Good day, and thank you for joining us. Welcome to the Capital One Q4 2024 Earnings Call. Please note that today's conference is being recorded. Following the presentations, there will be a question-and-answer session. I would now like to introduce your speaker today, Jeff Norris, Senior Vice President of Finance. Please proceed.

Thanks, and welcome, everyone. And just as a reminder, as always, we are webcasting live over the Internet, and to access the call on the Internet, please log on to Capital One's website, capitalone.com, and follow the links from there. In addition to the press release and financials, we've included a presentation summarizing our fourth-quarter 2024 results. With me this evening are Mr. Richard Fairbank, Capital One's Chairman and Chief Executive Officer; and Mr. Andrew Young, Capital One's Chief Financial Officer. Rich and Andrew are going to walk you through this presentation. To access a copy of the presentation and press release, please go to Capital One's website, click on Investors, and click on financials, and then click on quarterly earnings release. Please note that this presentation may contain forward-looking statements. Information regarding Capital One's financial performance and any forward-looking statements contained in today's discussion and the materials speak only as of the particular date or dates indicated in the materials. Capital One does not undertake any obligation to update or revise any of this information, whether as a result of new information, future events, or otherwise. Numerous factors could cause our actual results to differ materially from those described in forward-looking statements. For more information on these factors, please see the section 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 will start on slide three of tonight's presentation. In the fourth quarter, Capital One earned $1.1 billion or $2.67 per diluted common share. For the full year, Capital One earned $4.8 billion or $11.59 per share. Included in the results for the fourth quarter were adjusting items related to Discover integration costs and a legal reserve build. Net of these adjusting items, fourth-quarter earnings per share were $3.09. Full-year adjusted earnings per share were $13.96. We also had one notable item in the quarter, which was $100 million of accelerated philanthropy contributions. Pre-provision earnings of $4.1 billion in the fourth quarter were down 13% from the third quarter, driven by higher non-interest expense. The linked quarter's increase in non-interest expense was driven by increases in both operating expenses and marketing spend. Revenue in the linked quarter increased 2%, driven by higher non-interest income. Provision for credit losses was $2.6 billion in the quarter, up about $160 million relative to the prior quarter. The quarterly increase in provision was driven by higher net charge-offs, partially offset by a larger allowance release. Turning to slide four, I will cover the allowance in greater detail. We released $245 million in allowance this quarter, and our allowance balance now stands at $16.3 billion. The decrease in this quarter's allowance was driven by releases in our Commercial Banking and Commercial segments. Our total portfolio coverage ratio decreased 20 basis points to 4.96%. I'll cover the drivers of the changes in allowance and coverage ratio by segment on slide five. The allowance balance in our domestic card business was flat. The coverage ratio declined 33 basis points, primarily driven by seasonal balances as well as favorable near-term credit trends. In our Consumer Banking segment, we released $131 million in allowance, resulting in a 22 basis point decrease to the coverage ratio. Vehicle values were stable in the quarter, resulting in an improved recoveries outlook, which drove the release. And finally, our Commercial Banking allowance decreased by $130 million, resulting in a 15 basis point decrease to the coverage ratio. The release was primarily driven by the reduction in criticized loans and, to a lesser extent, by charge-offs in the quarter. Turning to page six, I'll now discuss liquidity. Total liquidity reserves in the quarter decreased by about $8 billion to approximately $124 billion. Our cash position ended the quarter at approximately $43 billion, down about $6 billion from the prior quarter. The decline in cash was largely driven by seasonally higher card loans and funding maturities, which were partially offset by continued strong growth in our Consumer Banking business deposits. Our preliminary average liquidity coverage ratio during the fourth quarter was 155%. Turning to page seven, I'll cover our net interest margin. Our fourth-quarter net interest margin was 7.03%, 8 basis points lower than last quarter and 30 basis points higher than the year-ago quarter. The linked quarter decrease in NIM was primarily driven by lower asset yields, which were only partially offset by lower deposit and wholesale funding costs. Turning to slide eight, I will end by discussing our capital position. Our common equity Tier-1 capital ratio ended the quarter at 13.5%, 10 basis points lower than the prior quarter. Net income in the quarter was more than offset by the impact of loan growth, dividends, and $150 million of share repurchases. As a reminder, the announcement of the acquisition of Discover constituted a material business change. Therefore, we continue to be subject to the Federal Reserve's pre-approval of our capital actions until the merger approval process has concluded. With that, I will turn the call over to Rich. Rich?

Thanks, Andrew, and good evening, everyone. Slide 10 shows fourth 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 fourth quarter, our Domestic Card business delivered another quarter of steady top-line growth, strong margins, and stable credit. Year-over-year purchase volume growth for the quarter was 7%. Ending loan balances increased $8 billion or about 5% year-over-year. Average loans increased about 6%, and fourth-quarter revenue was up 9% from the fourth quarter of 2023, driven by the growth in purchase volume and loans. Revenue margin for the quarter increased 55 basis points from the prior year quarter to 18.6%, largely driven by the impact of the end of the Walmart revenue sharing agreement. The charge-off rate for the quarter was 6.06%. The impact of the end of the Walmart loss-sharing agreement increased the fourth-quarter charge-off rate by roughly 40 basis points. Excluding this impact, the charge-off rate for the quarter would have been 5.66%, up 31 basis points year-over-year. And after 20 consecutive months of second derivative improvement, the 30-plus delinquency rate crossed into actual year-over-year improvement. The 30-plus delinquency rate at the end of December was 4.53%, down 8 basis points from the prior year. As a reminder, the end of the Walmart loss-sharing agreement did not have a meaningful impact on the delinquency rate. On a sequential-quarter basis, the charge-off rate was up 45 basis points. The 30-plus delinquency rate was flat compared to the linked quarter. Domestic Card non-interest expense was up 13% compared to the fourth quarter of 2023. Operating expense and marketing both increased year-over-year. Total company marketing expense in the quarter was $1.4 billion, up 10% 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 fourth quarter of 2023, Domestic Card marketing in the quarter included higher media spend and increased investment in premium benefits and differentiated customer experiences like our travel portal, airport lounges, and Capital One Shopping. Slide 12 shows fourth-quarter results in our Consumer Banking business. Auto originations were up 53% from the prior-year quarter. A portion of this growth can be attributed to overall market growth, while the remainder is the result of our strong position to pursue resilient growth in the current marketplace. As a reminder, our choices to tighten credit and pull back in anticipation of credit score inflation and declining vehicle values were still in effect in the fourth quarter of 2023, resulting in relatively low originations. These choices also drove stability in credit performance that positioned us to lean into current marketplace opportunities and return to originations growth in 2024. With four consecutive quarters of origination growth in 2024, Consumer Banking loan balances returned to growth in the fourth quarter. Ending loans increased $2.7 billion or about 4% year-over-year and average loans were up 1%. On a linked-quarter basis, ending loans were up 2% and average loans were up 1%. Compared to the year-ago quarter, ending consumer deposits grew about 7% and average consumer deposits were up about 8%. Consumer Banking revenue for the quarter was up about 1% year-over-year. Growth in loans and deposits was partially offset by a higher year-over-year average deposit interest rate. Non-interest expense was up about 10% compared to the fourth quarter of 2023, driven largely by the unique fourth-quarter items Andrew discussed, as well as increased auto originations and continued technology investments. The auto charge-off rate for the quarter was 2.32%, up 13 basis points year-over-year. The 30-plus delinquency rate was 5.95%, down 39 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 strong and stable on a seasonally adjusted basis. Slide 13 shows fourth-quarter results for our Commercial Banking business. Compared to the linked quarter, ending loan balances were essentially flat. Average loans were down about 1%. Both ending and average deposits were up about 4% from the linked quarter. Fourth-quarter revenue was up 7% from the linked quarter, and non-interest expense was up by about 5%. The Commercial Banking annualized net charge-off rate for the fourth quarter increased 4 basis points from the sequential quarter to 0.26%. The commercial criticized performing loan rate was 6.35%, down 131 basis points compared to the linked quarter. The criticized non-performing loan rate decreased 16 basis points to 1.39%. In closing, we continued to post strong and steady results in the fourth 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 for the fourth consecutive quarter, and the return to year-over-year growth in loan balances and consumer credit trends remained stable. Our full-year operating efficiency ratio net of adjustments was 42.35%, consistent with our guidance of the low 42s, even after incurring $100 million in accelerated philanthropy contributions. Turning to the Discover acquisition, the shareholder votes are scheduled for February 18th, and we continue to work closely with the Federal Reserve, the OCC and the Department of Justice as our applications continue to work their way through the regulatory approval process. We remain well-positioned to complete the acquisition early in 2025, subject to regulatory and shareholder approval. 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 enhance competition and create significant value for merchants and customers. And now we'll be happy to answer your questions. Jeff?

Thank you, Rich. We will now start the Q&A session. Remember, as a courtesy to other investors and analysts who may wish to ask a question, please limit yourself to one question plus a single follow-up. And if you have 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.

Thank you. Our first question comes from Ryan Nash with Goldman Sachs. You may proceed.

Hey, good afternoon, everyone.

Hey, Ryan.

Hey, Ryan.

So Rich, delinquencies have been in line or better for nine straight months losses, and you talked about delinquencies now being down on a year-over-year basis and losses have sort of followed suit, but at a little bit of a slower pace. And you've outlined a lot of the reasons, deferred charge-offs, the press recoveries. But when you think about credit from here, just broadly, what are you seeing from the consumer and how are you thinking about loss performance as well as any other factors that could be impacting losses? And do you think we're on a downward trajectory from here? Thank you. And I have a follow-up.

Thank you, Ryan. I'll start by discussing consumer health before moving on to Capital One's credit performance. The US consumer remains a strong pillar of the economy. Although we noticed some softening in the first half of 2024, the unemployment rate has stabilized in the latter half, with job creation showing signs of renewed strength. Real incomes are growing steadily as inflation begins to moderate. Consumers are managing their debt servicing burdens, which are stable close to pre-pandemic levels, and many have higher bank account balances than before the pandemic. However, it’s important to recognize that individual consumer circumstances vary greatly, and averages may not reflect the complete picture. There are areas of concern, particularly due to the cumulative impact of inflation and high interest rates on consumers whose incomes haven't kept pace. Additionally, inflation pressures persist, and long-term interest rates have risen sharply since the Fed began lowering rates in September. This creates a disconnect between the average consumer and those more financially vulnerable, evident in our Card business payment rates. Generally, card payment rates are significantly higher than pre-pandemic levels across our major customer segments. However, the proportion of customers making only minimum payments is also slightly above pre-pandemic levels, aligning with higher card delinquencies. This trend is observed across the credit spectrum. I’m not implying that this is exclusive to the lower-end market; in fact, the lower-end segment seems to be performing relatively well at this time. We clearly see some lingering pandemic-related effects such as delayed charge-offs from the unprecedented stimulus and forbearance periods in 2020 to 2022. While isolating this effect is challenging, we can derive insights from our credit trends and industry patterns over recent years. Ultimately, I believe consumers are in a favorable position compared to historical benchmarks, despite the pressures we’ve mentioned that need to be resolved before credit loss levels can return to pre-pandemic standards. The consumer narrative remains strong and consistent with previous quarters. Moving on to Capital One Credit, our card delinquencies have aligned with typical seasonal patterns throughout 2024, with losses lagging by about a quarter. Earlier this year, we noted that shifts in tax refund timing and levels due to tax law changes were likely affecting seasonal credit patterns in our Card business. We established new seasonality benchmarks for delinquencies based on post-pandemic data, which exhibit less volatility than before. After a full year of observing this new benchmark, we are confident in its accuracy. This year’s stabilization in delinquencies was evident, and rather than claiming a peak or predicting credit improvement, we recognize the notable stabilization we've observed. In the fourth quarter, we reported a seasonally adjusted improvement in delinquencies for the first time since normalization began, ending the year with slightly lower figures compared to the previous year, which is certainly encouraging. Looking ahead, while we’re not providing guidance on future credit, several dynamics are at play. Our recoveries inventory will gradually rebuild, which should help reduce losses over time. Nevertheless, high interest rates are likely to remain challenging for some consumers, particularly those with larger debt burdens. We also anticipate the continuation of delayed charge-offs, though this effect is difficult to quantify and forecast. Over time, we expect to revert to a situation where traditional labor market indicators influence changes in Consumer Credit, but that will take time. As we enter the new year, we'll monitor the level and timing of tax refunds, acknowledging their potential impact on seasonal trends in card credit.

Got it. Thanks for the color. If I can throw in one high-level follow-up. So Rich, efficiency improvement has been a hallmark of Capital One for the last seven or eight years, excluding a small period during COVID. You recently talked about investments you wanted to make in the network once the deal hopefully closes at some point in the first quarter? I guess the question is, do you expect to continue to be on an efficiency journey, fully recognizing that the cost saves obviously make it easier, but just curious how you're thinking about efficiency for the consolidated company over the medium term, fully recognizing that there's going to be a lot of noise in the results?

We look forward to completing our deal and diving into the financials, performance, and details of Discover. We see a significant opportunity with this impressive company. As we've mentioned, there are three key areas that will require ongoing investment as we explore the strategic advantages of the Discover deal. The first is compliance and risk management, where Discover has made significant strides, and we are committed to supporting and enhancing those efforts. The second area is network acceptance. We were impressed to learn about the high acceptance rate of Discover in the United States, and they have been actively advertising this success. Internationally, they have focused on customer travel patterns and have made considerable progress. For Capital One, expanding acceptance internationally is crucial for future growth, and this will take several years. The third area is building the network brand; we intend to keep the Discover name, which is strong. However, we also recognize the need to enhance consumer perception and build international presence. These three investment areas have been a priority since the beginning of the deal. Regarding efficiency ratios, Capital One has been on a decade-long journey to improve its operating efficiency, even while increasing technology investments. This paradox means that while we invest in technology, we also see efficiency improvements in terms of growth and cost savings. This focus on operating efficiency will continue for Capital One and the combined organization. The three key investment areas we’ve outlined will also contribute to operating performance. Historically, our strategic investments have led to better operating efficiency, which is a crucial way we provide value to investors. We believe there will be ongoing opportunities in this area over the long term.

Next question, please.

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

Hi, thank you. Good evening. I wanted to follow up on Credit first. It seems the trend that we've seen for the second derivative suggests there's room for that to continue to go lower. Is there some sort of framework to think about how much lower DQs can trend going forward? And is there anything in the near term that can cause the second derivative to inflect higher again? And I have a follow-up.

Thank you for the question, Terry. Since our company was established, we have consistently focused on delinquencies as they are the most reliable indicator of credit performance among various metrics we track. While there are numerous metrics we monitor, delinquencies certainly rank highest. It’s an important milestone that we’ve observed, especially with the second derivative finally crossing the horizontal axis, which we appreciate noting. When analyzing monthly trends, seasonality plays a significant role. Although we don’t publish an exact seasonality curve due to the lack of a precise benchmark, we aim to inform our investors about our perspective on it. Capital One has experienced more pronounced seasonal fluctuations compared to other card issuers. The primary factor behind this heightened seasonality is tax refunds. Given that we have a larger subprime portfolio compared to competitors who avoid subprime altogether, our customers typically display greater seasonal variations in their credit performance than higher-end market customers. Tax refunds can create a beneficial seasonal cash flow for these consumers, which can contribute to payment patterns. Changes to tax withholding rules in previous years resulted in fewer tax refunds and smaller average refund amounts, with the IRS also delaying certain refunds. This has caused significant variability recently. Establishing a clear seasonality curve has been challenging due to the dramatic normalization of credit affecting the seasonal patterns. However, we’ve developed a detrended seasonal curve based on 2023 data, which has proven accurate for 2024. In 2024, we observed a decrease in refunds compared to pre-pandemic levels, with about 25% less overall refund volume. Delinquencies aligned with our updated post-pandemic seasonality benchmarks, which mirrored previous timing, but the new curve reflects approximately 35% to 40% less fluctuation compared to earlier trends. Additionally, auto loan delinquencies showcase similar seasonal trends but with quicker variations. We typically notice a seasonal low for auto delinquencies in Q1 and losses spike in Q2, and this year's seasonal improvements were slightly delayed. Now, discussing credit performance, it's important to note that the consumer landscape is quite healthy, and the overall economy appears stable. This environment seems to favor improved credit performance, supported by consistent recovery rates, though our recovery inventory has been limited during the pandemic and is gradually improving. We must consider the impact of inflation and the situation of consumers on the fringes who are still facing challenges. Delayed charge-offs are likely affecting these consumers. Overall, our credit metrics are strong, and the consumer situation is favorable. However, we need to be cautious about overstating the positive trends, as delayed charge-offs still require attention, especially for those consumers struggling the most.

Got it. That's helpful. Maybe just to talk about the auto business. You called out the loan book return to growth this quarter. Should we expect you to lean into that and see loan growth accelerate? And maybe can you just talk about the overall profitability of the loans you're booking today versus what you've seen historically? Thank you.

We are very optimistic about the auto business. The credit performance is notably impressive, especially when we consider that our auto delinquencies have consistently stayed below pre-pandemic levels and have improved year-over-year for the last two quarters. In comparison to our card business, we took more significant measures in the auto sector to manage credit when we faced margin pressures due to inflation not being passed through and declining vehicle values. We made necessary adjustments, and those issues are now starting to resolve. Currently, margins are more normalized, and as credit conditions improve, we see credit score inflation easing. We will need to monitor vehicle values closely. Thanks to the substantial investments we've made in technology, underwriting, and our auto navigator platform, we feel confident about advancing further in the auto sector. Overall, the trends we observe in margins, credit, and competition give us confidence in our decision to focus on the auto business.

Next question, please.

Thank you. Our next question comes from Rick Shane with J.P. Morgan. You may proceed.

Thanks for taking my question. Hey, Rich, you did a great job laying out the factors that have caused the historical relationship between labor and credit to weaken. And one of the factors you mentioned was the impact of rates. And that makes sense credit cards are one of the two largest classes of floating rate consumer debt. As we think about reversion to historical norms, should we expect charge-off rates to be structurally higher as long as interest rates are structurally higher, or is it possible to get back to historic loss rates in a high interest rate environment?

It's a great question. It's interesting how some of us were involved in similar situations in the past when inflation was a significant issue. Speculating on this, if we consider the impact of interest rates on consumer credit, higher rates can affect the burden of debt servicing for consumers. While higher rates gradually influence consumer products, they don't immediately lead to increased debt burdens. Mortgages and auto loans mostly have fixed rates, which means there's a delay before interest rates affect consumers more directly. However, this effect can persist over time. Most credit cards have variable APRs, so rising interest rates usually cause higher minimum payments for consumers overall. If wages stabilize and keep pace with inflation, it seems plausible that charge-off rates for credit cards could remain consistent with those from a lower interest rate environment. The situation becomes more complicated if interest rates rise suddenly, but if they stabilize at a moderate level higher than in the last couple of decades, it might lead to credit metrics aligning with historical trends. The primary reason they're not currently is likely due to the unprecedented number of years of charge-offs resulting from government stimulus and forbearance measures that were temporary for many consumers. Some of these issues are still unfolding with current charge-offs. Looking back over the years, it's useful to consider the typical levels of credit losses versus the actual levels, especially thinking about delayed charge-offs. While not all of this underperformance will convert to charge-offs, the delayed charge-off effect has contributed to why credit losses in credit card businesses are currently higher than pre-pandemic levels in what should be a benign environment. Time will help resolve this, and there are significant positive factors at play that are beneficial for the industry.

Thank you very much, Rich.

Next question, please.

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

Good evening. Just on the efficiency side, just a follow-up to Ryan's line of questioning. I know you've guided to an operating efficiency ratio in the low 42% range for 2024. Does this 42% range remain the case as you look at 2025, or do you see a change to the upside or the downside off of this level? Thanks.

I believe the operating efficiency ratio has shown significant improvement, with a 700 basis point gain since we began our technology transformation in 2013. This is certainly a positive development, driven mainly by our tech transformation. While we continue to invest, we are also finding ways to reduce costs through decreased vendor expenses, the high costs associated with legacy technology, the advantages offered by cloud solutions, and the opportunity to rebuild our operations on a modern technology foundation. This ongoing journey is producing benefits, but I want to emphasize that we've seen substantial increases in the ratio over the past couple of years. It's important not to take the recent trends and assume they indicate an accelerating downturn. We don't provide short-term guidance, but we are making significant investments in the business. I want to stress that when we take a broader view of Capital One's journey, we see that efficiency has not been our primary goal; it's one of several benefits stemming from the tech transformation, and it's encouraging to see this trend continue. However, we recommend against making projections based on year-to-year changes. Overall, it's a positive long-term narrative.

Thank you, Rich. I have a quick follow-up. Have you made any updates to your expected deal metrics related to the Discover deal, specifically the 15% or greater EPS accretion forecast for 2027, the expense efficiencies, or the timing for integrating the $175 billion in purchase volume into the network? Thank you.

Hey, John. Yes, what I'll say is it's two independent public companies. We still are operating separately at this point, and there are a number of variables that have moved and will continue to move between now and legal day one. And so I'm not going to specifically comment on how any one of those variables or metrics are changing since the deal model. What I will say is we considered a wide range of outcomes across each of the line items, and we continue to be comfortable with the estimates that we included in the deal model. We feel very good both strategically and financially about the deal today as we did nearly a year ago when we announced it. And so as we get to legal day one and put the marks on the balance sheet, we'll provide updates on the relevant metrics at that point.

Next question, please.

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

Good afternoon, and thank you for taking my questions. I wanted to start first by just talking about NIM a little bit. You called out the Walmart impact this quarter. Any other call-outs for the quarter? It just feels banks have been quite disciplined about lowering saving account interest rates as the Fed has reduced rates? Do you think that continues, or are you starting to see some demand for deposits or deposit competition ramping as we start contemplating loan growth here into 2025? I guess just related to that, if you could just talk about some of the puts and takes on NIM in 2025 that'd be great? Thank you.

Sure, Mihir. Let me remind everyone that in the first quarter, we have two fewer days, which will lead to roughly a 15 basis point decrease in NIM. Looking beyond the day count and considering the longer term, many of the same factors I've mentioned in previous quarters still apply as potential headwinds and tailwinds. Regarding headwinds, we're slightly asset-sensitive, so we might see a small drop in NIM if rates continue to decline, and we noticed some of that this quarter. Additionally, in our rate risk modeling, we factor in deposit betas, so if betas decrease more slowly, we would be slightly more asset-sensitive in that case. On the tailwind side, a steepening yield curve compared to forwards would be beneficial if that trend continues. However, the most significant factor we've observed in recent quarters is card growth, which is becoming a larger portion of our balance sheet. All else being equal, this is a substantial tailwind for NIM. These are the primary forces at play that I wanted to highlight.

Thank you. Turning to capital return, you've been buying back $150 million in stock over the past few quarters, and your CET1 is now at 13.5%. We understand that with the deal, you need to get approval for any capital actions. My question has two parts: first, is that approval making you a bit cautious at the moment? And second, once the deal is approved, should we expect you to be quite aggressive in reducing capital, or is it more likely that it will remain elevated for a while after the deal as you handle the integration?

Yes. I'll wrap my answer to both of those questions into one for you, Mihir. First of all, just go without saying, but I will say it too, which is we clearly recognize that over the longer term capital return is a key component of shareholder value creation. And you've seen in prior periods, we've executed substantial share repurchases. But in the near term, our pending deal is certainly influencing our approach to capital in a few ways. As you said, we're still under regulatory pre-approval rules for each of our capital actions. Then second, we will need to run our own bottoms-up analysis as a combined company to just assess our view of the combined capital need, and we continue to be two separate companies and therefore, don't have the ability to do that analysis until after close. Then third, we will need the Fed's approval to go back to operating under the SEB framework. If I pull up from there, and put all of those together, I think it's likely we're going to stay at a slower repurchase pace until we resolve these factors, but after that, we'll have more flexibility.

Next question, please.

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

Thank you. Good evening, Rich and Andrew. It was good to hear all the references to the Capital One Arena around the inauguration. I wanted to ask about your ability to better compete against the big banks in debit, assuming the Discover transaction closes as you expect? We know debit rewards for Visa, Mastercard issuers essentially went away after the force reduction in interchange under Dodd-Frank, but would reintroducing debit rewards be something that you'd consider given the greater flexibility that owning the Discover Network will afford you?

Hey, Bill. A key part of the deal is our enthusiasm for acquiring the network, which adds an important aspect to our vertical integration strategy. While we frequently discuss credit cards, the debit segment is crucial as well. Capital One has been steadily investing in our national banking business. Furthermore, owning our own network will be advantageous, allowing us to benefit from the vertically integrated economics and the scale created by combining Discover's volume with Capital One's. Let me take a broader view and touch on Capital One's Consumer Banking strategy, where debit plays a central role. When considering consumer banking historically, banks were once ubiquitous on every corner. Over the past couple of decades, we've seen the rise of direct banks, which provide savings options with higher rates and no physical locations. Through acquisitions, we have also gained several traditional banks with branch networks and the country's largest direct bank. I emphasized at that acquisition's announcement that while it was an excellent financial move, it was a strategic game changer for Capital One about 12 years ago. Since then, we've been diligently pursuing a unique business model that combines these two approaches. We envision the Bank of the Future, which isn't solely a direct bank or one with branches everywhere but rather a bank with minimal physical presence. We have branches and also cafes in major metropolitan areas that serve as a blend of a branch and a showroom for Capital One. These spaces allow people to learn about Capital One and how we can assist them in improving their lives. Our strategy encompasses building towards this vision by considering thin physical distribution complemented by digital capabilities, making almost all branch services available digitally. While there are some services, like safe deposit boxes, that we haven't transitioned digitally, we aim to deliver the majority of branch-related activities through a combination of minimal physical locations and comprehensive digital services. To drive business, we need exceptional products, and we've distinguished ourselves as the only major bank without fees or minimums, including the recent introduction of no overdraft fees. These advantageous offerings stem from the superior economics of our light physical distribution model. Regarding our debit card strategy, we haven't finalized the deal or fully evaluated the outcomes from the Discover side yet. However, we are pleased with our current strategy and are heavily investing to grow that segment. The substantial increase in marketing over the years is driven by Capital One’s organic growth as a National bank with limited physical presence, requiring substantial marketing efforts. Discover provides an exciting boost to a strategy we've been developing for over a decade, and I see it as more of the same from Capital One, now with additional momentum.

I appreciate all the details, Rich. Thank you.

Next question, please.

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

Great. Thanks. Rich, you talked about better growth in Auto and Card, you talked about the high-end cards. Talk about the non-prime businesses in both card and auto, given the improved credit, how you're thinking about growth in those businesses in the coming quarters?

At the lower end of the business, especially in the non-prime or subprime market, I would describe the situation as stable. The consumer credit side was the first part of our business to normalize, particularly in this segment, which has shown strong stability. Originations in this area, as well as across our business, have been consistently aligning over the years. Although it's a highly competitive sector with many traditional and non-traditional players, we monitor the competition closely. Given the strong performance metrics and the strength of the consumer, we continue to focus on both the card and auto segments much like we have historically. For cards, the approach has been consistent over the years, while we’ve previously scaled back in auto but are now slowly increasing our involvement again. We're very encouraged by the stability and strength of the metrics that support these businesses.

Thank you. As a follow-up, how do you view reserve levels in light of the expected improvement in credit losses on a core basis? It seems that the growth on your balance sheet will likely come from the lower loss categories rather than the higher ones. What are your thoughts on reserve levels as we move forward?

Sure, Moshe. So what's going to happen in future quarters starts with what happened this quarter. So I just want to reiterate a couple of the drivers of this quarter as a jumping-off point. As I said in the prepared remarks, your coverage was down 33 basis points by two things. The bigger effect being that we typically have seasonally higher balances in the fourth quarter that require very low levels of coverage, and that denominator effect from those balances put downward pressure on coverage. The other effect was that the allowance we needed for what I'll call non-seasonal growth was offset by favorable observed credit performance. So we added $0 of allowance balance to the numerator, but the non-seasonal growth impacted the denominator. In the first quarter, I just wanted to provide that backdrop to say the seasonal balances will run off, and so there will be a corresponding upward pressure on coverage, all else equal from that effect. But beyond that, it's really going to come down to growth and our loss forecast and loss forecast specifically for the coverage. To the extent that loss forecast improves, changes in coverage could be modest in the near term as we just reflect the uncertainty of our projections and the allowance. But eventually, the improved loss forecast is going to flow through the allowance and continue to bring the coverage ratio down as uncertainties become more certain. So while the direction of travel would be down, the pace and timing are going to depend on a variety of factors, one of which will include the mix of businesses, as you say, but when it's denominated to the whole portfolio, the relative growth of different forecasted loss portions of the book aren't going to have a material impact on coverage just given that the new originations as a percentage of the overall book in any given quarter is relatively small. The only thing I also want to remind you of is, I know our investors look at history as a potential guide for levels of coverage. I just want to remind you that we called out the roughly 50 basis points of impact to coverage from the termination of the loss-sharing agreement with Walmart. So that created a step function change in coverage relative to our prior history as well.

Next question, please.

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

Yes, Rich, your Credit Card purchase volume growth on a like account basis has picked up. I'm just trying to get a sense if this is a Q4 blip, or are you thinking that the consumer is actually more confident here after the election? And are you seeing that same improvement in consumer and small business as well?

Our growth in overall purchase volume continues to be driven by an increase in our branded card customer base, which includes both consumer and small business segments. This growth has been a significant factor in our originations, particularly at the higher end of the market. On a customer level, however, the spend growth per customer in our consumer business has remained largely flat through 2023 and the first half of 2024. It started to improve midway through last year and continued to grow in Q4. I don't have the small business card numbers specifically, as they are included in the overall figures I provided. The recent uptick in spend per customer is notable, and while it's difficult to predict whether this trend will continue or what precisely is driving it, I wanted to highlight this positive development as we concluded the year.

Got it. Andrew, you mentioned this, but could you share your thoughts on how the '24 vintage is shaping up in terms of credit performance? I've seen some industry data indicating that delinquencies are still relatively high for '24.

Yes, Don, I'll address that. Recently, we've observed stability in the performance of our card business originations, which is notable. For the past few years, we've highlighted this consistent trend. When comparing vintage over vintage, the risk levels have mostly remained stable. It's also impressive that our new origination vintages are performing similarly to those from before the pandemic. However, when making these comparisons, we should avoid 2019 since it was quickly impacted by the pandemic, and instead focus on 2017 and 2018. From Capital One's perspective, this stability in origination performance, both quarter-over-quarter and in relation to pre-pandemic levels, is the result of our actions to address inflated credit scores and the surplus of industry supplies, particularly in the subprime market at that time. We made some adjustments and kept a close eye on the origination vintages, which has contributed to the ongoing stability in Capital One's recent vintages. While we still need to look back about six months to see the trend, we're continuously observing positive results. Additionally, we've analyzed industry data indicating some discrepancies in vintages over the past couple of years. This suggests that the industry as a whole may not align with what we've described. I believe this disparity exists because many companies in the industry haven't adjusted for inflated credit scores. We proactively modified our models under the assumption that the grading from the system was overly generous, akin to handing out As when they should have been Bs, and we took action without immediate validation because we felt it was necessary. Thus, if you observe the overall industry origination trends, you will notice some gaps, which I believe is a significant contributing factor.

Next question, please.

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

Thank you. I guess, Rich, just one more on the deal. Given the timeline that you've outlined earlier this year, is it fair to assume like everything is going pretty smoothly in terms of the regulatory approval process and there hasn't been any surprises? I'm also wondering sort of where you guys are in terms of the integration efforts and how much work has been done there?

Okay. Yes, so no, the approval process continues to move forward. We've made substantial process in the recent months. We remain actively engaged with the Fed and the OCC about our merger applications. It's the Fed and the OCC who ultimately decide on our merger application. Late last year, we received approval from the Delaware State Bank Commissioner, which we needed because Discover is a State Chartered Bank. We of course had the big public hearing in July, and that went very well, we feel. Earlier this month, of course, we finalized a joint proxy statement with the SEC setting up the February 18 shareholder vote. So that was good progress finally there. We are also engaged with the Justice Department as they play a key role in advising the Fed and the OCC on the competitive aspects of the deal. We continue to believe that this transaction is both pro-competitive and pro-consumer, bringing our best-in-class products and services to a broader set of consumers and small businesses, really enhancing opportunities and benefits for merchants as well. So pulling way up, it's certainly the deal process is a long labor, but we remain well-positioned to get approval of the deal early this year. We are really proud of the work everyone is doing here, and we look forward to getting this over the goal line.

Okay. I want to follow up on a previous question about the integration of the two companies and the associated efficiencies and necessary investments. When you combine the two companies, the efficiency ratio actually declines, and there are significant synergies in both revenue and expenses. Do you believe these synergies are enough to cover the investments you've mentioned, or do you anticipate needing to make additional investments as you dive deeper into the company's operations?

I don't think we're in a position to provide more details, not because we want to be secretive, but because our situation hasn't changed since we announced the deal. We are diligently preparing for the integration, although we remain separate companies. Discover is also working hard on their compliance and integration preparations. We don't have access to their numbers or business model, so we're essentially where we were when we started. However, Discover operates with a much lower efficiency ratio than Capital One, which is beneficial for the combined entity. It's also true that Discover has historically invested less in certain areas compared to Capital One, and they are now catching up. While we haven’t seen their side of things, we anticipate that there will be areas where we need to increase investments, particularly in risk management, which will require substantial funding. We've made assumptions in our deal model about focusing on these investments. There will be significant effects resulting from this merger, with Discover's efficiency ratio and their past underinvestment relative to Capital One playing important roles. We also expect to gain considerable synergies from merging overlapping business operations, which is a very positive aspect. The investments we plan to make will far exceed Discover's traditional levels. We've discussed risk management extensively, and they are now committing to that area. Regarding international acceptance, I am impressed by their accomplishments despite not having a large scale, but we intend to invest more there. We have strategically aligned our card business to transition to the Discover network, particularly targeting customers who aren’t frequent international travelers. Moving this business to Discover should be straightforward. These investments are crucial for maximizing our long-term potential and moving more business than we initially projected. To facilitate this transition, we need to ensure that Discover's acceptance and brand standards are elevated, which is why the investments we are discussing will be made over several years. These will ultimately enhance the value of the deal in the long term.

Next question, please.

And our final question comes from John Hecht with Jefferies. You may proceed.

Good afternoon, guys, and thanks for fitting me in here. First question, just thinking about the mix of the overall consumer book. I mean, you've got some new cards like the Venture One and Quicksilver, and some of those are attracted to different demographic groups. And then you've got the subprime mix, and then you've got auto. Where do we see just given kind of inbound customer mix? Where do we see that going this year as a standalone business? And then, Rich, do you have any comments on what the total portfolio might look like assuming the combination with Discover?

Certainly, let me discuss Discover for a moment. Capital One has traditionally been a comprehensive player in the market. For many years, we have operated a subprime business that aligns with our information-based strategy, focusing on succeeding in the credit sector while offering exceptional deals to our customers. It’s not just about managing credit but also providing value and encouraging responsible credit use. The deals we provide are straightforward and significantly more advantageous than many others in the market. This sector remains a stable and essential part of Capital One, and we are committed to it. Over the past decade, our card business has seen a notable shift towards targeting the premium market, a trend we plan to pursue as it holds considerable potential. Though this requires substantial investment, the fastest-growing segment of our business consistently consists of high spenders. This indicates substantial growth prospects beyond our current standings, and we will continue to focus our investments there. When looking more broadly at our card business, while we maintain our subprime operations, we are also gradually shifting towards higher market segments. This shift is evident within each category—subprime, prime, and the premium market—reflecting a consumer-first philosophy throughout our operations. What we have observed over the years serves as a reliable indicator of the future trajectory of Capital One, where we will persistently invest across the board, especially focusing on the premium market with the most significant growth potential. Now, turning to Discover, their strategy has been quite distinct from ours. While we have a broad market approach, Discover has concentrated on the prime sector and has excelled there. From an opportunity standpoint, we are looking to enhance our presence in that part of the market, which we may not have emphasized as much before. We have been involved, but we likely had a more predominant focus elsewhere. With this acquisition, we will incorporate a business that is more uniform compared to our diverse operations. To summarize our strategy, we plan to maintain our successful initiatives at Capital One, all while ensuring we do not disrupt Discover's effective business model in the prime market. We aim to integrate technology and risk management processes without compromising their core strengths. Ultimately, our goal is to combine Discover's growth potential with the existing complementary businesses within Capital One, enhancing efficiencies and leveraging cutting-edge technology throughout our operations.

Great. Very much appreciate it. Thanks.

Well, thank you everyone for joining us on the conference call today and thank you for your continuing interest in Capital One. Have a great night, everybody.

Thanks, everybody.

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