Earnings Call Transcript - COF Q3 2024

Jeff Norris, Senior Vice President of Finance

Good day, and thank you for standing by. Welcome to the Capital One Q3 2024 Earnings Call. Please be advised that today's conference is being recorded. I would now like to hand the conference over to your speaker today, Jeff Norris, Senior Vice President of Finance. Please go ahead. Thanks very much, Josh, and welcome, everyone. We're webcasting live over the Internet as usual. And to access the call on the Internet, please log on to Capital One's website at capitalone.com and follow the links from there. In addition to the press release and financials, we've included a presentation summarizing our third quarter 2024 results. With me today are Mr. Richard Fairbank, Capital One's Chairman and Chief Executive Officer; and Mr. Andrew Young, Capital One's Chief Financial Officer. Rich and Andrew will walk you through this presentation. To access a copy of the presentation and the press release, please go to Capital One's website, click on investors, then 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. And 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 at Capital One's website and filed with the SEC. Now, I'll turn the call over to Mr. Young. Andrew?

Andrew Young, CFO

Thanks, Jeff, and good afternoon, everyone. I will start on Slide 3 of tonight's presentation. In the third quarter, Capital One earned $1.8 billion or $4.41 per diluted common share. Included in the results for the quarter were adjusting items related to Discover integration costs and a small downward revision to our FDIC special assessment estimate. Net of these adjusting items, third quarter earnings per share were $4.51. Pre-provision earnings in the third quarter increased 3% from the second quarter to $4.7 billion. Revenue in the linked quarter increased 5%, driven by higher net interest income. Non-interest expense increased 7%, driven by increases in both operating expense and marketing spend. Provision for credit losses was $2.5 billion in the quarter, down $1.4 billion relative to the prior quarter. The quarterly decrease was primarily driven by the absence of the second quarter's one-time allowance build for the termination of the Walmart partnership, a decline in the coverage ratio in card and a $40 million decrease in net charge-offs. Turning to Slide 4. I will cover the allowance in greater detail. We released $134 million in allowance this quarter, and our allowance balance now stands at $16.5 billion. Our total portfolio coverage ratio decreased 7 basis points to 5.16%. The decrease in this quarter's allowance and coverage ratio was largely driven by allowance releases in our Card and Consumer Banking segments. I'll cover the drivers of the changes in allowance and coverage ratio by segment on Slide 5. In our Domestic Card business, we released $66 million of allowance, which decreased coverage by 18 basis points to 8.36%. Our credit outlook has improved slightly as our confidence in the stability of underlying credit trends has grown, driving a modest release in allowance. In our Consumer Banking segment, we released $50 million in allowance, resulting in a 10-basis point decrease to our coverage ratio. The release was driven by strong credit performance and increasing recoveries in our auto business. And finally, our commercial banking allowance decreased by $14 million, resulting in the coverage ratio remaining essentially flat at 1.76%. Turning to Page 6. I'll now discuss liquidity. Total liquidity reserves in the quarter increased about $9 billion to approximately $132 billion. Our cash position ended the quarter at approximately $49 billion, up about $4 billion from the prior quarter, driven primarily by continued strong deposit growth. Our preliminary average liquidity coverage ratio during the third quarter was 163%, up from 155% in the second quarter. Turning to Page 7. I'll cover our net interest margin. Our third quarter net interest margin was 7.11%, 41 basis points higher than last quarter and 42 basis points higher than the year ago quarter. The sequential increase in NIM was largely the result of three factors. First, we had higher card and auto yields. As a reminder, the card yield benefited from a full quarter impact of the termination of the revenue-sharing agreement with Walmart. The removal of revenue sharing increased the total company NIM by 12 basis points quarter-over-quarter and 22 basis points relative to the year ago quarter. Second, there was one additional day in the third quarter. And finally, we had a higher mix of card loans on the balance sheet. Turning to Slide 8. I will end by discussing our capital position. Our common equity Tier 1 capital ratio ended the quarter at 13.6%, 40 basis points higher than the prior quarter. Higher net income in the quarter was partially offset by the impact of dividends, loan growth 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?

Richard Fairbank, Chairman and CEO

Thank you, Andrew, and good evening, everyone. Slide 10 shows third 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 third quarter, our Domestic Card business delivered another quarter of top-line growth, strong margins and stable credit. Year-over-year purchase volume growth for the quarter was 5%. Ending loan balances increased $9.1 billion or about 6% year-over-year. Average loans increased about 7% and third quarter revenue was up 10%, driven by the growth in purchase volume and loans. Revenue margin for the quarter increased 43 basis points year-over-year to 18.7%. The full quarter effect of the end of the Walmart revenue sharing agreement drove a 51-basis point year-over-year increase. Excluding this impact, the revenue margin would have been about 18.2%. The charge-off rate for the quarter was 5.61%. The full quarter impact of the end of the Walmart loss-sharing agreement increased the quarterly charge-off rate by 38 basis points. Excluding this impact, the charge-off rate for the quarter would have been 5.23%, up 83 basis points year-over-year. The 30+ delinquency rate at quarter end was 4.53%, up 22 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. The pace of year-over-year increases in both the charge-off rate and the delinquency rate have been steadily declining for several quarters and continued to shrink in the third quarter. On a sequential quarter basis, the charge-off rate, excluding the Walmart impact was down 63 basis points and the 30+ delinquency rate was up 39 basis points. Both sequential quarter trends are consistent with seasonal expectations. Domestic Card non-interest expense was up 12% compared to the third quarter of 2023, primarily driven by higher marketing expense. Total company marketing expense in the quarter was $1.1 billion, up 15% 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 third quarter of 2023, Domestic Card marketing in the quarter included increased marketing to grow originations at the top of the market, higher media spend and increased investment in differentiated customer experiences like our travel portal, airport lounges and Capital One Shopping. Slide 12 shows third quarter results in our Consumer Banking business. Auto originations were up 23% year-over-year in the third quarter. Our stable credit performance, which is the result of choices we've made over the past couple of years, puts us in a strong position to lean into current origination opportunities in the marketplace. Consumer Banking ending loans were essentially flat year-over-year and average loans were down 1%. On a linked quarter basis, ending loans and average loans were both up 1%. Compared to the year ago quarter, both ending and average consumer deposits were up about 6%. Consumer Banking revenue for the quarter was down about 3% year-over-year, largely driven by higher deposit costs compared to the prior year quarter. Non-interest expense was up about 5% compared to the third quarter of 2023, driven largely by continued technology investments and increased auto originations. The auto charge-off rate for the quarter was 2.05%, up 28 basis points year-over-year. The 30+ delinquency rate was 5.61%, down 3 basis points year-over-year, largely as the result of our choice to tighten credit and pull back in 2022; auto charge-offs have been strong and stable. Slide 13 shows third quarter results for our Commercial Banking business. Compared to the linked quarter, ending loan balances decreased about 2%. Average loans were down about 1%. The modest declines are largely the result of choices we made in 2023 to tighten credit. Ending deposits were up about 5% from the linked quarter. Average deposits were down about 1%. We continue to manage down selected less attractive commercial deposit balances. Third quarter revenue was up 1% from the linked quarter and non-interest expense was up by about 2%. The Commercial Banking annualized net charge-off rate for the third quarter increased 7 basis points from the sequential quarter to 0.22%. The Commercial Banking criticized performing loan rate was 7.66%, down 96 basis points compared to the linked quarter. The criticized non-performing loan rate increased 9 basis points to 1.55%. In closing, we continued to post strong results in the third quarter. We delivered another quarter of top-line growth in domestic card loans, purchase volume and revenue. In the auto business, we saw year-over-year growth in originations for the third consecutive quarter and consumer credit trends remained stable. Our year-to-date operating efficiency ratio, net of adjustments through September was 41.7%. We had guided to 2024 annual operating efficiency ratio, net of adjustments to be modestly down compared to the 43.5% we posted in 2023. Our view included the positive impact from the end of the revenue sharing related to the Walmart partnership and assumed the CFPB late fee rule would take effect in October. Looking forward, we now expect the full year 2024 annual operating efficiency ratio net of adjustments to be in the low 42s. We expect a sequential quarter increase in operating expense in the fourth quarter, that will be roughly in line with historical patterns as we continue to invest in our technology transformation. And we are no longer assuming that the CFPB late fee rule will be implemented in 2024, given ongoing uncertainty around industry litigation. Our view of 2024 marketing has not changed. We continue to lean into marketing to grow and to further strengthen our franchise. In the Domestic Card business, we continue to get traction in originations across our products and channels. In Consumer Banking, we're leaning into marketing to grow our digital-first national banking franchise. We continue to expect total company marketing in the second half of 2024 to be meaningfully higher than in the first half, similar to the pattern we saw last year and that includes the much higher marketing levels that we typically see in the fourth quarter. And turning to the Discover acquisition, we're working closely with the regulators as our applications continue to work their way through the regulatory approval process. Separately, Discover mentioned in their press release and on their earnings call last week that they continue to work in parallel with the SEC to resolve comments regarding their accounting approach for their card misclassification matter. As soon as that process wraps up, we expect to mail out a joint proxy and a schedule to schedule a shareholder vote most likely early next year. We remain well-positioned to get shareholder and regulatory approvals and we expect to be in a position 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 Norris, Senior Vice President of Finance

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. If you have any further questions after the Q&A session, the Investor Relations team will be available after the call. Josh, please start the Q&A.

Operator, Operator

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

Ryan Nash, Analyst

Hi, good afternoon, everyone. Rich, to start with credit, you have a clear view of various segments of the consumer market, such as high-end consumers, subprime, prime, private label, and different areas of auto financing. It appears that you are experiencing strong credit results, unlike some others. Can you discuss what you're observing across the consumer landscape and these various groups? Additionally, what do you believe this indicates regarding potential losses in your key asset classes? Thank you. I have a follow-up.

Richard Fairbank, Chairman and CEO

Okay. Thank you, Ryan. So let me just pull up and just talk first about the health of the consumer. I think the U.S. consumer remains a source of relative strength in the overall economy. Think about this. The labor market remains strong. We saw signs of softening in the first half of 2024 and the unemployment rate picked up a bit, but the most recent data points on unemployment and job creation have actually shown renewed strength. Incomes are growing in real terms and last month, we saw a significant upward revision of the savings rate. Consumer debt servicing burdens are stable relative to pre-pandemic levels and consumers have higher average bank account balances than before the pandemic. Now we see some pockets of pressure related to sort of the cumulative effects of inflation and elevated interest rates. And we are almost certainly still seeing a thing that we've been calling out for years, even really before it happened saying we think it inevitably will happen but we won't fully be able to measure that. We won't be able to measure that along the way, but that is delayed charge-offs from the pandemic period. We should remember that millions of consumers who would have charged off under normal circumstances in 2020, 2021, and 2022 avoided defaulting, thanks to unprecedented stimulus and forbearance. And these consumers were on the edge, and they got a lifeline. But for some of them, their underlying vulnerability remains. So I believe that what we're seeing today is some catching up from that period of historically low charge-offs. So I'd say consumers on the whole are in good shape compared to most historical benchmarks, but I do think there's some pockets of pressure that will persist until we fully work through this cycle essentially of inflation and elevated interest rates and, of course, for an unmeasurable period of time, there will be, I think this delayed charge-off effect from the pandemic. So that's a comment, Ryan, sort of on the consumer generally. You said you had another question. Of course, I can get into Capital One's individual credit as well. But why don't I hear where you want to take this?

Ryan Nash, Analyst

Yes. It would be useful if you could provide insight on Capital One specifically, but I have another question for Andrew that you can both address. Andrew, there was a significant increase in the net interest margin and the Fed has started to ease. Could you discuss the factors influencing the margin and your expectations moving forward? Historically, you've operated within a 6.8% to 6.9% range. Considering the changing dynamics of the balance sheet, do you think we have moved beyond that range? Thank you.

Andrew Young, CFO

Yes, Ryan. Look, as I think about the NIM in the near term, I enumerated the driving forces of what led to the increase this quarter. But in the near term outside of seasonal effects, we have one modest likely headwind, which as you can see in our disclosures, is that we're asset sensitive, and so that will put a bit of pressure on NIM in the immediate term, but we also have one potential tailwind, I'll call it, and that is the pace of card growth relative to the rest of the balance sheet. And you've seen the tailwind to NIM all else equal over the last few quarters. Longer term, I think there's a few headwinds and tailwinds. The tailwind being again card even beyond the next few quarters, we've seen strong growth, particularly relative to the rest of our balance sheet. And I've highlighted in the past that our current levels of cash are likely above where we think they will eventually settle out. And if we were to see a steepening of the yield curve, that's also a good guide to us, all else equal. On the headwind side, I think there's a question of where betas go from here and there's a possibility that they could be slower or lower depending on a host of factors. We could maintain cash levels for some period of time at least, especially in light of the strong deposit growth we're seeing. And then always there's a little bit of a wildcard of the path of credit, right? And so if for some reason it stays elevated, the potential revenue suppression could be a headwind. But overall, I would say taking all of those factors into account, you've kind of seen the stability over the last few quarters prior to this one and the step-up here in the third quarter. And so I'll let you kind of weigh all of the headwinds and tailwinds that I just laid out for you.

Ryan Nash, Analyst

Thank you.

Richard Fairbank, Chairman and CEO

So, Ryan, I want to discuss the consumer landscape and specifically talk about Capital One. In the Card business, our delinquencies and charge-offs are aligning with typical seasonal patterns, and our card credit has stabilized, above pre-pandemic levels. There are three main reasons for this. First, our recovery rates are still relatively low compared to pre-pandemic figures due to historically low charge-offs in the past, which has affected our charge-off inventory. Our recovery rate per dollar of charge-offs has been stable, and slightly improved compared to before the pandemic, but the overall inventory remains below pre-pandemic levels, although it’s gradually increasing. We expect this effect to lessen over the next few quarters. Secondly, we believe that the combined impact of inflation and higher interest rates is creating affordability pressures for some consumers, especially those whose incomes haven't kept up with inflation or who have high debt servicing costs. Importantly, strong income growth has been observed at the lower end of the income distribution since 2020, and customers facing the highest debt burdens tend to fall more into the prime category than subprime. Finally, there is a delayed charge-off effect that we think is still affecting our metrics. To provide a broader industry perspective, post-pandemic origination vintages are showing higher risk levels than those before the pandemic, likely due to inflated credit scores during that period. While this is an overall industry observation and not exclusive to Capital One, we took proactive measures by tightening our underwriting standards in 2020 and 2021 when credit conditions were optimal. As credit standards have normalized, we have continued to make adjustments where we've noticed rising risks, ensuring that our recent originations have maintained a stable performance consistent with pre-pandemic risk levels. However, there may be some underlying deterioration in the broader market that our strategic decisions have helped us avoid. Overall, we are pleased with our strong and stable credit results, which stem from the choices we've made throughout the pandemic and afterwards. We feel confident about our position, which is a key reason we are committed to increasing our originations in this business. I can address the auto segment at a later point if needed.

Jeff Norris, Senior Vice President of Finance

Next question, please.

Operator, Operator

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

Sanjay Sakhrani, Analyst

Thank you. Good evening. Just following up on credit, sorry. Just Rich, you had mentioned, maybe it was last quarter or the quarter before that we should start to see the credit, the delinquency improvements do better than seasonality. And I guess stabilized as you know, it's moving along with seasonality. Is some of that related to the stuff you were just talking about or do you still expect the improvement to be better than seasonality at some point?

Richard Fairbank, Chairman and CEO

At some point, it can take a long time, but I don't recall saying we expected credit to outperform seasonality. Over the past several months, we've stated that credit is normalizing. We're actively monitoring for early signs of this normalization, although we can't predict exactly when or how it will fully manifest. More than a year ago, we started noticing signs of credit stabilizing, particularly in the lower end of the market. Although we've experienced a downturn due to certain factors, there are ongoing trends related to credit stabilization. We haven't suggested that credit is likely to decline from here. We can discuss that further in another question. Additionally, regarding seasonality, I made a note last quarter about a potential change in seasonal patterns, which is important to address, especially for those monitoring monthly credit trends. Our portfolio exhibits more distinct seasonal patterns than the industry average. The second quarter typically shows the lowest delinquency rates, while the fourth quarter typically shows the highest. Card losses generally lag behind delinquencies and are lowest in the third quarter, with the highest losses occurring in the first quarter. We have always believed that tax refunds significantly influence these seasonal trends, driving a seasonal improvement in delinquent payments during the February-March period, which subsequently leads to lower delinquencies through late spring and reduced charge-offs later in the year. Tax refunds also contribute to a seasonal increase in our recovery rates. A few years back, changes to tax withholding resulted in fewer tax refunds and lower average refund amounts, with the IRS also delaying certain refunds due to fraud concerns. We monitored this situation closely, but the pandemic created a lot of noise in the payment data, making it difficult to assess changes in credit seasonality patterns. In the first half of this year, as credit metrics began to stabilize, we noted that the combination of lower and delayed tax refunds might have impacted our near-term credit performance by postponing and softening the usual seasonal improvements we see in the second quarter. We were cautious about making any definitive claims, as we wanted to ensure we weren't misinterpreting credit data that appeared worse than expected. We also anticipated a more muted seasonal increase in delinquencies for the third quarter based on this phenomenon, and weeks have passed with several quarters of data confirming that. Now, in a sense, credit trends are performing better than historical seasonal patterns, as we've experienced both the downside and upside. Overall, the evidence suggests that this effect is indeed occurring. In 2024, we expect to see fewer refunds than pre-pandemic levels, with about 25% lower total refund amounts in real terms. Consequently, as tax refunds become less influential, we're observing a decrease in the amplitude of seasonality. This is the seasonality we are currently seeing, and an adjusted analysis of last year confirms this new trend. On the auto side, these seasonal effects occur even more rapidly and intensely. I wanted to share this information to highlight that we are noticing a clear settling of credit trends.

Sanjay Sakhrani, Analyst

I mean my follow-up question would be the question you were looking for later. What's the path to normalization? And I guess for credit as well as the reserve rate, we're well above the levels we were in 2019, maybe you and Andrew can tag team on that one. Thank you.

Richard Fairbank, Chairman and CEO

So why don't I start, Andrew. We're really pleased with how card credit has settled after a significant period of normalization. Looking ahead, while we're not providing guidance on future credit, I want to highlight several influencing factors. One is the phenomenon of delayed charge-offs, which we strongly believe exists but cannot measure precisely. If you consider the area under the curve of charge-offs that haven't occurred, we don't expect all of that to manifest over time. However, this concept suggests there may still be a considerable amount of delayed inventory that could materialize. I want to emphasize this effect, which I think will moderate eventually but may persist for some time. Another factor is the continuing rebuilding of recoveries inventory, which should gradually help mitigate our losses over time, assuming all else remains equal. Additionally, while moderating inflation appears to positively influence card credit, high interest rates could still create pressure for some consumers, particularly those with higher debt servicing burdens. The economy will also play a role, but those are some of the key factors I believe will influence credit as it develops here, Sanjay.

Andrew Young, CFO

Regarding the allowance, we will be allowing for growth, which is our starting point in dollar terms. I believe you are more interested in coverage, so let me address that. In the fourth quarter, we usually experience seasonally higher balances that typically result in lower coverage due to the increased expected payments. All things considered, this will create downward pressure on coverage for that quarter. However, I understand you are seeking a longer-term perspective. Over time, coverage will largely depend on our loss forecasts and our confidence in those estimates. The factors that influence these forecasts have been discussed by Rich. It's also essential to keep in mind that even if our future projected losses are lower than those in the current quarter's forecast, coverage may only see slight declines because of the uncertainties involved. Eventually, if the lower loss forecast materializes, it will influence the allowance and reduce the coverage ratio as uncertainties diminish. Therefore, the trend in that situation would be downward, although the timing and speed of this change will depend on various factors. Since you mentioned CECL Day 1, I want to highlight that CECL Day 1 served as a rough estimate for a through-the-cycle coverage assumption, which included a law-sharing agreement with Walmart. With the end of that agreement, we experienced a roughly 50-basis point impact on allowance coverage last quarter. As you consider CECL Day 1 without the Walmart effect, the approximate 6.5% is actually closer to 7%. I hope this provides you with a sense of the expected direction moving forward.

Jeff Norris, Senior Vice President of Finance

Next question, please.

Operator, Operator

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

Terry Ma, Analyst

Oh, thank you. Good evening. I wanted to touch on the auto business and ask kind of what you're seeing in a competitive environment and how you're thinking about growth going forward. You called out originations have been positive the last three quarters and it looks like loan growth is going to turn positive. I know you're still mindful of used-car prices. So should we expect more measured growth in auto going forward?

Richard Fairbank, Chairman and CEO

Thank you, Terry. Our auto originations have been growing for the last three quarters. As mentioned in our previous calls from 2022 and early 2023, we anticipated some risk and a pullback in our originations. Despite the decline in vehicle values, the credit performance for both our new and existing loans remains strong. Additionally, some of the industry challenges, such as high interest rates and vehicle prices, are starting to ease, as interest rates have begun to decrease and vehicle values have fallen from their peaks, although they still remain above pre-pandemic levels. Our interest margins on new loans have improved, and credit has stabilized, allowing us to identify growth opportunities in a resilient manner. Our strategy is to focus on areas we favor, supported by our advanced underwriting and technology infrastructure, data-driven decision making, and strong relationships with our dealer network. Looking ahead, we are optimistic about our auto business and believe we are well-positioned for disciplined growth, particularly in what we consider to be a resilient market.

Terry Ma, Analyst

Great. Thank you.

Jeff Norris, Senior Vice President of Finance

Next question, please.

Operator, Operator

Thank you. Our next question comes from Bill Carcache with Wolfe Research Securities. You may proceed. Bill, your line is now open.

Bill Carcache, Analyst

Thank you. Good evening, Rich and Andrew. Following up on your NIM commentary, Andrew, if credit continues to trend in line or potentially better than normal seasonality from here, is it reasonable to expect revenue suppression would begin to serve as more of a NIM tailwind that would arguably overwhelm some of the NIM headwinds that you described in your earlier response?

Andrew Young, CFO

Outside of seasonality, Bill, which is an important qualifier to that, but yes, to the extent that credit is coming down in an absolute sense, suppression is highly correlated with loss rates. So over a period of time, that's what we would expect to see.

Bill Carcache, Analyst

Thanks for that. I have another question for you, Andrew, regarding your comments on reserves. In previous quarters, it appeared that qualitative overlays may have hindered your ability to release reserves. Would it be accurate to say that this quarter's reserve release indicates you anticipate consumer credit conditions will continue to gradually improve, suggesting that peak losses and reserve rates are likely now behind us?

Andrew Young, CFO

It's hard to think about the qualitative factors in isolation, Bill, because we look at the totality of the forecast and the economic backdrop. And that's just one albeit important but component of thinking about the allowance overall. So really the release this quarter was driven by the stability of underlying credit trends and just our confidence in those trends. So that's really the driver that led to this quarter's release.

Bill Carcache, Analyst

Thank you for taking my questions.

Jeff Norris, Senior Vice President of Finance

Next question, please.

Operator, Operator

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

Don Fandetti, Analyst

Hi, Rich, on the Discover merger, do you still feel like owning a network helps your position with regulatory approval? I mean, I guess the DOJ suit against Visa does validate that. I'm just trying to get a sense on whether or not you feel like your arguments are resonating with regulators and you have confidence in the deal closing?

Richard Fairbank, Chairman and CEO

So I think it's, you know, this is an unusual deal in the sense that usually there is a player in a certain industry doing an acquisition of another player in that industry and certainly part of the consideration is looking at those aspects, but the very unusual part here is two things. First of all, one is such an important part of this acquisition is buying a network, something that we don't have. So we're not even in that part of the business. But then secondly, of course, it is, you know, an acquisition buying a position in an industry that is getting a tremendous amount of scrutiny for how concentrated it is. And the network that we are acquiring, for example, on the credit card side has gone from 6% down to 4% share in recent years. And so certainly, we are making a strong case to a regulator that obviously has shown they care a lot about competition in that marketplace that we certainly believe that this is a very pro-competitive in that sense. Of course, we also believe very much that on the credit card side, the deal is pro-competitive as well.

Don Fandetti, Analyst

Thank you.

Richard Fairbank, Chairman and CEO

Yes. And yes. Yes, go ahead.

Jeff Norris, Senior Vice President of Finance

Next question, please.

Operator, Operator

Thank you. Our next question comes from John Heck with Jefferies. You may proceed.

John Heck, Analyst

Good afternoon, everyone. I appreciate you taking my questions. Most have already been addressed. I'm curious if you could provide some insights on spending trends and the volume of business being built. We've noted that consumers seem to be more cautious and responsible with their spending rather than reacting to any weaknesses or concerns about the economy. I would like to know your thoughts on this and how it impacts your business.

Richard Fairbank, Chairman and CEO

Thank you, John. Consumer spending has experienced quite a few ups and downs over the last few years. At the beginning of the pandemic, spending per customer dropped significantly, then increased as people resumed spending, and has since stabilized. Since the start of 2023, spending per customer has mostly remained flat but has started to rise slightly in recent months. The growth in spending that you see for Capital One is primarily driven by the increase in new accounts and the spending associated with those accounts, along with a slight uptick in recent months. While some people have questioned the spending patterns, discretionary and non-discretionary spending growth rates have been quite stable lately, and the mix remains consistent across income levels and credit scores, aligning with pre-pandemic figures. We believe that spending in the card business has settled down. Interestingly, when we look at the banking industry as a whole, the only area experiencing growth is the credit card sector, while many other banking products have struggled. The credit card remains a crucial part of the ongoing shift away from cash and checks towards more convenient payment methods. This macro trend continues to benefit the industry. Additionally, many companies, including Capital One, have focused strategies that prioritize spending, influencing our marketing and credit decisions, providing another advantage for our metrics. Thank you, John.

John Heck, Analyst

Thank you. Appreciate the color.

Jeff Norris, Senior Vice President of Finance

Next question, please.

Operator, Operator

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

Mihir Bhatia, Analyst

Good afternoon. Thank you for taking my question. And actually, just following up kind of similar lines as John's question about spending. Maybe just drilling down specifically on the venture x portfolio. And I was wondering if you could just talk a little bit more about it. It's been in the market for a couple of years now. Just how much has it grown, how material is it to the overall card business? What are you seeing in terms of performance in that portfolio that's encouraging you to invest more in it? But just any additional details would be great. Thank you.

Ime Archibong, Executive Vice President

Thank you. I'm here to discuss our Venture X card, which we launched in late 2021. We are very pleased with the market response and customer engagement. This launch represents an important step in our long-term strategy to succeed at the premium end of the market, a journey that began years ago. Each year, we've pushed ourselves to achieve more, leveraging the momentum and brand strength we've built to continue growing. The Venture X card is a significant milestone in this process, alongside the introduction of our Capital One travel portal and lounges, which have enhanced the customer experience as a whole. Last year, we also launched the Venture X business card, which has received positive market feedback and customer engagement. While we don't share specific numbers, we are pleased with our ongoing efforts to excel in the top market segment, and both Venture X products are gaining traction. It's important to note that winning in this segment is not just about launching products with specific features; it requires a comprehensive and sustained approach to create unique experiences and build brand credibility as a premium player. This involves increased marketing investment, targeted at reinforcing our position in the market. Moreover, we've observed that as we climb up in the spending segments, the growth rate of our purchase volume accelerates, indicating strong traction not only in overall volume but also as we reach further into the premium market.

Jeff Norris, Senior Vice President of Finance

Next question, please.

Operator, Operator

Thank you. Our next question comes from Chase Haynes with Evercore ISI. You may proceed.

John Pancari, Analyst

Hi, it's John Pancari at Evercore ISI. I wanted to just ask on capital CET1 ratio at 13.6%. I wanted to get your updated thoughts here on how you think about buyback in that context. I know you had indicated that the Discover transaction could impact the pace of buybacks ultimately, but you still bought back about $150 million in the third quarter. So I wanted to get your updated thoughts there. Thanks.

Andrew Young, CFO

Yes, John, there are several factors influencing our capital management strategy. Firstly, there is uncertainty surrounding the end game rule. The re-proposal offered some broad indications, but the specifics are crucial, along with the unclear timing for implementation. Secondly, while it has been easing, macroeconomic uncertainty still persists. Most importantly, we are facing the upcoming Discover acquisition. After the close, we need to assess the requirements of the combined entity and also go through the Fed's CCAR process to determine both our outlook and the Fed's perspective on the capital needs of the combined company. These are the reasons we are operating at our current levels and consider it wise to do so. We have maintained a $150 million buyback pace for several quarters. Once we fall back under an SEB regime, we will have the flexibility to return capital as appropriate. In late 2021 and early 2022, when we had excess capital, we returned approximately $2.5 billion per quarter in repurchases. If we find ourselves in a similar situation again, we recognize that returning excess capital is vital for enhancing shareholder value, and we can act swiftly. However, I must emphasize the factors currently influencing our operations.

John Pancari, Analyst

Got it. Thank you, Andrew. If I could just ask one more on the loan yield increase, up about 58 basis points this quarter, how much of that increase was the impact from Walmart for the full quarter? And was there any impact on the APR from any increase to the APR in response to the proposed CFPB late fee rule? Thanks.

Andrew Young, CFO

And John, I just want to make sure I understand your question of the yields quarter-over-quarter, are you saying or like year-over-year yield on card, year-over-year yield in card is flat when you take into account the effect of Walmart. Quarter-over-quarter, it's really just the seasonality effect. There's the partial quarter of Walmart, but yield is really the seasonal effects and partial quarter of Walmart when you're comparing third quarter to the second quarter.

John Pancari, Analyst

Okay.

Andrew Young, CFO

And then...

John Pancari, Analyst

Okay, thank you.

Jeff Norris, Senior Vice President of Finance

Next question, please.

Operator, Operator

Thank you. And our final question comes from the line of Jeff Adelson with Morgan Stanley. You may proceed.

Jeff Adelson, Analyst

Hi, good evening. Thanks for taking my question. Just one for me to follow up on John's question there. Just on the late fee rule, I fully appreciate that things remain in flux at this point. But could you give us an update in your latest thinking and how you're potentially preparing for that with any offsets or mitigating actions? Have any of those actions been taken yet? And I get that you talked about taking a more mindful approach here. Just wanted to make sure that this is still the same approach you're taking or if there's anything else we should be thinking about in our models here? Thank you.

Andrew Young, CFO

Thank you, Jeff. At this point, we're awaiting the outcome of industry litigation to determine if and when the late fee rule will take effect, and we won't speculate on the timing. As previously mentioned, if the rule is enacted as is, it will significantly impact our revenue. We also believe it will affect the marketplace in areas such as competition, pricing, customer behavior, volumes, and credit. We've dedicated decades to cultivating a customer-first business model with minimal fees and straightforward products. We feel these decisions have led to better growth, lower attrition, and improved credit selection. Our priority will always be to maintain our customer base, loyalty, and credit resilience if the rule is implemented. So far, the only action we've taken is to delay a few investments in anticipation of the rule's potential implementation. If the ruling does not occur, we will likely proceed with those investments over time. Thank you, Jeff.

Jeff Norris, Senior Vice President of Finance

Well, that concludes our Q&A session for the evening. Thank you for joining us on this conference call today and for your continuing interest in Capital One. Everybody, have a great night.

Richard Fairbank, Chairman and CEO

Thank you.

Operator, Operator

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