Capital One Financial Corp

NYSE:COF

Earnings Call Transcript 2022-Q1

[Operator]

Good day, ladies and gentlemen. And welcome to the Capital One First Quarter 2022 Earnings Conference Call. All lines have been placed on mute to prevent any background noise. After the speakers’ remarks, there will be a question-and-answer period. [Operator Instructions]

Thank you. I would now like to turn the call over to Mr. Jeff Norris, Senior Vice President of Global Finance. Sir, you may begin.

[Jeff Norris, Senior Vice President, Global Finance]

Thanks very much, Keith. And welcome everybody to Capital One’s first quarter 2022 earnings conference call. As usual, we are webcasting live over the Internet. 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 have included a presentation summarizing our first quarter 2022 results.

With me this evening are Mr. Richard Fairbank, Capital One’s Chairman and Chief Executive Officer; and Mr. Andrew Young, Capital One’s Chief Financial Officer. Rich and Andrew are going to walk you through this presentation. To access a copy of the presentation and press release, please go to Capital One’s website, click on Investors, 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 other 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 those factors, please see the section titled Forward-Looking Information in the earnings release presentation and the Risk Factors section in our annual and quarterly reports, accessible at the Capital One website and filed with the SEC.

Now, I will turn the call over to Mr. Young. Andrew?

[Andrew Young, Chief Financial Officer]

Thanks, Jeff, and good afternoon, everyone. I will start on slide three of tonight’s presentation. In the first quarter Capital One earned $2.4 billion or $5.62 per diluted common share. The results include one notable item, $192 million gain from the sale of two Card partnership loan portfolios in the quarter.

Period end loans held for investment grew 1% on a linked-quarter basis and average loans grew 3%. Revenue in the linked-quarter increased 1%. Non-interest expense decreased 3% in the quarter, driven by declines in both marketing and operating expenses. Provision expense in the quarter was $677 million, as net charge-offs of $767 million were partially offset by an allowance release.

Turning to slide four, I will cover the changes in our allowance in greater detail. For the total company we released $119 million of allowance in the first quarter and the total allowance balance now stands at $11.3 billion. We continue to hold an elevated amount of qualitative factors to account for a number of uncertainties. Our total company coverage ratio is now 4%.

Turning to slide five, I will discuss the allowance and coverage of each of our segments. As you can see in the graph, our allowance coverage ratio was largely flat across each of our business segments.

In our Total Card segment, the allowance balance declined $65 million, driven by our international Card businesses.

In our Domestic Card business, the allowance balance remained flat at $8 billion. With the slight decline in ending loans, the flat allowance balance in Domestic Card resulted in a slight increase in the coverage ratio to 7.38%.

In our Consumer Banking segment, the allowance balance declined by $16 million, which when coupled with loan growth resulted in a 10 basis point decline in coverage to 2.37%.

And in Commercial, the $41 million decline in allowance balance was driven by portfolio credit improvement. The decline in coverage ratio was driven by both the allowance release, as well as growth.

Turning to page six, I will now discuss liquidity. You can see our preliminary average liquidity coverage ratio during the first quarter was 140%. The LCR remained stable and continues to be well above the 100% regulatory requirement.

The investment portfolio ended the quarter at $89 billion, declining by about $6 billion on a linked-quarter basis. Rising rates drove a market value decline of $4.3 billion, with the remaining decline due to our continued efforts to reduce our investment portfolio from the elevated levels during the pandemic.

Turning to page seven, I will cover our net interest margin. Our first quarter net interest margin was 6.49%, 50 basis points higher than the year ago quarter and 11 basis points lower than Q4. Relative to a year ago, the increase in NIM is largely driven by a balance sheet shift, as we deployed excess cash to loans. The linked-quarter decrease in NIM was driven by having two fewer days in the first quarter.

Normalizing for day count effect, higher yields in both our Card business and in our investment portfolio were roughly offset by the impact of hedges on the balance sheet and lower auto yields. Outside of quarterly day count, the NIM from here will largely be a function of the changes in our balance sheet mix, interest rates and the impacts of competition on loan yields and deposit betas.

Turning to slide eight, I will end by discussing our capital position. Our common equity Tier 1 capital ratio was 12.7% at the end of the first quarter, down 40 basis points from the prior quarter.

Net income in the quarter was more than offset by share repurchases, the impact of the CECL transition and higher risk weighted assets. Recall that the phasing of CECL transition relief began on January 1st. We recognize 25% of our $2.4 billion total after-tax phasing amount in the first quarter.

Also in the quarter, we repurchased $2.4 billion of common stock as part of the $5 billion share authorization that our Board approved in January. Earlier this month, in addition to approving our CCAR 2022 submission and our capital plan, our Board of Directors also approved the authorization of up to an additional $5 billion of common stock repurchases that will be available beginning in the third quarter of this year. We continue to estimate that our CET1 capital need is around 11%.

With that, I will turn the call over to Rich. Rich?

[Richard Fairbank, Chairman and CEO]

Thank you, Andrew, and good evening, everyone. I will begin on slide 10 with our Credit Card business. Year-over-year growth in purchase volume and loans coupled with strong revenue margin drove an increase in revenue compared to the first quarter of 2021. Credit Card segment results are largely a function of our Domestic Card results and trends, which are shown on slide 11.

Our Domestic Card business posted strong year-over-year growth in every topline metric in the first quarter, as we continued our longstanding strategic focus on winning with heavy spenders and building a franchise across the business. Purchase volume for the first quarter was up 26% year-over-year and up 47% compared to the first quarter of 2019.

The rebound in loan growth accelerated with ending loan balances up $16.9 billion or about 19% year-over-year. Ending loans were down just 1% from the sequential quarter, better than the typical seasonal decline of around 7% and revenue was up 20% year-over-year, driven by the growth in purchase volume and loans, as well as strong revenue margin.

Domestic Card revenue margin for the first quarter was 18.3%. Revenue margin continued to benefit from spend velocity, which is the purchase volume and net interchange growth outpacing loan growth. Spend velocity is driven by the traction we are getting with heavy spenders. The margin also includes a gain from a Card partnership portfolio sale in the quarter.

Credit results remain strikingly strong. The Domestic Card charge-off rate for the quarter was 2.12%, a 42 basis point improvement year-over-year. The 30-plus delinquency rate at quarter end was 2.32%, 8 basis points above the prior year.

Gradual credit normalization continued in the first quarter. On a linked-quarter basis, the charge-off rate was up 63 basis points and the delinquency rate was up 10 basis points.

Non-interest expense was up 33% from the first quarter of 2021, driven by an increase in marketing. Total company marketing expense was $918 million in the quarter. Our choices in Domestic Card marketing are the biggest, but of course, not the only driver of total company marketing trends.

We continue to see opportunities to book Domestic Card accounts and loans that can generate resilient and attractive returns and we continued to lean into marketing to drive growth and build our Domestic Card franchise.

Consumer balance sheets and labor markets are strong, and in our own portfolio, credit results continued to be well below pre-pandemic levels and they are normalizing gradually. We are keeping a close eye on competitor actions and potential marketplace risks. And as always, we are underwriting to worsening scenarios, even as we lean into marketing.

Our Domestic Card marketing is evolving and increasing as our decade long focus on heavy spenders continues to gain traction. We increased marketing to grow the heavy spender franchise and drive the successful launch of Venture X.

Growth in new accounts and robust customer spending drove an increase in early spend bonuses, which show up in our marketing expense and part of our marketing is focused on strengthening our heavy spender franchise with investments in our new travel portal and airport lounges.

And looking across the whole company, our digital transformation is generating new business opportunities like Capital One Shopping in our Card business and Auto Navigator in our Auto business. And modern technology infrastructure and capabilities are driving our digital first National Direct Banking strategy in Consumer Banking. We are marketing to continue to propel these growing digital businesses.

Our marketing is paying-off across these opportunities. We posted very strong growth in Domestic Card purchase volume, new accounts and loans. We are gaining share and building a long-term franchise with heavy spenders. And away from the Card business, we are growing auto originations and deepening dealer relationships with Auto Navigator and our National Direct Banking business is winning with customers and driving growth.

Speaking of our Auto and Retail Banking businesses, let’s move to slide 12, which shows that strong loan growth in our Consumer Banking business continued in the first quarter. Driven by auto, first quarter ending loans increased 14% year-over-year in the Consumer Banking business. Average loans also grew 14%.

First quarter auto originations were up 33% year-over-year. On a linked-quarter basis, auto originations were up 20%. Our digital capabilities and deep dealer relationship strategy continued to drive year-over-year growth in our Auto business. We continue to closely monitor competitive and credit dynamics in the auto marketplace.

First quarter ending deposits in the Consumer Bank were up $4.4 billion or 2% year-over-year. Average deposits were also up 2% year-over-year. Consumer Banking revenue grew 2% from the prior year quarter, driven by growth in auto loans, partially offset by declining auto loan yields and the early effects of our decision to completely eliminate overdraft fees. The year-over-year decrease in auto loan yields was driven by a mix shift toward prime loans and our focus on booking higher quality loans within credit segment.

Across the auto lending industry, the pace of price increases has not kept up with the pace of rising interest rates. The decline in loan yields coupled with the pace of pricing changes has compressed margins in our Auto business.

First quarter provision for credit losses swung from a net benefit of $126 million in the first quarter of 2021 to a net expense of $130 million. The allowance for credit losses in our Auto business was flat in the quarter compared to an allowance release in the year ago quarter.

The auto charge-off rate and delinquency rate are gradually normalizing, and remain strong and well below pre-pandemic levels. The charge-off rate for the first quarter was 0.66%, up 19 basis points year-over-year. The 30-plus delinquency rate was 3.85%, up 73 basis points year-over-year. On a linked-quarter basis, the charge-off rate was up 8 basis points and the 30-plus delinquency rate was down 47 basis points.

Slide 13 shows first quarter results for our Commercial Banking business, which delivered strong growth in loans, deposits and revenue in the quarter. First quarter ending loan balances were up 17% year-over-year, driven by growth in selected industry specialties and increasing utilization. Average loans were up 15%.

Ending deposits grew 9% from the first year, excuse me, from the first quarter of 2021, as middle market and government customers continued to hold elevated levels of liquidity. Quarterly average deposits increased 12% year-over-year.

First quarter revenue was up 16% from the prior year quarter. Non-interest expense was also up 16%. Commercial Credit performance remains strong. In the first quarter, the Commercial Banking annualized charge-off rate was 6 basis points. The criticized performing loan rate was 5.7% and the criticized non-performing loan rate was 0.8%.

In closing, we continued to drive strong growth in Domestic Card revenue, purchase volume and loans in the first quarter. We also posted strong Auto and Commercial growth. Credit is gradually normalizing and remains strikingly strong across our businesses and we continue to return capital to our shareholders.

Pulling way up, we are well-positioned to capitalize on the accelerating digital revolution in banking. Our modern technology stack is powering our performance and our growth opportunity and it’s the engine of enduring value creation over the long-term.

And now, we will be happy to answer your questions. Jeff?

[Jeff Norris, Senior Vice President, Global Finance]

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

Keith, please start the Q&A.

[Operator]

Thank you. [Operator Instructions] We will take our first question from Sanjay Sakhrani with KBW. Please go ahead.

[Sanjay Sakhrani, KBW]

Thanks. So, obviously, the investor sentiment has turned quite cautious on the consumer, but it seems like, Rich you think credits doing, I mean clearly credit is doing quite well in your loan book and you guys are leaning into growth. Maybe you could just give us some perspective on some of the macro headwinds that the consumer is facing, and sort of how you see it progressing through the portfolio as the year progresses? Thanks.

[Richard Fairbank, Chairman and CEO]

Okay. Hey, Sanjay. Yeah. So let’s just talk about the health of the consumer. I think the U.S. consumer continues to be strong. While the savings rate has reverted back to pre-pandemic levels, the cumulative impact of savings over the last two years is still a significant positive. We see this in higher bank account balances and higher household net worth and it is true across the income spectrum.

Now, of course, the bulk of government stimulus is now behind us and most industry forbearance programs are winding down. But I think we will see some sustained benefits from consumer deleveraging through the pandemic. Debt servicing burdens are lower than they have been in decades, supported both by deleveraging and by low interest rates.

On the other side of the consumer balance sheet, labor market demand remained strong. So in our own portfolio, Sanjay, we see continuing strength in roll rates, cure rates and recovery rates, and even as we see signs of normalization, our credit metrics remain strikingly strong by any historical standard.

There are emerging headwinds as well, for example, high price inflation. The inflation has the potential to erode the excess savings, consumers accumulated through the pandemic, especially of price increases continue to run ahead of wage growth and also higher interest rates would push debt servicing burdens back up.

But if we pull up on the whole, I’d say consumers are in good shape coming out of the pandemic relative to most historical benchmarks. In fact, the -- I am just learned over the years that, I have got a lot of confidence in how -- what consumers learn from downturns and scares that they have and the choices that they make and I think we are just seeing very rational behavior by consumers. I worry more about markets and how competitors operate and lending practices and things like that, we can save that for another question.

But we still feel good about the consumer and look it is a natural thing, it would be an unnatural thing for credit to stay where it is. And so, normalization, the root word in normalization is nor, and there is quite a journey to really sort of an equilibrium place for credit performance. And one of the reasons that we are still leaning pretty hard into our growth opportunities is our confidence in the consumer and our read of the marketplace at this time.

[Sanjay Sakhrani, KBW]

Okay. Great. And a follow-up question on some of the regulatory scrutiny we are seeing. There has been some chatter on Card loan fees and overdraft fees, the latter of which I think you guys have gotten in front of. Maybe you could just talk a little bit about the Card loan fees -- the Card fees, chatter out there from some of the regulators and how it might affect your business? Thanks.

[Richard Fairbank, Chairman and CEO]

Yeah. Well, Sanjay, we as a company have been very focused on minimizing fees, just in general for our consumers. Obviously the overdraft announcement was a pretty dramatic case in point there.

But even in the Card business, when you look, we really what Capital One has is an APR and a late fee and in some cases a cash advance fee, both of those fees are really to discourage certain behaviors that we don’t think are in the interest of the consumer. So, yes, so our strategy has been to have pricing be upfront and have -- it be clear and very simple.

Now late fees or something that we have continued to have late fees, because we wouldn’t want our loved ones ending up paying late on their bill, so just late fee, I think is one of the natural fees that probably makes sense to have on a product. The fed is created a Safe Harbor with respect to late fees, maybe the industry well, that will be revisited and obviously we will watch that as we continue our business.

[Jeff Norris, Senior Vice President, Global Finance]

Next question please.

[Operator]

We will take our next question from Rick Shane with JPMorgan. Please go ahead.

[Rick Shane, JPMorgan]

Thanks for taking my question. Can we just talk a little bit more about the partnership portfolio sale, how to think about that from an asset perspective in the impact on the P&L in terms of revenue and any associated decline in expenses associated with that sale?

[Andrew Young, Chief Financial Officer]

Yeah. Rick, it’s Andrew. I mean, we disclosed the overall gains between the two portfolios of $192 million. The two portfolios combined, you saw probably last year when they got marked held for sale were roughly $4 billion, but below the surface there we are not going to get into specifically the run rate of revenue or the expenses associated with that in part, because we are growing the rest of the portfolio and you are going to see partnership businesses come in and out over time.

[Rick Shane, JPMorgan]

Okay. Thank you.

[Jeff Norris, Senior Vice President, Global Finance]

Next question please.

[Operator]

We will take our next question from Bill Carcache with Wolfe Research. Please go ahead.

[Bill Carcache, Wolfe Research]

Thank you. Good afternoon. Rich and Andrew, you have unique insight into consumers at both ends of the credit spectrum. Could you parse out for us in a little bit more detail, just following up on Sanjay’s question? Specifically at what kinds of credit normalization trends you are seeing at both the high end and the low end of the credit spectrum, if you could sort of juxtapose those for us and maybe call out any differences? And then, perhaps, any possibility of that inflationary pressures could lead to a bit faster normalization at any -- at the lower end?

[Richard Fairbank, Chairman and CEO]

Yeah. Hey, Bill. So we have for quite a long time saying, we should all expect normalization. In terms of what we see in normalization, I -- it’s pretty early and pretty modest, in fact, if anything I guess, we would -- we are sort of struck by the how moderate the pace is, but we shouldn’t necessarily count on that, but it is certainly striking so far.

What we are seeing in normalization is really across the credit spectrum and across the income spectrum. It does seem that normalization is a bit more pronounced at the lower end of the market, if you sort of measure either in terms of income or credit score. But those are also populations that improved more and more quickly earlier in the pandemic. So that’s -- so I think we are seeing and we would expect this is and across the Boards kind of return toward normal over time.

With respect to inflation, we worry a lot about inflation and that is something that, especially if inflation, as we have seen in, what it costs to live is faster than wage inflation. These can put pressures and sometimes can put pressures more on the -- in the Main Street America. And so it’s something that we worry quite a bit about and I think that, it would be very natural for these inflation pressures to put more pressure on consumers.

[Bill Carcache, Wolfe Research]

Thank you, Richard. It’s really helpful. If I may ask a related follow-up, maybe could you discuss the extent to which positive credit migration fueled by pandemic stimulus, that perhaps may have led you to increase line sizes and then now the extent to which we could sort of see a reversal in that and perhaps as credit normalizes, would you expect negative credit migration to ultimately lead to a reversal of those line sizes or is that not how it worked?

[Richard Fairbank, Chairman and CEO]

Yeah. Over the years, we have worked hard to originate accounts, and we have said, it’s kind of a coiled spring of growth opportunity and we uncoil the spring gradually based on customer performance and also the marketplace.

And so we have as part of the growth that you see, while it’s being powered by very strong originations and in some return to spending in Card usage by the back book, we also have been selectively increasing credit lines.

Nothing dramatic, but it’s consistent with my earlier comments about the consumer, and again, with great demonstration by the performance of our customers, we have been selectively increasing credit lines and I think I don’t see anything that would change our lean in that direction.

Again, it’s selective and it assumes a worsening environment, it assumes normalization in all of those things. So I don’t think we would be setup to be surprised there and I don’t see -- I don’t have any conversations about trying to reverse that direction.

[Jeff Norris, Senior Vice President, Global Finance]

Next question please.

[Operator]

We will take our next question from John Pancari with Evercore ISI. Please go ahead.

[John Pancari, Evercore ISI]

Good evening. On the -- regarding the credit on the reserve front, I know you had released an incremental $190 million and you indicated that you do have additional qualitative reserves aside. I know your reserve ratio right now was a near your day one CECL level. How should we think about the potential for incremental reserve releases from here? Do you think that we stabilize at this level of the reserve ratio or do you think there is incremental room to release?

[Andrew Young, Chief Financial Officer]

Well, John, when you quote the -- this is Andrew, by the way. When you quote the reserve level, keep in mind that there pretty significantly different reserve levels by asset class and so the total company level, of course, is influenced by that mix.

So I would suggest we decompose it a bit by each of them since auto was a little bit below where it was on CECL day one and that’s largely a function of the elevated used car prices, our mix in prime. So we are seeing loss rates that are much below, I think, 66 basis points was the number this quarter.

And so all else equal, you would expect that our coverage ratio there would be well below, what it was at adoption and yet, it’s only a little bit below and that’s for the qualitative factors there. But the largest factor to the total company reserve will clearly be Card.

And that’s one where I think it’s always helpful to just start with a reminder of how that allowance is constructed, because answering your question is really dependent on a number of assumptions, where quite frankly your guess could be as good as mine.

And so with Card, the first thing that goes into the allowance is just the expectation of future losses and recoveries and you can see within our delinquency bucket in the near-term, but beyond that, we assume that there is a relatively swift normalization of losses from those unusually strong levels, historically strong.

The second is the size of the balance sheet, which he saw this quarter is growing at a quite healthy pace when you normalize quarter-over-quarter for seasonal effects and certainly up 19%, I think the number is in Q1 for Card relative to a year ago.

And then the third input is that level of qualitative factors and that’s really just to account for a variety of risks related to inflation and various things that are impacting that and just uncertainty in the more macro economy. And so the future allowance is really going to be determined by how all of those effects net out.

The one thing that I will just remind you is, what we call the quarter swap effect and that is as credit begins to normalize, we will be replacing a currently low loss quarter with a slightly higher loss quarter, so that’s another thing that will create pressure, all else equal.

But if favorable credit trends continue and the factors driving those qualitative reserve subside, we could see the allowance be down to flat. But if normalization plays out and we are growing at a significant clip, I wouldn’t anticipate that we will see allowance release, in fact, I can see allowance build. So it’s really just a function of all of those factors. Sorry for the long-winded technical answer there, but I just think all of those factors are really important for you to understand, because the range of outcome on the allowance is quite large.

[John Pancari, Evercore ISI]

Got it. Okay, Andrew. Thank you. And then my follow-up question is just around consumer spend behavior and volumes. On behavior, are you seeing any shifts in spending on discretionary towards -- shifting towards non-discretionary? And then, secondly, are you -- on the volume side, do you forecast a slowdown in Card spend volume overall as the fed hikes and aims at slowing the economy? Thanks.

[Richard Fairbank, Chairman and CEO]

Thanks, John. I have not -- look, recently a discretionary versus non-discretionary, so I don’t want to speculate on that. I will tell you a thing that is -- certainly striking is what’s happening with T&E spend these days. Just by way of comparison T&E spend was up 90%, compared to the first quarter of 2021. Of course, that was a very depressed quarter.

But up around 20% from first quarter 2019 level. So there is a lot of -- I think would people sort of just bursting out and wanting to free themselves from some of what they have been through in the pandemic, we certainly see strength there.

But I think your question about, as really inflation hits and we see just a lot of downstream effects that can happen from that, that certainly could impact Card spend. But I would say a lot of the traction that we have in Card spend is coming from our -- are really spender focused business, and frankly, heavy spender focused business and I think that, I am not sure that a change in inflation is going to have necessarily that much impact on the propensity of the heavy spenders to spend.

[Jeff Norris, Senior Vice President, Global Finance]

Next question please.

[Operator]

We will take our next question from Ryan Nash with Goldman Sachs. Please go ahead.

[Ryan Nash, Goldman Sachs]

Hey. Good evening, everyone.

[Andrew Young, Chief Financial Officer]

Hey, Ryan.

[Richard Fairbank, Chairman and CEO]

Hey, Ryan.

[Ryan Nash, Goldman Sachs]

Hey, Rich, Andrew. So maybe just to start off, Rich, you referenced the competitive landscape out there in Card and Auto, a few times, I think you said larger upfront bonuses and you are closely watching some of the competitive dynamics. Can you maybe just talk about, what you are seeing out there and I think it’s historically it’s been unusual for you to be grown this fast when the rest of the market is also growing? So I am just wondering, can you maybe just talk about on the Card side, what you are seeing banks versus non-banks and anything you are seeing on the Auto side would be helpful at this point?

[Richard Fairbank, Chairman and CEO]

Okay. Ryan, I do have a smile at your comment, because often we have zagged while -- zig while others zag and we have -- you and I in fact have chatted about that and the reason sometimes behind it.

Because it’s not just an accident that sometimes has been our pattern, because part of what we are reading is the competitive marketplace and that has impact on the opportunity and on credit performance and selection dynamics and a lot of things.

So your question is a great one, but I think a lot of companies out there to see the strength of the consumer. They are sort of feeling the consumer, sort of roaring back with respect to more normal activities. And I think people are leaning into to take advantage of that and certainly we are. But we -- let me talk a little bit just about the competition in the Card business.

We certainly know that there is elevated marketing. All the companies are pretty much coming out and showing more marketing, talking about more marketing, so that is happening and we have a careful eye to see what that does to the opportunity that we are experiencing. But I will kind of come back to our opportunity there, but certainly marketing levels are elevated.

Competition in the rewards space is probably a notch more intense than pre-pandemic levels, but it’s pretty stable in recent quarters and not what I would call irrational. Certainly incredibly good players at the top of the market and there is a lot of competition there, but that hasn’t really altered our view of the opportunity, either APRs generally been stable.

Turning to the fintechs for a second, obviously we have seen a lot of, buy now pay later activity. I think that we should note that the fintechs who are in the lending business have been lending in the greatest rearview mirror of credit -- industry credit performance that you could ever imagine. And businesses like instalment lending based businesses sometimes are pretty sensitive in that environment. So I -- but we continue to see quite a bit of activity on fintechs as well.

But on the Card side, before I turn to Auto, all -- we have an eye on the competition, I think generally the competition while intense is not unreasonable, we have not seen the big changes in people’s underwriting policy, the kinds of things that -- we haven’t seen dramatic changes in pricing.

So I think it’s more, I would label it at the intense level that we would expect that a time like this, but not unreasonable and not something that would cause us to move off our pretty strong lean into the growth opportunity.

So in the Auto business, let me just talk a little bit about this. The competition in the Auto business continues to remain intense. It’s showing up across the Board from credit unions, big banks and small independent lenders, and it’s playing out across all Credit segments.

And you just kind of double-click into that for a second, credit unions that have been wash with deposits, they have been gaining significant share, consistent with what we have observed during prior cycles and especially as interest rates go up a little bit.

And let’s talk in fact about rising interest rates. I think it’s almost always the case in business that when in a sense a cost of goods sold rises, there typically is a lag and how that makes it way into consumer pricing.

What we have -- as I mentioned in the earlier comments, we have not seen the marketplace, the auto marketplace yet respond in terms of pricing relative to what’s actually happening to interest rates, so there is a some compression there.

I think typically what we have seen in the past is competitors respond with differing speeds to interest rate increases. So sometimes players like credit unions tend to and maybe they have different FTP methodologies or whatever it tend to be sort of the slowest to respond, but we -- so we will have to keep an eye on that.

But I think that, we are really excited about our opportunity in the Auto business. The technology products that we have out there are really cutting edge and getting a huge amount of traction. Our -- I is just very careful on the pricing out there and also just whether there is an over exuberance relative to the number of planets that are aligned in the auto lending business, particularly what sort of happened to used car values and is -- and in fact that still there, just keep an eye on whether that industry can remain as rational as it’s been in the last couple of years.

[Ryan Nash, Goldman Sachs]

Maybe as a quick follow-up, sticking with things that are unusual, Andrew, you guys are continuing to aggressively return capital. I think you have two different $5 billion asset [ph] out there, which again is unusual for you guys. I was wondering, can you maybe just talk a little bit about the timing of the utilization of those and how to think about use of capital as you are getting closer to the 11% CET1 target? Thank you.

[Andrew Young, Chief Financial Officer]

Yeah. I recall that in January, we did not have an active program at the time, so our Board authorized $5 billion and capital levels were even higher than they are today at that point. And so earlier this month in conjunction with the approval of the capital plan in our CCAR submission they authorized an additional $5 billion, which coincides with the capital plan and therefore would be available at the start of the third quarter.

But in terms of the pace of that activity, it feels a little bit different than it did when we were at 14.5% over a year ago. To your point like asymptotically we are sort of heading towards 11% and so the pace of repurchases is as always is going to be dependent on our primary use of capital for loan growth and then the dividends.

But beyond that, we are going to keep a really close eye on just the level of capital and earnings and growth and end market dynamics and take advantage of the fact that we are able to operate under the SCB framework and maintain that flexibility. So nothing specific in terms of the timeline there, but just wanted to be clear about the approvals when we announced it a few weeks ago.

[Jeff Norris, Senior Vice President, Global Finance]

Next question please.

[Operator]

We will take our next question from Betsy Graseck with Morgan Stanley. Please go ahead.

[Betsy Graseck, Morgan Stanley]

Hi. Good evening.

[Andrew Young, Chief Financial Officer]

Hi, Betsy.

[Richard Fairbank, Chairman and CEO]

Hi. Good evening, Betsy.

[Betsy Graseck, Morgan Stanley]

I guess, just switching gears a little bit. I wanted to ask a little bit about what you are seeing with regard to payment rates and is there any differentiation amongst the customer base as to how that’s been projecting?

[Richard Fairbank, Chairman and CEO]

So, Betsy, we continue to see elevated payment rates across our customer base and while lately it’s been sort of flattening out if you will, I mean, payment rates are just well above pre-pandemic levels. And while not a perfect proxy, you can see these trends in our trust metrics where the payment rate in March remained close to 50%.

One of the more recent drivers of higher repayment rates is really the flip side of amazingly strong credit and healthy consumer balance sheets and we certainly expect consumer credit to gradually normalize, maybe you know it’s kind of been happening a little slower than one might otherwise expect.

And I certainly believe payment rates will remain sort of the flip side of really strong credit. So over time, the normalization of credit plausibly leads to some normalization of higher payment -- of normal, excuse me, a payment rate.

I think there is another phenomenon happening sort of on little cat feet, behind our payment rate numbers and that is that each year we are gaining more and more traction with heavy spenders. Also you may remember for years we talked about, gosh, this goes all the way back to the Great Recession, Capital One’s systematic avoidance of high balance revolvers, which leaves a lot of revenue and earnings on the table during the good times, but is a move for the sake of resilience.

But I think this sort of systematic effects of avoiding high balance revolvers and the systematic effects of more and more traction with heavy spenders also has created somewhat of a sort of more sustainable change in our payment rate as well. But, certainly, probably, the biggest factor of the moment is the rate at which consumers are being so creditworthy and putting so much of their money into payments.

[Betsy Graseck, Morgan Stanley]

Got it. And then just as a follow-up on the marketing piece, I know we spoke about a little bit earlier in the call. But as we are thinking through the opportunities that we have, do you feel like there is an opportunity to lean into marketing kind of Q-by-Q-by-Q to a greater degree. So we should build half off of 1Q, such that our marketing is higher year-on-year, full year and that’s what I am getting from the conversation earlier, but I just want to make sure it’s the right takeaway?

[Richard Fairbank, Chairman and CEO]

Well, yeah, let me just -- why don’t I do this, Betsy, let me just pull up and sort of talk about marketing overall and then we can kind of come back to the quarter that we just had. There are few things driving our marketing levels higher these days.

First of all, the opportunities that we see. We are seeing attractive growth opportunities across our businesses and we are leaning hard into them while the opportunities are there. In our Card business, we have continued to expand our products and the marketing channels that we are originating in and these opportunities are significantly enhanced by our technology transformation, which is enabled us to leverage more data, access more channels, leverage machine learning models and enable customized solutions. So we are seeing significant traction in originations across our business.

And I want to note that, so much of our Card business overall and our growth is in our Branded Card franchise, as opposed to co-brand and private label partnerships. And by the way we also like those businesses, but for Capital One that’s a relatively smaller proportion of our business.

And in Branded Card, we enjoy the full economics of the business and we own the customer franchise. So while the industry doesn’t track data on this, I think, our share growth in Branded Card s is particularly noteworthy. And Branded Card is, of course, as the word implies, it’s about our brand and we continue to invest in the company’s brand and in the flagship products.

And some of the strength that you see in our revenue margin comes from having so much Branded Card, where we own all the economics. But the flip side of that is that, the marketing and the brand building are entirely on us and that all shows up in our marketing numbers. But that’s an absolute centerpiece of building a highly valuable franchise.

Now second important driver of our growing marketing spend is the continued traction we are getting in our more than decade long journey, to drive more and more our market with a focus on the heavy spenders. So we launched our venture Card way back in 2010 and that was the beginning of that strategic push for heavy spenders.

But it hasn’t just been about flagship Card s, it’s been about working backwards from what it takes to win with heavy spenders and that’s about great products with heavy reward content, it’s about great servicing, it’s about customer experiences tailored for heavy spender lifestyles, and of course, an exceptional digital experience.

So for years we have been on this journey and every year we have had growing traction and while our whole franchise of spenders has grown nicely, we have grown even faster with heavier spenders. And with each year of success we have had the license to stretch a little higher up market and we are continuing to invest to make that possible.

And lately, you have seen our launch of our travel portal which has garnered some rave reviews in the marketplace. You have seen the launch of airport lounges, which have a special appeal to the top of the market and the frequent travelers.

And last fall, we launched Venture X, which moved us into the next tier of premium Card s. And that launch has been very successful and we continue to invest in the growth of that product. You can see some of the results from our continued quest for heavy spenders in the tremendous purchase volume growth that we have had.

Over any time period you pick over the last decade or shorter time periods, you will find Capital One with -- posting really high in your top of the league tables, if not at the top of the league tables purchase volume growth.

And also note that almost all of the heavy spender growth is in our Branded Card s and that’s why you can see such strength in spend velocity and our revenue margin. This journey for the heavy spender has a different economic mix than some of our traditional Card business.

It has higher upfront cost, brand building, higher upfront costs of marketing and promotions, and of course, investment in high end experiences. But long-term value of the heavy spender franchise is tremendous with high spend levels, strong margins, very low losses, low attrition and a lift to our brand and really the rest of our franchise. So the spender franchise is already making its mark on many line items of our financial performance and that’s a continuing long-term benefit of these investments.

I just want to mention the third factor contributing to the higher marketing, if some of the traction that we are getting with our new digital offerings, including Auto Navigator, Capital One Shopping and our National Bank.

And just to comment on the National Bank, which unlike Capital One, unlike other banks who are driving growth through bank acquisitions, we are focused on continuing to build our bank organically, which of course, does take marketing investment.

So that was just, take me a chance to share with you what is behind the pretty high levels of marketing that you are seeing and the great opportunities that we see for our franchise and to grow it.

Now, due in part to the current marketplace environment and importantly capitalizing on our strategic quest, those quest being our building of the modern tech stack and the continued move up market. This has -- these things are contributing to driving higher marketing levels these days.

So that is -- that sort of a pulling out sort of a narrative on why it is that we are leaning hard into marketing and it’s a combination of sort of the opportunity at the moment, as well as capitalizing on the journey that’s been many years in the making.

Typically, we have a seasonal dip in marketing levels this year. An important contributor to our marketing was things related to that, for example, the launch of venture Card s, early spend bonuses and things like that. So things are not -- it’s not quite as strong and a seasonal effect this year as it has been in other years.

We are not specifically giving a guidance on the rest of the year, but I just wanted to share with you, why it is that we are leaning in the marketing, what’s driving that and I am -- as you can probably tell from the answer, I am really enthused about our opportunities and we are though leaning into take advantage of them and a lot of that is about marketing.

[Jeff Norris, Senior Vice President, Global Finance]

Next question please.

[Operator]

We will take our next question from Moshe Orenbuch with Credit Suisse. Please go ahead.

[Moshe Orenbuch, Credit Suisse]

Great. Thanks. Rich, just wondering, what would it take to see both kind of -- you talked about some of the potential pressures particularly for the lower end consumer in terms of inflation and other sorts of things. What would it take to actually start to see you pulled back both at the lower end consumer and for the higher spenders, like what sort of -- what will be the warning signs?

[Richard Fairbank, Chairman and CEO]

Yeah. So, Moshe, with respect to the lower end consumers, it’s less about, let’s imagine we don’t have to do very much imagining to envision environments that are more difficult than this one, where the consumers in a more challenged place where the competitors are -- have gone a whole notch more aggressive.

And what I think is more our pattern in that case is to particularly use the credit line lever to manage the risk as opposed to just a big dial back say in origination machines. So we just more cautious online, try to continue to build the franchise, maybe not as aggressively as sometimes. But, again, we have over our 30 years, Moshe, in building sort of Main Street franchise, really do a lot of the regulating and things on the loan side [ph].

On heavy spenders we continued to find so much traction and what I have often said about the quest for heavy spenders, unlike a lot of things that I have seen in our business journey, this is not a thing that is very well suited to a blitz here a pullback of blitz and a pull back. Now, that doesn’t mean we wouldn’t be dialing the knobs up and down, on certain things like marketing or choices or product or whatever.

But this is and I think there is a reason that not very many players are really, really successful at the top of the market. This is about really building a franchise at that end of the market. That’s not just taking regular consumer products and addressing them up with more rewards or the fancy advertising and the -- that’s why, I mentioned, this journey that were like in the 12th year of the journey where we declared we are going to just keep moving up market.

One can’t do it overnight. It’s something you have to earn along the way. But all of our metrics continue to show traction and success, traction on brand metrics as well, and pretty much all the customer metrics, you have seen what’s happening on purchase volumes, the -- when we track, the things that we have booked over the years we sort of love the annuities we are booking.

So that to me is something that we are going to keep pursuing as we have for a long time. But what we will -- the things that we will throttle along the way are certain marketing choices, certain product choices, but that one, that I partly shared -- I want to share this a little bit more about this today that that’s a journey that Capital One has been on as part of our central part of our strategy in Card for a lot of years.

[Moshe Orenbuch, Credit Suisse]

Great. Thanks, Rich. And as -- maybe as a follow up, could you talk a little bit about where you see the industry and Capital One in terms of the deposit price competition is now starting to see a deposit betas as we are now starting to see interest rates moving up?

[Andrew Young, Chief Financial Officer]

Sure. Moshe, it’s Andrew. And recognizing that retail deposits are 85% of our portfolio, I will focus on that and over the last gosh six-ish years we had the falling rate cycle over the last couple where betas were right around 50% and then the last rising cycle, which was from the late 2015, I think, to early 2019, our cumulative beta was right around 40% and so betas are generally slow to rise over the first couple of hikes.

But keep in mind is that last rising rate cycle we had eight hikes over 3.5 years, I believe it was, whereas in this cycle we could see four hikes that each equal 25 basis points and get up to 250 or 275 is forward suggest quite quickly. So I could make a case that industry betas will be higher or lower than that history.

On the lower side there is elevated deposit balances across the industry, that loan-to-deposit ratios are quite low, industry NIMs are low and we are moving off a zero floor. But the flip side is the larger and quicker rate hikes, the possibility of some more aggressive pricing by institutions that are more reliant, on those funds to deposits to fund loan growth and institutional surge deposit run-off.

So just want to give you a flavor of -- I think there is a lot that we are going to learn over the course of the next few months. But as we look at all and have a point estimate, that kind of run through all of our assumptions and our point estimate at this point is that, going to largely be in line with that rising, the last rising cycle of something like 40 basis points that starts-off a little slower and picks-up. But again they start-off slower might be a particularly condensed timeframe relative to what we saw in that last cycle.

[Jeff Norris, Senior Vice President, Global Finance]

Next question please.

[Operator]

We will take our next question from Don Fandetti with Wells Fargo. Please go ahead.

[Don Fandetti, Wells Fargo]

Quick question on the outlook for the adjusted efficiency ratio from Q1 levels, and then, Rich, on Commercial Card issuing, can you talk about that business and I know it’s -- you have been marketing I know in that small business Card, which has been sort of tough for banks to rollout?

[Richard Fairbank, Chairman and CEO]

Okay. Don, thank you. We have been focused on improving our operating efficiency ratio for years. And the pandemic also accelerated technology race and raised the stakes for all players across many industries and certainly in banking. And I think for every player the clock is ticking on their tech readiness and companies are waking up to the investment imperative.

And we have talked about the investment flowing into fintechs is breathtaking and the arms race for tech talent is fierce is that I have seen in any time in my career and in any job family. So there is an urgency in responding to the marketplace.

But I do want to also say that the fast-moving marketplace is also the creator of our opportunity and I think Capital One is uniquely positioned to take advantage of that opportunity and that’s why we are investing now.

So really this is very similar message to what I said last quarter. What I have been saying for a long time, we are still very focused on the opportunity to drive operate -- operating efficiency improvement over the longer term. The engine that powers it is revenue growth and digital productivity gains.

But the timing of efficiency improvement needs to incorporate the imperatives of the current marketplace. So, but delivering positive operating leverage over time continues to be an incredibly important north star to us and frankly one of the most important payoffs of our technology journey and an important element of how we deliver long-term value.

So I think you have sort of seen -- you can see some of the effects of what I am talking about in the first quarter operating efficiency and when you adjust for gains from portfolio sales in the quarter.

So I think it’s very similar conversation to what I was saying last time, we can see some of the evidence of that in the quarterly numbers, but the current pressure doesn’t change at all, our belief in the longer term opportunity to drive operating efficiency improvement.

[Andrew Young, Chief Financial Officer]

Don, what was your question on Commercial?

[Don Fandetti, Wells Fargo]

Yeah.

[Richard Fairbank, Chairman and CEO]

Oh! Sorry. Sorry.

[Don Fandetti, Wells Fargo]

My question was…

[Richard Fairbank, Chairman and CEO]

You wanted to...

[Don Fandetti, Wells Fargo]

…Rich, your outlook on commercial, I know, as you rollout of node limit small business Card, which has been tougher banks to do. I didn’t know if maybe you are using the public cloud, just wanted to see your thoughts on that?

[Richard Fairbank, Chairman and CEO]

Yeah. So when you are talking about, yeah, Commercial you are talking about here in our business Card -- business Credit Card. You may have seen the ads on TV that talk about no preset spending limit that’s more complicated way to just say in a sense, not a credit limit that gets hard wired.

This is something that is you know, dynamically there isn’t a credit line per say this is dynamic transaction underwriting in real time. It’s a very hard thing to build. It’s taken us years to get there and it’s absolutely a -- one of the many, many benefits of the tech transformation we have done and the journey to the cloud in the building of modern applications in modern platforms.

And so, I have always said to -- investors will often ask where can I see, where is the -- I want to reach out and touch the benefit of your tech transformation and all the money we have spent on that.

And I have said, look, there is not going to be any one thing, that you point out and say, oh, my gosh, that’s I now see everything. This is about this journey -- is a journey that when we -- when years ago when we kind of said, some day we would like to do this thing over here, some day we would like to do that.

We would also like to have much better efficiency, we would like to better risk management, we would like to do lots of things and a striking thing was, all the things that we wanted to do, usually in life, they are -- you have to pick some and it’s all about trade-offs.

What I am struck by in this journey is a shared path to all the things that years ago we set out to do and that path relates to building modern technology across the company and from the bottom of the tech stack up and that is what we have done.

And then over time, you as investors will see manifestations of that. See while that Auto Navigator product Capital One built that can underwrite every car in America and for any consumer in a fraction of the second that’s striking and then one sees, well also -- you actually have a no preset spending limit that’s striking.

And we didn’t do the journey for the sake of any one of those, but I think on an increasing basis, investors will see examples of things that are -- that stand on the shoulders of the years of investment we have made in technology.

And things that also by themselves like this Card thing we are talking about is itself, within that journey that took a bunch of years. But it’s all about working backwards from wins with customers and that’s why we are doing that.

[Don Fandetti, Wells Fargo]

Thank you.

[Jeff Norris, Senior Vice President, Global Finance]

Next question please.

[Operator]

Our final question this evening will come from John Hecht with Jefferies. Please go ahead.

[John Hecht, Jefferies]

Thanks very much guys for fitting in my question. Rich, you talked a lot about credit in the strength of your customer base. Aside from that, that we are seeing you, call it, some of the more modern or emerging platforms, we are observing some delinquency drift there. And in fact, we are even seeing some reactions in the capital markets, some securitization deals are getting canceled or renegotiated as they go. I am wondering what do you ascribe that to and are there any reverberating effects from that type of development or migration into your business over time?

[Richard Fairbank, Chairman and CEO]

So, John, as I often say with the smile, Capital One was one of the original fintechs. We are a fintech -- before fintechs were word. But if you think about what we did is, we built a lending company, we started with Cards that we ultimately building a broad based financial institution.

One thing that enabled that journey to happen is the advent of the capital markets and we were able to ride the very mediocre growth Capital One in the ‘90s based on securitizations and things and so we were very grateful for that.

But at the same time we then did, probably one of the most things that I think most shocked our investors, I guess, it shocked because you spent a lot of years talking about it before we did it, but striking thing when we chose to transform our company to a traditional bank balance sheet, because we want to create much greater resilience in our funding.

So the reason I mentioned that is, as we were in the old days and as fintechs that are built on securitization, have an opportunity to grow quickly. But they also have a just an inherent structural challenge with resilience. So, for all of them, they need to and their investors need to keep a careful eye on that.

I want to talk just a little bit about, you mentioned, some of the lending results and some of the uptick. So first of all, we shouldn’t be surprised to see upticks and delinquencies just for companies in general, whether they are banks or some of the fintechs. Typically, companies that have a less of a history of consumer credit data are probably more challenged with respect to how to read this rearview mirror.

I mean, for example, let’s just say, that you created a fintech in the last couple of years, how would one look in the rear view mirror and determine where resilience is and where it isn’t, since in general pretty much everybody did well. So that’s one of the challenge any new company has is building deepen of credit history to do that. So I’d say that’s just a challenge they bring to the table, it’s not their fault. There is nothing. It’s just -- it’s a structural thing.

The other thing that always happens with normalization, as normalization tends to happen faster on front books than back books and so part of what you may be seeing on fintechs is, if their high growth fintechs, just the proportion that their front book represents as a percentage of the whole is quite different and it would be surprising if they didn’t normalize faster, given that typically front books normalize faster than back books.

And a lot of us have seasoned back books with years of experience with them and that’s also very helpful in normalization journey. So as one that was an original fintech, I have great fascination with the fintechs, lot of respect for a lot of things they are doing. But also know that, there is some structural things that they are going to have to confront that they and their investors will have to keep an eye on.

[John Hecht, Jefferies]

Perfect. Appreciate the color there.

[Jeff Norris, Senior Vice President, Global Finance]

Well, thank you for joining us on the conference call today and thank you for your continuing interest in Capital One. Remember Investor Relations team will be here after the call to answer any further questions you may have. Thanks for joining us. Have a great evening.

[Operator]

Ladies and gentlemen, this concludes today’s conference. We appreciate your participation. You may now disconnect.