Capital One Financial Corporation (COF)

“So as you suggest, looking ahead there should be a bit of a NIM catch-up that happens in the third quarter as the average cash catches up to the ending cash.”

“On the Discover front book, 50% of Discover originations are now on Capital 1's tech platform, and we expect to be fully on our tech stack for new originations by the end of the third quarter.”

“we continue to think that need is 11%.”

“We remain on track to deliver the full $2.5 billion of announced synergies.”

“We are on track to achieve the remaining operating expense synergies by the second half of 27.”

“We will we will lean into marketing more on the Discovery side as well, we are really, marketing is really mostly a front book thing. So we are as we speak, leaning more into the marketing.”

“But looking ahead, our recoveries inventory should taper off a bit in the next year or so because the inventory of recent charge offs will itself be going down.”

“I do wanna also mention in parallel to Discover's dial back of card loans, they also dial back on personal loans. And you know, we have also sort of mechanically during the integration dialed back on a little bit on the personal loans as well. So that brownout will continue and, in fact, increase”

“I continue to point you to that as a pretty good indicator of where our structural NIM is going to be likely in at least the near term.”

“And then, also, as a reminder, the back half of the year, we have 1 more day in each of the quarters. So that adds a 9 basis point tailwind to NIM.”

“So that brownout will continue and, in fact, increase And the bottom the bottom sort of the bottom of the brownout will be somewhere around the fourth quarter of this year.”

“With respect to the brownout, we expect continued contraction in the near term but as we can unleash more of Capital 1's tech and capabilities with Discover on the other side of our conversions, We are looking forward to returning to growth.”

“On Discover's back book, we will begin the major conversion waves later this month. But we will not be fully on Capital 1's tech stack until the first quarter of next year.”

“we still expect our earnings power on the other side of the Discover integration to be consistent with what we expected at the time we announced the deal”

“even on the other side of the integration, you know, I think it is reasonable that Capital 1 legacy Capital 1 will be a faster growing institution than Discover.”

“For our travel business, we will be focused on the hopper build out through the balance of this year, so bringing our travel portal to Brex will likely follow that work.”

“but we expect to have fully transitioned new originations by the end of Q3.”

“Specifically to your cash point, I do expect that, that cash position will trend down over time, given that it is particularly elevated this quarter.”

“As a reminder, the Brex transaction is expected to decrease the CET1 ratio by a little over 40 basis points in the second quarter.”

“But if we put those things together, we still feel very good about achieving the full $2.5 billion of synergies by the time we complete integration in the middle of '27.”

“Most importantly, we still expect our earnings power on the other side of the Discover integration to be consistent with what we expected at the time we announced the deal, inclusive of the Brex and Hopper travel infrastructure.”

“We still expect our earnings power on the other side of the Discover integration to be consistent with what we expected at the time we announced the deal.”

“We remain on track to deliver the expected synergies.”

“One other thing. In parallel to Discover's dial back of card loans, they also dialed back personal loans. Those loans are mostly cross-sell to the existing file. And those cross-sells have been further scaled back sort of for mechanical reasons during the integration process. So there is a brownout in personal loans also during this period, even as we like that business that they have built and do plan to lean into that on the other side.”

“Now with respect to the back book, we expect that the back book of existing Discover accounts will be fully converted onto our platform by the first quarter of next year.”

“So in the first quarter, Discover Card outstandings were down 1.2% year-over-year and the brown out will increase a bit until we get to the other side of the tech integration with Discover.”

“But if you look at the back half of the year, that on a seasonally adjusted basis is a pretty good indication of where you should expect NIM to kind of structurally be.”

“But if I just take a step back and look more broadly, absent any meaningful change in the balance sheet mix beyond the cash trending down, the structural level for NIM that we saw after we closed the Discover transaction, should persist.”

“We expect to increasingly lean into marketing to take advantage of these compelling market opportunities.”

“We continue to see good opportunities to grow the Discover Card business on the other side of our tech integration, where we can implement growth expansions powered by our unique technology and underwriting.”

“The legacy Discover card loans continued to contract slightly and will likely continue to face a temporary growth headwind in the near term due to Discovery's prior credit policy cutbacks and some additional credit policy changes we've made since closing the acquisition.”

“It doesn't change the expected pace or magnitude of our quarterly share repurchases.”

“We have the added effect this year of the cash proceeds from the home loan sale that are unlikely to come all the way down in the immediate term.”

“The legacy Discover card loans continued to contract slightly and will likely continue to face near-term growth headwinds due to Discover's prior credit policy cutbacks and some trimming around the edges that we're doing.”

“So Saul, in isolation, Brex will result in earnings dilution initially.”

“We remain on track to deliver the expected synergies.”

“We believe this growth dynamic will lead to significant accretion over time.”

“So that's the brownout, but that will continue until card integration is done.”

“Now that is everything we're talking about is temporary in nature.”

“Now importantly, we still expect our earnings power on the other side of the Discover integration to be consistent with what we expected at the time we announced the Discover deal, inclusive of Brex.”

“The net effect will be some upward pressure on the efficiency ratio in the near term.”

“In recent quarters, we've talked about these opportunities. And we have indicated that collectively, these investments will put upward pressure on the efficiency ratio in the near term, and we continue to lean into those.”

“Importantly, we expect Brex to have no impact on the Discover integration or expected synergies.”

“I will say, based on what we know today, at least in the very near term, it's reasonable to assume that we'll be picking up the pace of share repurchases from here.”

“That effort is going well, and we expect it to be largely completed in early 2026, so we expect revenue synergies to ramp up in the fourth quarter and in early 2026.”

“Fourth quarter marketing will likely be somewhat above recent seasonal patterns.”

“Importantly, the earnings power of our combined company that we envision on the other side of the deal integration is consistent with what we assumed at the time of our deal announcement, even though some individual variables have moved along the way.”

“We continue to expect that integration costs will be somewhat higher than our original estimate, and we remain on track to deliver $2.5 billion in combined synergies.”

“And these effects will collectively produce a bit of a "brownout" of Discover's outstanding growth over the next couple of years.”

“The legacy Discover card loans continued to contract slightly and will likely continue to face a growth headwind due to Discover's prior credit policy cutbacks and some trimming around the edges that we will implement going forward.”

“We feel comfortable that at 14%, we're operating with excess capital above the long-term need of the combined company and we have the flexibility with our repurchase actions as we're operating under the SCB, but we need to complete that work.”

“We expect the majority of customers to be on the debit -- excuse me, on the Discover network by the fourth quarter of 2025, with all debit purchase volume running on the Discover network by early 2026.”

“Building the national bank requires sustained investment in marketing, and we are doing that, and we expect to lean in even more.”

“The cost synergies that we have identified as a result of bringing our 2 organizations together, and those cost synergies are fully intact.”

“We are on track to deliver the $2.5 billion in total net synergies we discussed on the April earnings call.”

“But as we have gotten more granularity on each of these efforts, we expect our integration costs will be somewhat higher than our previously announced $2.8 billion.”

“So as a result of that, I'd say, at least for the second quarter, it's reasonable to assume we'll likely maintain the pace we've been on, until we get to the other side of close and do that analysis.”

“As a result, we expect current Discover shareholders will be shareholders of Capital One's common stock as of the expected record date and will therefore receive Capital One's $0.60 second quarter dividend, subject to Board approval.”

“Looking ahead, we expect the record date for the second quarter dividend for both Discover and Capital One to be after the May 18 closing date.”

“So we continue to expect that we'll achieve the synergies that we estimated when we announced the deal based on the integration budget that we estimated at the announcement.”

“And we continue to believe that we'll achieve the synergies run rate in about 24 months following the May 18 closing date.”

“Based on our due diligence and integration planning, we continue to expect that we will achieve the synergies we estimated when we announced the deal, enabled by the integration costs we estimated at the announcement.”

“look, if we continue to see near-term favorability in our credit performance, that's going to bring down coverage all else equal over time, if we see a meaningful worsening in economic outlooks or changes in consumer credit behavior from what we see today that could put upward pressure on our coverage”

“If there is ultimately no reduction to the current debit interchange fee levels it would lower our debit network synergy because it would increase the baseline to which we are comparing by about $170 million.”

“But beyond that, it's really going to come down to growth and our loss forecast and loss forecast specifically for the coverage. And to the extent that loss forecast improves, changes in coverage could be modest in the near term as we just reflect the uncertainty of our projections and the allowance. But eventually, the improved loss forecast is going to flow through the allowance and continue to bring the coverage ratio down as uncertainties become more certain.”

“But then probably the single biggest factor and we've seen this play out over the last number of quarters is the card growth and card becoming a bigger percentage of our balance sheet, all else equal is a pretty meaningful tailwind to NIM.”

“Our recoveries inventory will continue to rebuild and that should be a gradual tailwind to our losses over time, all else equal.”

“We remain well-positioned to complete the acquisition early in 2025, subject to regulatory and shareholder approval.”

“So the engine that drives operating efficiency ratio strategically will continue at Capital One and it should continue it with the combined institution as well.”

“But on the tailwind side, the steepening yield curve relative to forwards would be a good guy if that persists.”

“So you'd see a small decrease in NIM if rates continue to decrease and you saw a little bit of that effect here in this quarter.”

“I think if wages -- if things stabilize and wages tend to keep up with inflation, I would think on the Credit Card side, there's -- it is plausible that charge-off rates could be very consistent with what they've been in a lower ambient rate environment.”

“As we've said before, if the rule is implemented in its current form, it will have a significant impact on our revenue.”

“Outside of seasonality, Bill, which is an important qualifier to that, but yes, to the extent that credit is coming down in an absolute sense, suppression is highly correlated with loss rates. So over a period of time, that's what we would expect to see.”

“Another factor is the recoveries inventory that continues to rebuild and that should be a gradual tailwind to our losses over time, all else being equal.”

“In the near term outside of seasonal effects, we have one modest likely headwind, which as you can see in our disclosures, is that we're asset sensitive and so that will put a bit of pressure on NIM in the immediate term”

“So this effect will diminish over the next few quarters, we would expect.”

“We continue to expect total company marketing in the second half of 2024 to be meaningfully higher than in the first half, similar to the pattern we saw last year and that includes the much higher marketing levels that we typically see in the fourth quarter.”

“And we are no longer assuming that the CFPB late fee rule will be implemented in 2024, given ongoing uncertainty around industry litigation.”

“We expect a sequential quarter increase in operating expense in the fourth quarter, that will be roughly in line with historical patterns as we continue to invest in our technology transformation.”

“If the ruling never happens, we will likely go ahead and make these investments over time.”

“On the headwind side, I think there's a question of where betas go from here and there's a possibility that they could be slower or lower depending on a host of factors.”

“And I've highlighted in the past that our current levels of cash are likely above where we think they will eventually settle out. And if we were to see a steepening of the yield curve, that's also a good guide to us, all else equal.”

“but we also have one potential tailwind, I'll call it, and that is the pace of card growth relative to the rest of the balance sheet.”

“We expect total company marketing in the second half of 2024 to be meaningfully higher than the first half, similar to the pattern we saw last year.”

“If the implementation of the rule is delayed, that would be a tailwind to 2024 annual operating efficiency ratio.”

“Our expectation includes the partial year impact of the proposed CFPB late fee rule, assuming the rule takes effect in October 2024.”

“For the full year 2024, we continue to expect annual operating efficiency ratio net of adjustments to be flat to modestly down compared to 2023.”

“Ultimately, these mitigating actions will play through different line items in the P&L and will mitigate the impact of the late fee rule on our P&L within a couple of years of their implementation.”

“As we've said before, when the rule is implemented, there will be significant impact to our P&L. We expect that this impact will gradually resolve itself within a couple of years from the implementation of our mitigating actions.”

“If the trend of lower tax refunds sustains, it could raise the level of charge-off somewhat in the near term but this does not change our view that credit is settling out modestly above pre pandemic levels in 2018 and 2019.”

“So, essentially, what's implied underneath it, is quite a bit of progress on the efficiency ratio, behind the flat to modestly down guidance that includes that fourth quarter effect.”

“If the proposed rule is implemented, there will be a significant impact to our P&L in the near term relative to what our path would have been. However, we have a set of mitigating actions that we're working through that we believe will gradually resolve this impact, a couple of years after the rule goes into effect.”

“And then even if the Fed starts decreasing rates, we're going to see the assets reprice more quickly than the deposits.”

“I don't think we'll get back to where we were pre-pandemic but I would expect over time that, that will come down from today's level. So that would also be a tailwind to NIM.”

“Just to remind everyone that in the first quarter with one fewer day, we're going to see roughly a 7 basis points headwind there.”

“Our expectation includes the partial year impact of the proposed CFPB late fee rule, assuming that rule takes effect in October 2024.”

“So this is the point where we see that happening, meaning charge-offs should move more or less with seasonality in the coming months.”

“If the proposed rule is implemented, there will be a significant impact to our P&L in the near term. However, we have a set of mitigating actions that we're working through that we believe will gradually resolve this impact a couple of years after the rule goes into effect.”

“even though cash balances remain elevated relative to historical standards, I think we will see it settle out at a level that's higher than pre-pandemic, but ultimately lower than where we are today as you look ahead over multiple quarters.”

“we can continue to see growth in card and particularly revolving card balances as a percent of the balance sheet like you saw this quarter.”

“depending on the path of credit, there's the potential at least for increased revenue suppression.”

“particularly assuming if rates do stay higher for longer, I wouldn't be surprised if there continues to be some upward pressure on beta at least in the near term, driven by those factors that I described, the pricing and product mix piece.”

“We could very well see a coverage ratio that remains flat or only modestly declined, at least in the near term as we incorporate the related uncertainty into the allowance.”

“If the proposed rule is implemented, there will be a significant impact to our revenue, gradually resolving over time.”

“But remember that our models tend to use the change in unemployment rates or the rate of job creation, which we're forecasting to come down to nearly 0, rather than the level of unemployment.”

“And we continue to expect that the full year 2023 annual operating efficiency ratio net of adjustments will be roughly flat to modestly down compared to 2022.”

“But I think you should expect that cash will remain elevated relative to pre-pandemic but over time, it probably will come down at least modestly from here.”

“And so -- but all in all, we see opportunity maybe expanding a little bit in the auto space, but we'll have to keep an eye on that.”

“So just overall funding costs, I think, would probably be a headwind.”

“in the real near term, I would think our average cash position will stay elevated relative to pre-pandemic levels, not necessarily relative to what we saw in the first quarter. But over a longer period of time, that will almost assuredly come back down and eventually be a tailwind for NIM.”

“if you look at our AFS AOCI, about 40% of that will pull to par between now and the end of '24.”

“We are also assuming adverse effect from inflation and some further worsening of consumer profiles from the sort of the flip side of their extraordinary outperformance in the earlier period during the pandemic.”

“We continue to expect that the full year 2023 annual operating efficiency ratio net of adjustments will be roughly flat to modestly down compared to 2022.”

“we continue to estimate that our longer-term CET1 capital need is around 11%.”

“we also could see a growing percentage of revolving card balances and in the immediate term, keep in mind, we'll have one more day in the second quarter.”

“So as I then pull that into thinking about NIM over time, that is likely a potential headwind for us, particularly in the near term given the lag of deposit pricing, where wholesale funding costs go could also be a headwind.”

“I wouldn't be surprised if there's at least some upward pressure on beta from where we were in the first quarter.”

“if we're updating our assumptions a quarter from now and our economic view changes that will likely change our estimation of the loss content of the portfolio at that time.”

“So, I would say the net of all of those factors is likely to be a modest headwind to NIM.”

“Yes, Betsy, I’ll start with your last question first, which is we are following the forward curve, assuming 50 bps here in the first quarter and holding flat throughout ‘23 before coming down in ‘24.”

“We continue to estimate that our longer term CET1 capital need is around 11%.”

“And then, the other factor that could prove to be a tailwind to potentially offset a little bit of the modest headwind that probably comes from the beta dynamics that I described is we could also see a bit of an increase in card revolve rates from where they are today.”

“I think the terminal beta was around 41. So, I could see a terminal beta being somewhere above that, just given competitive dynamics in the marketplace at this point.”

“Given our recent rate of growth, I think it’s likely we’ll see some growth math effect again over the next few years.”

“The 150 basis point projected moves over the next couple of months are already sort of embedded in that neutral baseline.”

“We continue to estimate that our longer-term CET1 capital need is around 11%.”

“We continue to see opportunities to book accounts and loans that can generate resilient and attractive returns.”

“But clearly, that comes with a funding cost that ultimately will probably leave margin much closer to flat.”

“The headwinds are going to be the deposit costs, not only from the rising deposit betas that I just described, but also wholesale funding costs to the extent that we do more of that and depending on credit spreads in the marketplace.”

“We continue to estimate that our long-term CET1 capital need is around 11%.”

“I think our cumulative beta could be around or slightly above the last rising cycle.”

“Earlier this month, in addition to approving our CCAR 2022 submission and our capital plan, our Board of Directors also approved the authorization of up to an additional $5 billion of common stock repurchases that will be available beginning in the third quarter of this year.”

“And I certainly believe payment rates will remain sort of the flip side of really strong credit. So over time, the normalization of credit plausibly leads to some normalization of higher payment -- of normal, excuse me, a payment rate.”

“we certainly expect consumer credit to gradually normalize, maybe you know it’s kind of been happening a little slower than one might otherwise expect.”

“We continue to estimate that our CET1 capital need is around 11%.”

“But if favorable credit trends continue and the factors driving those qualitative reserve subside, we could see the allowance be down to flat. But if normalization plays out and we are growing at a significant clip, I wouldn’t anticipate that we will see allowance release, in fact, I can see allowance build.”

“Outside of quarterly day count, the NIM from here will largely be a function of the changes in our balance sheet mix, interest rates and the impacts of competition on loan yields and deposit betas.”

“But as that happens, count me is betting that, that driver of payment rates is going to pull the payment rates down.”

“Right now, our outlook assumes relatively swift normalization of losses from today's unusually strong levels.”

“So that's roughly a 15 basis point headwind to NIM, all else equal, but the other effects are really what's going to drive the NIM over the longer term.”

“But modern technology capabilities are the engine that drives revenue growth and digital productivity gains, and the investments we're making today are the drivers of the efficiency improvements that we expect to continue to get over time.”

“The investment imperatives of the marketplace and the rising cost of tech talent will pressure our operating efficiency ratio in the near term, as we have discussed.”

“So I would expect the payment rates to follow, not exactly in lockstep, but I think that, that should follow.”

“But I think that we see the opportunity for loan growth, in addition to the other growth metrics, as good.”

“And we're seeing a little bit of the leading edge of the wage pressures so I would expect that to accelerate a bit, but some of the marked-related items in incentive compensation, some of the project work, will likely fall off.”

“We expect that the striking rise in the cost of modern tech talent, on top of our growth investment, will pressure annual operating efficiency in the near term.”

“We continue to see attractive opportunities to grow our Domestic Card business and our growth opportunities are enhanced by our technology transformation. We continue to lean into marketing to drive growth and build our Domestic Card franchise.”

“We continue to estimate that our CET1 capital need is around 11%.”

“Outside of quarterly day count effects, the NIM from here will largely be a function of the change in card balances, cash and securities levels and interest rates.”

“So you could see cash and securities coming down, which all else equal benefit NIM.”

“If that strength continues, and that's pretty plausible, that would tend to have an upward boost on the payment rate.”

“We are gradually increasing credit lines, nothing too dramatic, but consistent with how we're leaning in, in general. We are increasing credit lines gradually. So that will be another boost on the loan growth side.”

“we are underwriting with the expectation of higher losses in the future.”

“Our journey will need to incorporate the investment imperative of the rapidly changing marketplace, and it is likely to pressure operating efficiency ratio along the way.”

“Looking ahead, we expect a sequential increase in total company marketing in the fourth quarter that's consistent with typical historical pattern.”

“Looking ahead to Q1, we expect the run rate for preferred dividends to decline to approximately $57 million per quarter, barring additional activity.”

“As a result of the full quarter of recent issuances and a partial quarter of the planned redemptions, we expect fourth quarter preferred dividends to remain elevated at around $74 million.”

“So as we look ahead, continued normalization of cash, continued growth in revolving card balances, those are the things that would be tailwinds to NIM, but movements in the other direction, things like sustained higher than normal payment rates or reduction in card yield would be headwinds.”