Earnings Call Transcript - COF Q3 2025

Jeff Norris, Senior Vice President of Finance

Thanks very much, Josh, and welcome, everybody to tonight's earnings call. To access the live webcast of this call, please go to the Investors section of Capital One's website, capitalone.com. A copy of the earnings presentation, press release and financial supplement can also be found in the Investors section of the Capital One website, capitalone.com, by selecting Financials and then Quarterly Earnings Release. 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 that summarizes our third 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. For more information on these factors, please see the section titled Forward-Looking Information in the earnings release presentation and the Risk Factors section of our annual and quarterly reports accessible on our website and filed with the SEC. Now I'll turn the call over to Mr. Young. Andrew?

Andrew Young, Chief Financial Officer

Thanks, Jeff, and good afternoon, everyone. I will start on Slide 3 of tonight's presentation. In the third quarter, Capital One earned $3.2 billion or $4.83 per diluted common share. There were multiple adjusting items related to the Discover acquisition in the quarter, including integration costs, intangible amortization expense and loan and deposit fair value mark amortization. Net of these adjusting items, third quarter earnings per share were $5.95. As expected, we continue to refine our purchase accounting assumptions while we are in the measurement period. In the quarter, our adjustments included a modest increase to goodwill, along with other refinements. You can find the revised purchase consideration walk and amortization schedules in the appendix of tonight's presentation. The results in the third quarter were impacted by the full quarter effect of the Discover acquisition. On a GAAP and adjusted basis, revenue in the third quarter increased $2.9 billion or 23% compared to the second quarter. Noninterest expense increased 18% or 16% net of adjustments, and pre-provision earnings were up 29% or 30% net of adjustments. Our provision for credit losses was $2.7 billion in the quarter. Excluding the $8.8 billion initial allowance build for Discover that we recognized last quarter, provision for credit losses increased about $50 million. Higher net charge-offs from the full quarter impact of Discover was roughly offset by a larger allowance release. Turning to Slide 4, I'll now cover the allowance in greater detail. The $760 million of allowance release in the quarter brought the allowance balance to $23.1 billion. Our total portfolio coverage ratio decreased 22 basis points and now stands at 5.21%. I'll cover the drivers of the changes in allowance and coverage ratio by segment on Slide 5. In our Domestic Card segment, we released $753 million of allowance in the quarter. The primary drivers of this quarter's release were continued observed credit favorability in both losses and recoveries as well as a slight improvement in the forecasted unemployment rate. These factors were partially offset by greater consideration of potential economic downside. The Domestic Card coverage ratio now stands at 7.28%. The allowance balance in our Consumer Banking segment was largely flat at $1.9 billion. Growth in the auto business was largely offset by observed credit favorability and continued strong vehicle prices. The ending coverage ratio of 2.26% was down 3 basis points from the prior quarter. And finally, in our Commercial Banking segment, we released $37 million of allowance in the quarter. The allowance release was largely driven by recent favorable credit performance. The Commercial Banking coverage ratio declined 5 basis points and now stands at 1.69%. Turning to Page 6, I'll now discuss liquidity. Total liquidity reserves ended the quarter at $143 billion, down roughly $1 billion from last quarter. Our cash position ended the quarter at $55.3 billion, $3.8 billion lower than the second quarter. Our preliminary average liquidity coverage ratio increased slightly during the third quarter to 161%. Turning to Page 7, I'll cover our net interest margin. Our third quarter net interest margin was 8.36%, 74 basis points higher than the prior quarter. Recall that in the second quarter, the partial quarter benefit from the acquisition of Discover was roughly 40 basis points. The full quarter of Discover in the third quarter drove approximately 45 basis points of incremental net interest margin. The remaining increase in NIM in the quarter was largely driven by higher yield on legacy Capital One Domestic Card loans and one additional day in the quarter. Turning to Slide 8, I will end by discussing our capital position. Our common equity Tier 1 capital ratio ended the quarter at 14.4%, approximately 40 basis points higher than the prior quarter. Income in the quarter was partially offset by $1 billion in share repurchases, dividends and an increase in risk-weighted assets. In the third quarter, we completed our bottoms-up capital assessment for the combined franchise. Based on the results of that analysis, we believe the long-term capital need of the combined company is 11%. Now that we've completed this work, our Board of Directors has approved a new repurchase authorization of up to $16 billion of the company's common stock. This new authorization becomes effective today and supersedes our previous repurchase authorization. In addition, we expect to increase our quarterly common stock dividend from $0.60 per share to $0.80 per share beginning in the fourth quarter, subject to Board approval. With that, I will turn the call over to Rich. Rich?

Richard Fairbank, Chairman and Chief Executive Officer

Thanks, Andrew, and good evening, everyone. Slide 10 shows our third-quarter results in the credit card business, which are mainly influenced by our Domestic Card performance and trends displayed on Slide 11. As was the case in the second quarter, the Discover acquisition significantly impacted our Domestic Card results, benefiting from a full quarter of combined operations and purchase accounting effects. Excluding Discover’s influence, our Domestic Card segment still demonstrated top-line growth, strong margins, and improving credit trends. Year-over-year purchase volume growth was 39%, primarily due to a full quarter of Discover purchase volume, whereas excluding Discover, the growth was about 6.5%. Ending loan balances saw a year-over-year increase of 70%, again largely attributed to the addition of Discover Card loans, with growth of about 3.5% when excluding Discover. Despite high competitive intensity, our legacy card business is performing well, particularly with heavy spenders in the market. The legacy Discover card loans have slightly decreased and are expected to face growth challenges due to previous credit policy cutbacks and upcoming adjustments. Although this will result in some short-term loan growth challenges, we see good opportunities for expanding the Discover Card business post-tech integration. Revenue increased by 59% compared to the third quarter of last year, boosted by a full quarter of Discover revenue. Without Discover, revenue growth was about 6.5%, supported by underlying increases in purchase volume and loans. The revenue margin for the quarter was 17.3%, including the impact of combined operations and fair value mark amortization. The Domestic Card charge-off rate for the quarter was 4.63%, showing a reduction from the previous quarter and year. While the third quarter tends to be the seasonal low for card losses, the recent linked quarter improvement exceeded our typical seasonal expectations. Our charge-off rate has shown improvement on a seasonally adjusted basis throughout 2025, reflecting a trend of decreasing delinquencies since late 2024 along with strong recoveries. A small portion of the linked quarter improvement, roughly 10 basis points, resulted from incorporating Discover Card portfolio results for the full quarter. The delinquency rate for Domestic Card was 3.89% at quarter's end, down year-over-year but up slightly from the previous quarter, which aligns with expected seasonal patterns. Domestic Card noninterest expenses rose by 62% compared to the third quarter of last year, reflecting the full impact of combined operations and purchase accounting amortization, alongside year-over-year increases in operating and marketing expenses. Our total company marketing expenses for the quarter reached approximately $1.4 billion, a 26% year-over-year increase. Domestic Card marketing includes Discover's marketing, higher media spending, and investments in premium benefits, which contribute to strong account originations and building a loyal base among heavy spenders. Fourth-quarter marketing is expected to be above recent seasonal trends. Slide 12 displays third-quarter results for our Consumer Banking business, with global payment network transaction volume around $153 billion. Auto loan originations grew by 17% from the previous year, attributed to market growth and our strong positioning. Consumer Banking's ending loan balances grew by $6.5 billion or approximately 8% year-over-year, with average loans also increasing by 8%. Consumer deposits grew about 35% year-over-year, largely due to Discover deposits. Excluding Discover, our digital-first national Consumer Banking business continues to gain traction. Revenue for Consumer Banking saw a 28% year-over-year increase, primarily due to Discover and growth in auto loans, while noninterest expenses rose by 46% from last year, mainly because of Discover and heightened auto loan originations. The auto charge-off rate for the quarter was 1.54%, down from last year due to our decision to tighten credit in 2022; charge-offs are improving on a seasonally adjusted basis, with the 30-plus delinquency rate at 4.99%, also down year-over-year. Slide 13 illustrates third-quarter results for our Commercial Banking sector. Compared to the previous quarter, ending loan balances were up by 1%, while average loan balances remained flat. Ending deposits rose about 2% from the linked quarter, although average deposits decreased by 2% as we manage less attractive commercial deposit balances. The net charge-off rate for the second quarter decreased by 12 basis points to 0.21%, while the criticized performing loan rate fell to 5.13%. The full impact of Discover operations and purchase accounting significantly influenced our reported results for the third quarter. However, even after adjusting for these effects, our earnings, top-line growth, credit performance, and capital generation remained robust. The Discover integration is proceeding well, and while we expect integration costs to be somewhat higher than initially estimated, we remain on track to achieve $2.5 billion in combined synergies. Revenue synergies are mainly driven by migrating our debit business to the Discover network, with completion expected in early 2026, and operating expense synergies will also take shape as platform conversions occur. As we conclude, I want to emphasize where we stand today. Years of strategic preparation have positioned us advantageously to grow and adapt in a rapidly changing marketplace. To take advantage of this moment, significant and sustained investments are necessary, and our acquisition of Discover not only enhances these opportunities but brings new ones as well. The Discover network is a valuable asset that needs scaling in today’s competitive landscape. We are actively moving our debit volume and parts of our credit card volume to the network to drive revenue synergies. Maximizing the benefits of being a payment network necessitates further investments in international acceptance and brand building. While Discover is a remarkable addition to Capital One's portfolio, legacy Capital One's long-term strategic transformation also puts us in a unique position. We are advancing our technology transformation into its 13th year, establishing a modern technology company centered around banking. This approach creates opportunities, leveraging our data and analytics expertise, essential to building a national lending brand. We've created what we believe to be the future of banking with full-service digital capabilities and selective physical branches in key locations. We're the only major bank growing a national presence organically, and our efforts are gaining traction. Owning our debit network accelerates this journey, though an organic growth model demands substantial marketing investments over several years. Turning to our credit card business, we are among a select few committed to capturing the high-end market segment, which requires sustained investments in exceptional products, customer experiences, exclusive events, and a premium brand image. We recognize that our primary competitors in this arena are significantly increasing their investment levels, prompting us to do the same. An emerging frontier in this competition is AI-driven experiences, and we are preparing for that. As we progress technologically, we are discovering accelerating growth opportunities. Examples include Capital One Shopping, Capital One Travel, and Auto Navigator, which are expanding rapidly as we invest to capitalize on market conditions. These initiatives are grounded in our modern technology infrastructure, which we are significantly investing in. A few large technology firms fully leverage the cloud and modern applications, allowing them to thrive as the industry evolves, and we are one of them. Our technological journey has focused on integrating AI at the core of our business processes, enhancing how banking operations and customer experiences are managed. While others may look to third-party AI solutions, we are embedding AI deeply within our infrastructure. This strategic direction necessitates substantial investments in AI and related talent, which we are committed to. After years of adaptive development aimed at seizing evolving market opportunities, I recognize the vast potential ahead, understanding the investments made to reach this point. Our opportunities are numerous and substantial, but so are the investments needed to achieve them. These investments will underpin our long-term growth and return prospects. The opportunities we discuss have emerged over years, and as I have communicated before, the projected earnings capability of our combined entity remains aligned with our initial forecast, despite fluctuations in certain variables. We are enthusiastic about the forthcoming opportunities and are committed to leveraging them. Now, we welcome your questions.

Jeff Norris, Senior Vice President of Finance

Thanks, Rich. We'll now start the Q&A session. As always, 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 our Q&A.

Sanjay Sakhrani, Analyst

Rich, it seems like great momentum in the business, but there's been a lot of chatter about the health of the consumer, some of the cracks we've seen, particularly in subprime, and maybe even specifically in auto. Maybe you could just talk a little bit about what you guys are seeing. And we hear a lot about sort of underemployment and looking at these employment stats and maybe just having the reality sort of delineate from what we're seeing from the broader macro. So could you just talk about what you guys are seeing and how you see the path forward?

Richard Fairbank, Chairman and Chief Executive Officer

Yes, let me start by discussing the health of the consumer. The US consumer and the overall macro economy have shown considerable resilience so far in 2025. Although unemployment has slightly increased recently, it remains low compared to historical averages. Layoffs and new unemployment claims are low and stable. Wages have been growing in real terms, and debt servicing burdens are stable and close to pre-pandemic levels. However, we are in a period of heightened economic uncertainty, with inflation rising again and uncertainties regarding tariffs. Job creation has been notably slow, and some consumers are experiencing pressure from the cumulative effects of price inflation and higher interest rates, which have raised the cost of new borrowing across most asset classes. We are closely monitoring the resumption of student loan repayments and collections, and we are also facing a government shutdown. Now, regarding credit, our charge-off rate is at 4.63%. This is 98 basis points lower than a year ago, with 19 basis points attributed to incorporating the Discover Card portfolio into our Domestic Card segment. The main factor contributing to our improved charge-offs is the steady decline over the past few quarters, both at legacy Capital One and Discover. Additionally, strong recovery rates have supported these charge-offs. The front book of new originations continues to perform well, with 2024 originations tracking at or below pre-pandemic levels for both Capital One and Discover. Looking ahead, our delinquencies remain our best leading indicator of short-term credit performance. In Q3, delinquencies followed typical seasonal patterns, consistent in both our legacy Domestic Card portfolio and Discover. Moving to the auto sector, our credit performance has been robust, with auto losses 25% lower year-over-year in the third quarter, aligning with pre-pandemic levels, and auto delinquencies continue to improve. In comparison to industry figures, there is a noticeable gap, likely reflecting our decisions and the technology driving those choices in our auto business. The stellar performance in auto does not necessarily represent the auto industry as a whole, but it is a positive indicator nonetheless. Regarding subprime, it's worth noting that this segment tends to show early signs of change. Subprime was among the first to show shifts during the post-pandemic recovery and has also stabilized and improved earlier than other segments. We are seeing subprime credit performance track similarly to prime credit. Specifically in subprime auto, despite noise surrounding rising delinquency rates in this space, our performance has remained stable. This stability can be attributed to our proactive strategies; we anticipated the normalization of inflated credit scores and declining vehicle values, leading us to significantly scale back our lending in 2022 and 2023. Consequently, our front book vintages in subprime auto have been stable and consistent with pre-pandemic levels, much like in our overall auto business. As I mentioned earlier, the stable performance in our auto segment largely results from our adaptive underwriting practices, rather than reflecting the broader performance trends in the subprime market across the industry. When analyzing our credit metrics in relation to income levels or FICO scores, we observe limited separation. Presently, the consumers in our portfolio tend to move in unison. We are aware that some economic metrics indicate increased pressure on lower-income consumers, and we will certainly continue to monitor that. However, we haven’t observed significant differential impacts within our portfolio.

Terry Ma, Analyst

I just want to start off with capital return. It's nice to see the buyback pace pick up in the third quarter and also get the new authorization. As we look forward, is there any time frame that we should expect you to kind of optimize toward that internal target of 11% from above 14% today?

Andrew Young, Chief Financial Officer

Yes, Terry, as you saw, we did step up the repurchase to $1 billion in the third quarter as we were in the final stages of completing that bottoms-up analysis to set that long-term capital need. And we now have the $16 billion of authorization. Over time, our actions are going to depend on current and projected levels of capital, but also very importantly, the environment that's around us at any given time and operating under the SCB provides us with a great deal of flexibility, and we'll certainly take advantage of that flexibility. So I don't want to be in the business of giving specific guidance as to our plans, primarily because our plans could shift fairly quickly. But I will say, based on what we know today, at least in the very near term, it's reasonable to assume that we'll be picking up the pace of share repurchases from here.

Terry Ma, Analyst

Got it. That's helpful. And then, Rich, I think you mentioned the Discover portfolio will face a headwind as you kind of trim along the edges going forward. Kind of any color on what you are kind of looking to trim and then how long that headwind would kind of persist for?

Richard Fairbank, Chairman and Chief Executive Officer

Thank you. What I refer to as a temporary slowdown in growth reminds me of past recovery phases. The factor you mentioned is just one of three contributing to this slowdown. After Discover expanded its credit offerings, the company significantly reduced its origination programs for 2023, 2024, and 2025. These reductions have slightly contracted the portfolio this year and created challenges for growth as smaller vintages accumulate. Essentially, the impact of stricter originations tends to unfold over several years. Importantly, these reductions have also improved credit quality in the card portfolio recently. The first factor in this context is Discover's significant and prolonged pullback, which, while beneficial in some ways, has clearly affected growth. Now, moving to the second factor, we will reduce some of our programs, particularly in areas with higher balance revolvers. I want to emphasize our respect for Discover; they have built an outstanding business, and we feel fortunate to be part of one company now. Discover has maintained a credit policy that tends toward revolving balances, which is more typical in the industry. In contrast, Capital One has taken a more cautious approach toward higher-balance revolvers. This is not to say they aren't appealing, but we've prioritized resilience with a strategy focused on spenders. We look forward to integrating with Discover, and it’s not surprising that we might trim certain revolving aspects, especially when it comes to higher unsecured consumer balances. The third factor is that we see good opportunities to grow Discover's legacy business by expanding its focus. Given the flow of new business, including customers attracted to the brand, we plan to adopt a broader perspective, aiming to engage more with high-end customers who spend significantly. Over the years, we have learned to safely penetrate lower credit segments than Discover has traditionally focused on, and we are eager for that opportunity. However, implementing these changes requires us to align our technology and decision-making infrastructure, which means we can trim the existing Discover credit policies more quickly than we can engage with new opportunities. This timing difference leads to a disconnect between cutbacks and growth. Overall, we begin at a slightly lower outstanding volume than initially anticipated. Nevertheless, I believe Discover has made sound decisions, and while smaller vintages are maturing, we will pull back slightly before pushing ahead. These dynamics will likely result in a temporary slowdown in Discover’s growth over the next couple of years, but our enthusiasm for their business model remains strong.

Ryan Nash, Analyst

I have two questions. The first is for Rich, with a follow-up for Andrew. Rich, at the end of your remarks last quarter, you spent a considerable amount of time discussing investments, and you mentioned some recognition of revenue and return associated with these. So, first, have any of these investments contributed to the run rate, or are they all additional from this point forward? Second, I understand you've been cautious about providing guidance, but can you give us some parameters to consider regarding where results are heading, whether it's in terms of PPNR growth, operating efficiency improvements, or anything that might help narrow the range of outcomes that investors are concerned about? I'll have a follow-up for Andrew.

Richard Fairbank, Chairman and Chief Executive Officer

Thank you, Ryan. Regarding the opportunities I've mentioned this quarter, these have been developed over several years. Except for the Discover opportunity, which is reasonably accessible, the rest have taken time to grow from what we identified as significant prospects. At Capital One, we find these opportunities and then require investment to realize their full potential, which has been our ongoing journey. Our portfolio consists of various initiatives at different life cycle stages in terms of investment and value generation. While there isn't much that's entirely new, it's important to note that the potential in these areas is accelerating, including the validation we see from our investments and the transition to more business-focused opportunities as we advance through the tech stack. All of these efforts have been ongoing for years, and I'm particularly impressed by the increase in opportunities arising from our strategic investments. Following the same approach we’ve taken in building Capital One, we patiently invest in opportunities but also recognize the urgency to adequately support them when they arise. Many of the projects we've discussed for years are now at a point where the need for investment is increasing. While many of these initiatives are already part of our operational budget, it's important to emphasize that the additional investment we're planning is higher than before, and I'm really enthusiastic about that. However, I want to remind investors that throughout Capital One's history, seizing opportunities requires investment to reach their full potential, and that's precisely where we find ourselves today.

Ryan Nash, Analyst

Got it. That's super helpful, Rich. And then Andrew, when I look at the reported NIM in the high 8.30s, adjusted just a tad over 8.40%, now we all know that 3Q is seasonally strong. But maybe as we look ahead, help us think about some of the moving pieces on the margin? And do you think we're at or near a sustainable level for the margin over the medium term?

Andrew Young, Chief Financial Officer

Yes. Sure, Ryan. I think describing where we're going is potentially helped by where we've been. So let me just kind of take a little bit of a walk over the course of the last year. So if you look relative to the year ago quarter, our NIM is up, excluding the fair value marks, I think, roughly 130 basis points. And so about 85 of that as we've enumerated on the last couple of calls, is from the addition of Discover. The remaining 45 basis points has really been a function of lower funding costs, so lower deposit rate paid, lower wholesale funding, lower wholesale funding mix. And those effects more than offsetting the lower yields on earning assets. And so as you said, there's seasonal effects in NIM. So looking ahead to the fourth quarter, you've got card and cash balances. You've got day count in Q1, you've got revolve rate in Q3, as you referenced, being a strong quarter. But if I look outside of any of those quarterly effects, the things that are going to move NIM from here, there's a couple that would move it in either direction, and that's just the relative growth of different asset classes and then how customers behave in card and retail. One other factor that's uncertain is just how far and how quickly the Fed moves and that could just bring some beta lag with it, but that effect should sort itself out over time. And so I really go back to the relative growth of assets and then customer behaviors as being the things that could move it in either direction. But overall, I would say the structural impacts that we've seen over the course of the last year and in particular, the addition of Discover is now reflected in the run rate that you see here in the third quarter.

Richard Shane, Analyst

When we look at the reserve rates and we adjust for sort of the Discover portfolio, your reserve ratios or your reserve rates on Domestic Card are basically have not been this low since the end of 2022. At that point, delinquencies were materially lower. I realize that the trend on net charge-offs is going to continue. But as you've talked about, the delinquency trend seems to be reverting to normal seasonality. So that cyclical tailwind seems to be abating. Is there much room for additional reserve release? And given that it looks like charge-offs may remain above historic norms, why drift down this much right now.

Andrew Young, Chief Financial Officer

The changes in any quarter depend heavily on the assumptions that guide the allowance from the previous quarter. When we consider all the factors involved in setting the quarterly allowance, the mention of drift down simply indicates the difference between those two figures. Relative to the assumptions from the end of the second quarter, three factors influenced the allowance for this quarter. First, as Rich mentioned in his response to Sanjay, the observed credit, including recoveries, was better than we had expected a quarter ago. Second, most economic indicators in the third quarter consensus forecast improved compared to the last quarter, including a decrease in estimated peak unemployment, which dropped by about 15 basis points to around 4.6. This better economic outlook led us to anticipate fewer future losses, which partially balanced the two positive factors while we also considered additional uncertainties related to potential economic downturns. Looking forward, the allocation will obviously be affected by growth. However, if I focus on coverage, there are seasonal patterns in the allowance, and in the fourth quarter, we typically see higher balances that are quickly paid down. Beyond that seasonal impact, our expectations will be mainly influenced by our forecast for future losses, which will be shaped by economic assumptions and customer behavior, with delinquencies serving as key indicators of future losses. We will take all of this into account, and it will guide our decisions regarding future allowances.

Richard Shane, Analyst

Got it. And I appreciate the answer. I think the one variable that may drive this may be the catch-up in terms of recoveries as well that you may actually outperform on the net charge-off side because of that?

Andrew Young, Chief Financial Officer

Correct. Well, there's 2 things. One is just the overall anticipated charge-offs, including the recoveries, but also, as you know, with CECL, we un-discount the expected overall recoveries as well. And so that's a tailwind to the current allowance because the quantum of recoveries that we now have is greater than what it was in the 2022 period that you referenced in your question.

Moshe Orenbuch, Analyst

Great. Rich, I was hoping we could go back to the discussion about the Discover kind of brand and kind of card and perhaps lumping the installment business as well. Given the trimming that you said that you might plan to do, but at the same time, I think Capital One has been known to be a stronger kind of underwriter with a broader range of products. Do you think that, that Discover kind of brand as it sits there as a lending tool will ultimately be back to the same share that it had before Discover made the mistakes in '22 or '23.

Richard Fairbank, Chairman and Chief Executive Officer

Moshe, you've highlighted a very important aspect. I want to start with the Discover brand itself. There are only a few banking institutions in America with truly national brands. We analyze everything about national brands and brand metrics. Discover ranks highly in brand awareness, consideration, and equity, showing us that while they haven't invested as much as Capital One, they still perform well in many areas. We consider this brand a great asset, and we aim to nurture and invest in it. The brand encompasses both the network and issuer sides. On the network side, we will maintain this brand, as enhancing the Discover network acceptance brand is key to increasing business on that network. As for the issuing side, Discover will not serve as a corporate brand anymore, but it will remain a prominent product brand in our portfolio. We will retain their flagship cash product and continue to invest in aspects like their student business and their strong servicing skills. We've observed their servicing performance from the outside, and they consistently rank at the top in servicing metrics. The entire company seems dedicated to providing an exceptional experience for Discover customers, especially in servicing. We plan to share best practices in servicing and invest in Discover’s approach. We will also preserve the Discover website, which receives hundreds of millions of visits, while integrating it into a single app. Finally, leveraging the brand, customer experience, and products that have been developed, we aim to combine that with our advanced data science, analytics, technology, and extensive marketing channels at Capital One to drive more business through the Discover brand. While this looks good on paper, executing this will require years of hard work. Early indicators are positive, but I want to make it clear to investors that growth may experience a slowdown for various reasons, which does not reflect the long-term potential at all. I just want to ensure investors are aware of this.

Moshe Orenbuch, Analyst

Got it. Maybe just as a follow-up, given what you've seen over the course of the last few months at the high end, the transactor card business, you've seen kind of product launches or refreshes from three major players out there, American Express, Chase, and Citi. Sometimes those have effects of like bringing more people into that ecosystem. And how do you think about that competitive dynamic for Capital One?

Richard Fairbank, Chairman and Chief Executive Officer

Thank you for your question, Moshe. I want to emphasize that our focus on the top tier of the market, specifically targeting heavy spenders, is not a straightforward task for card companies. Since we launched in 2010, after building a successful mass market company, we identified that we needed to approach this segment differently. We can't simply enhance our existing mass market products; we have to understand what it requires to succeed in this premium space, including technology, unique experiences, and establishing a credible premium brand. Creating differentiated products in this area is crucial for our success. My perspective is a reflection of our investment strategy—we thoroughly analyze where the opportunities for success lie, work backward from what it takes to achieve them, and invest over time to reach those goals. We've experienced impressive growth, particularly among higher spending customers, and we're continuously reaching for even more each year as we prove ourselves in this area. The launch of Venture X in 2023 has been particularly successful, showcasing sustained traction since its release. It was designed to compete with strong players in the market. In response to your question, we've observed notable actions from our competitors, who are increasingly investing in their offerings and enhancing their services for customers. They’re also adjusting their pricing strategy, adopting a different model than ours, which doesn’t render either approach superior; it’s simply different. Capital One focuses on straightforward messaging combined with rewards, like double points on all purchases and higher rewards for travel through our portal. I believe our competitors' actions present an opportunity for Venture X. While we respect their efforts, we are committed to investing in unique experiences and differentiated offerings at the high end of the market. It's evident that all our competitors are striving to excel in this valuable segment, and we at Capital One are ready to invest patiently over the long term. We are pleased with our current positioning and will continue to push ourselves to reach new heights each year.

Donald Fandetti, Analyst

Rich, can you talk a bit about the credit outlook for your commercial portfolio? I know there have been market concerns around private credit NBFIs, but your metrics were good. And I think there was a modest release this quarter.

Richard Fairbank, Chairman and Chief Executive Officer

Thank you, Don. Let me take a moment to discuss the Commercial Banking market overall. We've seen substantial and sustained capital inflows into private credit and private equity, which have significantly boosted commercial lending throughout the industry. This rapid growth in demand, along with a favorable credit environment, has naturally led to reduced spreads and increased pressure on lending standards as a larger pool of market participants vie for loans. In light of these changing market conditions, we have prioritized maintaining credit discipline, even if it means sacrificing market share growth in the commercial segment. This has involved making early decisions to tighten credit back in 2022 as we recognized mounting pressures in commercial real estate and the possibility of rising rates impacting corporate borrowers. Consequently, Capital One's commercial loans have decreased by 6%, while the overall commercial market has grown by 10% since the end of 2022. Additionally, we've intentionally shifted more of our focus from traditional lending to credit-enhanced structures that offer diversification through pooled collateral and a credit enhancement from subordinated capital provided by NBFI clients, which helps to absorb losses before affecting the senior positions. Now, focusing specifically on the NBFI sector within commercial, it's worth noting that the term nonbank financial institution is quite broad, and the risks involved can vary significantly among the various industry subcategories, including corporate, commercial real estate, consumer, and financial lending. At Capital One, we've developed specialized relationship management, credit, and underwriting teams for these sectors. We are highly focused on the subcategories where we are confident about the credit quality, underlying collateral, and structural protections of our lending approach in the current market. The credit performance of our NBFI lending portfolio remains strong; however, in light of increased competition, we are diligently monitoring the portfolio and managing our lending terms. This cautious approach has led to a slower pace of NBFI lending growth since the end of 2022, even as the industry continues to expand in this area. In general, we have a deep interest in industry structure at Capital One. Since our inception, we have focused on doing things differently from traditional banks. I often say that we handle half of what banks do but execute those functions at scale. A critical aspect of our strategy is our emphasis on understanding industry structure. The commercial marketplace faces more challenges in its structure compared to most consumer sectors, especially due to the increasing share of nonbank financials and their varying economic foundations. We closely observe this marketplace structure and instead of simply aiming for a certain size, we work backward from that structure to identify the areas where we believe we can succeed and concentrate our efforts there. We never set specific growth objectives for our teams; instead, we want them to understand that sometimes the best decision is to pull back. In summary, that's our strategy in a vast marketplace that requires careful management.

Jeffrey Adelson, Analyst

If I could just follow up on the premium card question. You discussed the investments your peers have made in premium card recently, which have come with notable increases to their annual fees as well. I think we're now sitting with a pretty sizable gap on your Venture X annual fee versus some of the others, and I don't believe you've increased that since the launch several years ago. So do you think this is an opportunity for you to maybe revisit the card's value proposition? Or do you feel like you're still finding good success with the growth and customers you're getting coming through so far?

Richard Fairbank, Chairman and Chief Executive Officer

Thank you for the great question. I have a lot of respect for the leading players in this space. They are doing remarkable things, and we learn from observing them. They continue to see a wealth of opportunity. For instance, take Chase; they are consistently reaching out to higher-end customers, naturally offering even more premium products than before. The ultimate goal for the major players in this space is to create a range of products that are distinct within their own offerings and also stand out against competitors. We are actively pursuing the Venture X opportunity while also enhancing experiences and opportunities for our higher-end customers. I believe it’s not about choosing one strategy over another; instead, we will take a comprehensive approach with multiple strategies to cater to various customer segments in the upper market. Additionally, I should mention that small business is another area where Capital One has made significant investments, which overlaps with the consumer side of our business, providing shared investment and branding opportunities. Our journey continues; we are 15 years post-Venture launch, and we are committed to moving forward. In fact, as I mentioned in my closing remarks, we are intensifying our efforts. Venture X is well-positioned, and there seems to be new opportunities available for it.

John Pancari, Analyst

I'll just ask one question given the timing here. Back to Ryan's expense question, when you're considering the necessary significant and sustained investments you mentioned, it sounds like it is mostly in the run rate, if I'm correct there. How should we think about a reasonable near-term or medium-term efficiency ratio now that you have sized up the required investments and as you're making them? If you're unable to quantify yet, do you think you may be in a position to provide that expectation as we approach 2026?

Richard Fairbank, Chairman and Chief Executive Officer

I want to clarify my earlier remarks. When I mentioned that these expenses are mostly in the run rate, I meant our investments in the various opportunities I've discussed, excluding the new Discover investments, are already accounted for. These investments have been in development for years. Even some of the so-called "new initiatives," like Capital One Shopping, our Travel portal, and Auto Navigator, have taken many years to come to fruition. I'm still looking for the first organic opportunity in Capital One's history that just appears out of nowhere for us to pursue. Our growth model has always focused on organic growth since the company's inception. Ironically, we've just completed the largest bank deal since the global financial crisis. While we do make acquisitions from time to time, particularly seeking growth platforms, acquisitions are not the core of our business model. Over the years, Capital One has operated on a challenging business model centered around organic growth. For instance, if you examine the growth of our card business, there have only been two acquisitions in its entire history: we acquired HSBC's card business in 2012 and now Discover. This gives us a significant edge compared to regional and other similarly sized banks. Our daily focus is on organic growth, which entails a lot of strategic planning to identify growth opportunities. Once identified, we work backwards to ensure we reach those goals, often requiring years of patience and investment to see returns. We have various opportunities at different stages in our portfolio, from holding to acceleration to maturity, where the benefits are starting to materialize. I'm encouraged by the positive outcomes of our long-term efforts and acknowledge the need to invest to capitalize on these successes. Regarding metrics, these initiatives show up across different aspects of the P&L. To build an organic growth company, growth is a key focus for us in every endeavor. The long-term payoff of our investments will primarily be seen in terms of growth. One notable aspect of our tech transformation investments, unlike in many businesses where trade-offs are common, is that our ambition to be a growth company with great customer experiences and efficiency actually follows a shared path. The initial majority of our efforts is similar across all objectives; only the final steps differ. This path is fundamentally about transforming our technology. As a result, we see exciting opportunities across growth, customer experience, efficiency, credit, fraud, and risk management, which are all enhanced through AI. In terms of metrics, the primary long-term beneficiary will be growth, with revenue growth occurring along the way. We are also investing heavily in operating costs and marketing. Many of these investments typically precede growth, putting pressure on our efficiency ratio in the short term. However, looking back at our historical journey, particularly since we started investing in technology, we have seen numerous efficiency gains. This offers insight into the choices we are making and how we anticipate they will develop over time.

Erika Najarian, Analyst

All my questions have been asked and answered. Thank you.

John Hecht, Analyst

I have two questions. The first is regarding the other expense line item, which showed a significant increase during the first full quarter of Discover. Can we determine if any part of that is related to integration expenses? Also, what contributes to the other expense category?

Andrew Young, Chief Financial Officer

Yes, John, there are three main factors contributing to this. First, there's the run rate related to Discover expenses that would typically fall under our other category. Second, we have some integration expenses. The third factor is related to previous discussions from last quarter regarding business changes and reporting alignment, which is expected to affect operating efficiency by approximately 90 basis points and total efficiency by 50 basis points. These changes are P&L neutral, but they do influence that specific line item. All three factors are contributing to the fluctuations in that line item this quarter.

Richard Fairbank, Chairman and Chief Executive Officer

Yes, John, that's a great question. For many years, private credit has focused primarily on the commercial side of the business. We are closely monitoring the developments on the consumer side. Additionally, we are involved in our NBFI business with some lending in that area. However, I don't have a significant strategic assessment to provide right now as it's still early. Certain aspects of the consumer business, particularly credit cards, don't fit as well with private credit. Conversely, products like installment loans, including auto lending, are more compatible. I appreciate your question, and I believe we need to observe this space carefully, considering both defensive and opportunity perspectives.

Jeff Norris, Senior Vice President of Finance

That concludes our Q&A session this evening. I just wanted to close by thanking everybody for joining our conference call today, and thanks for your interest in Capital One. Have a great evening.

Operator, Operator

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