CAPITAL-ONE Earningcall Transcript Of Q2 of 2024

Andrew M. Young -- Chief Financial Officer

Thanks, Jeff, and good afternoon, everyone. I will start on Slide 3 of tonight's presentation. In the
second quarter, Capital One earned $597 million or $1.38 per diluted common share. Included in

the results for the quarter were adjusting items related to the Walmart partnership termination,
Discover integration costs and an accrual for our updated estimate of the FDIC's special
assessment.

Net of these adjusting items, second quarter earnings per share were $3.14. Relative to the prior
quarter, period-end loans held for investment increased 1%, while average loans were flat.
Ending deposits were flat versus last quarter, while average deposits increased 1%. Our
percentage of FDIC insured deposits increased one percentage point to 83% of total deposits.

Pre-provision earnings in the second quarter increased 7% from the first quarter. Revenue in the
linked quarter increased 1% driven by higher net and noninterest income, while noninterest
expense decreased 4% driven by a decline in operating expense. Our provision for credit losses
was $3.9 billion in the quarter. The $1.2 billion increase in provision relative to the prior quarter
was almost entirely driven by higher allowance.

Included in the second quarter was an $826 million allowance billed from the elimination of the
loss sharing provisions that occurred within the termination of the Walmart partnership. The
remaining quarter-over-quarter provision increase was driven by $353 million higher net reserve
build and a $28 million increase in net charge-offs. Turning to Slide 4. I will cover the allowance
in greater detail.

We built $1.3 billion in allowance this quarter. The allowance balance now stands at $16.6
billion. Our total portfolio coverage ratio increased 35 basis points to 5.23%. The increase in this
quarter's allowance and coverage ratio was largely driven by a build in our card segment.

I'll cover the drivers of the changes in allowance and coverage ratio by segment on Slide 5. In
our domestic card business, the allowance coverage ratio increased by 69 basis points to
8.54%. The substantial majority of the increase in coverage was driven by the impact of the
termination of the Walmart loss sharing agreement. In our consumer banking segment, the
allowance decreased by $23 million, resulting in a 5 basis-point-decrease to the coverage ratio.

And finally, our commercial banking allowance increased by $6 million. Coverage ratio remained
essentially flat at 1.74%. Turning to Page 6, I'll now discuss liquidity. Total liquidity reserves in
the quarter decreased about $5 billion to approximately $123 billion.

Our cash position ended the quarter at approximately $45 billion, down about $6 billion from the
prior quarter. The decrease was driven by wholesale funding maturities, loan growth, and
declines in our commercial deposits partially offset by deposit growth in our retail banking
business. You can see our preliminary average liquidity coverage ratio during the second quarter
was 155%, down from 164% in the first quarter. Turning to Page 7, I'll cover our net interest
margin.

Our second quarter net interest margin was 6.7%, 1 basis point higher than last quarter and 22
basis points higher than the year-ago quarter. The relatively flat quarter-over-quarter NIM was
the result of largely offsetting factors. NIM in the quarter benefited from the termination of the
revenue sharing agreement with Walmart, as well as modestly higher yields in the auto
business. These two factors were roughly offset by the seasonal effects on yield in the card
portfolio and a slight increase in the rate paid on retail deposits.

Turning to Slide 8, I will end by discussing our capital position. Our common equity Tier 1 capital
ratio ended the quarter at 13.2%, 10 basis points higher than the prior quarter. Net income in the
quarter was largely offset by the impact of dividends and $150 million of share repurchases.
During the quarter, the Federal Reserve released the results of their stress test.

Our preliminary stress capital buffer requirement is 5.5%, resulting in a CET1 requirement of
10%. However, as we disclosed in our last 10-Q, the announcement of the acquisition of
Discover constituted a material business change. As a result, we are subject to the Federal
Reserve's preapproval of our capital actions until the merger approval process has concluded.
With that, I will turn the call over to Rich.

Rich?

Richard D. Fairbank -- Chairman and Chief Executive Officer

Thanks, Andrew, and good evening, everyone. Slide 10 shows second 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 second quarter, our domestic card
business delivered another quarter of strong results as we continue to invest in flagship
products and exceptional customer experiences to grow our franchise.

Year-over-year purchase volume growth for the quarter was 5%. Ending loan balances increased
$11.1 billion or about 8% year over year. Average loans also increased about 8%. And second
quarter revenue was up 9%, driven by the growth in purchase volume and loans.

Revenue margin for the quarter remained strong at 17.9%. The revenue margin includes a
positive impact of about 18 basis points resulting from the partial quarter effect of the end of
the Walmart revenue-sharing agreement. The charge-off rate for the quarter was 6.05% and the
partial quarter impact of the end of the Walmart loss sharing agreement increased the quarterly
charge-off rate by 19 basis points. Excluding this impact, the charge-off rate for the quarter
would have been 5.86%, up 148 basis points year over year.

The 30-plus delinquency rate at quarter end was 4.14%, up 40 basis points from the prior year.
As a reminder, the end of the Walmart loss-sharing agreement did not have a meaningful impact

on delinquency rate. The pace of year-over-year increases in both the charge-off rate and the
delinquency rate have been steadily declining for several quarters and continued to shrink in the
second quarter. On a sequential quarter basis, the charge-off rate, excluding the Walmart
impact, was down 8 basis points, and the 30-plus delinquency rate was down 34 basis points.

Domestic card noninterest expense was up 5% compared to the second quarter of 2023,
primarily driven by higher marketing expense. Total company marketing expense in the quarter
was $1.1 billion, up 20% 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. Compared to the second quarter of 2023, domestic card marketing in the quarter
included increased marketing to grow originations at the top of the marketplace, higher media
spend, and increased investment in differentiated customer experiences like our travel portal,
airport lounges, and Capital One Shopping. Slide 12 shows second quarter results for our
consumer banking business. After returning to positive growth last quarter, auto originations
were up 18% year over year in the second quarter.

Consumer banking ending loans were down $1.6 billion or 2% year over year, and average loans
were down 3%. On a linked-quarter basis, ending loans were up 1% and average loans were flat.
Compared to the year-ago quarter, ending consumer deposits were up about 7% and average
deposits were up 5%. Consumer banking revenue for the quarter was down about 9% year over
year, largely driven by higher deposit costs and lower average loans compared to the prior-year
quarter.

Noninterest expense was up about 2% compared to the second quarter of 2023, driven by an
increase in marketing to support our national digital bank. The auto charge-off rate for the
quarter was 1.81%, up 41 basis points year over year. The 30-plus delinquency rate was 5.67%,
up 29 basis points year over year. Largely as the result of our choice to tighten credit and pull
back in 2022, auto charge-offs have been strong and stable.

Slide 13 shows second quarter results for our commercial banking business. Compared to the
linked quarter ending loan balances decreased about 1%. Average loans were also down about
1%. The modest declines are largely the result of choices we made in 2023 to tighten credit.

Ending deposits were down about 6% from the linked quarter. Average deposits were down
about 3%. The declines are largely driven by our continued choices to manage down selected
less attractive commercial deposit balances. Second quarter revenue was essentially flat from
the linked quarter and noninterest expense was lower by about 6%.

The commercial banking annualized net charge-off rate for the second quarter increased 2
basis points from the sequential quarter to 0.15%. The commercial banking criticized
performing loan rate was 8.2%, up 23 basis points compared to the linked quarter. The criticized
nonperforming loan rate increased 18 basis points to 1.46%. In closing, we continued to deliver
strong results in the second quarter.

We delivered another quarter of top-line growth in domestic card loan purchase volume and
revenue and a second consecutive quarter of year-over-year growth in auto originations.
Consumer credit trends continued to show stability and our operating efficiency ratio improved.
We had guided to 2024 annual operating efficiency ratio net of adjustments to be flat to
modestly down compared to 2023, assuming the CFPB late fee rule takes effect in October, and
we're on a very consistent path with what we expected when we gave that guidance. If the
implementation of the rule is delayed, that would be a tailwind to 2024 annual operating
efficiency ratio.

One thing that has changed is the Walmart relationship. Our partnership ended in the second
quarter, which will increase charge-off rates but have a positive impact on operating efficiency
ratio. Including the Walmart impact, we expect full year 2024 operating efficiency ratio net of
adjustments to be modestly down compared to 2023. We continue to lean into marketing to
grow and to further strengthen our franchise.

In the domestic card business, we continue to get traction in originations across our products
and channels and our origination opportunities are enhanced by our technology transformation,
which enables us to leverage machine learning at scale to identify the most attractive growth
opportunities and customize our marketing offers. We are also getting traction in building our
franchise at the top of the market with heavy spenders. It is not lost on us that competitive
intensity and marketing levels are increasing at the very top of the market, and we know we have
important investments to make. We continue to be pleased to see our investments pay off in
customer and spend growth and returns.

And we're building an enduring franchise with annuity-like revenue streams very low losses and
very low attrition. In consumer banking, our modern technology and leading digital capabilities
are powering our digital-first national banking strategy and we're leaning even harder into
marketing to grow our national checking franchise, which has had industry-leading pricing with
no fees and industry-leading customer satisfaction. Pulling up, marketing is a key driver of
current and future growth and value creation across the company, and we're leaning hard into
our marketing investments. We expect total company marketing in the second half of 2024 to be
meaningfully higher than the first half, similar to the pattern we saw last year.

We are all in and working hard to complete the Discover acquisition. Our applications for
regulatory approval are in process, and we're fully mobilized to plan and deliver a successful

integration. We continue to expect that we'll be in a position to complete the acquisition late this
year or early next year subject to regulatory and shareholder approval. The combination of
Capital One and Discover creates game-changing strategic opportunities.

The Discover payments network positions Capital One is a more diversified, vertically integrated
global payments platform, and adding Capital One's debit spending and a growing portion of our
credit card purchase volume to the Discover network will add significant scale increasing the
network's value to merchants, small businesses and consumers and driving enhanced network
growth. In credit cards and consumer banking, we're bringing together proven franchises with
complementary strategies and a shared focus on the customer. And we will be able to leverage
and scale the benefits of our 11-year technology transformation across every business and the
network. Pulling way up, the acquisition of Discover is a singular opportunity.

It will create a consumer banking and global payments platform with unique capabilities modern
technology, powerful brands, and a franchise of more than 100 million customers. It delivers
compelling financial results and offers the potential to create significant value for merchants
and customers. And now we'll be happy to answer your questions. Jeff?

Jeff Norris -- Senior Vice President, Global Finance

Thanks, Rich. We'll now start the Q&A session. As a courtesy to other investors and analysts
who may wish to ask a question, please limit yourself to one question plus a single follow-up. If
you have any follow-up questions after the Q&A session, the Investor Relations team will be
available after the call.

Josh, please start the Q&A.

Questions & Answers: