Capital One Financial Corporation (COF) Q1 2025 Earnings Report, Transcript and Summary

Good day and thank you for standing by. Welcome to the Capital One Q1 2025 Earnings Call. Please be advised that today's conference is being recorded. After the speakers’ presentation, there will be a question and answer session. [Operator Instructions] I would now like to hand the conference over to your speaker today, Jeff Norris, Senior Vice President of Finance. Please go ahead.

Thanks very much, Josh, and welcome to everyone. To access our live webcast of this call, please go to the Investors section of Capital One's website at capitalone.com and follow the links from there. A copy of the earnings presentation, press release and financial supplement can be found in the investors section of Capital One's website at capitalone.com by selecting financials and then quarterly earnings releases. 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. Richard and Andrew are going to walk you through our presentation, summarizing our first quarter results for 2025. 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 our actual results to differ materially from those described in forward-looking statements. And for more information on these factors, please see the section titled forward-looking information in the earnings release presentation and the risk factor section of our annual and quarterly reports accessible at Capital One's website and filed with the SEC. And now I'll turn the call over to Mr. Young. Andrew?

Thanks, Jeff, and good afternoon, everyone. I will start on Slide 3 of tonight's presentation. In the first quarter, Capital One earned $1.4 billion, or $3.45 per diluted common share. Included in the results for the quarter were adjusting items for legal reserve activities and discover integration expenses. Net of these adjusting items, first quarter earnings per share were $4.06. Pre-provision earnings in the first quarter were largely flat to the fourth quarter at $4.1 billion. On an adjusted basis, pre-provision earnings increased 2% from the fourth quarter. Revenue in the linked quarter declined 2% driven by 2 fewer days in the quarter. Noninterest expense decreased 5% on an adjusted basis, driven by declines in both marketing and operating expenses. Our provision for credit losses was $2.4 billion in the quarter, a decrease of $273 million compared to the prior quarter. The decrease was driven by $148 million lower net charge-offs and $123 million larger reserve release. Turning to Slide 4. I will cover the allowance in greater detail. We released $368 million in allowance this quarter, bringing the allowance balance to $15.9 billion. Our total portfolio coverage ratio decreased 5 basis points to 4.91%. I'll cover the drivers of the changes in allowance and coverage ratio by segment on Slide 5. In our Domestic Card business, we released $458 million in allowance. The allowance release was driven by continued favorable credit performance in the quarter, partially offset by higher consideration to our downside economic scenario and increased qualitative factors to account for heightened uncertainty. The coverage ratio remained largely flat as the impact of the allowance release was offset by the denominator effect from the paydown of seasonal balances. As a reminder, our Domestic Card coverage ratio is about 100 basis points above CECL day 1 after taking into account the impact of the termination of the Walmart agreement. The allowance balance in our Consumer Banking segment was largely flat at $1.9 billion. Observed credit favorability and the impact of stable auction prices was largely offset by growth in the auto business. The coverage ratio decreased by 4 basis points. And finally, our commercial banking allowance increased by $117 million. The build in allowance was driven by increased qualitative factors to account for heightened uncertainty as well as specific reserves for a small number of individual credits. Coverage ratio increased by 12 basis points to 1.73%. Turning to Page 6. I'll now discuss liquidity. Total liquidity reserves in the quarter increased to $131 billion, about $7 billion higher than last quarter. Our cash position ended in the quarter at approximately $49 billion, up $5 billion from the prior quarter. The increase was driven by continued strong deposit growth in our retail banking business and the paydown of seasonal card balances. Our preliminary average liquidity coverage ratio during the first quarter was 152%. Turning to Page 7, I'll cover our net interest margin. Our first quarter net interest margin was 6.93%. 10 basis points lower than last quarter. The quarter-over-quarter decrease was driven by the 15 basis point impact of having 2 fewer days in the quarter. Beyond day count, NIM increased 5 basis points as the beneficial impact of the reduction in the repay in our deposits was only partially offset by the seasonal impact of lower average card loans and higher cash. On a year-over-year basis, NIM increased 24 basis points, driven by a favorable mix towards card loan and the termination of the revenue sharing agreement with Walmart, partially offset by 1 fewer day relative to last year's leap year. Turning to Slide 8. I will end by discussing our capital position. Our common equity Tier 1 capital ratio ended quarter at 13.6%, approximately 10 basis points higher than the prior quarter. Net income in the quarter and the impact of seasonal loan declines were largely offset by the impact of the final CECL phase-in dividends and $150 million of share repurchases. 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. 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. With that, I will turn the call over to Rich. Rich?

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. In the first quarter, our Domestic Card business delivered another quarter of top-line growth, strong margins and improving credit. Year-over-year purchase volume growth for the quarter was 5%. The first quarter of 2024 had an extra day since it was a leap year. Adjusting for this leap year effect, year-over-year purchase volume growth was about 6%. Ending loan balances increased $6.4 billion or about 4% year-over-year. Average loans increased about 5% and revenue was up 7% from the first quarter of 2024, driven by the growth in purchase volume and loans. Revenue margin for the quarter increased 37 basis points from the prior year quarter to 18.2%, primarily driven by the impact of the end of the Walmart revenue sharing agreement. The charge-off rate for the quarter was 6.19%, up 25 basis points year-over-year. The impact of the end of the Walmart loss sharing agreement increased the first quarter charge-off rate by 42 basis points. Excluding this impact, the charge-off rate for the quarter would have been [5.77%] (ph) a year-over-year improvement of 17 basis points. Our delinquencies have been improving steadily for several quarters on a seasonally adjusted basis. The 30-plus delinquency rate at the end of the first quarter was down 4.25%, down 23 basis points from the prior year. Domestic Card noninterest expense was up 13% compared to the first quarter of 2024. Operating expense and marketing both increased year-over-year. Total company marketing expense in the quarter was $1.2 billion, up 19% year-over-year. Our choices in domestic card are the biggest driver of total company marketing. We continue to see compelling growth opportunities in our Domestic Card business. Our marketing continues to deliver strong new account growth across the domestic card business and build an enduring franchise with heavy spenders at the top of the marketplace. Compared to the first quarter of 2024, domestic card marketing in the quarter included higher direct response marketing, higher media spend and increased investment in premium benefits and differentiated customer experiences like our travel portal, airline lounges and Capital One shopping. As always, all of our marketing and origination choices are informed by our continuous monitoring of portfolio trends market conditions and consumer and competitor behaviors. Slide 12 shows first quarter results in our Consumer Banking business. Auto originations were up 22% from the prior year quarter, driven by overall market growth and our strong position to pursue resilient growth in the current marketplace. Consumer Banking ending loan balances increased $3.8 billion or about 5% year-over-year. Average loans were also up 5%. Compared to the year ago quarter, ending consumer deposits grew about 8% and average consumer deposits were up about 9%. Our digital-first national consumer banking business continues to grow and gain traction, powered by our technology transformation and our compelling no fees, no minimums and no overdraft fees customer value proposition. Consumer Banking revenue for the quarter was down about 2% year-over-year, driven by margin compression in Retail Banking, partially offset by growth in auto loans and retail deposits. Noninterest expense was up about 27% compared to the first quarter of 2024 driven largely by the first quarter adjusting item Andrew discussed, as well as increased auto originations, higher marketing to drive growth in our National Consumer Banking business and continued technology investments. The auto charge-off rate for the quarter was 1.55%, down 44 basis points year-over-year, largely as a result of our choice to tighten credit and pull back in 2022, auto charge-offs have been a strong and stable contributor on a seasonally adjusted basis. The 30-plus delinquency rate was 4.93% down 35 basis points year-over-year. Slide 13 shows the first quarter results for our Commercial Banking business. Compared to the linked-quarter, both ending and average loan balances were essentially flat. Ending deposits were down about 5% from the linked quarter. Average deposits were roughly flat. We continue to manage down select less attractive commercial deposit balances. First quarter revenue was down 7% from the linked quarter and non-interest expense was down by about 6%. The commercial banking annualized net charge-off rate for the first quarter declined 15 basis points from the sequential quarter to 0.11%. The commercial criticized performing loan rate was 6.41%, up 6 basis points compared to the linked quarter. The criticized nonperforming loan rate was essentially flat at 1.40%. In closing, we continued to post strong and steady results in the first quarter. We delivered another quarter of top-line growth in domestic card loans, purchase volume and revenue. In the auto business, we posted growth in originations and loan balances. Our national Consumer Banking business continued to deliver strong year-over-year growth and consumer credit continued to improve. Looking forward, we're very excited to move forward with our acquisition of Discover. Last week, we received regulatory approval for our acquisition of Discover, and we're fully mobilized to complete the transaction on May 18. Until we close, we are still separate public companies, so we have limited access to Discovery's information. 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. And we continue to believe that we'll achieve the synergies run rate in about 24 months following the May 18 closing date. And also, just a reminder, our network synergy estimate assumed the implementation of lower debit interchange rates proposed by the Fed under Reg II in October 2023. Those proposed rates are still pending because of various lawsuits. 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 it would have no impact on our company's future revenue because, of course, the debit business will be on the Discover Network. Pulling way up, the acquisition of Discover is a singular opportunity. The combination of Capital One and Discover will create a leading consumer banking and payments platform with unique capabilities, modern technology, powerful brands and a customer franchise of over 100 million customers that spans the marketplace. It combines proven and complementary banking and credit card businesses with a global payments network. It leverages Capital One's technology transformation and digital capabilities across a significantly larger customer franchise. It delivers compelling financial results and offers the potential to enhance competition and create significant value for merchants and customers, and it enables and drives significant strategic and economic upside 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. Remember, as a courtesy to other investors and analysts who may wish to ask a question, please limit yourself to 1 question plus a single follow-up. If you have follow-up questions after the session is over, Investor Relations team will be available to answer them. Josh, please start the Q&A.

[Operator Instructions] Our first question comes from Ryan Nash with Goldman Sachs. You may proceed.

Good evening Rich, good evening Andrew.

Hi, Ryan.

So Rich, obviously, a lot of concerns in the market regarding tariffs and the state of the consumer. It's hard to see those concerns in the results, given better-than-expected credit in the reserve release. So maybe just talk a little bit about what you are seeing in the data within Capital One, what gave you the confidence to release reserves. And then for Andrew, you mentioned some of the drivers, favorable credit, higher allocation to the downside. Maybe just remind us what's included for the -- within the allowance for both unemployment and the overall economy? Thank you.

Great. Thanks, Ryan. So let me take your question about what we're seeing in the data. Let me start with a more macro discussion of the health of the consumer and how our major metrics, credit metrics are performing. And then let me just kind of double-click into the data that we're seeing on the spending side over the last couple of weeks because of course, everybody is watching that so closely. But first, pulling kind of way up on the consumer. The U.S. consumer remains a source of strength in the economy. That's true for almost any metric that we look at. the unemployment rate is low and stable. Job creation remains healthy, real wages are growing. Consumer debt servicing burdens remain stable near pre-pandemic levels. In our card portfolio, we're seeing improving delinquency rates and lower delinquency entries, and payment rates are improving on a year-over-year basis. Now of course, the circumstances of individual consumers and households will vary as they always do. And what we look at often with national metrics is averages. And as we've discussed before, some pockets of consumers are feeling pressure from the cumulative effects of inflation and higher interest rates. And we're still seeing delayed charge-off effects from the pandemic, although our improving delinquency suggests that this effect may be moderating. But on the whole, I'd say the U.S. consumer is in good shape. And we watch -- we always watch all the sort of leading indicator credit metrics to have a view of where credit is headed. So let me just take a look at those. And then I'll come back to the sort of last couple of weeks of spend data. So when we look inside our portfolio, of course, delinquencies are the best leading indicator. And we -- our delinquencies were stable on a seasonally adjusted basis throughout most of 2024. And as I mentioned, they improved relative to our seasonal expectation over the last six months. So that's obviously very good news there. Looking at other metrics. Payment rates we've seen – card payment rates increase year-over-year for the last 2 quarters. And this improvement is coincident with the improvements that we're seeing in our delinquency rate. Now of course, increasing payment rates, sort of slow down loan growth rate, but it's a trade we're always happy to make because of the flip side of the coin of the better credit performance. Now underneath the surface of this average improvement in paints, we are also seeing the portion of customers making just the minimum payment running somewhat above free pandemic levels. So while the average customer is doing well, some customers at the margin are likely feeling stress from inflation and elevated interest rates. Revolve rates. Let me turn to look at that. Revolve rates have stabilized over the past year but remain below pre-pandemic levels for our major products and segments. So that, again, is another healthy indicator -- a healthy indicator. Now none of these observations are conclusive on their own, but I think they are collectively helpful at giving us insight into credit and economic trends. Now there's another thing, Ryan, that we look at of course, is new account originations. And we look at our new originations. We see early performance that is consistent with our expectations. It's stable and even improving a bit vintage over vintage and consistent with pre-pandemic levels. Now this might be less of that observation may be more of a Capital One effect specifically because much of the stability from decisions we made starting back in 2020 to account for inflated bureau scores and competitive dynamics and the flood of fintech supply. And so I think our interpretation is our active management has probably offset some underlying worsening that has happened in the marketplace. The other metric we look at is recoveries and our recoveries inventory continues to rebuild, of course, from the prior normalization of charge-offs that should be a gradual tailwind to our losses over time all else being equal. So that's the strong credit situation that we see. And of course, especially in the current – uncertain environment, we're monitoring that very, very carefully. Let me turn and just talk about the latest in terms of spend trends in our card business and in auto. So let me start with card. The spend trends were largely stable through the end of the first quarter. In recent weeks, we've started to see an uptick in spend growth per customer relative to this time last year across our consumer segments. I would note we haven't observed this more recent trend in our small business card portfolio. Now some of this uptick is likely driven by the timing of the Easter holiday, which fell in April this year versus March last year. So we maybe should discount that a little bit. We've also seen a recent increase in retail spending, particularly electronics in the past few weeks. Maybe that's a pulling forward of purchases in light of the tariffs, we'll have to see over time. At the same time, we've seen some easing in the T&E growth and airfare in particular. And the final thing I want to do is just talk about the auto patterns that we're seeing. While it's early, when we look at industry data, there appears to be a bit of a pull forward in auto purchases likely as consumers are trying to get ahead of tariff impacts. And we continue to monitor our application and origination volumes. I think also there is some early indication that auction prices are increasing more than seasonal norms. All of this is very early, but that would be what we see right at the margin. So with that, I'll turn it over to Andrew for your question.

Yes, Ryan, a few factors at play with respect to the allowance. Why don't I just start with our baseline forecast, and then I'll touch on water considerations. So for the baseline forecast, as Rich just talked about, our seasonally adjusted delinquency rates have been improving on a year-over-year basis since about October of last year and charge-offs have been improving for the last few months after you account for Walmart. And so when we take those observed credit results and then we take our baseline forecast, our baseline forecast at the end of March, we use consensus estimates. And so consensus estimates at that point looks quite similar to consensus estimates at the end of December. Unemployment was in the -- I think, peaking in the [4%, 3%] (ph) range and GDP growth around 2 and inflation in the high 2s coming down from there. And so if we take our observed credit results with that baseline forecast, what's baking in the oven resulted in an allowance release that would have been quite a bit larger than what we actually released this quarter. And so the effect of tamping down the magnitude of that allowance release was really our consideration to downside economic risks and greater uncertainty, that really manifested itself in the final days of the quarter. And so we more heavily considered our downside scenario, which includes more severe rising unemployment and renewed inflation relative to the downside scenario we had a quarter ago. And the favorable trends that I described then were partially offset by that greater consideration of the downside, as well as the uncertainties around the forecast. And all of that ultimately led to the roughly $450 million release you saw in the quarter.

Next question please.

Our next question comes from Sanjay Sakhrani with KBW. You may proceed.

Thank you. Rich, Andrew. Rich, you mentioned you're fully mobilized to integrate. I'm just curious how we should think about the timing in terms of some of the milestones to achieve the synergies. For example, how long would it take for the debit conversion to happen and maybe a similar point on expenses?

Yes. Sanjay, as you said, we are still in the midst of doing our planning. But what I would highlight for you is based on what we know today, our assumption is that we are essentially just picking up all of the assumptions that we provided 14 months ago at deal announcement and pushing it back by a little less than 6 months because you'll recall, we assumed the transaction would close when we did the announcement in late Q4, early Q1, so a center date there of January 1. Now we're closing on May 18. I would point you back to the timing that we included in the announcement and just shift all of that back to correspond to the later closing date.

Okay. Great. And then maybe a follow-up on capital return. Obviously, you guys are well above the CET1 target, I think, Discover as well you've talked about sort of a phased migration back towards your target. Could you just discuss how we should think about it going forward in terms of when you might be able to start sort of elevating the amount of capital return? Thanks.

Yes. We're still operating as two independent companies, Sanjay. So at this point, our access to a lot of the more proprietary and confidential data has been limited. And after we close the transaction, we'll have access to the data, we need to do the analysis to determine what we believe is the capital need of the combined company. And in addition, we're in the midst of this year's CCAR, and we'll get our new SEB in June. And 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. But once we've completed that work, we understand the importance of returning excess capital to shareholders, and we intend to do so.

Next question, please.

Our next question comes from Terry Ma with Barclays. You may proceed.

Hi, thank you. Good evening. So you called out marketing was up 19% year-over-year. It seems like you're still seeing some compelling opportunities and are leaning in. So maybe talk about where you're seeing the best opportunities right now? And then also, how are you thinking about balancing that investment for growth versus risk management, particularly in subprime? Thank you.

Yes. Terry, thank you and good evening. Our marketing investment continues to power the future growth of the company as we capitalize on opportunities that have become available from many of the choices we've made over the past years, but especially on the shoulders of our technology transformation. So our marketing investments generally fall into 3 categories. First is our investments to fuel customer growth, and we remain really excited about the opportunities that marketing is providing especially in our card business. The tech transformation has allowed us to leverage much more data and also more advanced modeling techniques, leveraging machine learning and AI. And the insights that we get from all of these advancements allow us to create more and more tailored solutions for customers, providing them with the right products and services when they need them. Another thing that's been going on is we've continued to expand the channels and the sources for generating new accounts. So that's kind of the basic right down the fairway marketing, very stimulus response kind of driven side of the business. Second is our continued investment to win at the top of the market with heavy spenders. And this has been a quest that we have been on for years, of course, and spent a lot of time talking about this. But our growth in heavy spenders provides long-term benefits to our business not only in generating a lot of spend growth but also because of what comes with franchise very low losses, low attrition and the lifting of the brand and really the lifting of, I think, all of our franchises across the company. So, of course, acquiring these customers is expensive and requires a number of sustained investments in order to attract and retain them. So significant marketing investment significant upfront early spend bonuses also, of course, we continue to invest in the experiences that we're offering our high-end customers, including exclusive access and experiences that aren't available in the general marketplace like lounge access, our full-service travel portal and access to unique properties and events. And of course, we have the continued investment in brand. So we believe this opportunity is very big. This is a long-term quest we've been on for over a decade, so far. And while all the players in the card business do some effort to win at the top of the market, I think it's a much smaller number of players that are really leaning in and focused and doing the investments to put themselves in a position to win there. By the way, it's not lost on us that, that small list of most aggressive competitors at the top of the market is really leaning in to their marketing investments and their experiences. So the bar of competition is high, but I think the payoff is very large over the long run. The third area of marketing investment for Capital One is building our national bank. And we declared really over a decade ago that we were going to build a digital first full-service national bank. And this, of course, involves thin physical distribution across the nation in terms of branches in some markets and cafes in leading metropolitan areas. We've had a big investment in the digital capabilities for full service banking on a remote basis. And for most banks that are building most full-service banks, virtually all full-service banks, their marketing statement is their branches themselves. Capital One, by organically building a digital first full service bank, the role that marketing plays relative to physical distribution is just a different ratio there. And so we're leaning very heavily into that. But we are really pleased with the momentum we have there. And we're excited by the combination with Discover will give us more scale and more momentum in that space. So those are the three sort of big areas that we're leaning into in marketing and the investments are significant. We're putting a lot of energy, of course, leveraging all of our -- we spent so many years building the measurement infrastructure to be able to measure before during and after how various investments are doing but pulling way up, this is really the engine that is driving a lot of the future growth of our company. And as you can see from some of the numbers that we're posting and some of the investment dollars we're putting into this, we are feeling very optimistic about our prospects. He also asked just what about the growth versus risk management and with the eye towards subprime. I think the consumer is in a good place. We are leaning into our marketing across the spectrum the subprime consumer actually has had a little bit of a faster rate of sort of curing post normalization of even relative to the rest of the spectrum as we've seen. So we continue to feel very good there. We're leaning into that. Now of course, we know that the uncertainty out there, the tariff prospects and everything has us very, very vigilant because if there's a shock to the system, we would expect that could hit harder at that part of the market. But I would leave you with the following impression. We're still leaning in, but we're very, very vigilant watching every day for early indicators of problems.

Next question.

Our next question comes from Moshe Orenbuch with TD Cowen. You may proceed.

Great. You just in the last answer mentioned that the Discovery transaction is going to kind of help advance kind of the national banking franchise. Hoping maybe you could kind of drill into that is when you think about the elements that either Discover brings or things you'd like to add to your national banking products? I mean, is rewards checking among them? Like what are the things that you think Capital One needs to do better to enhance that as you think about it going forward?

So Moshe, if we pull way up on our national banking strategy, it's very, very differentiated from most banks. Obviously, most banks have -- to overstate it a little bit, a branch on every corner kind of thing, not really every corner these days. But it's physical distribution 1, 2 and 3, all about physical distribution and then creating the customer experiences to go along with that. And of course, also their strategies of most regional banks are out there trying to build national banks. And the way they're going to get there is through acquisitions. Now it's ironic, I'm going to make the comment. I'm going to -- in the wake of a few days ago announcing the regulators approved a major acquisition. But it's not the regular buying of a full-service branch bank-based bank. So our national bank doesn't have, as it's in its growth agenda, buying other sort of regional and local banks. Our business model is in building a national bank is one that doesn't -- we haven't really seen an example in nature here in America of doing that. But the key there is we have -- we're trying to build a bank with leaner economics that comes from not having branches all over the place and then to take -- and also to be very modern in its technology and its digital experiences. And in terms of the customer base that we attract to self-select to a more digitally first kind of experience. And with that business model comes less expensive economics. And then what we've done is to pass the better economics on to the consumer in the form of very aggressive pricing with no fees no minimums and no overdraft fees. So it is a streamlined economics, then margin aggressively priced business model. The benefit of the Discover acquisition relative to that, even though paradoxically, it's a bit of a paradox there because, of course, we are buying especially a credit card business is that the benefit of vertical integration with the network allows our thin margin business to strengthen its margins and allows us to lean in harder and invest even more in building organically this national bank, which has never really been done before. But that's the key way that the Discover acquisition is going to help turbocharge our national bank.

Got it. Thanks. Maybe just keeping on the theme with Discover, recognizing that obviously, you don't run the company yet and haven't been inside. But just from what you know about the card business and its focus and what it's done and the fact that it's probably been less aggressively managed over the last somewhere between a year and two years, depending on when you start that. What do you think are the things that need to be done? And does that portfolio shrink before it grows? Any thoughts as to the Discover market and how to think about what you'd like to do with it?

Well, Moshe, we are very struck at how complementary their business model is relative to ours. So we have stretched across the credit spectrum to the tippy top down to -- into subprime. They, of course, have much more stuck to their knitting right in the sort of prime part of the marketplace. They have spent years and years optimizing that business in a way that I have great respect for relative to how to target the customers they want and the marketing and the message and the experience. We've also really come to appreciate just how exceptional some of their customer experiences are. You've seen, I don't know of any other card issuer that goes on national [DV] (ph) and does a lot of advertising about their servicing experience. I mean, not that we don't have great stories to tell, too. But I've always been struck, wow, they're on TV, talk about this thing. Well, when we look at just data that we've collected over time and we've collected a lot of it lately, data as an outsider looking at what people think about their customer experience, their servicing experience, some of their product experiences, they get very high marks. So what we feel that one of the most striking things about Discover is there focus on the customer, they are sticking to the knitting in their kind of one or a couple of sort of big segments and then having everything work backwards from winning in that space. So what we're going to do, even as we integrate and generate of course, efficiencies and the benefits of leveraging Capital One's technology, Capital One's risk management capabilities and a lot of things is very much have a great reference and respect for the business model they've created and making sure to preserve some of those really, really key success factors there. And so we're excited to jump in and do that, still 2 separate companies. So we're going to learn a lot more in the next few weeks. But this is going to be -- and a lot of acquisitions are just -- the goal of the acquisitions is just to take 2 companies squash them together and rip out the costs. I think that Discover brings us a growth platform. Both on the network side and with respect to their card franchise that allows us to preserve the best of what they do, leverage a lot of Capital One's capabilities that we bring and build something really special.

Next question please.

Our next question comes from Rick Shane with JPMorgan. You may proceed.

Hey, guys. Thanks for taking my question this afternoon. Look, I think one thing that is pretty clear over the last few years, there's been a significant divergence in technology investment between Capital One and Discover. Obviously, you are very interested in the synergies. I'm curious, as you've gone through your due diligence process, how the technology stacks compare for each company? Is this going to be an easy transition to get the Discover systems onto the Capital One system? Or is it going to be sort of the equivalent of you're looking for folks who can code cobalt or something antiquated because of the more limited investment?

So we are very benefited by the now a 12-year technology transformation that we have had at Capital One. And that includes a tremendous investment starting at the bottom of the tech stack up in building core infrastructure. And we're talking about going to the cloud, of course, applications that modernizing all of the 1,300 applications on which Capital One is built, doing a transformation of our data ecosystem and so on. The bottom of the tech stack investments that we have made are just ideally suited for doing an acquisition, of course, especially in a -- of a credit card company because Discover will be able to step right in on the shoulders of our own technology transformation, and we can generate a lot of both cost savings but even more importantly, move them, help them leverage a more modern tech stack along the way. Now they are a mainframe. They have data centers and mainframes even as they've also taken some of their business to the cloud. So we will be going back into the world of data centers. We've been there, done that. And we have a lot of experience with respect to managing those environments, but also over time, moving those environments to the cloud. The new thing for Capital One from a technology point of view, of course, is going to be the network. And running a global network is a really very complex and very high stakes activity. And we think Discover has done that very well the Capital One way is to lean into technology, and I'm sure that we will together go on a great journey with their network to help over time take a strong network that they built and modernize it over time. But we should note that this will be a return for a number of years for Capital One into the world of data centers. But we don't think this is a step into the past. What we do think is an ability to leverage the scale and stand on the shoulders of what we have built and to take a really extraordinary company and bring it on to more modern technology and generate even better experiences and economics.

Got it. But it sounds like you will be on their tech stack for a couple of years and in their data center still?

Well, on the network side, so we have -- on the credit card side, we have a whole road map of how we're going to take their credit card business and move it on to our tech stack. On the network side, given that we don't have the equivalent on our side, we don't have a road map of a different destination. What we want to do is go in there and see what they've got. And we would like to take that on the same journey that we've taken all the rest of Capital One. But I think this is going to be measured in a whole bunch of years because they have built a global network and that's not going to be a quick kind of transformation to put that thing in the cloud.

Next question please.

Our next question comes from John Pancari with Evercore ISI. You may proceed.

Good evening. I appreciate that you cited no change to the Discover synergies or integration. I also know you indicated you don't own the company yet. So it's tough to completely look under the hood. Is there anything about the backdrop today, the regulatory developments, the competitive backdrop or anything that you see today that you think could lead to a revision to those synergies once you close the deal in May? And then separately, you didn't mention 15% EPS accretion of [27%] (ph) or to 14% CET1 on close. Just wondering if there's any change there. Thanks.

John, to the last point, in terms of the assumptions of metric. First of all, with CET1 again, that was just what we assumed at the time of the announcement where both companies would be combined for CET1. And so you can look haven't yet seen Discover's results for Q1, but you'll be able to do that math quite easily of where the combined CET1 will be. And then I'd refer you back to the earlier question in terms of our capital plans from there. With respect to metrics like EPS accretion or ROIC, a number of things have changed over the course of the last year, not the least of which is the denominator there. And so as we just take a step back and look at the overall numbers and the moving parts. So I would just say the strategic and financial benefits that we assumed 14 months ago remain fully intact. And we're just excited today as we were at the time of the announcement. And then with respect to the regulatory environment and backdrop, I would sort of lump that in with a number of things have changed over the course of the last 14 months, but nothing that we are specifically pointing to in terms of the strategic implications at all to the deal.

John, let me just also just say a few things. And of course, we're still separate public companies, so we won't have full access to Discovery's information until after we close the acquisition. But 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 on the risk management side to Andrew's point, we've always said look, we believe that's going to be a big investment. We continue to believe it's going to be a big investment. They're well down that path. We haven't -- from a far, haven't seen anything to change our estimate for what that will take. But of course, we of course, will do whatever it takes to get there, but we have a similar view of the magnitude of what the undertaking is as we had before. I want to also just make a comment about sort of long-term opportunity. When we announced the deal, we also said that we saw potentially significant long-term strategic and economic opportunities that we did not include in our synergy estimates or the deal model. This would involve moving even more of our business onto the Discover network than what we put into the deal model. The path to get there is to build international acceptance of the Discover Network and to enhance and elevate the Discover global network brand. And the more we thought about that, we believe that brand investment is better made as the international acceptance gets to, I'd say, the good place. But as it gets to an even better place, that's probably more when we would lean into really building the sort of global network brand. Like many investments we've made over the years, we believe that these investments are longer term in nature and will generate significant benefits that will grow and accumulate over time. So what we're saying here is we had a deal model for very kind of close in benefits that we saw and the associated costs, and that's very much what we see. And then additionally, we are excited about longer-term possibilities that will take some -- that's a longer-term quest, that's investments over and a more extended period of time with benefits that would transcend things that we put into the deal model.

Next question please.

Our next question comes from Mihir Bhatia with Bank of America. You may proceed.

Hi congrats and thank you for taking my question. Just wanted to talk a little bit about just the uncertain macro. Maybe, Rich, it's been a while since we've had what you would call maybe a normal recession. Obviously, we had COVID a few years back. But I was just wondering if you could talk a little bit about just the recession resiliency at Capital One, maybe some of the factors or some of the levers that you can pull if you start seeing the macro deteriorate? And just how is it different now than the last time between 10, 15 years since we had one. So just how is Capital One different between the mix changing as you leaned into higher spending improvements in technology. Just how is Capital One different from a recession resilience point of view?

Thank you, Mihir. So it's interesting you use the word normal recession. And of course, I smile as I say that because you're right, certainly COVID, it's hard to learn much if anything in COVID. Well, given that, by the way credit exploded to the best place it's ever been. We'll start with that anomaly. But, of course, our whole business model works backwards from resilience. That's what it's all about. And every underwriting decision, we underwrite to something quite a bit more stressed than the current environment. So we look in the rearview mirror to see results, and then we stress it in every underwriting decision that we make. We, of course, I think the whole stress testing exercise that the Fed has led has really, I think, to help push all institutions to get more rigorous in their modeling in that. And we put a lot of energy into that, but I tip my hat to the -- I think some of the resilience modeling that all banks are encouraged to do. And so one needs significant buffers on the capital side buffers in terms of margins and then buffers in terms of flexibility as well. So one of the real benefits of having a credit card business well, one of the sort of striking things about a credit card business in a, let's call it, a normal recession, Mihir, is that spending tends to -- and consumers tend to pull back. And so you actually get some relief on the balance sheet side. The Fed does not model it that way because they insist that companies continue to lean in and crank up the growth even though empirically, we have never done that in recessions and so on. So you've got the flexibility with respect to the -- there's balance sheet flexibility. The marketing, of course, we have a very big marketing budget. There's recession flexibility there. I would note that some of our marketing investments, things like lounges, some of the investments at the top of the market are a little more fixed in nature than one might just think about because you can -- when you're sending out solicitations, you can just stop doing that or do a lot less of it. So there is flexibility on the marketing side. As a percent of the entire marketing budget is probably a little less sort of instantly flexible than it once was, but you have that as well. There are levers within the business on product structures and so on that are additional flexibility. One thing I would point out in the last “normal recession”, which Capital One, I think, had a pretty great performance during, I would point out for all of us card players we had a majority of our balance sheet of our card balance sheet with -- our card assets were off balance sheet. And so next time around, we won't have some of the benefits that we had in terms the balance sheet pressures there. We're under CECL, of course, as well. But if I pull way up on this, your question goes near and dear to what we talk about every day to take our business model, distress it as we underwrite it, to stress it as we manage it, every choice that we make. And I think that paradoxically, the unsecured credit card business. I think, has really great resilience to it. And I say paradoxically, because people love to have assets that are collateral. But if you look at most of the bad things that have happened in the world of banking, they happened that the collateral has a collapse in value. And so the business becomes a lot more unsecured than one thing. The reality of the card business, it is unsecured to start with. And we underwrite it in full knowledge of that and build in the buffers and flexibility to be resilient when really bad times come.

Rich, just in the spirit of what's different this time than the last time maybe a word about we're in a really different place in the technology world and the capabilities that, that gives us to sort of look at way more data and way more algorithms in our underwriting and fine-tune things around the edges. That's also a big change.

Well, the ability we can certainly move quite a bit faster than ever before. It's one thing to decide on credit policy changes. It's another thing for any company to be able to implement it right away. So with the ability to move quickly the ability to gather data at an incredibly granular level across so many different slices of the business is very valuable. The ability to leverage machine learning and AI to diagnostically help us see variances and aberrations that might take humans some precious months to sort of identify. So I think that one of the big benefits of our tech transformation is the ability to have way better granularity and monitoring. And the monitoring has the opportunity to be full file real-time and diagnostic in its nature, and these things can really help when the economy turns.

Thanks. Next question please.

Our next question comes from Don Fandetti with Wells Fargo. You may proceed.

Rich, I was wondering if you could talk a little bit about the auto lending business. in terms of how you're thinking about loan growth. You've got a lot of different dynamics like tariffs going on. Are you still leaning in? And do you think that there will be the demand to support that growth?

So well, we feel certainly great about the auto business. You've seen the delinquency and loss performance in the auto business, and it's really quite striking how strong it is. Our auto credit performance consistently strong, as a result of the proactive choices we made over the past years where we trimmed around the edges, in card, we trimmed around the edges. But in auto, we did even more -- we pulled back sharply in '22 and 2023 in response to the combination of margin pressure, normalizing credit and inflated vehicle values. But that's put us in a really strong position now with respect to the auto credit performance that you see. Now from a growth point of view, over the past year, we've leaned into the growth to take advantage of the opportunities that we see in the market. You've seen our origination volumes. I think they were like 22% higher on a year-over-year basis in the first quarter, and outstandings have now finally moved and were up, I think, 5% year-over-year. We have invested very heavily in technology in the auto business, both in terms of credit underwriting, but also in terms of building our Navigator platform to allow customers and dealers to use the platform to help for a customer to be able to see what the financing on any vehicle on -- in any lots in America and a fraction of a second, what the financing for that individual would be. And so from a customer point of view and then a dealer point of view in terms of helping the customer get to the right place with their financing. This platform has also been beneficial with respect to generating good volumes and helping customers both consumers and the dealers. So we have a lot of momentum in the business. So now you ask about tariffs. Certainly, I think if tariffs are -- if the tariff wars sort of really continue on, the auto business is I think might be really quite impacted because the immediate effect would be an almost certain increase in vehicle prices. And that would have sort of mixed effects on auto credit. But with production costs rising, supply chain costs rising, you could just really end up with vehicle value disruption in the business. And then we kind of say, well, how would higher vehicle prices, what would be the impact on our auto business, it would actually support the credit performance of our back book by improving equity positions for borrowers and increasing the recovery rates, but for new originations, higher vehicle prices would be a headwind both in terms of consumer demand and in terms of credit. And just one other thing to just keep in mind, keep in mind whenever there is tariffs that might gyrate quite a bit. even in the case where tariffs are abruptly removed at some point, you can see vehicle values drop abruptly, which can sort of adversely affect credit in a business like this one. So basically pulling way up, we feel great about our auto business, great about the position we're in and the traction that we're getting. We feel good about the consumer right now. And so we are still leaning in, but it's with a very watchful eye with respect to this uncertain economy.

Next, question. Please.

Our next question comes from Bill Carcache with Wolfe Research Securities. You may procced.

Rich and Andrew. Following up on your expense commentary and the choices you're making. Do you think, Rich, may be necessary to adjust your investment priorities as you continue to build out your various businesses while now also allocating capital to the build-out of the network business. And if you could speak more broadly to how focused you are on managing expenses for the revenue environment and generating positive operating leverage along the way as you make these investments?

Thanks so much, Bill. We've been focused on operating efficiency improvement for years, as you know. And we'd like to go back to 2013 because that's when we began our technology transformation and started really leaning into investments in technology from that point all the way to today. Over that time, we've driven about 700 basis points of improvement even as we've continued to make significant investments in technology and this improvement was driven by significant revenue growth powered by marketing and credit breakthroughs enabled by the technology transformation as well as expense efficiency from process automation, analog cost savings and reduction in legacy tech vendor costs. So it is not an accident that operating efficiency ratio improvements and significant tech investments have been traveling companions. And that's because technology investments and efficiency improvement are on a shared path as modern technology is the engine of sustained revenue growth and digital productivity gains. Now 2023 and 2024 witnessed quite a big improvement in the efficiency ratio. I do want to point out that with the late fee risk hanging over the last couple of years. There was some deferral of investments. So with that risk effectively off the table, there is a little catch up there that you see in our numbers now. But our story on efficiency continues to be the same. And we continue to have our eyes very focused on the longer-term where operating efficiency continues to be an important way that we generate returns. To your point about priorities, it is not lost on us that we have a lot of opportunities that we are blessed with. We have all the opportunities that come from moving up the tech stack and the more we move up the tech stack, the more there are sort of direct benefits to the business in the form of better customer experiences, more opportunities, better leveraging of data to create marketing and credit opportunities and things like that. And we have the Discover deal. And I've talked many times about there is the sort of immediate opportunity that we capture in our deal model. But then there is the longer-term opportunity that comes from really investing in the network, especially internationally, investing in the brand. And then really being able to put more business on the network. So in that environment, we spend a lot of time on prioritization and it's a good problem to have as many opportunities as we do. But to the point of your question, we very much keep our big picture in mind and the measuring stick associated with our journey and a very important one of those is our efficiency journey. Thank you.

Next question please.

Our next question comes from John Hecht with Jefferies. You may proceed.

Good afternoon. Thanks for taking my question. I guess my question is around marketing synergies. On one hand, it seems that the amount of media advertising maybe the physical mailings to the commerce, I mean 1 plus 1 is not going to equal 2, I think, with those endeavors. On the other hand, Rich, I think you're interested in really focusing on continued brand development, particularly on the global network. So how do we think about the kind of puts and takes of the opportunities for synergies versus the desire to spend and invest in the brand.

So Discover. And are you referring to the Discover brand, the Capital One brand, are you referring to both there as your particularly a Discover Point and the synergies associated with Discover?

Correct.

Yes. So it's a real blessing to have the opportunity in this acquisition to bring on board with a rare, well-recognized very strong brand. And so we now have two companies with very strong brands. So what we plan to do is we plan to continue, of course, I shouldn't say, of course, because all of this, we've done a lot of thinking about, but we are very, in our views that the Discover Branded is absolutely the right brand for the network and we will continue to invest in that brand and especially build the credibility and the capabilities globally with respect to the brand. We will also continue the Discover brand on the credit card side. It will be more of a really powerful product brand. Obviously, it's not going to be a corporation brand anymore, but we intend to have it as a strong product brand, and it goes back to what I think is the collective -- the combination of the business model they've created that has generated such amazing results over the year, which the brand plays an important role there. So we will continue to invest in that. Now there are some savings around the edges that we can do in our collective marketing campaigns, I am sure. So there's some benefit there. And I want to make one other comment about investing in the network brand. That is something that we don't plan to come roaring out of this acquisition on national TV. We’re really leaning into the network brand. What we much more plan to do is -- we believe that the synergies and the whole moves that we have talked about at the time we announced our deal of moving our entire debit business and a portion of our credit card business onto the network. We believe that can be done within the context of the current brand and the acceptance and the capabilities that Discover has built so skillfully. What we need to do in order to generate longer-term opportunity is to build the acceptance internationally up to a sort of you know it when you see it point when it's the right time to lean into brand development of a global brand, a global acceptance and so that -- in terms of the brand spend there, that's more of a delayed thing. It is something that we certainly plan to lean into overtime, but that would come as we see it today, that would come sort of after we have gotten the international acceptance to sort of when you see a point that it's ready to really take this story on TV.

Next question, please.

Our next question comes from Erika Najarian with UBS. You may proceed.

Good evening. Just two quick follow-up questions. First is for you, Andrew. I'm just going all the way back to Ryan's question on ACL. Is there any way to have a neat answer on what the weighted average unemployment rate would be if we took into account the heavier weighting on the downside scenario. And as we look forward for Capital One stand-alone. How should we think about the ACL ratio given improved credit performance relative to the heightened macro uncertainty? And I did have a follow-up.

Yes. In terms of the weighted edge, Erica, our process is one where we take the baseline and then apply various considerations to the downside scenario and uncertainties. So it's not a formulaic multiple scenarios with multiple probabilities that allow us to give you a weighted average a leverage number, which is why we kind of give the qualitative description there. And then in terms of how we think about things looking ahead with the allowance, 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 and just given the heightened uncertainty in which we're living at this point, I don't want to try to project where that's going to land a quarter from now until we'll go through our full process at the end of -- in the second quarter, and we'll see where the allowance ultimately lands.

Got it. And just my follow-up question. implicit in your response to John Pancari's question, are you also affirming the purchase accounting assumptions from February of 2024? And just confirming that there any adjustments to be made given the heightened uncertainty to the Discover portfolio in terms of credit going forward, it would be on the day 2 provision, of course, not the purchase credit impaired mark.

Right. Well, we're going to segment their portfolio for PCD and non-PCD and part of that, obviously, it would run through the balance sheet and part of that would run through the P&L on day 2. With respect to affirming balance sheet marks, I'll explicitly not affirm the balance sheet marks given that rates and credit and the stock price and a number of other variables have moved. And so we need to get to day 1 and do all of our analysis on those marks, and we'll provide the relevant updates at the appropriate time after we get to a close.

Next question please.

Our next question comes from Brian Foran with Truist. You may proceed.

Hi, I had one on spend and one on the network. On spend, in prior quarters, you've given us the high end versus low end kind of updating commentary. I just wonder if you could give us that and maybe specifically on the tariff reaction, any differences you are observing in high end versus low end? Or is it about the same?

So Brian, the relative to the tariffs and any early impact that we have seen. We have not seen that a big difference between high end versus low end there. Again, these are very early observations. Spend has generally has picked up a little bit in the last week or two, whether that is a pull forward or whether that's some other effect remains to be seen, but we haven't seen a striking difference on where on the spectrum that falls.

And then on the network, and I apologize, I feel like I'm going to oversimplify this and ask this in a dumb way, but when I talk to people, I mean, I think everyone sees the value of a globally competitive network. We can just look at the multiples Visa Mastercard at. It also seems like a very long and expensive journey. I'm just trying to unpack what you're signaling. Is it incrementally each year investing in the network? Or is it like, and again, I know I'm simplifying this, I'm not trying to put words in your mouth, but like is there some signaling that like, hey, guys, we might reset the expense outlook to take on Visa Mastercard full stop?

Yes. So Well, I'm glad you asked that question. We aren't on a quest to replicate Visa and MasterCard's model. It's an extraordinary model they have and on behalf of all the banks in the United States almost all of them. They are the intermediary between all the banks and the merchants, and of course, they get paid on a few basis points here and there, times the trillions of dollars of transactions. It's an amazing business model. By the way, just with respect to that, it is the case that Discover does have on the debit side, they are a network provider for several thousand banks. So I don't want to diminish that particular business model, it's a great thing. It came from their acquisition in 2005 of the Pulse network. And it's a very nice business model, and we would love to grow that. So I do think that being a network for other financial institutions will be part of the business model over the years. That like most other things, the road to significantly change the game there, probably, again, goes through that same path of building greater global network acceptance and the brand credibility sort of for the network that goes along with that. But anyway -- but the biggest opportunity for Capital One beyond the sort of the direct opportunity that we identified with the amount of volume that we moved is to be able to put more of our volume on the network. And it is our view that as we look to do more of that, we, -- again those roads lead to because lots of people -- so many of our customers our international travelers. And again, it did discover for a company of their size, I marvel at what they've built globally. Now in the United States, it's virtually -- it's basically accepted everywhere in the United States. Internationally, no one is accepted everywhere, but they've gotten a great head start on that, but we believe that in order to really capitalize on the network and to give the network the scale that in this profoundly scale-driven business, the scale that would really help it and sort of getting the flywheel of scale in this network effect business, all roads lead through building more international acceptance and then really leaning into the global brand associated with that network. But as we look at it, the primary payoff of that would be just putting more volume on the business in a very scale-driven business. And then over time, we could also look at other opportunities such as being a network for other financial institutions.

Next question, please.

And our final question comes from the line of Robert Wildhack with Autonomous Research. You may proceed.

Hi guys. Rich, you've hit on the international acceptance them quite a bit this evening and there internationally, it seems like that's more of a chicken and egg problem where you have to kind of build and catalyze acceptance. I'm wondering if you could share your thoughts on the specific investments strategies or levers you might have to solve that chicken and egg problem internationally and ultimately close the acceptance gap. Thanks.

Yes. So if you look at how any of the big networks have built their business, including how Discover has built international acceptance. It's really cobbling together a variety of solutions internationally really through partnerships. In Discovery's case, certainly, and this would be where the leverage is to partner with networks to partner with -- to go through merchant acquirers who can weigh more than one retail time, more at scale, create acceptance to partner with financial institutions, basically card issuing banks in different countries and finally, to go directly to merchants. They have gotten to their pretty striking levels of acceptance through a combination of those 4 and it's a boots on the ground, roll up your sleeves, do something, but what I'm comfortable is this is something they've already done. And it's just something that we will lean into and probably lean into it more than they were able to because of the opportunity and the price that we see on the other end of this with the combined scale that we have, to your point, it is a chicken and egg problem. And when you show up, they want to know how much volume you're bringing and as we get people. And as we sign up customers, they want to know how much acceptance we have. So it's a classic chicken and anything, but it's not starting at 0. It's starting at a pretty striking level of acceptance. They've sloped the work that they work backwards from where Americans travel. And so the playbook is there. We would lean into this playbook and then I think the opportunities also are outside of what we've sort of modeled in terms of the benefits in our deal model.

Well, that concludes our Q&A session. Thank you all for joining us on the conference call today, and thank you for your continued interest in Capital One. Have a great evening, everybody.

Thank you. This concludes today's conference call. Thank you for participating. You may now disconnect.