Capital One Financial Corp
NYSE:COF
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Capital One Financial Corp
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Good day, ladies and gentlemen and welcome to the Capital One Second Quarter 2021 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 conference over to Mr. Jeff Norris, Senior Vice President of Finance. Sir, you may begin.
Thanks very much, Holly. And welcome everyone to Capital One's second quarter 2021 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've included a presentation summarizing our second quarter 2021 results. With me today are Mr. Richard Fairbank, Capital One's Chairman and Chief Executive Officer; 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 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 forward-looking statements contained in today's discussion and the materials speak only as of the particular date or dates indicated in the materials. Capital One does not undertake any obligation to update or revise any of this information, whether as a result of new information, future events, or otherwise. Numerous factors could cause our actual results to differ materially from those described in forward-looking statements. For more information on these factors, please see the section titled Forward-Looking Information in the earnings release presentation and the Risk Factors section in our annual and quarterly reports accessible at the Capital One website and filed with the SEC.
Now, I'll turn the call over to Mr. Young. Andrew?
Thanks, Jeff. And good afternoon everyone. I'll start on Slide 3 of tonight's presentation. In the second quarter, Capital One earned $3.5 billion or $7.62 per diluted common share. Included in the results for the quarter was a $55 million legal reserve build. Net of this adjusting item, earnings per share in the quarter was $7.71. On a GAAP basis, pre-provision earnings increased slightly in the sequential quarter to $3.4 billion. We recorded a provision benefit of $1.2 billion in the quarter as $541 million of charge-offs with offset by a $1.7 billion allowance release.
Revenue grew 4% in the linked quarter, largely driven by the impact of a strong domestic card purchase volume on non-interest income, and the absence of the mark on our Snowflake investment a quarter ago. Period-end loans held for investments grew $6.5 billion or 3%, inclusive of the effect of moving $4.1 billion of loans to held for sale during the quarter. The loans moved to held for sale consisted of $2.6 billion of an international card partnership portfolio and $1.5 billion in commercial loans.
Turning to Slide 4, I will cover the changes in our allowance in the quarter. We released $1.7 billion of allowance, primarily driven by observed strong credit performance and an improved economic outlook.
Turning to Slide 5, we provide to be allowance coverage ratios by segment. You can see allowance coverage declined in the quarter across all segments, largely reflecting the dynamics I just described. However, coverage ratios remain well above pre-pandemic levels due to continued economic uncertainty as our allowance is built to absorb a wide range of outcomes.
Our domestic card coverage is now 8.9%, down from 10.5% last quarter. Our branded card coverage is 10.1%. Recall that the difference between branded and domestic coverage is largely driven by the loss-sharing agreements in some of our partnership portfolios. Coverage in our consumer business declined about 60 basis points to 3.0%. In addition to continued strong credit performance and improved economic outlook, historically high auto values aided the reduction in coverage. Coverage in our commercial banking business declined about 25 basis points to 1.7% with the single largest driver being the improvement in our energy portfolio.
Turning to Page 6. I'll now discuss liquidity. You can see our preliminary average liquidity coverage ratio during the first -- during the quarter was 141%. The LCR continues to be well above the 100% regulatory requirement. Our liquidity reserves from cash, securities, and federal home loan bank capacity ended the quarter at approximately $137 billion, the $14 billion decline in total liquidity was driven by lower ending cash balances. Our cash position declined in the quarter, as it was redeployed to net loan growth, wholesale funding maturities, a modest increase in our securities portfolio, and share repurchases.
Moving to Page 7. I'll now discuss net interest margin. You can see that our second quarter net interest margin was 5.89%, 10 basis points lower than the prior quarter. The linked-quarter decline in NIM was largely driven by lower yield in our card portfolio where the typical seasonal decrease in revolve rate was exacerbated by higher transactor volume and associated higher payments. These impacts were partially offset by the favorable impact from one more day in the quarter.
Lastly, turning to Slide 8. I will cover our capital position. Our common equity Tier 1 capital ratio was 14.5% at the end of the second quarter, down 10 basis points from the first quarter. Loan growth and capital actions were largely offset by earnings growth. During the quarter, the Federal Reserve released the results of their stress test. Our stress capital buffer requirement which will be effective on October 1 of this year is 2.5% resulting in a total capital requirement by the Fed of 7.0%.
While we saw a decline in this year's SCB, it's important to note that the Fed's stress testing results can move around meaningfully from year-to-year and are only one of many factors that we use in our capital planning process. Based on our internal modeling, we continue to estimate that our CET1 capital need is around 11%.
Turning to share repurchases, we repurchased $1.7 billion of common stock in the second quarter, the full amount allowed under the Fed's capital preservation measures. We have approximately $5.3 billion remaining of our current Board authorization of $7.5 billion.
Now let me move on to dividends. In the third quarter of 2020, we reduced our dividend to $0.10 due to the Fed's capital preservation measures. We chose to continue this reduced level of dividend in the fourth quarter of 2020 out of an abundance of caution. The difference between our historical $0.40 dividend and the reduced level for those two quarters was $0.60 per common share. Therefore, we expect to make up for the reduced level of dividends from the second half of 2020 by paying a $0.60 special dividend in the third quarter of 2021.
In addition to the special dividend, we expect to increase our quarterly common stock dividend from $0.40 per share to $0.60 per share in the third quarter, both the $0.60 special dividend and the increase of our quarterly common stock dividend to $0.60 will be subject to board approval.
With that, I will turn the call over to Rich. Rich?
Thanks, Andrew. And good evening everyone. I'll begin on Slide 10 with our Credit Card business. Strong year-over-year purchase volume growth drove an increase in revenue compared to the second quarter of 2020, more than offsetting a modest year-over-year decline in loan balance and provision for credit losses improved significantly. Credit Card segment results are largely a function of our domestic card results and trends, which are shown on Side 11.
Second quarter results reflect building momentum in our domestic card business. As we emerge from the pandemic, consumers are spending more and continuing to make elevated payments. Accelerating purchase volume growth partially offset the impact of historically high payment rates resulting in strong revenue growth and a more modest year-over-year decline in loan balances.
High payment rates are continuing to contribute to strikingly strong credit results. Domestic card purchase volume for the second quarter was up 48% from the second quarter of 2020. Purchase volume was up 25% from the second quarter of 2019, which is an acceleration from the first quarter when we saw a growth of 17% versus 2019.
T&E spending continues to catch up to overall spending and accelerated through the second quarter. In June, T&E purchase volume was up 3% compared to June of 2019. At the end of the quarter, domestic card loan balances were down $4.1 billion or about 4% year-over-year. Excluding the impact of a partnership portfolio moved to held for sale last year, second quarter ending loans declined about 2% year-over-year. Compared to the sequential quarter, ending loans were up about 5% ahead of typical seasonal growth of 2%.
Credit performance remains strikingly strong. The domestic card charge-off rate for the quarter was 2.28%, a 225 basis point improvement year-over-year. The 30-plus delinquency rate at quarter-end was 1.68%, a 106 basis points better than the prior year. Provision for credit losses improved by about $3.5 billion year-over-year. We swung from a large allowance build in the second quarter last year to a large allowance release this year.
Let me turn to domestic card revenue margin. Purchase volume growth outpacing loan growth and strong credit were the key drivers of domestic card revenue margin, which was up 226 basis points year-over-year to 17.7%. Revenue margin increased over 50 basis points quarter-over-quarter, higher than our typical seasonal pattern.
Total company marketing expense was $620 million in the quarter, up $347 million compared to the second quarter of 2020. Our choices in card marketing are the biggest driver of total company marketing trends. As we emerge from the pandemic, we're seeing strong originations and purchase volumes. Our growth opportunities are enhanced by our technology transformation. We are leaning further into marketing to drive future growth and continue to build our franchise. At the same time, we're keeping a watchful eye on the competitive environment which is intensifying. Pulling up, our domestic card business continues to deliver significant value and build momentum.
Slide 12 summarizes second quarter results for our consumer banking business. Auto growth and exceptional auto credit are the main themes in the second quarter consumer banking results. Driven by auto, second quarter ending loans increased 12% year-over-year in the consumer banking business. Average loans also grew 12%. Auto originations were up 56% year-over-year and up 47% from the linked quarter. Pent-up demand and high auto prices drove a second quarter surge in growth across the auto marketplace. In the context of increased industry growth, our digital capabilities and deep dealer relationship strategy continued to drive strong growth in our auto business.
Second quarter ending deposits in the consumer bank were up $4.4 billion or 2% year-over-year. Average deposits were up 9% year-over-year. Consumer Banking revenue increased 27% from the prior-year quarter, driven by growth in auto loans and retail deposits. Second quarter provision for credit losses improved by $1.2 billion year-over-year driven by an allowance release and lower charge-offs in our auto business.
Credit results in our auto business are strikingly strong. Year-over-year, the second quarter charge-off rate improved 120 basis points to negative 0.12%, and the delinquency rate was essentially flat at 3.26%. In the quarter, elevated used car prices drove an increase in auction proceeds amplifying the normal seasonal benefit we see from tax refunds around this time of the year. As used vehicle prices normalize, they will become a headwind to the auto charge-off rate. We expect the auto charge-off rate to increase from the unusually low second quarter level.
Moving to Slide 13, I'll discuss our Commercial Banking business. Second quarter ending loan balances were down 5% year-over-year. Average loans were down 7%. Commercial line utilization continues to be down year-over-year and we moved $1.5 billion of commercial real estate loans to held-for-sale. Quarterly average deposits increased 22% from the second quarter of 2020 and 5% from the linked quarter as middle market and government customers continued to hold elevated levels of liquidity.
Second quarter revenue was up 3% from the prior year quarter and down 6% from the linked quarter. The linked-quarter decline is more than entirely driven by a one-time cost associated with moving the commercial real estate loans to held-for-sale. This decline was offset by an equivalent one-time gain in the other category and is therefore neutral to the company. Excluding this effect, Commercial Banking revenue would have increased about 13% year-over-year and 4% from the linked quarter.
Provision for credit losses improved significantly compared to the second quarter of 2020, driven by a swing from an allowance build to an allowance release, and a swing from net charge-offs to net recoveries. In the second quarter. The Commercial Banking annualized charge-off rate was negative 11 basis points. The criticized performing loan rate was 7.6% and the criticized nonperforming loan rate was 1.0%. Our Commercial Banking business is delivering solid performance as we continue to build our commercial capabilities.
I'll close tonight with some thoughts on our results and our strategic positioning. Several key themes are evident in our second quarter results. Credit remains strikingly strong, purchase volume and loans are rebounding, we are continuing to invest to propel our future results, and we're returning capital to our shareholders. We are seeing increasing near-term opportunities to build our domestic card business as we emerge from the pandemic. We are leaning further into marketing to seize these opportunities. We are also increasing our marketing for Auto, National Banking, and our brand.
We are now in the ninth year of a journey to build a modern technology company from the bottom of the tech stack up. Our progress is accelerating and the stakes are rising. Competitor tech investments are increasing as technology is increasingly seen as an existential issue. The investment flowing into FinTechs is nothing short of breathtaking and the war for tech talent continues to escalate, including levels of compensation.
We continue to invest in technology and the opportunities that emerge as our transformation gains traction. Our modern technology is powering our current performance and setting us up to capitalize on the accelerating digital revolution in banking.
And now, we'll be happy to answer your questions. Jeff?
Thanks, Rich. We'll now start the Q&A session. As a courtesy to other investors and analysts who may wish to ask a question, please limit yourself to one question, plus a single follow-up. If you have follow-up questions after the Q&A session, the investor relations team will be available after the call.
Holly, please start the Q&A.
Absolutely. Thank you so much. [Operator Instructions] Our first question today will come from John Pancari with Evercore ISI.
Good evening. Want to see if I can get your thoughts on the payment rates. Did you see a peak in the quarter? And if not, if you can talk about the timing of inflection? And then separately, how does that impact your growth assumption for card receivables and the timing on that front? Thanks.
You know, John, in our card business, payment rates remain at historically high levels. And as you know, government stimulus has been amplifying payment rates. And while these programs have been winding down, customer balance sheets are extremely healthy and payment rates remain elevated.
You can see the payment rate trends in our reported trust metrics. And while not a perfect reflection of our total portfolio, Q2 payment rates remain at historically high levels and these high payment rates are muting balance growth even as spend is very strong. And of course, the flip side of high payment rates is strikingly strong credit performance, which drives strong profitability and capital generation. So, we actually are always happy when our customers are paying in high levels and it's indicative of a healthy consumer. And those high-payment rates correlate with the really strong credit results that we continue to see.
We are -- if we look at the monthly numbers, we can see, John, a little bit of easing of the payment rates. I don't know if that would be a trend to indicate. It's certainly would be very plausible to me that as consumers now step up and spend more and more and they're going out, returning hopefully back to normal, it would be a natural thing that payment rates would ease a little bit here and that also credit metrics would move toward normalizing a little bit.
So I guess, John, I would say, we've seen the earliest of indications of that. It's still running at really quite a breathtaking level.
Next question, please?
Our next question will come from Moshe Orenbuch with Credit Suisse.
Great. Thanks. Rich, putting together the comments you made about the significant amount of excess capital and then the comment in the release about seeing increasing near-term opportunities to build your franchise, could you talk a little bit about whether you're looking at primarily kind of organic opportunities or inorganic ones as well?
Moshe, as you know well because you've been there from the beginning in following us and having great insights. We really built our company as sort of wired for organic growth. We installed that in the founding days, what I call horizontal accounting where we track every action and cohort, and everything on a lifetime economic basis and we measure it before and during and afterward to see how it's going. And that -- and so, we always put organic at the top of the list.
And here is a great example. I mean, while every bank that's -- every National Bank that's been created has come through many, many acquisitions. We've had some acquisitions in our journey but we are really leaning into an organically driven national growth strategy in banking. So -- and as I said a few minutes ago, we see good organic growth opportunities, which are partly a function of the market and where it is right now and very much these opportunities stand on the shoulders of the technology that we've built in some of the innovations that we're rolling out.
On -- with respect to acquisitions, we're not putting any energy or strategic focus on doing bank acquisitions. What we are looking at is technology acquisitions. And really, in fact, there is a spectrum on the technology side with respect to FinTechs and tech companies on the continuum at one end is, just being a partner with them and then next notch on the continuum is being a partner and an investor in them. And you saw that with Snowflake for example and then there are some times acquisitions. All of those have -- we've been active in all of those places on the continuum over the last few years, and I'm struck by the traction and success that we're having.
When we look back at some of the acquisitions of little FinTechs for example and tech companies, we are very, very pleased with the performance and in many ways, these things are generally outperforming. One of the big benefits that we have is that we have a modern tech stack so do the FinTechs or tech companies that we're buying. And so, the integration and the compatibility, the ability to attract and then really retain the talent past the -- sort of the contractual period is something that I think leans in our favor.
So, lots of positives there. There is one big kind of elephant in the room with respect to acquisitions on the tech side and that's the valuations. So, we've recently gone to several -- a few of these conversations and said, love the company but not at that price. So, we are very aware about the -- where pricing is but strategically, I think if you kind of open the aperture and don't talk about necessarily this very moment, I think for Capital One it's an organic-first strategy but acquisitions of FinTechs and tech companies at the right price, usually be little ones, I think will help fill out our business and accelerate our opportunities.
Next question, please?
Absolutely. Next, we'll hear from Kevin Barker with Piper Sandler.
Thank you. Considering the -- we saw in the first -- during 2020, do you expect normalized credit to maybe run below pre-pandemic levels as we go into 2022 and eventually into 2023?
Kevin, [indiscernible] hearing that. But I think we -- it was a little echoey but I think we -- I felt I heard what you were saying there, Kevin. From where we are right now, which is at an extraordinary benign level that virtually has never been seen before in modern times. It's got a ways to go to normalize. We are not choosing to make a prediction on where that is because we want to be coy about it, but because in fact, I think it's a hard thing to predict these days. What we like to talk about is the drivers. So, talking about the drivers, the consumer is in a very strong place right now. And I think what's striking is, and I mentioned this earlier, when you look at what the average consumer and this is average because the experience for an individual consumer can be way different from what I'm describing on average. But the accumulated sort of surplus that consumers have been able to build up is something that even when the government stimulus monthly benefits ease [ph], I think there is a bit of accumulated balance there that will be beneficial for the credit performance of consumers.
The -- so we -- there's really only one way for the credit to go from here and that is in normalizing. I think it starts with a bit of a head start and I think that the rate at which it normalizes is going to be pretty linked to consumers' choices on payment rates. And as I mentioned earlier, I think it's a natural thing for payment rates to gradually decline and for credit to gradually normalize. The directions are inevitable, the timing is speculative. Our view is during this period of time let's take advantage of the market opportunity that is here, the place the consumer is but let's also be cognizant of how markets work -- how credit markets work in particular and be on the lookout for some of the natural indicators of overheating.
Next question, please?
Thank you. Next, we'll hear from Rick Shane with JPMorgan.
Hey, everybody. Thanks for taking my question this afternoon. Look, we're -- and this topic has come up a couple of times. We're looking at the reserve rates and thinking about them in the context of day one reserve levels. I'm curious how you now reflect on day one allowance coverage and what that could look like on a long-term basis as we return to normal? I'm curious in particular, if you think some of the policy initiatives we've seen during the crisis change your long-term outlook in terms of potential loss rates?,
Thanks, Rick. This is Andrew. I'll take that. I think as we look at the allowance, every quarter we're going to take into account a large number of variables and assumptions which would certainly take policy and other factors. And so, as I reflect back on the ratio that we had upon adoption, a lot of things have changed since then. And so, within every single asset class, the mix is going to impact our coverage needs and then you look at overall the balance sheet mix across each of those asset classes will impact things. So, I look at all of those factors and I don't think that the ratio at adoption is necessarily a destination.
But I also think that if you put into the formula, like all of the economic assumptions and all of the asset mix, I still believe that the pre-pandemic coverage ratio can still serve as a very rough benchmark of what coverage ratios might look like. But again, it will take into account each successive quarter all of the things that we're looking at in terms of the mix and broad economic assumptions, including policy as you mentioned.
Next question, please?
Thank you. Next, we'll hear from Betsy Graseck with Morgan Stanley.
Hi. Good afternoon.
Hey, Betsy.
Just a question here on how you're thinking about the opportunity to invest for that account growth. You indicated the account growth is up, maybe give us a sense as to how much more it's up unusual? I know you usually don't give numbers for that, but it would be helpful to understand the benefit that those marketing dollars is generating today? And then how much more you think the opportunity set is here to ramp up the marketing in the back half of the year given the opportunity set that you have in front of you? Thanks.
Betsy, yeah, we don't tend to give out the specific account growth numbers, the origination numbers. But they are strong right now. They're not the strongest that we have ever seen. And we're pleased that they're really quite strong because obviously, there was some weakness a year ago in those kind of numbers. So, we have seen a very solid performance. We feel really good about the account originations.
So, we are leaning further into marketing to drive future growth and also to just continue to build the underlying franchise. And as we've said, these opportunities are partly because of what the market has to give right now and partly opportunities that are enhanced by our technology transformation.
And the marketing of course is especially going into the card side of the business, but also -- just look on TV, you've seen us steadily investing in national banking. We're very happy with how that's going. And you may have seen for the first time this quarter that we have now gone on National TV in the auto side. So, these are advertising that is debuting some of the technology innovations that we have at Capital One, some of the exceptional customer experiences that we've built. And we're seeing good traction in the origination side of the business. And so, we continue to lean into marketing.
Next question, please?
Thank you. Next, we'll hear from Don Fandetti with Wells Fargo.
Hey, Rich. I was wondering if you could talk a bit about the tech spend outlook. I saw a report that Capital One was hiring a large amount of software programmers to take advantage of the public cloud move. And then you mentioned FinTech, I was just curious if you thought that the regulatory landscape whenever balance out or is that sort of something that's not going to happen?
Okay. Yes, Don. Thank you. So, let me talk about tech and the tech hiring. Winning in technology really kind of begins and ends with one thing, hiring world-class tech talent. And it is the easiest thing to talk about and possibly the hardest thing to pull off in business today. As -- you know, because while this principal is -- this talent principle is true in any business. It is profoundly true in technology as the demand for world-class tech talent vastly exceeds the supply.
So, we've built a tech brand and have had great success in attracting top talent. And we're competing head-to-head with the leading technology companies in the US. And we've been leaning into tech hiring for years and this is a strong year of hiring. Most of the new roles we're hiring for are engineering roles in software development, cloud infrastructure, and machine learning. And these are the most sought-after roles in the world and we're getting real traction here. But essentially, if you pull way up and we -- it's more than just words when we say it, we've really been living this which is to from the ground up build a technology company that does banking essentially, what Capital One is. The technology and data are increasingly what the business is and at the heart of that journey is the tech talent.
I also mentioned one other thing, Don, is that the cost of technology talent is visibly moving upward right in front of our eyes and I wanted to flag that to investors. That is just something that -- again, it's the natural consequence of the demand greatly exceeding the supply. But -- so I think it's going to be hard for most companies, for all companies to do hiring and get the numbers that they want. We are leaning into that. I think we're in a very good position. But it's -- we're going to need to pay appropriately for that talent.
Don, you asked about FinTechs and what we feel about FinTechs, and possibly a comment on the regulatory side. I just have a tremendous interest in FinTechs, maybe that's because Capital One was an original FinTechs before there was such a word. And I look at the FinTech marketplace and I think some of these FinTechs are bringing great innovations to the market. And we very carefully study these innovations and I think that we look at these both as threats to our business, we look at them as opportunities. Maybe we can partner with the FinTechs, in some case, their acquisitions associated with that, and in some cases what they are doing as beacons of opportunity that we can pursue.
The FinTechs today, I think what banks have to stare at is that FinTechs today are benefiting from their modern cloud-based technologies and their innovative and entrepreneurial approach to disrupting [ph] markets, the tremendous amount of funding that is out there. I mean for example, these days, the venture capital funding going into FinTechs is close to I think, I don't have this data right in front of me, but it is close to double the next category in terms of the amount of venture funding going into this. So this is pretty electrifying.
And the FinTechs benefited from a lower level of regulation than financial institutions have. Now, I don't think, right now, the success of FinTechs that one can look at FinTechs and say the primary reason they're succeeding in areas, sometimes more than the banks are, is because they are less regulated. I think they are succeeding for the factors that we talked about. I think when you look over time and envision these FinTechs with tremendous growth and being large disruptors, it is an elephant in the room relative to what's the regulatory context, the capital that they're going to be carrying, the regulatory requirements, and the levelness of the playing field. So, we certainly have a watchful eye on that.
But when we look at the FinTechs, the success we're seeing in them, to me is indicative of the opportunity that exists to re-imagine banking. And that's what we've been focused on for years. And then if we kind of take our focus off of Fintechs for a minute and think about Capital One, like the FinTechs, we have a modern technology infrastructure based in the cloud. We also have other benefits they don't have. I have mentioned most of them. We have tremendous customer scale, a powerful brand, and literally decades of underwriting and banking experience. So, when I pull up, I think we and the FinTechs are well-positioned for success in some ways for the same reasons, in some ways for different reasons. But I think the biggest takeaway of all of this is that the banking industry is changing on an accelerated basis. The competition is unbelievably and increasingly well-funded and we look at that and we say it indicates the magnitude of change, the magnitude of the opportunity, but it also is a -- indicates an imperative that we need to make sure that during the windows of opportunity that we lean in and invest where we need to invest, because these opportunities won't last forever. Thank you, Don.
Next question, please?
Thank you. Next, we'll hear from Sanjay Sakhrani with KBW.
Thanks. I guess I had a follow-up question on the opportunity in US card for growth. I assume a lot of the account growth that you're seeing right now is coming in the super-prime or the transactor space because of the growth in transaction volumes. Is that correct? And I guess, if we think about the subprime consumer, maybe you could just talk about what their behaviors are today? And how do you see growth from that segment unfolding? Thanks.
Sanjay, the -- certainly, what's the biggest newsworthy thing that's happening in the short run is the surge on the super-prime side, the return to travel and entertainment spend powered a lot by heavy spenders. And that you just can feel in a sense the world pent up and just bursting out. And I think that's sort of the biggest news that we see inside our numbers as we look at it.
The subprime business I think has been more characteristic of in general, the sort of mass-market of America. And that is -- that things have not been as dramatic in terms of pullbacks nor are they -- is dramatic in terms of leaning in. But we've just continued to take the same strategy we've had in the subprime business really, in the prime business for years and we are carefully leaning into originations and growing the underlying franchise. And then at the right opportunities, raising the lines when we feel that the opportunity and the conditions warrant.
So, we continue to lean into originations really, across our business and we are opening up credit lines -- gradually opening up credit lines because we see good results, the consumer is in a pretty good position, our customers are in a good place. And you remember, Sanjay, we talked about the sort of years of holding back on that. It's not like we're unleashing the credit lines right now, but we are sort of net-net more on the opening up side than the tightening side at the moment. And that's of course with a watchful eye on all the key indicators and things that naturally will change because of our credit market's work.
Next question, please?
Thank you. And our next question comes from Ryan Nash with Goldman Sachs.
Hey. Good evening, everyone.
Hey, Ryan.
So, Rich, you mentioned several times that you're leaning into marketing. I guess from the outside looking in, how should we assess the return on these investments? Should it come in the form of accelerating growth or improved efficiency? And I guess, Rich, just on the efficiency point, we obviously saw improvement year-over-year for the first time in several quarters. It seems like the top line should be improving. This combined with the technology investments that you're making, at what point do you think you'll be ready to reintroduce the 42% efficiency target or what do we need to see for you to reinstate a timeline for that? Thanks.
Okay. Thanks. Well, first a word on marketing. As I said to Betsy, we are leaning into the marketing right now and sort of leaning a little further into it, because what we do is always so windows driven, as you know, Ryan. And so that's where we are in the marketing side. So, from an efficiency point of view, you notice pretty high levels of spending on marketing. That - marketing goes up, marketing goes down, but that at the moment is been more on the upside.
Let me turn and - one thing I want to say about competition if I could just because this is very relevant to these growth conversations and then our pivot to the efficiency point. Most competitors have been - the feel of their earnings calls is they too are leaning into the opportunities that they see at the moment. And we see this - we see competition heating up all around us, especially in rewards. Typically, that's kind of the flashpoints where you see these things the most. But you see it in the marketing and the media activity, we see it in direct mail numbers, we see it in the rewards offerings and the heating up of some of that. And competition is intense right now, Ryan, but it's not yet irrational.
But I want to just kind of take the moment to reflect on what I call sort of the physics of competitive cycles. Because I've seen this enough that it's pretty much you can count on these things happening, the timing is always the question. But right now, credit is historically good across the industry and the consumer is in great shape. The longer this persists, the more competition will likely be to extrapolate these trends to inform their decision-making. And this can embolden them to make more aggressive offers, market more intensely, and a particular one I worry about, loosening underwriting standards.
And in this particular environment, the benign rearview mirror could encourage lenders to reach for growth and it could be exacerbated by credit modeling that relies on consumer credit data that frankly may be very unique to the downturn and not as good for predicting where credit performance is going to be over time. Ryan, if you're building a credit model right now and you're looking back at the data on the last year or two, what are you going to do with that with respect to what that tells you about the next time things turn down.
So the - and there is also a lot of earnings and capital and liquidity in the system, and then you've got the FinTechs that are really revving up as I talked about earlier. So the - there - even as we're leaning into this opportunity, we remind ourselves every day that the seeds for the next challenges coming up in the credit cycle as opposed to the economic cycle in the credit cycle, these seeds are being planted right now. And so, what we do is, we don't just look at our models to make decisions [indiscernible] way up and we have a very watchful eye for the key indicators of these not only likely, basically inevitable things to happen and then we will act accordingly, we just never want to be surprised.
Let me turn to talk about operating efficiency. We've been focused on improving our operating efficiency ratio for years. And from 2013 to 2019, we delivered 400 basis points of improvement with the combination of revenue growth and tight expense management. And of course, the pandemic interrupted our progress, particularly on revenue growth. As it turns out, the pandemic also accelerated the technology race and raised the stakes for all players across many industries and frankly, particularly in banking.
And so, as I talked about earlier, I think everyone can feel the clock ticking. Companies, everybody in banking feeling the clock ticking on their tech readiness. The investment flowing into the FinTechs, the arms race for talent. And so, we are struck by the emerging opportunities in the marketplace, they are significant, but the windows aren't unlimited. So, we feel we're very well positioned on this. But, we are continuing to invest in this moment in our technology and in the opportunities that we see out there.
So, meanwhile, we continue to focus on operating efficiency. Our tech transformation is the engine of long-term efficiency gains, both through revenue growth and digital productivity gains. So, continuing to invest in our technology opportunities and driving for efficiency improvements are on a shared path. We're still driving towards the same destination of operating efficiency, but the timing of our operating efficiency improvement needs to incorporate the imperatives of the current marketplace. And delivering positive operating leverage over time continues to be one of the important pay-offs of our technology journey and a key element of how we deliver long-term shareholder value.
Next question, please?
Absolutely. Next, we'll hear from Bill Carcache with Wolfe Research.
Thank you. Rich, as you think about the process of normalization of payment rates and revolve rates that you described, would you expect that to provide an incremental tailwind to loan growth such that we could actually see loan growth outpace spending growth as we look ahead?
I think one of the things that I think the banking industry -- I mean, we've talked about this relationship between payment rates and growth from time to time but I think it's been more of an occasional conversation with the street. And I think the whole banking industry and the investment community has really sort of collectively gone through and learned an important lesson here about the metric that really honestly wasn't talked about that much which is payment rates and the profound impact payment rates has on both loan growth and in fact, credit performance. And the striking thing is, it's not only empirical that relationship, but it's intuitive as well, which to me really reinforces -- there is something very important here.
And as I've said to you, we kind of route for higher payment rates. Because I think it reflects a healthier consumer even and we get paid on the credit side and sometimes paid very well as you can see here. But it is a natural thing that will happen over time, the normalization of credit will very likely come along with the lowering of payment rates. And that in turn is likely sort of mathematically all other things being equal, that will be a boost to loan growth.
So, when you say will -- but I think for those numbers to move significantly enough to in fact, have loan growth lead the rate of growth relative to metrics like spending and some of the other things or for us originations and things like that, that's got quite a journey to do to get there. I'm not saying that it won't, but I wouldn't run to the bank counting on a loan growth topping the lead tables of the various growth metrics.
But I think what is baking -- what really essentially is baking in the oven is a gradual normalization of credit, correspondingly for the same reason a lowering of payment rates. And we are probably seeing the very early -- sort of on a monthly basis, the very early indicators of that phenomenon.
Next question, please?
Thank you. And our final question today comes from Bob Napoli with William Blair.
Thank you and good afternoon. Rich, appreciate your comments on FinTech and how you're looking at partnering, buying, and et cetera. But I just was hoping to get maybe a little bit more color and your thoughts around what areas of FinTech? I know, it's been a few years since you bought Paribus, the online price tracking. But there's a lot of -- there is, as you talk about all that investment, it's going into a very broad group of -- whether it's buy now pay later, B2B payments, wealth management, business spend management, kind of charge card business spend management areas. So I just wondered what areas are most attractive to you where we would see partnerships or acquisitions?
Bob, what we do is -- and you mentioned a bunch of interesting areas, for example. But what we do is rather than say these three areas are our priority areas and let's go look for FinTech. We have a -- and this is one of the -- really, one of the benefits of years on our tech transformation is we see opportunities in a lot of areas across the portfolio of businesses that we're in. And so, rather than say these three here are the priority, let's go see what we can partner with or buy. What we do is we massively study the FinTech marketplace across all the areas that we are also leaning into. Frankly, we study it beyond that because we can learn a lot. So -- and then what we do is, the sheer learning alone is worth the effort. And so, we go to school on this and we try to say -- a bunch of times, we say, wow, look at that. They thought us that idea. We did it in Capital One, they're good or bad but look, let's see what we can learn from that.
And -- but also along the way. We look across that continuum of partnering, investing, or buying these things, but if we really look from the other end of the telescope rather than what we need, what we look for is what do we find -- and especially, what do we find relative to a company with the talent and the culture and the business model that would be really accelerative to us. And so, every once in a while we do an acquisition and -- but there is a lot of focus on that particular business model. We always ask ourselves, could we build that rather than buy it. And then we really look hard at the talent, because in the end, what really has made our most successful acquisitions has been that the talent comes, stays, and leads becomes leading executives in the company. And so, that's how it works. And a lot of times, we don't buy anything but we always come out having learned a lot, Bob. Thank you.
Well. Thanks, everybody for joining us on the conference call today. Thank you for your continuing interest in Capital One. Remember, Investor Relations team will be available in just a few minutes if you have any further questions. Have a great night.
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