Capital One Financial Corporation (COF) Q3 2021 Earnings Report, Transcript and Summary

Good day, ladies and gentlemen. Welcome to the Capital One Third Quarter 2021 Earnings Conference Call. [Operator Instructions] I would now like to turn the call over to Mr. Jeff Norris, Senior Vice President of Finance. Sir, you may begin.

Thanks very much, Keith, and welcome, everybody, to Capital One's Third Quarter 2021 Earnings Conference Call. As usual, we are webcasting live over the Internet. 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 the financials, we have included a presentation summarizing our third quarter 2021 results. With me today 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 will walk you through this presentation. To access a copy of the presentation and press release, please go to Capital One's website, click on Investors and 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. 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 the actual results to differ materially from those described in forward-looking statements. For more information on these factors, please see the section titled Forward-Looking Information in the earnings release presentation and the Risk Factors section in our annual and quarterly reports accessible at Capital One's website and filed with the SEC. Now I'll turn the call over to Mr. Young. Andrew?

Thanks, Jeff, and good afternoon, everyone. I'll start on Slide 3 of tonight's presentation. In the third quarter, Capital One earned $3.1 billion or $6.78 per diluted common share. Included in our results for the quarter was a $45 million legal reserve build. Net of this adjusting item, earnings per share in the quarter were $6.86. On a GAAP basis, pre-provision earnings were $3.6 billion, an increase of 7% relative to a quarter ago. Period-end loans held for investment grew $11.8 billion or 5% as we had strong loan growth across all of our businesses. Recall that we moved $4.1 billion of loans to be held for sale late in the second quarter so average loans in the third quarter grew more modestly at 3%. Revenue increased 6% in the linked quarter, largely driven by the loan growth I just described, coupled with margin expansion in our Card business. Operating expenses grew 3% in the quarter, with total noninterest expense increasing 6%. In addition to strong pre-provision earnings, the P&L was aided by a provision benefit in the quarter as record low charge-offs were more than offset by an allowance release. Turning to Slide 4. I will cover the changes in our allowance in greater detail. We released $770 million of allowance in the third quarter as the effects of continued actual strong credit performance and a reduction in qualitative factors drove a decline in allowance balance, which was partially offset by loan growth in the quarter. Turning to Slide 5. You can see our allowance coverage ratios continue to decline across all of our segments, driven by the factors I just described. Turning to Page 6. I'll now discuss liquidity. You can see our preliminary average liquidity coverage ratio during the third quarter was 143%. The LCR remained stable and continues to be well above the 100% regulatory requirement. Our liquidity reserves from cash, securities and Federal Home Loan Bank capacity ended the quarter at approximately $124 billion, down $13 billion from the prior quarter as we continue to run off excess liquidity built during the pandemic. The 9% decline in total liquidity was driven by a modest reduction in the size of our investment portfolio and $8 billion in lower ending cash balances, which were used to fund loan growth and share repurchases. The decline in cash balances had an impact on our NIM, which I will discuss in more detail on Page 7. You can see that our third quarter net interest margin was 6.35%, 46 basis points higher than Q2 and 67 basis points higher than the year ago quarter. The linked quarter increase in NIM was largely driven by 4 factors. First, the decline in average cash balances I just described; second, margin expansion in our Domestic Card business; third, loan growth in our Domestic Card business; and lastly, the benefit of one additional day in the quarter. Turning to Slide 8. I will end by covering our capital position. Our common equity Tier 1 capital ratio was 13.8% at the end of the third quarter, down 70 basis points from the prior quarter. Net income in the quarter was more than offset by an increase in risk-weighted assets and share repurchases. We repurchased $2.7 billion of common stock in the third quarter and have approximately $2.6 billion remaining of our current board authorization of $7.5 billion. At the beginning of the third quarter, we began operating under the Federal Reserve's stress capital buffer framework, resulting in a minimum CET1 capital requirement of 7% as of October 1. And however, based on our internal modeling, we continue to estimate that our CET1 capital need is around 11%. Before I turn the call over to Rich, let me describe a few items related to our preferred stock. On October 18, we announced our intention to redeem our outstanding preferred stock Series G and Series H in early December. 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. Looking ahead to Q1, we expect the run rate for preferred dividends to decline to approximately $57 million per quarter, barring additional activity. With that, I will turn the call over to Rich. Rich?

Thanks, Andrew. I'll begin on Slide 10 with our Credit Card business. Strong year-over-year purchase volume growth and strong revenue margin drove an increase in revenue compared to the third quarter of 2020 and provision for credit losses improved significantly. Credit Card segment results are largely a function of our domestic card results and trends, which are shown on Slide 11. As you can see on Slide 11, third quarter Domestic Card revenue grew 14% year-over-year. Purchase volume for the third quarter was up 28% year-over-year and up 27% compared to the third quarter of 2019. And the rebound in loan growth continued with ending loan balances up $3.7 billion or about 4% year-over-year. Ending loans also grew 4% from the sequential quarter ahead of typical seasonal growth of around 1%. Ending loan growth was the result of strong growth in purchase volume as well as the traction we're getting with new account originations and line increases, partially offset by continued high payment rates. Payment rates leveled off in the third quarter, but remain near historic highs. The flip side of high payment rates is strong credit and credit results remain strikingly strong. The Domestic Card charge-off rate for the quarter was 1.36%, a 228 basis point improvement year-over-year. The 30-plus delinquency rate at quarter end was 1.93%, a 28 basis points improvement over the prior year. The pace of year-over-year improvement is slowing, particularly for the delinquency rate. Domestic Card revenue margin was up 218 basis points year-over-year to 18.4%. Two factors drove most of the increase. Revenue margin benefited from spend velocity, which is purchase volume growth and net interchange outpacing loan growth and favorable current credit performance enabled us to recognize a higher proportion of finance charges and fees in third quarter revenue as well. This credit-driven revenue impact generally tracks Domestic Card credit trends. Total company marketing expense was $751 million in the quarter, including marketing in card, auto and retail banking. Our choices in card marketing are the biggest driver of total company marketing trends. We continue to see attractive opportunities to grow our Domestic Card business. Our loan -- well, our growth opportunities are enhanced by our technology transformation. Turning opportunities into actual growth requires investment. And once again, we're leaning further into marketing to drive growth and to build our franchise. At the same time, we're keeping a watchful eye on the competitive environment, which is intensifying. Looking ahead, we expect a sequential increase in total company marketing in the fourth quarter that's consistent with typical historical pattern. Pulling up, our Domestic Card business continues to deliver significant value as we invest to build our franchise. Slide 12 summarizes third quarter results for our Consumer Banking business. Consistent auto growth and strong auto credit are the main themes in the third quarter Consumer Banking results. Our digital capabilities and deep dealer relationship strategy continue to drive strong growth in our auto business. Driven by auto, third quarter ending loans increased 12% year-over-year in the Consumer Banking business. Average loans also grew 12%. Auto originations were up 29% year-over-year. On a linked quarter basis, auto originations were down 11% from the exceptionally high level in the second quarter. As we discussed last quarter, pent-up demand and high auto prices had driven a second quarter surge in originations across the auto marketplace. Third quarter ending deposits in the consumer bank were up $2.7 billion or 1% year-over-year. Average deposits were also up 1% year-over-year. Consumer Banking revenue increased 14% from the prior year quarter, driven by growth in auto loans. Third quarter provision for credit losses improved by $48 million year-over-year, driven by an allowance release in our auto business. Credit results in our auto business remained strong. Year-over-year, the third quarter charge-off rate improved 5 basis points to 0.18% and the delinquency rate improved 11 basis points to 3.65%. Looking at sequential quarter trends, the charge-off rate increase from the unprecedented negative charge-off rate in the second quarter and the 30-plus delinquency rate was up 39 basis points from the second quarter, consistent with historical seasonal pattern. Moving to Slide 13, I'll discuss our Commercial Banking business. Third quarter ending loan balances were up 4% year-over-year, driven by growth in selected industry specialties. Average loans were down 2%. Ending deposits grew 18% from the third quarter of 2020, as middle market and government customers continue to hold elevated levels of liquidity. Quarterly average deposits also increased 18% year-over-year. Third quarter revenue was up 17% from the prior year quarter and 23% from the linked quarter. Recall that revenue in the second quarter was unusually low due to the impact of moving $1.5 billion of commercial real estate loans to held for sale. Commercial credit performance remained strong. In the third quarter, the commercial banking annualized charge-off rate was 5 basis points. The criticized performing loan rate was 6.9% and the criticized nonperforming loan rate was 0.8%. Our Commercial Banking business is delivering solid performance as we continue to build our commercial capabilities. I'll close tonight with some thoughts on our results and our strategic positioning. In the third quarter, we drove strong growth in Domestic Card revenue, purchase volume and new accounts. And loan growth is picking up. Credit remains strikingly strong across our businesses, and we continue to return capital to our shareholders. In the marketplace, the pandemic has clearly accelerated digital adoption. The game is changing from new and permanent shifts in virtual and hybrid work to more digital product and exceptional customer experiences to new fintech innovation and business model. The common thread throughout all of this is technology and the stakes are rising faster than ever before. Competitors are embracing the realization that technology capabilities may be an existential issue. The investment flowing into fintech is breathtaking and it's growing. We can see investors voting with their feet in stunning fintech valuation. And the war for tech talent continues to escalate, which will drive up tech labor costs even before any headcount increases. All these developments underscore the size of the opportunity for players who lead the way in transforming how banking works. And Capital One is very well positioned to do just that. We are in the ninth year of our technology transformation from the bottom of the tech stack up. We were in original fintech, and we have built modern technology capabilities at scale. But what is also clear in the marketplace is that the time frames for investment and innovation are compressing. The imperative to invest is now. We have been on a long journey to drive down operating efficiency ratio powered by revenue growth and digital productivity gains. 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. Pulling way up, we're living through an extraordinary time of accelerating digital change. Our modern technology stack is powering our performance and our opportunity. It's setting us up to capitalize on the accelerating digital revolution in banking and it's the engine that drives enduring value creation over the long term. And now we'll be happy to answer your questions. Jeff?

Thank you, Rich. We'll now start the Q&A session. [Operator Instructions] If you have any follow-up questions after the Q&A session, the Investor Relations team will be available after the call. Keith, please start the Q&A.

[Operator Instructions] We'll take our first question from Ryan Nash with Goldman Sachs.

So Rich, you talked about competition across the industry has intensified, you noted in both traditional players and fintechs. And yet, it seems like your strategy is working as evidenced by the better-than-peer growth metrics and credit. So I was just wondering, can you maybe just talk about the competitive environment you're seeing out there? How does it compare to maybe the middle part of the last decade? Where we saw competition accelerate? And where do you think it goes from here? And then I guess, maybe wrap that in with what does it mean for growth for the company? And I have 1 follow-up question.

Okay. Ryan, great question. So what -- there's -- let me really talk about the card competition that's probably the heart of your questions here, but we can also expand on that. But in Domestic -- in the Card business, competition has definitely intensified, especially in rewards. Marketing and media activity are I would say, approaching pre-pandemic levels and competitors continue to lean into marketing and originations. Direct mail is back to 2019 levels. Originations have also recovered across the industry and are above pre-pandemic levels. The pricing continues to be mostly stable. Our rewards offerings have become richer, and we continue to watch that very closely. We saw some modest increases in upfront bonuses, mainly in the form of limited time offers and in travel as demand returns. Our rewards earned rates have also increased with some of the new product structures introduced recently, particularly in the cashback space. And of course, there's also a lot of increasing activity with fintechs, such as buy-now-pay-later, installment lending, and we talked about the breathtaking levels of investment by venture capital into that industry. So -- and by the way, all of this is incredibly natural how a market should be reacting. If we didn't see everything that I just described to you, I would wonder if I woke up in the wrong place. This is incredibly natural. But in the context of this increased competition, we continue to see good opportunities for growth, which are enhanced by our tech transformation. And we're keeping a close eye on competition, looking for adverse selection that may come as a result of that. And we are underwriting with the expectation of higher losses in the future. Now you asked for a comparison, Ryan, about how does this compare with the last decade. Certainly, in the middle of the last decade, competition in the credit card space really started picking up. But -- and some of the descriptors I would use here, I would use there in the sense that more spending on marketing and originations being kind of robust for the industry. Back then, we saw a bunch of things that we really don't see now, but we'll have to keep it out and eye out for that. What we saw back then is very aggressive behavior in ways that was more than just marketing. It really was in the form of looser underwriting. And in practices, some consumer practices that we did not feel were fully in the customer's interest. So there were a lot of things to react to in that marketplace. And if you look back Capital One's loan growth kind of slowed in the card business as we moderated in the face of what we thought was competition that was over the top and that was going to not only make it more costly to originate, but much more importantly, could impact the quality of -- the credit quality of what is being booked. So we do not feel right now that we're at a time like that, we have to be on the lookout for natural things that happens as competitors continue to heed up their efforts to grow. But I think we're in a pretty good period, Ryan, right now in the marketplace. And for Capital One, as indicated by my comment about marketing, we see good opportunities. We're leaning into that. And we have our having learned over the years and seen a lot of things, Ryan, we're going to have our eye out for things that we think are over the top.

And if I can just ask one quick follow-up. I know credit is as good as it's ever been. And I know you don't have a crystal ball, but yours is probably better than mine. So I was wondering that given that this downturn has been like no other, how are you thinking about the trajectory of credit over an intermediate time frame? Do you think we could run well below normal for an extended period of time? Or do you think there is the risk of fast normalization as the industry has become more concerned about?

Well, I think we are, Ryan, certainly in a pretty extraordinary -- well, not even pretty extraordinary. We're in an extraordinary place from a credit point of view, and I'm speaking of the industry, and obviously, Capital One as well. And not only for our Credit Card business, but also really across the board at Capital One. So as we think about where it could go from here, let's think a little bit about what's driving where it is. So obviously, the high level of consumer support through the government stimulus has been a factor. Although that's mostly in the rearview mirror, there's some lingering benefits in terms of the consumer balance sheet that come from that. But this will be a good time to watch how credit performs in the -- basically in the absence of that. We've also had widespread industry forbearance and consumers themselves have behave very rationally through this period of uncertainty, generally saving more spending less and paying down debt. And then on top of that, we've seen strong labor markets so far this year with very high demand for workers, solid wage growth, which should support consumers as government stimulates stimulus expires. So where does everything go from here? It feels inevitable that losses will increase from the exceptionally low levels of the past year and of where we are. But I think the timing -- it's much easier to have conviction about what will happen and the timing of that. We're looking for signs of normalization, card delinquencies ticked up modestly in August and September. Although this is the time of year when we tend to see seasonal increases in delinquencies. So we -- this is just a -- I think this is a very strong time. And the I think most companies are enjoying the strength that most banks enjoying the strength that they have. I think they're leaning into their opportunities. And for Capital One, I think our opportunities are particularly good because of the technology that we -- the shoulders that we stand on. But with a watchful eye for normalization that will absolutely inevitably happen. And by the way, when it happens, that's normal. That's not necessarily alarming at all. It would be surprising if it didn't happen, but we'll just watch out for the extremes of behavior and in the meantime, lean into our opportunities.

We'll take our next question from Moshe Orenbuch with Credit Suisse.

Great. Rich, you talked a lot about the competitive dynamic in the credit card industry and talked about some steps you're taking from an underwriting standpoint to kind of make up for that. Could you talk a little bit about how you think about the ability to expand credit lines for your customers? Because that's always been a big factor in terms of generating kind of ongoing loan growth and strong spreads. I do have a follow-up question.

Yes. So Moshe, we are -- as you know, we talked about continuing our originations going in prior years, sometimes while we were holding back on line with the caution about the environment that we were in. And we talked about the coiled spring that, that represents. And so we always take the philosophy of trying to continue to build the underlying franchise and then expand the lines as we see validation about the strength of the marketplace and the strength of the individual customers. And 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.

Got you. And just as a follow-up, you talked about the potential for pressure on the efficiency ratio. I mean, you've had some pretty strong revenue growth. Could you talk about -- I mean, obviously, one would think that, that kind of helps from the standpoint of being able to fund the investment. Could you talk about what factors would drive periods of time where that efficiency ratio would be pressured versus times would be improving?

Yes. Well, look, revenue growth is the best friend of efficiency ratio, as you point out, Moshe. And our philosophy, I think some companies sort of drive -- try to drive a very sustained efficiency ratio improvement by just squeezing cost out and we're certainly trying to drive a lot of efficiencies from technology. But our philosophy is certainly that leaning into investing in technology and in growth opportunities can be an engine for revenue growth, and that, combined with digital efficiencies can help drive a sustained long-term improvement in efficiency ratio. And of course, we've enjoyed something like a 400 basis point improvement in efficiency ratio from 2013 to 2019 when the pandemic kind of interrupted our process. The reason I pointed out the -- my comment about efficiency ratio a few minutes ago was pointing out some of the pressures on the cost side that really come from the sweeping digital change that's transforming the marketplace and the compressed time frame for investment and innovation. And -- so new and traditional competitors embracing the need to invest in technology, the arms race for tech talent is fierce. And in fact, it's the biggest talent arms race that I've seen in my 3 decades of building Capital One. And that Moshe, that's a disappointing one because that raises the tied level of tech costs without generating in a sense, any benefits directly from that. And just talking about the fintechs for a minute. Here's some striking data. Investments in fintechs through the first 3 quarters of this year has been more than $90 billion or on an annualized basis, of course, that's $120 billion, and that's more than double last year's total. And I mean those are just breathtaking investment numbers. And that's a huge assault on our industry from a kind of a defensive point of view as we react to that. But also, I look at this and say, that's a clear indication that banking is ripe for transformation, which we have believed for many, many years. So this all shows up in the need to invest both in technology itself and in leading digital products to gain competitive advantage and the clock is ticking. So we're in a strong position to take advantage of the opportunities in the marketplace, and we have invested for years to build a modern tech stack. We have a deep heritage in big data and analytics. And we have a large customer franchise and a national brand. So I really like our positioning and our chances, but we do have to invest to capitalize on the opportunity. So Moshe, the pulling way up -- the pressures come really from 2 things, which both derived from one thing, which is the rapidly changing marketplace. So you've got the cost pressure in terms of tech wages and the compressing time frames for innovation across the industry. And we just wanted to share that with investors and that we are leaning in to capitalize on this opportunity. And all other things being equal, that pressures' efficiency ratio. Of course, when you pull way up everything I just talked about, maybe not so much the tech labor cost. But the investment imperative is in service of the same longer-term objectives, enhancing growth, building a franchise and very importantly, driving greater efficiency.

We'll take our next question from Betsy Graseck with Morgan Stanley.

Rich, I wanted to understand in the spend numbers that you generated in the quarter. Just wanted to get a sense as to what you're seeing in terms of where there's been change at the margin? Has this spend been accelerating in any specific type of customer, maybe the higher end or the starter routers. And then the degree to which you think that's sustainable here going forward, what are you sensing in terms of spend trajectory from here? And then I have a follow-up. Could you hear me, okay?

Betsy, this is Andrew. I can hear you, but we had Rich on mute for a second.

I was on mute, sorry. Let me start over, Betsy. Great, It was so eloquent. I can't repeat what I said now. But the spend growth is really an across-the-board thing from mass market customers to the heavy spenders that we have in our portfolio. And virtually every spend category is up, and it's up over -- it's up over last year. It's up over 2 years ago. The only laggard versus 2 years ago -- I shouldn't say laggard. Basically, the travel and entertainment category has kind of caught up with where it was 2 years ago. But given that you saw our overall purchase volume numbers are up 27% compared to 2019. It just kind of shows you how much -- pretty much all the rest of the categories are surging ahead. So that's partly a comment on the marketplace. And it's also partly a comment about Capital One and our -- the traction that we're getting in spend across our business. Obviously, you can see from our marketing and from our products, and we've spent years investing in building a spender franchise. And we -- the numbers that we've been posting are indicative of a lot of traction there. Now I'm going to -- I'm not going to give guidance on where it's going to go from here. I think it's got good momentum. But also, I think consumers have been sort of making up for lost time. And I think as they break out being so cooped up in the pandemic, the spend levels have been up. And we'll see where things go from here, but we certainly carry quite a bit of momentum into the marketplace. And the purchase volume success ends up being -- giving a boost to the outstanding growth of Capital One, which, of course, like all the banks is still being constrained somewhat by the high payment rates. But we were really happy to see that even the outstanding growth is -- the needle started to move there in the quarter.

Got it. Okay. That's helpful. Just the other follow-up question I had has to do with how you think about not only the cost per account, but the value of that account and how long it takes for that account to become at run rate? I asked because you mentioned earlier how the competition is quite hot. So you might -- someone might come away from this call thinking, okay, cost to acquire account is up, but then the value of that account getting to full run rate levels, how do you feel about that in this environment versus what you've seen in the past? Is that something that takes a 12- to 18-month time frame or given where we are with the job growth inflation pick up all that, is it possible that there's a longer tail on the value of the accounts that you're generating today?

So the time to pay back for any of the originations we do, obviously, is dependent on the particular segment. But we've been investing for years and not just spending money on marketing, but spending money on building the franchise of Capital One. And the building a brand, creating the really exceptional technology that powers the products that we have with customers, creating exceptional customer experiences. And I think what we are seeing is the continued benefit of our investment in the franchise. Now we talked about leaning into marketing, which we have been doing and -- as I said, we're continuing to do that. We see good opportunities in the places we've been investing for years. And while there is increasing competition, we continue to see a good origination traction and a cost per account originated that is very reasonable for us by our historical standards. And we really like everything we see about the early performance of the things that we're booking. So that would suggest, let's see that the value of these accounts should be strong. And so given all of this, we see opportunity to continue as we've been going and keep a close eye on things that may change in the marketplace one segment at a time. But for right now, we think the opportunities are good and the return on the growing investment that we have had is good.

We'll take our next question from Rick Shane with JPMorgan.

Rich, look, you've been very clear about the opportunity, generally speaking, in terms of technology. When we think about technology, I think there are probably 4 places or 4 opportunities. It's product, it's customer experience, it's back office, and it's potentially underwriting and adding value there. I'm curious, when you think about those 4 factors or those 4 elements, where you see the biggest opportunity to enhance return? And are you seeing misuse of technology and people driving bad decisions or bad outcomes on any of these factors?

So hello, Rick. And all the areas that you mentioned are opportunity areas. I think that the list is even more expansive than what you have, but I certainly agree with the 4 because I'm looking at products, customer experience, back office and underwriting. And I -- let me just kind of think through some of the real opportunity areas for us. And importantly, what I want to say is and what I'm going to talk about here stands on the shoulders of our modern tech stack and we're working to build breakthrough capabilities and solutions. For example, our new marketing platforms leverage big data streaming in real time to reach more customers with the right offers and driving to improve and optimize conversion rates. Our new credit decisioning platforms enable us to use way more data and more sophisticated machine learning algorithms to make better credit decisions. our new fraud platform enables us to approve more transactions for our customers while simultaneously reducing fraud costs. And just let me pause on fraud for a second because one thinks that while investing in fraud is really important, of course, to getting fraud cost down because fraud costs have continued to sort of rise in the industry. But it's also the opportunity -- having breakthroughs in the management of fraud creates an opportunity on the customer experience side and the business opportunities we have. I'll give you 2 examples. One is in credit cards for very heavy spenders, where the card always works is an incredibly important battle cry in -- at the top of the marketplace. And so the spillover benefits there are significant and also in building a national digital bank. So if a bank just goes out there and hang out a shingle and say come on in and have folks sign up for digital bank accounts. It turns out while fraud rates in the branches or people -- if they want to commit fraud, they don't typically walk into a branch to commit account opening fraud. But it's very easy to do that online. So what we have found is that our heavy investment in fraud has been instrumental to our national banking strategy that you see featured on TV and the ability to really, on a mass basis, open up accounts nationwide and be comfortable with respect to the fraud cost. So the -- so we've been talking about some of the risk management side. Let me also say just another key area, not really directly on your list, but sort of risk management beyond just underwriting or fraud is, as you know, just banks, the business. Risk management is the business. And the ability to automate risk management process is the ability to move to a 100% monitoring all the time in real time of things that were otherwise just sampled. There's just a lot of benefits that come from transforming how we work. Then to your customer experience category, we're building growing franchises in addition to the core card business and enhancing the experiences of our flagship cards. We're growing franchises with innovative products like Capital One Shopping and Credit Wise. In the auto business, we're delivering innovative products like Auto Navigator, which offers real-time underwriting of any car on any lot in America in a fraction of the second and enables customers to know in advance what their financing terms will be on any car before they visit the dealership. And that was a little word-of-mouth thing until we put it on national TV in the last few months. I'm sure you've seen the ad. We're strengthening our brand and customer franchise, evidenced by high Net Promoter Scores and J.D. Power naming Capital One, the leading mobile banking app. I turn to the card partnership business. We're winning card partnership opportunities where increasingly, retailers are focusing on digital capabilities as like a preemptively important part of the conversation. We're partnering with tech leaders like Snowflake, where we are their largest customer. And in addition to getting valuable early investment stake in them, we've been able to leverage the world's leading data management platform for our own innovation. On the operating side, we're steadily working to automate our operating processes, enabling us to reduce risk and to reduce cost. Then there's the tech-on-tech savings, our investments in modern technology are enabling us to reduce legacy tech costs and legacy vendor costs. So again, even as we invest more in modern tech, we're really powered by some of the benefits of reducing legacy tech costs. Digital productivity gains are powering speed to market and revenue generation. And with all these growing opportunities, we're enjoying the virtuous cycle of attracting more and better tech talent, which in turn accelerates our progress. So even sort of beyond your list of 4, which is a great list, our technology transformation is changing the trajectory of Capital One in driving growth, improving efficiency, strengthening risk management, enhancing the brand and improving our status as a leading destination for great talent. And so we like very much the position that we're in here. as I've said, time frames are compressing in the industry, and we want to make sure that we capitalize on those opportunities. Thanks for your question, Rick.

We'll take our next Bill Carcache with Wolfe Research.

Rich, I wanted to ask specifically about your high-spending transactor business. Are you seeing evidence of the larger banks demonstrate demonstrating a willingness to go underwater on credit card rewards with the hope of driving engagement and winning business in other areas like wealth management and mortgage. And if so, how do you see these dynamics playing out across the industry in general and Capital One in particular?

So the competition in rewards is certainly very intense. We see it in the marketing levels, everybody's stepping up for more of that. The product structures and the overall rewards levels continue to be fairly aggressive. And you can see banks out there refreshing products in the market recently with enhanced rewards. And not only in the cash back space but also to your point, at the very top of the market, including with the high fee rewards card. So I have not -- look, I think we all live on pretty thin margins in transaction margins in this business really because of what's happening and it's great for consumers. The leading banks have past so many benefits on the consumers. But what I -- I would be surprised if our biggest competitors at the top of the market are losing money on every transaction and trying to make it up with volume elsewhere in their franchise. Now there may be selected examples of that. But I think what the leading players and this is certainly what we've been doing at Capital One, we have invested for years in brand and digital capabilities, customer experience, the servicing side of things, the card always works side of things to where one doesn't have to compete solely on the basis of rewards, important though that is, I think, really for the top players, I think this is really, at the end of the day about building a franchise, a sustainable franchise. And I certainly, from everything I see, feel that, that's what we have here at Capital One. And I think a small number of players are particularly investing -- years of investing to get that position. And I think all of us are well served by what we have.

We'll take our next question from John Pancari with Evercore.

Just on the expense side, I know you indicated on the marketing side, you expect a sequential quarter increase in the fourth quarter, consistent with the historical trends. If you look at it, going back, you're seeing anywhere between $100 million to $300 million linked quarter increase in the fourth quarter in marketing costs. So just wanted to try to get an idea if you can maybe help us size that up. And then one separate thing on the expense side. The efficiency ratio longer-term implication of the IT investment. Just wondering if there's any way to think about what that could interpret into in terms of an impact on the ratio on that operating ratio.

John, I'll take the first question and then pass it over to Rich for the second one. As you note, in the fourth quarter, we typically have seasonal increase just due to volumes and a number of -- I think you used the term sundry items. And Rich has talked about the investment that we are making on the technology side and compensation. So I would think that not giving any sort of explicit guidance, but I think if you look at history as your guide, there's a lot in there that kind of would suggest where we might be going in the near term. And Rich talked about the investments over time and how that's going to play into the number of factors across the P&L in terms of revenue growth in fraud and many other things that are playing down through there. So that's how I would think about the short to medium term. And I'll turn it over to Rich to answer your second question.

Yes. So John, we declared years ago that through the tech transformation that we were driving, which along the way was going to cost more to drive that, that over time this transformation and the extra growth that we could get in the marketplace could -- that would put us in a good position to drive operating efficiency over the longer term and that, that would be an important part of the investor value proposition for Capital One. And we've already -- seeing some significant improvements in operating efficiency. I talked about the pressures that come from rising tech labor costs and the imperative to invest. But while, again, the rising labor costs sort of by themselves don't really generate a lot of value, they cost money. The things we're talking about here of leaning into investment opportunities are the very things that are part of our original strategic philosophy about driving operating efficiency. That's the way that we drive more growth over time. The way that we drive more digital productivity gains will be to continue leaning into our tech transformation and the investment at the top of the tech stack for the -- in the growth opportunities that can help power that. So we are still all in on the quest, the efficiency ratio quest. And the kind of destinations that we have talked about, we need to incorporate the investment imperative that we have along the way.

And then on the credit front, on delinquency trends, just wanted to see if you can talk a little bit about if you're seeing any changes in the lower FICO bands in terms of delinquency trends. We've been seeing that at a couple of other players that they're seeing some pressure on the lower FICO and non-prime areas? Are you seeing anything there, any evidence of upside pressure that would not be otherwise seasonally evident?

Yes, John, I think that most of what we see tends to be more in the range of normal. But I would be the first to argue that subprime customers have certainly had a number of benefits in the marketplace that, that over time will and are going away. So it would be a natural thing. Normalization is a very natural thing across the board. It would certainly be a natural thing there. We watch all these trends carefully. What we've seen in both card and auto would really be in the category of both seasonal and normal. But I wouldn't draw any big extrapolations from that, just more of an observation of what we see at this point.

We'll take our next question from Sanjay Sakhrani with KBW.

I guess I have 1 big picture question for Rich. Obviously, a big topic in the fintech world is embedded banking and how big tech companies might be the central hub for consumers rather than what currently might be the bank app? I know you're making sizable investments to compete, but do you think there's inevitability that behavior shift towards these aggregators?

So Sanjay, look, that is a really great question. And one that for many, many years, we have been -- we put a -- we have put your strategic question, kind of front and center in our own thinking for years. So ever since you could watch, of course, in China and the incredible way that inside tech apps, one's whole life, including financial life gets embedded in there. That's the most extreme example of the front end of banking really being taken over by a tech company. And the risk, of course, as one looks at the marketplace, to your point, is the front end of banking being taken over by tech companies and banks being the utilities quietly behind the scenes of that. And that has been central on our radar screen from for many years. And we have seen -- and I think that there continues to be momentum in both camps. So in terms of the tech companies being the front end of banking, we see increasing traction in aggregation and many, many types of aggregation, not just people coming to go get a budgeting app kind of thing. We see that one-off aggregation for particular things and a whole variety of things in consumers' life. But between the incredible scale that tech companies have in terms of customers, the incredible engagement they have and now the increasing traction in aggregation that is something that all of us need to really be staring at. And I think there is, in a sense, kind of a great race going on between that model and the model of a bank being the go-to place, not only for the back end of banking, but really for the front end of banking where one can manage one's financial life through the technology of a customer's bank. And that's been a primary objective of ours for a long time. And one of the probably 20 reasons that we've worked so hard to transform our technology because we want to have shoulders to stand on, that are the same shoulders as the leading tech companies have. So that we can build software and have the kind of capability and speed to market and so on that comes from being a modern tech company. And I have -- we have seen a lot of traction at Capital One. And I think some of the other leading banks have seen a lot of traction too. I mean just looking at the growth of not only how many mobile customers that we have -- both online and mobile customers, the growth rate of that. But also the frequency of visits and the increasing number of things that we can do for our customers. And the old world of banking was a reactive one. Customer would walk into a branch and say, I have a particular need, and then the banker would figure this out. The opportunity that comes in the new world of technology is where proactive banking is as important as reactive banking. They're not proactive banking in the sense of spamming more customers with lots of cross-sell offers. But really banking where we are watching the customers' money when the customer isn't, and providing leverage right in the flow of the customer's financial life to provide them the information that they need and the guidance that they need. And if you notice some of the TV ads, we did probably 6 to 12 months ago, were all about some of the real-time alerts that were helping people with things that they really had no idea were going on with respect to their money. So I think that the great race that you talk about is on. It's one of the reasons we feel a real imperative to invest. But we like our position, and I really like actually our chances to not just build some features and have a bunch of customers, but actually to be at the center of our customers' financial lives and to be able to really build a growing franchise where Capital One is right there, where the eyeballs are and where a customers' mind share is.

Just one quick follow-up for Andrew. On the NIM, obviously, you saw a nice increase and you mentioned a number of different items. But as we look ahead, it would seem with the loan growth and the remixing, there's probably tailwinds for the NIM to the upside? Or how should we think about that, U.S. cards specifically?

So Sanjay, you're touching on really the primary drivers. So if you're looking just at card versus the corporate side, I mean, there's kind of 4 factors I would call out that drove it in the quarter in card yield. Specifically, Rich talked about the credit, kind of, benefits that are flowing through in suppression saw a tick up of delinquencies in the third quarter, in line with seasonal trends, but that aids late fees. They tend to have a fourth -- a third thing of seasonally higher revolve rates and then day count in the quarter are kind of the drivers of card yield. So when I think about how those play out, you can figure out which things are kind of seasonal to the quarter versus which things are driven by more macroeconomic factors versus what is sort of underlying trends. I'll pull up though and just give a corporate view of NIM because you touched on some of the other dimensions that are really playing through more corporately, which is the reduction of cash at the total company level and having that be replaced by card growth. And then those factors, coupled with the higher yield in card that I just described is really what benefited this quarter. 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. So we'll just have to see how those things sort of net against one another.

We'll take our next question from John Hecht with Jefferies.

Sanjay actually just asked my NIM question. So I have a question, maybe diving deeper into the growth opportunities. Are you seeing -- is there a better arbitrage or better competitive opportunities in revolver versus transactor? Or is it subprime versus prime? And maybe answer that both card and auto.

Okay, John, I don't see a particular segment that really stands out. A strategic thing that we've been really leaning into for a number of years at Capital One is a continued migration toward the transactor side of the business, not running away from the other one, but differentially really investing and enhancing that. And of course, when you see all the purchase volume growth and other things, you can see the benefit there. But what we have also found is that the real emphasis on the transacting side of the business even for revolvers ends up being something that not only generates more transactions, but it helps drive a healthier prime and even subprime book. So that quest is very aligned and well at Capital One. We see growth opportunities really across the board. There's pretty intense competition across the board, but I think we see growth opportunities and a relatively rational marketplace in card across the board. The auto business, auto -- there's 2 things I would say about auto. First of all, there's like 4 or 5 planets that are aligned in the auto business that I don't think in our lifetimes are going to align again that have led to some of the extreme performance that's happened in the auto business in terms of the growth, the revenue, the credit side of the business, it's been a very strong thing. Given the strength, we have been particularly -- had a cautious eye looking at competitive pressures in that business. And I've always said that the auto business is more subject to competitive pressure disrupting the business than the card business because the card business is one-on-one us with a customer or a prospect. The auto business, again, has the dealer in the middle of the whole exchange and the dealer is driving an auction. And so we continue to be -- very carefully monitoring the competitive effects. We are seeing growing competition in the auto business. It's showing up across the board from big banks, credit unions, and smaller independent lenders, and we're seeing it play out across all credit segments. It's showing up in pricing, underwriting and loan terms. And many lenders have expanded beyond their pre-pandemic credit box. And as the competitive environment continues to evolve, we remain focused on the disciplined execution of our strategy and our core philosophy of maintaining high resilience and taking what the market gives us remained unchanged. In our underwriting, we made conservative assumptions and assume rapid normalization of vehicle values to more sustainable levels. So there's kind of 2 competing things going on in the auto business that sort of -- that drives the results that you see. One is growing competition, which is very understandable because every auto player has posted really strong returns and wants to get more of that. There are some signs that we raise an eyebrow to make sure that we see sound underwriting out there in the marketplace. But we also have -- our opportunity is differentially being also powered by our tech capabilities that we have in the auto business, things like Auto Navigator, things like our relationship with the dealers and their reliance on our technology to help them underwrite better and sell cars more rapidly and effectively. So the net of those 2 forces has led us to post another really solid quarter, and we're leaning in, in the auto business, but we should all understand we should be cautious about where the marketplace will go and also understand that the planet alignment, at some point those planets won't be as aligned as they have been.

Our last question this evening is from Kevin Barker with Piper Sandler.

Just to follow-up on some of the competitive dynamics that you speak about, especially for fintechs. I mean have you considered possibly more radical change? Whether it's acquiring the fintechs in order to accelerate your growth or your competitive position in the market or potentially trying to develop more radical efficiencies within Capital One, in order to spend to address the competitive environment within fintech?

Sorry, I was on mute there. Sorry for the silence. Thank you, Kevin, for the good question there. As we have said on a number of occasions, the banking industry -- by the way, scale matters a lot. And by the way, however important scale was years ago -- and by the way, as someone that started Capital One 3 decades ago -- and I've always were worshiped on the altar, scale, and it's been a tough journey because we didn't have the scale for most of the time. And One is always reminded of how more scale would help. Banks -- most of the banking industry is, I think, focusing a lot on buying other banks to build a very important scale. At Capital One, we are not looking at bank acquisitions. We are building a national -- I mean -- by the way, we did 4 bank acquisitions in our past that were very important in putting us in a good position of threshold scale in the banking industry. But where we are focused on the banking side is in building a national digital bank. And that's really going to be an organic quest. No company has ever really built one organically, but we like where we are, and we like our chances. Our acquisition focus is looking at technology companies and the fintechs. And I mentioned both of those. We have done acquisition of technology companies where they have some of the tech capabilities that we're building. And since we share a similar tech stack, that's been a compatible thing to do and an accelerant. And then, of course, we are looking at fintechs and Capital One has done a number of those acquisitions in the past as well. We -- it's not lost on us the breathtaking valuations that these companies command. And so we want to be a patient investor, but we are real students of the fintech marketplace because we can learn so much from them. We're inspired by some of the things they come up with and the things that they do, and we partner with some of them to take stakes in some of them and sometimes do acquisitions. I think Capital One is in ideal position as an acquirer of a fintech because of the tech stack that we have. And pretty much every fintech out there -- every modern fintech out there is on the cloud. And I think that the -- they're on the cloud, the tech talent they have is like very similar to our own. Culturally, the whole thing, the emphasis on data and analytics that is behind a number of the fintechs has been a focus of our company since its founding days. So I think that we have some natural advantages on the acquiring side. So for years, we've looked at fintechs and occasionally, made acquisitions, and we certainly are pleased with the ones we have made.

Well, I think that concludes our earnings call for this evening. Thank you for joining us on the conference call today, and thank you for your continuing interest in Capital One. Remember, the Investor Relations team will be here this evening to answer any further questions you may have. Have a great night.

Ladies and gentlemen, this concludes today's conference. We appreciate your participation. You may now disconnect.