort of pricing strategy in retail banking. We wanna offer our customers a compelling rate, but not necessarily a rate that incents people to join us just because of the rate. We really wanna build a full service, you know, customer franchise with deep and lasting customer relationships across, you know, multiple banking products as opposed to just going for the highest rate paid deposit. Our rates are, you know, on average higher in the direct bank than in the branch infrastructure. They're very rarely sort of the market leading rate. I wouldn't expect that to change.
All right. maybe an annoying topic for you to answer, but late fees. What's your latest thinking on late fees and how you react to it and what the timeline might look like for resolution on all this?
Sure. I'll caveat this answer by saying I don't have a lot of specifics to share because we're at the forefront of figuring out kind of the impacts and the actions that we might take in response. I do think that, you know, we've been on a multi-decade journey as a company to really be on the right side of customer issues. We've reduced our reliance on fee-based revenues over time and are really trying to drive a customer franchise and a set of customer relationships that are not overly dependent on fees, particularly penalty fees. Cited an example, we're the first and one of the very few really large banks to totally eliminate overdraft fees in the deposit franchise. That's just one example.
The late fee is a little bit of a different animal because it's not, you know, primarily a revenue lever. It's primarily an incentive for customers to make payments on time and to not go late. It's a key part of credit risk management and, you know, serving all the populations that we serve. We're at work really trying to figure out the holistic impacts that might result from this and how we would respond to them, you know, across a number of dimensions. You know, we may have more to say on that over time as we kind of do our work, but not a lot of specifics to share other than.
Yeah, it's difficult.
Yeah.
Yeah. Okay. Anything on capital and buyback appetite? It feels like you're more focused on growth, but how are you feeling about that?
you know, we've long said that our kind of long-term target for CET1 capital ratio is probably around 11%. We're running a little bit higher than that now. you know, I think we've been well served in the past across a number of environments to have a little bit of a buffer at times of uncertainty for both offensive and defensive reasons. It's always good to have a buffer when you're facing some economic uncertainty. part of the reason it's good is because it enables us to sort of be well-capitalized for the growth opportunities we're currently seeing and taking advantage of. Be well-capitalized for, you know, opportunities that tend to emerge as the cycle plays out.
What we found is that some of the very best organic origination opportunities happen right after the sort of peak of a downturn or trough of a downturn, I guess, would be the right way to describe it. To be, you know, well-positioned relative to peers and in a strong capital position to take advantage of those opportunities is part of our calculus. I think, you know, we're thinking that our capital levels position us to thrive in a number of environments and a number of potential outcomes as we see this cycle play out.
Okay. Been interesting we've all been waiting for the downturn and it just doesn't seem to happen. We had a short discussion on this, but GDP is better than it was a quarter ago. The unemployment rate has come down. It's difficult to handicap all this, but do you have a view on whether things are getting better or worse? Is this just too short of a time period to draw any conclusions on that?
Well-
Not a trick question, by the way.
No, no, I understand.
Yeah.
You know, I don't have a great grounded answer to that question. It would be sort of Jeff Norris's speculation and opinion as a very distant amateur economist, which is probably not insightful or relevant. You know, our view of how we run the business at Capital One is we don't wanna base our decisions based on predictions of the economy. We wanna base our decisions on things that will be resilient to a range of outcomes and stress scenarios. You know, we've kind of... we talk about it inside the company as hardwiring resilience into all the choices we make.
We learned a long time ago that the choices you make during the good times have a much bigger impact on how you fare through the bad times than anything you make sort of in the heat of the moment. You know, that has us avoiding certain businesses. It has us de-emphasizing more heavily indebted customers in our card and consumer lending businesses. It has us, you know, pulling back in auto, even though there was no credit impetus to pull back when we started that. It has us leaning into growth in card, but at the same time fine-tuning and trimming at the margins to always kind of stay in real time, you know, looking for signs of increasing risk.
It has us, you know, pricing things in a way that we think provides margin coverage, among other things, and holding, you know, really strong levels of Capital. I think the way to sustainably deliver value in the businesses we've chosen to be in is to make some tough choices during the good times that put you in strong position if and when the cycle comes. You know, we've done that since the founding days of the company. We continue to do that today.
Mm-hmm. Okay. Any last questions for Jeff?
Ask one more. I think you guys have articulated, and your peers have too, that DFAST stress tests are not really direct drivers of your view of your own capital adequacy, and we have a new scenario, and that slingshot to 10% gets wider the better unemployment gets. Is that framework kind of still the right one to have? Thank you.
Well, you know, I think with the stress capital buffer regime, we have a little bit more degrees of freedom and flexibility to sort of, you know, assess and set our own capital levels. I think the DFAST and CCAR exercise is still an important part of our total view of capital. You know, we're in the midst of, you know, executing that exercise as we speak, so I don't really have much to say about that until the results are out. You know, as I said, I think, you know, capital is an area of relative strength for us and, that's as a result of our own internal frameworks as well as the DFAST exercise.
Okay. That's all the time we have for today. Jeff, I wanna thank you for being here representing Capital One. Good luck the rest of the day in the meetings.
Thanks, Brian.
I just really appreciate you being here.
Thanks, everybody.