Yahoo Finance Capital One Financial Corporation (NYSE:COF) Q1 2024 Earnings Call Transcript
Capital One Financial Corporation (NYSE:COF) Q1 2024 Earnings Call Transcript April 25, 2024
Capital One Financial Corporation misses on earnings expectations. Reported EPS is $3.21 EPS, expectations were $3.25. Capital One Financial Corporation isn’t one of the 30 most popular stocks among hedge funds at the end of the third quarter (see the details here).
Operator: Good day, and thank you for standing by. Welcome to the Capital One Q1 2024 Earnings Call. Please be advised that today's conference is being recorded. I would now like to hand the conference over to your speaker today, Jeff Norris, Senior Vice President of Finance. Please go ahead.
Jeff Norris: Thanks very much, Josh, and welcome to everyone. We are webcasting live over the Internet this evening. To access the call on the Internet, please log on to Capital One's website at capitalone.com and follow the links from there. In addition to the press release and financials, we have included a presentation summarizing our first quarter 2024 results. With me this evening are Mr. Richard Fairbank, Capital One's Chairman and Chief Executive Officer, and Mr. Andrew Young, Capital One's Chief Financial Officer. Rich and Andrew are going to walk you through this presentation. To access a copy of the presentation and press release, please go to Capital One's website and click on Investors, then click on Financials, and then click on Quarterly Earnings Release.
Please note that this presentation may contain forward-looking statements. Information regarding Capital One's financial performance and any forward-looking statements contained in today's discussion and the materials speak only as of the particular date or dates indicated in the materials, and Capital One does not undertake any obligation to update or revise any of this information, whether as a result of new information, future events or otherwise. Numerous factors could cause our actual results to differ materially from those described in forward-looking statements. For more information on these factors, please see the section called Forward-Looking Information in the earnings release presentation and the Risk Factors section of our annual and quarterly reports accessible at Capital One's website and filed with the SEC.
And with that, I'll turn the call over to Rich -- to Andrew. Mr. Young?
Andrew Young: Thanks, Jeff, and good afternoon, everyone. I will start on Slide 3 of tonight's presentation. In the first quarter, Capital One earned $1.3 billion or $3.13 per diluted common share. Included in the results for the quarter was a $42 million additional accrual for our updated estimate of the FDIC's special assessment. Net of this adjusting item, first quarter earnings per share were $3.21. Relative to the prior quarter, period-end loans held for investment decreased 2% and period-end deposits increased 1%. Both average loans and average deposits were flat. Our percentage of FDIC insured deposits remained at 82% of total deposits. Pre-provision earnings in the first quarter increased 13% from the fourth quarter or 6% adjusting for the impacts of FDIC special assessments in both quarters.
Revenue in the linked quarter declined 1%, largely driven by lower non-interest income. Non-interest expense decreased 6% on an adjusted basis, driven by declines in both operating and marketing expenses. Our provision for credit losses was $2.7 billion in the quarter, a decrease of $174 million compared to the prior quarter. The decrease was driven by $257 million lower net reserve build, partially offset by an $83 million increase in net charge-offs. Turning to Slide 4, I will cover the allowance in greater detail. We built $91 million in allowance this quarter, bringing the balance to $15.4 billion, an increase of less than 1% from the fourth quarter. The slight increase in allowance balance was driven by modest builds in our auto and domestic card portfolios.
Our total portfolio coverage ratio increased 11 basis points to 4.88%. I'll cover the drivers of the changes in allowance and coverage ratio by segment on Slide 5. Our baseline economic forecast modestly improved this quarter compared to what we assumed last quarter, which generally aligns with consensus. We continue to consider a range of economic outcomes in our reserving process. In our Domestic Card business, the allowance coverage ratio increased by 22 basis points to 7.85%. The increase in coverage was primarily driven by the denominator effect of the run-off of the fourth quarter's seasonal outstandings. In our Consumer Banking segment, the allowance increased by $46 million, resulting in a 7 basis point increase to the coverage ratio.
The allowance increase was primarily driven by a higher level of originations in the auto finance business. And finally, our Commercial Banking allowance decreased by $7 million, primarily driven by portfolio contraction. Coverage ratio increased by 1 basis point to 1.72%. Turning to Page 6, I'll now discuss liquidity. Total liquidity reserves in the quarter increased to $127 billion, about $7 billion higher than last quarter. Our cash position ended the quarter at approximately $51 billion, up about $8 billion from the prior quarter. The increase in cash was driven by continued strong deposit growth in our retail banking business and the seasonality of our card balances. Our average liquidity coverage ratio during the first quarter remains strong and well above regulatory minimums at 164%.
Turning to Page 7, I'll cover our net interest margin. Our first quarter net interest margin was 6.69%, 4 basis points lower than last quarter and 9 basis points higher than the year-ago quarter. The quarter-over-quarter decrease in NIM was largely driven by the impact of having one fewer day in the quarter. Modestly higher asset yields were mostly offset by higher funding costs in the quarter. Turning to Slide 8, I will end by discussing our capital position. Our common equity Tier 1 capital ratio ended the quarter at 13.1%, approximately 20 basis points higher than the prior quarter. Strong earnings and lower risk-weighted assets more than offset the impact of CECL phase-in, dividends and share repurchases. We repurchased approximately $100 million of shares in the first quarter.
Our repurchase activity in the quarter was impacted by blackout restrictions and daily purchase volume limitations related to the announcement of the Discover transaction. With that, I will turn the call over to Rich. Rich?
Richard Fairbank: Thanks, Andrew, and good evening, everyone. Slide 10 shows first quarter results in our Credit Card business. Credit Card segment results are largely a function of our Domestic Card results and trends, which are shown on Slide 11. Top-line growth trends in the Domestic Card business remained strong in the first quarter. Year-over-year purchase volume growth for the first quarter was 6%. Ending loan balances increased $12.9 billion or about 10% year-over-year. Average loans increased 11%. And first quarter revenue was up 12% year-over-year, driven by the growth in purchase volume and loans. The charge-off rate for the quarter was up 190 basis points year-over-year to 5.94%, about 18% above its pre-pandemic level in the first quarter of 2019.
The 30-plus delinquency rate at quarter-end increased 82 basis points from the prior year to 4.48%. On a sequential quarter basis, the charge-off rate was up 59 basis points and the 30-plus delinquency rate was down 13 basis points. The linked-quarter delinquency and charge-off rate trends were modestly worse than what we would expect from normal seasonality. We believe this is largely driven by lower and later tax refund payments to consumers so far in 2024 relative to what we've historically observed. Tax refunds are an important factor in credit seasonality. Each year they drive an improvement in delinquency payments and recovery starting in February. Our portfolio trend generally have a more pronounced seasonal pattern than the industry average.
Last quarter, our view was that the charge-off rate was settling out about 15% above 2019 levels in the near term. That was based on an extrapolation of our delinquency inventory and flow rates over three to six months, and that was the horizon of our estimate. If the trend of lower tax refund 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. The continuing deceleration in the pace of credit normalization trend, sometimes referred to as the improving second derivative, supports our view. The pace of year-over-year increases in both the charge-off rate and the delinquency rate have been steadily declining for several quarters and continued to shrink in the first quarter.
Domestic Card non-interest expense was up 6% compared to the first quarter of 2023, with increases in both operating expense and marketing expense. Total company marketing expense of about $1 billion for the quarter was up 13% year-over-year. Total company marketing drives growth and builds franchise in our Domestic Card and Consumer Banking businesses and builds and leverages the value of our brand. Our choices in Domestic Card are the biggest driver of total company marketing. We continue to see attractive growth opportunities in our Domestic Card business. Our opportunities are enhanced by our technology transformation. Our marketing continues to deliver strong new account growth across the Domestic Card business. And in the first quarter, Domestic Card marketing also included higher early spend bonuses driven by strong new account growth, higher media spend, and increased marketing for franchise enhancements like our travel portal, airport lounges, and Capital One shopping.
We continue to lean into marketing to drive resilient growth and enhance our Domestic Card franchise. As always, we're keeping a close eye on competitor actions and potential marketplace risks. Slide 12 shows first quarter results for our Consumer Banking business. In the first quarter, auto originations increased 21% from the prior-year quarter, a return to growth after several quarters of year-over-year declines. Consumer Banking ending loans decreased about $3.1 billion, or 4% year-over-year. On a linked-quarter basis, ending loans were essentially flat. We posted another quarter of year-over-year growth in consumer deposits. First quarter ending deposits in the consumer bank were up just under $10 billion or 3% year-over-year. Compared to the sequential quarter, ending deposits were up about 2%.
Average deposits were up 6% year-over-year and up 1% from the sequential quarter. Powered by our modern technology and leading digital capabilities, our digital-first national direct banking strategy continues to deliver strong consumer deposit growth. Consumer Banking revenue for the quarter was down about 13% year-over-year, largely driven by lower auto loan balances and higher deposit costs. Non-interest expense was down about 3% compared to the first quarter of 2023. Lower operating expenses were partially offset by an increase in marketing to support our national digital bank. The auto charge-off rate for the quarter was 1.99%, up 46 basis points year-over-year. The 30-plus delinquency rate was 5.28%, up 28 basis points year-over-year.
Compared to the linked quarter, the charge-off rate was down 20 basis points, while the 30-plus delinquency rate was down 106 basis points. The linked-quarter charge-off rate improvement modestly underperformed the typical seasonal patterns we've historically observed, driven by the tax refund trends I just discussed. Even with the tax refund effects, auto credit performance remained strong. Slide 13 shows first quarter results for our Commercial Banking business. Compared to the linked quarter, ending loan balances decreased about 1%. Average loans were also down about 1%. The modest declines are largely the result of choices we made in 2023 to tighten credit. Ending deposits were down about 5% from the linked quarter. Average deposits were down about 8%.
The declines are largely driven by our continued choices to manage down selected, less attractive commercial deposit balances. First quarter revenue was up 2% from the linked quarter. Non-interest expense was up about 6%. The Commercial Banking annualized net charge-off rate for the first quarter decreased 40 basis points from the sequential quarter to 0.13%. The Commercial Banking criticized performing loan rate was 8.39%, down 42 basis points compared to the linked quarter. The criticized non-performing loan rate increased 44 basis points to 1.28%. Commercial credit risks continue to be most pronounced in the commercial office portfolio, which is less than 1% of total company loan balances. In closing, we continued to deliver strong results in the first quarter.
We posted another quarter of top-line growth in Domestic Card revenue, purchase volume and loans. Domestic Card credit trend continue to stabilize and auto credit trends remained stable and in line with normal seasonal pattern. We grew consumer deposits, and we added liquidity and maintained capital to further strengthen our already strong and resilient balance sheet. Over the last decade, we've driven significant operating efficiency improvement, even as we've invested to transform our technology, and we continue to drive for efficiency improvement over time. 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. Our expectation includes the partial year impact of the proposed CFPB late fee rule assuming the rule takes effect in October 2024.
The timing of the new rule remains uncertain. If the rule were to take effect at an earlier date, it would be a headwind to the 2024 operating efficiency ratio. Of course, the biggest news in the quarter was our announcement that we entered into a definitive agreement to acquire Discover. We've submitted our applications for regulatory approval and we're fully mobilized to plan and deliver a successful integration. The combination of Capital One and Discover creates game-changing strategic opportunities. The Discover payments network positions Capital One as a more diversified, vertically-integrated global payments platform. And adding Capital One's debit spending and a growing portion of our credit card purchase volume to the Discover network will add significant scale, increasing the network's value to merchants, small businesses, and consumers, and driving enhanced network growth.
In the Credit Card business, we're bringing together two proven franchises with complementary strategies and a shared focus on the customer. And we can accelerate the growth of our national digital-first Consumer Banking business by adding the Discover consumer deposit franchise and the vertical integration benefits of the debit network. We will be able to leverage and scale the benefits of our 11-year technology transformation across every business and the network, which will serve as a catalyst for innovation and enhanced capabilities in risk management and compliance, underwriting, marketing, and customer service. Pulling way up, the acquisition of Discover is a singular opportunity. It will create a consumer banking and global payments platform with unique capabilities, modern technology, powerful brands, and a franchise of more than 100 million customers.
It delivers compelling financial results, and it offers the potential to create significant value for merchants and customers, and an unparalleled strategic and economic upside over the long term. And now, we'll be happy to answer your questions. Jeff?
Jeff Norris: Thank you, Rich. We'll now start the Q&A session. Remember, as a courtesy to other investors and analysts who may wish to ask a question, please limit yourself to one question plus a single follow-up. And if you have follow-up questions after the Q&A session, the Investor Relations team will be available after the call. Josh, please start the Q&A.
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