Capital One Financial Corp

NYSE:COF

Earnings Call Transcript 2020-Q3

[Operator]

Welcome to the Capital One Third Quarter 2020 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, SVP of Global Finance]

Thanks very much Keith, and welcome everybody to Capital One's third quarter 2020 earnings conference call. As usual, we are webcasting live on the Internet. To access the call on the Internet, please log onto Capital One's Web site, capitalone.com and follow the links from there. In addition to the press release and the financials, we have included a presentation summarizing our second quarter 2020 results.

With me virtually today are Mr. Richard Fairbank, Capital One's Chairman and Chief Executive Officer and Mr. Scott Blackley, Capital One's Chief Financial Officer. Rich and Scott will walk you through this presentation. To access a copy of the presentation and the press release, please go to Capital One's Web site, 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. And for more information on these factors, please see the section entitled Forward-Looking Information in the earnings release presentation and the Risk Factors section in our annual and quarterly reports accessible at the Capital One Web site and filed with the SEC.

Now I'll turn the call over to Scott.

[Scott Blackley, CFO]

Thanks Jeff and good afternoon everyone. I'll start on slide three of today's presentation where you can see Capital One earned $2.4 billion or $5.06 per diluted common share in the third quarter. Included in EPS for the quarter were three adjusting items which are outlined on the slide. Net of these adjusting items, earnings per share in the quarter was $5.05 per share.

In addition to the adjusting items, we had a couple notable items in the quarter. We recorded a gain of $470 million or $0.79 per share related to an equity stake in Snowflake, which recently priced its initial public offering. We also recorded a $327 million or $0.54 per share allowance release associated with moving a partnership card portfolio to held-for-sale.

Turning to slide four I will cover the quarterly allowance moves in more detail. Excluding the held-for-sale transfer, we released $390 million of allowance for the total company in the third quarter, mostly driven by a small balance sheet. In our allowance, we continue to assume no benefits from further government stimulus beyond any residual impacts of prior legislation in a correspondingly severe economic outlook with targeted qualitative factors for specific areas of uncertainty.

We assume we end this year at a 9.7% unemployment rate, improving to around 8% by the end of 2021. Turning to slide five, you can see that allowance coverage levels were essentially flat as allowance releases were commensurate with contractions in our card and commercial loan portfolios. Our consumer banking coverage ratio declined modestly to 4% from 4.3%, mostly driven by a release in our auto finance allowance, which was driven by updated auction price assumptions.

Moving to slide six, I'll discuss our liquidity position. You can see our preliminary average liquidity coverage ratio during the third quarter was 147%, up from 146% at the end of the second quarter and well above the 100% regulatory requirement. Our liquidity reserves from cash, securities, and federal home loan bank capacity is largely flat to last quarter at $148 billion, including about $44 billion in cash driven by continued inflows of consumer deposits.

Turning to slide seven, you can see that our net interest margin declined 10 basis points quarter-over-quarter. This decline was driven by higher average cash in the quarter, the effects of investment securities and lower average card balances. In the quarter, we purchased securities to manage down a portion of our excess cash balance, resulting in a quarter-over-quarter decline in ending cash of approximately $12 billion.

Given the low rate environment, we also saw our premium amortization expense increase due to increased prepayments on our mortgage-backed securities, driving a 5-basis-point net interest margin decline relative to last quarter.

Looking forward, our net interest margin will depend on how the impacts of this downturn in any future stimulus play out across our balance sheet, including asset mix, deposit balances, and pricing, and our cash position.

Lastly, turning the slide eight, I will cover our capital position. Our common equity Tier 1 capital ratio was 13% at the end of the third quarter, up 60 basis points from the second quarter. We expect to maintain our $0.10 dividend for the quarter. Our decision is mainly driven by the fact that we're in the midst of our CCAR Resubmission. We continue to accrue capital, and we expect to reassess our common stock dividend after we receive the Fed’s feedback on our CCAR Resubmission.

We recognize the capital distribution, both dividends and share repurchases is an important component of shareholder return. Turning to preferred stock issuances in the quarter, we issued a new series of preferred stock as we expect to redeem our outstanding preferred stock Series F in the fourth quarter.

This redemption will result in a one-time charge that will reduce net income available to common shareholders by approximately $17 million in the fourth quarter of 2020. Following the redemption of Series F beginning in Q1 of next year, we expect quarterly preferred dividends to be about $60 million, barring any future issuances or other redemption activity.

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

[Richard Fairbank, Chairman and CEO]

Thanks, Scott, and I'll begin on Slide 10, which summarizes results for our credit card business. Year-over-year, credit card loan balances, purchase volume, and revenue declined in the third quarter driven by the impacts of the pandemic. The biggest driver of quarterly results was the provision for credit losses, which improved significantly compared to both the prior year and linked quarters.

Credit card segment results are a function of our domestic card results and trends, which are shown on Slide 11. Consumer behavior was a key driver of domestic card results in the third quarter. In the current environment, consumers continue to behave cautiously spending less, saving more, and paying down debts. These behaviors are amplified by the cumulative effects of stimulus and widespread forbearance across the banking industry.

We're seeing the effects of cautious consumer behavior across several key business’ results, including pressure on spending and higher payments rates resulting in declining loan balances. But this cautious behavior is also a key driver of the most impactful domestic card headline in the quarter, strikingly strong credit results.

We posted exceptional credit performance in the third quarter, especially in the context of the pandemic. The charge-off rate for the quarter was 3.64% a 48 basis point improvement year-over-year, and an 89 basis point improvement from the sequential quarter. The 30 plus delinquency rate at quarter end was 2.21%, a 150 basis points better than the prior year.

The linked quarter improvement in the delinquency rate was 53 basis points, even though the typical seasonal pattern is a 50 - excuse me a 40 basis points increase. In addition to positive impacts from cautious consumers, stimulus, and widespread forbearance, our credit performance is benefiting from resilience choices we made before the downturn began, including our avoiding of high balance revolvers and caution on credit lines.

Our own domestic card forbearance is not a significant driver of credit performance, because enrollment is low. We've provided updated information on domestic card forbearance on Appendix Slide 17. Purchase volume is rebounding from the sharp declines early in the pandemic. Third quarter purchase volume was down just 1% from the prior year quarter. That compares to a year-over-year decline of about 15% in the second quarter and about 30% in the first weeks of the pandemic.

By late September and through the first half of October, year-over-year purchase volume growth was modestly positive. Despite the rebound, purchase volume growth is still down compared to the double-digit growth we were seeing before the pandemic.

In the third quarter, domestic card ending loan balances shrank by $9.1 billion or 9% year-over-year. Average loans declined 6% year-over-year. On a linked quarter basis, both ending and average loans were down 4%. Cautious consumer behavior drove the declines. Our choices to tighten underwriting and pull back on marketing early in the pandemic were also a factor.

Ending loan balances include the impact of two notable factors. We moved $2.1 billion of partnership loans to held-for-sale in the quarter as Scott mentioned, which adds to both year-over-year and linked quarter declines. And of course, we added the Walmart portfolio last year, which offsets the year-over-year decline but has no impact on the linked quarter.

Excluding both the move to held for sale and the Walmart portfolio acquisition, third quarter ending loans declined about 13% from the prior year quarter, and about 2% from the linked quarter. Third quarter revenue decreased 6% year-over-year in line with average loans, revenue margin was up 7 basis points from the third quarter of 2019 to 16.2%.

Non-interest expense was down $274 million, or 13% from the third quarter of last year, largely driven by our choice to pull back on marketing when the pandemic hit. While, total company marketing in the third quarter was essentially flat compared to the second quarter, domestic card marketing increased from unusually low levels, with most of the increase weighted toward the end of the quarter.

Looking ahead, we expect a significant sequential increase in total company marketing in the fourth quarter powered by the normal Q3 to Q4 seasonal ramp plus the full quarter effect of the increases in domestic cards. As always, actual marketing in the fourth quarter and longer term will depend on our real time assessment of opportunities for resilient growth in the competitive marketplace.

Third quarter provision for credit losses improved by $632 million year-over-year, driven by the allowance benefit of moving the partnership portfolio to held-for-sale and the volume driven allowance release that Scott discussed.

Slide 12 summarizes third quarter results for our consumer banking business. Driven by our auto business, ending loans increased 11% year-over-year, average loans also grew 11%. When the COVID downturn began, we tightened our underwriting box in auto to focus on the most resilient assets. We believe several factors are driving the growth we're seeing, even in the context of our tightening.

The auto market rebound thus far has been stronger for larger franchise dealers, the part of the market where we are focused. Some of the recent growth is likely driven by pent up demand from the early days of the shutdown. And our digital products and services are driving growth in direct-to-consumer originations and growth with dealers who want to provide a low touch car buying experience in response to social distancing.

Our dealer relationship strategy and the digital infrastructure and capabilities we've built from the bottom up, put us in a strong position to grow high quality auto loans, even with tighter underwriting. Third quarter ending deposits in the consumer bank were up $43.3 billion or 21% year-over-year, driven by the stimulus driven surge in deposits in the second quarter.

Average deposit interest rate decreased 65 basis points as we reduce deposit pricing in response to the market interest rate environment and competitive dynamics over the course of the second and third quarters. Consumer banking revenue increased 9% from the third quarter of last year. Revenue growth from higher auto loans and retail deposits was partially offset by differences in the timing of Federal Reserve rate cuts preceding our deposit pricing moves.

Non-interest expense and consumer banking was up 3%. Third quarter provision for credit losses improved by $246 million year-over-year driven by lower charge offs and a modest allowance released in our auto business. Our auto business posted unusually strong credit results in the third quarter. The charge off rate improved a 137 basis points compared to the prior year quarter to 0.23%. The delinquency rate improved 271 basis points year-over-year to 3.76%.

In addition to the same general drivers of domestic card credit strength, auto credit benefited from very strong auction values. And in contrast to domestic card, our own COVID Auto forbearance is having a significant positive impact because we've extended release to customers in later stages of delinquency and enrollment is much higher. We provided an updated auto forbearance information chart on Appendix Slide 18.

Moving to Slide 13, I'll discuss our commercial banking business. Third quarter ending loan balances were up 3% year-over-year, driven by growth and selected C&I and CRE specialties. Average loans were up 5%. Average deposits increased about 18% from the third quarter of 2019 as middle market customers continue to bolster their liquidity. Third quarter revenue was up 7% from the prior year quarter.

Revenue growth from higher loan and deposit volumes, higher non-interest income and lower deposit rate paid was partially offset by lower loan yields. Non-interest expense increased by 2%. Provision for credit losses improved by $167 million compared to the third quarter of 2019 largely driven by the allowance release that Scott discussed.

The commercial banking annualized charge-off rate for the quarter was 0.43%. To criticize performing loan rates for the quarter increased compared to both the prior year and linked quarters to 8.7% driven by downgrades in multifamily CRE. The credit size non-performing loan rates rose modestly to 1.0%. Our oil and gas exposure declined year-over-year. We've provided a breakout of our oil and gas portfolio composition and reserves on Appendix Slide 19.

I'll close tonight with some thoughts on our results in the quarter and our positioning for the future. Capital One posted strong third quarter results. Year-over-year revenue growth and lower non-interest expenses drove pre-provision earnings up, and provision for credit losses improved by more than $1 billion, as credit results across our card and auto businesses remained strikingly strong.

Following way up, we continue to be well served by the choices we made before the pandemic. Since our founding days, we've hardwired resilience into the choices we've made on credit, capital and liquidity through good times and bad.

As a result, we entered the downturn with strong and resilient credit trends, a fortified balance sheet and deep experience and successfully navigating through prior periods of stress, including the great recession. And our investments to transform our technology and how we work, and our efforts to drive the company to digital are powering our response to the downturn and positioning us for the acceleration of digital change and adoption driven by the pandemic.

As we continue to lean into resilience to manage through the near-term challenges, we also continue to focus on the things that create long-term value when delivered and sustained overtime profitable resilient growth, effective investments to transform technology, positive operating leverage, and capital distribution.

And now we'll be happy to answer your questions. Jeff?

[Jeff Norris, SVP of Global Finance]

Thank you, Rich. We'll now start the Q&A session. As a courtesy to other investors and analysts you may wish to ask a question, please limit yourself to one question plus a single follow up. If you have any follow-up questions after the Q&A session has ended, the Investor Relations team will be available after the call. Keith, please start the Q&A.

[Operator]

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

[Sanjay Sakhrani, KBW]

Thanks. I guess I have a question on the net interest margin trajectory going forward, Scott. I know you talked about some contributors that caused the sequential degradation and the dependency for some items in the future.

But looking ahead, if we assume a stable macro, could you maybe just dimensionalize some of the upside levers you have? I know there's a step up in the Walmart share, you have the funding costs coming through, the lower funding costs and lower liquidity potentially, could just talk about those, Scott?

[Scott Blackley, CFO]

Sure. Good afternoon, Sanjay. So, with respect to NIM, I think that the current margin is towards the low end of where I would expect to see NIM given our balance sheet mix. And if I just look at kind of the factors right now, cash is elevated, but deposit growth has slowed in Q3. In Q4, we're going to get the full quarter benefit of the deposit pricing actions that we took in Q3, and then auto growth is positive to NIM.

So, I look at just those factors and there those are all positives. When you talk about longer term, more stimulus is the potential there is that that might drive more savings, which would be a headwind to NIM if we received more cash in the form of deposits. But, on the other hand, that's going to be a positive to our credit performance, and that seems like a good trade to make.

So overall, at this point, feeling like we're towards the lows on NIM, and there are a number of factors that would go in a positive direction if everything in the economy kind of went stable from here forward.

[Sanjay Sakhrani, KBW]

Okay, great. And I guess talking about the economy. Your reserve rates were stable as not sort of declined a tad. Could you just talk about how do you see that unfolding, assuming things don't change materially in the macro situation? And maybe, Rich, you could chime in on some of the things that you're worried about or not on the macro side because you mentioned credit quality looks strikingly strong. Thanks.

[Scott Blackley, CFO]

Why don't I start on the allowance and then Rich you can jump on the back end of that question? So when I look at the allowance, there's a couple important considerations. One is that we build our allowance to exclude the potentially positive effects of stimulus beyond what's already in place, and we've assumed some further worsening in the economy.

Second, our delinquency inventories are at really, really low level, so we're starting at a place where, it's going to take a while for losses to actually manifest. So, I feel really comfortable with our coverage levels where they are today. And, if we just look at going forward, more stimulus could be a significant positive factor to allowance.

And the economy is another wild card, if it worsens beyond our current assumptions and we didn't get stimulus in that case. In that case, we might be looking at the potential for reserve additions, but in an economy that goes kind of sideways or doesn't worsen much or if we get stimulus, I think there's some upside in the allowance.

[Richard Fairbank, Chairman and CEO]

Sanjay, just a comment about the consumer, this is the biggest disconnect that I certainly have experienced in my three decades of building Capital One, between what we see in the economy itself and the actual performance of the consumer, especially from a credit point of view.

Now, some things that I think always happen in a downturn, and that is consumers tend to get more conservative, so they tend to pull back, spend less, save more. So in some ways, why would what we see here be any different from the past?

And look, I still put a high degree of uncertainty around things, so I'm going to give you some views, but don't use this as like a prediction of what the consumer is going to do in the rest of this downturn. But I do think the consumer being in better shape going into this crisis starts kind of on the plus ledger for the consumer.

Debt levels were lower, payment obligations lower still supported by the low interest rates. The savings rate over the past few years was, I think, around double what it was before the great recession. And so, the consumer entered in a stronger situation.

Then what happened is, unlike most other downturns, and certainly unlike the Great Recession, which took a lot of months to sort of build its momentum, this thing kind of came all of a sudden. And the world went into free fall, sort of as I often say, we all went down the elevator together at the same time; consumers did, companies did, and the government did.

And so that I think the reaction by the consumers was more striking and more conservative than has happened in the past. So, they're spending less, saving more, paying down debt. And I think it's amplified relative to the past. Then overlay on top of this of course, that the swift and unprecedented government stimulus, and the widespread forbearance programs across the banking industry were both much greater and much swifter than occurred in the past.

And so, the cumulative impact to consumer balance sheets of lower wages, offsetting government support and lower spending is -- some of these effects by their conservatism and some of the benefits that they were granted by external parties has added up to a positive net consumer sort of savings effect of over a $1 trillion or about $10,000 per household.

And obviously, the impact across individual consumers and households is highly variable. But we now have the expiration of the expanded unemployment benefit, that's a blow to many millions of unemployed Americans. I think what we're dealing with is a cumulation of benefits that the consumer has had during this downturn, such that when suddenly the stimulus was kind of shut off, we didn't see our credit metrics suddenly skyrocket to work force places.

I think the consumer is working through some of that cumulative that has built up, but I think that we still have to look at -- we're talking about electrifying economic numbers, awful lot of job losses, now a lot more of them being more permanent, and the government stimulus at this point not having been renewed, so I think it's just a matter of time before this thing could reverse itself in a significant way.

And you see everything I say, I just want to say relative to a metaphor I've been using when I talk to investors is, every month that their favorable credit trends were sort of burrowing a longer tunnel underneath the huge economic worsening mountain such that even as potentially things revert to significantly worse place for the consumer, I think we've reduced the cumulative losses through the downturn rather than just delaying the impact.

So those are some thoughts Sanjay on what we're seeing. It's certainly not something collectively that I've observed before. But - and no one should look at this and feel, okay I give up. I'll speak for myself, we certainly - we feel really good about performance we're seeing, but we feel quite cautious about what could happen.

[Jeff Norris, SVP of Global Finance]

Next question, please.

[Operator]

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

[Betsy Graseck, Morgan Stanley]

Hi, good evening.

[Scott Blackley, CFO]

Hi, Betsy.

[Betsy Graseck, Morgan Stanley]

I wanted to dig in a little bit on the auto results. I know that you mentioned you have very strong auto results both on the loan side as well as on the credit side. First question here is just around the used car prices, they're clearly up a lot of about 15% year-on-year. And I guess just wanted to understand how much that piece of the equation impacted your net charge-off and your NIM around auto. And what you're assuming for used car prices going forward from here?

[Richard Fairbank, Chairman and CEO]

Okay, Betsy there's been unprecedented volatility in auction prices since the start of the pandemic. At the start of the pandemic, we saw a sudden collapse in auction prices as stay at home orders basically froze markets, and auction houses rushed to move online.

By the end of the second quarter, we saw auction prices rebound to pre-COVID levels. And as the stay at home orders were lifted, consumer demand experienced sort of V shaped recovery in the auto space and supply remain constrained by leap delays and the decision of most lenders to suspend repossession.

At the start of the third quarter, there was a massive amount of uncertainty around the stability of these trends, particularly whether consumer demand would remain strong with the expiration of stimulus and whether it would be enough to offset projected increases in supply.

But as it turned out, through the third quarter, consumer demand remained incredibly strong, resulting in supply constraints that drove up auction prices as dealers struggled to maintain inventory levels. Over the last couple of weeks, we've seen the industry start to work through these supply constraints, with auction prices declining slightly, and dealer inventory starting to recover toward the pre-COVID levels.

So going forward, we would expect auction prices to normalize over the next several months, as the industry fully works through these supply issues. We're underwriting to an assumption that they're going to be significantly adverse from there, just because of the - just to be cautious and because of the extreme volatility.

To your question about how important was this in the results? It was one of the factors. So for example, in the credit results, there really were three auto - so why was auto credit so good beyond what we're seeing in cards that we've talked about? There are three auto specific effects. One is, our COVID loan extension programs having a more meaningful impact on our credit metrics than it is in card, because the program's got a more, bigger proportion of customers in it and because we extended relief to the impacted customers in later stage of delinquency.

And then we've got the used car auction prices, which basically reached all-time highs in Q3. And we've also seen somewhat higher auto recoveries from the catch up from our temporary suspension of repossessions earlier in the downturn.

So, it's definitely sort of a bunch of planets aligning in the auto space, driving performance that is extraordinary in some sense, and certainly on the credit side much of the things I talked about are more temporary in nature.

[Betsy Graseck, Morgan Stanley]

Got it, okay no, that's super helpful. Thanks for all that color Rich. The follow up question I have. Just have to do with what you're seeing with regard to the accounts that are exiting forbearance in the various products sets that you have? Some other folks, this earnings cycle have been suggesting that accounts exiting forbearance or exiting with a higher rate of delinquencies I'm wondering if you are seeing the same thing and could you put a number on what that difference is between accounts that were in forbearance and aren't? Thanks.

[Richard Fairbank, Chairman and CEO]

Yeah, so by the way, I would put - with let's say, you told me a downturn of any kind was coming. And we installed a forbearance program. I would with 100% confidence say, customers who enter a forbearance program and exited will have higher delinquencies than those who never did. Only because it's a, you take a population and you now create a filter, and this is an important filter, did you raise your hand and say, I'd like some of that forbearance? Is it versus one minus that group? It would be extremely rare for that group not to have higher delinquencies.

Interestingly, probably the biggest driver of the delinquency number is it like what or what percentage of them are when they leave and that they stay current? So probably the biggest driver of that is how wide the funnel was in the first place, by which the company was inviting customers to come in and take the forbearance.

The wider the funnel, the more likely regular, very low risk customers sort of took advantage of the program. So, in our business, let me just look this up here. If we look at the customers in our card business, we look at the customers who no longer enrolled, who are no longer enrolled, but were previously, 88% of them are current. In auto it is 86%.

And the other thing, again, I just want to say I'm not sure how much information content there is in that only because one has filtered a population. The most telling thing would be the overall delinquencies that you see on our portfolio because all these customers who have entered forbearance are basically part of the delinquency metrics that you observe.

[Jeff Norris, SVP of Global Finance]

Next question, please.

[Operator]

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

[Ryan Nash, Goldman Sachs]

Good evening, guys.

[Richard Fairbank, Chairman and CEO]

Hi Nash.

[Ryan Nash, Goldman Sachs]

Rich, you noted that we could see a significant ramp in marketing in 4Q. Can you maybe just clarify what the expectations are in terms of the quarter-over-quarter increase? And second, just more broadly speaking, when competition is historically pulled back, you've used it as an opportunity when you've seen a window to accelerate growth.

And I was just wondering if you could just talk about your approach to increasing marketing spend at this point. And are things still too uncertain for you to do that? Do you have any sort of visibility at this point? Or is it more just seasonal in nature, and we should expect it to remain low as another issue or talked about this morning? Thanks.

[Richard Fairbank, Chairman and CEO]

Yes. So this our saying that marketing to be higher in the fourth quarter than the third is not a declaration that we see all the light at the end of the tunnel, we're all in, you're right at Capital One we sometimes dig while others dig. We also sometimes dig while others dig, and it's all a situational kind of thing. The primary, the reason that we're kind of leaning into this marketing guidance relative to the next quarter is more just how low it is now, not to look at that and say that, at that low level, it's going to sustain itself. So, let me just give you a little more context here.

We pulled back in certain channels early in the crisis in response to the decrease opportunity for quality growth. And just given the unprecedented uncertainty early on, we've since re-entered most channels. And it's interesting, while marketing was flat overall in the company, within card marketing increased through the quarter.

Again, it was mostly just coming off such a very low level. And so, what we are saying is you have the seasonal ramp that always happens in the fourth quarter as Capital One. And then on top of that, because even though our marketing was flat within the quarter company wide, within card it was quite slow. And so we're really saying just the full seasonal - the full quarter effect and that will also pull the numbers of fair amount higher.

So, it's really more a pulling-up from weight being so low as opposed to a statement of a big transformation and how much marketing and growth we're going after here.

[Ryan Nash, Goldman Sachs]

But in your prepared remarks, you talked about capital return being an important part of the picture for shareholders. When we look to capital ratios are at 13 and once we get through the next few quarters should be at least 13.5% or over 20% of your market cap in excess.

Now, I know we still have a handful of things that we need to get through. The Fed stress test, but it seems like if we had the minimum from the SCB of 10.1 and your internal target of 11, it seems like you have the potential to get pretty aggressive on returning capital. So if you maybe just talk about the capital priorities, and how quickly do you think you can manage the capital down once we have clarity on where the economy is headed? Thanks.

[Scott Blackley, CFO]

Yes, thanks Ryan. Well, as you know all the large banks are going through CCAR 2.0 right now, and as I mentioned, we're going to get through that process and get our feedback before we make any adjustments to our capital situation.

I think that as we talked about with stress capital buffer, with the buffer for us under that framework, where the total capital required under that framework is 10.1, we want to operate in most environments with a buffer above that, so, probably over 11%.

I think that what I'm hoping is that we'll start to see the Fed move away from the current level of restrictions, and that in the first quarter, they will migrate to the stress capital buffer framework, which should allow us to manage our capital distributions both dividends and share repurchases on a much more dynamic basis.

And as we talked about and we mentioned in our comments, we do appreciate that this is an important component of shareholder return. And so, we're looking to get back into the business of having an appropriate amount of capital and making sure the shareholders are receiving distributions.

[Jeff Norris, SVP of Global Finance]

Next question, please.

[Operator]

We'll take our next question from Rick Shane with JP Morgan. Please go ahead.

[Rick Shane, JPMorgan]

Hey, guys, thanks for taking my question. Good afternoon. Rich, you in response to Sanjay's question touched on something that I think is really interesting. You mentioned divergence between labor markets and credit markets and credit performance. And you hypothesized whether or not what we've seen is a delay in credit events, or we're actually going to see moderation from all of the policy initiatives. And you alluded to the fact that you think it's the latter.

I want to make - I want to understand, in part, what drives that view? And then I want to turn the question to Scott and ask, where's the reserve or the allowance in that context? Are you still more reserved in the delay scenario at this point?

[Richard Fairbank, Chairman and CEO]

Hey Rick, I want to make sure that I articulate for a second your two circulate for a second, your two scenarios, the delay scenario describe what you're saying that is. That would be, it's going to get as bad as ever. It's just delayed in getting there. And the moderation…

[Rick Shane, JPMorgan]

Got it.

[Richard Fairbank, Chairman and CEO]

Yeah. So yeah, I'll let Scott talk about the allowance just sort of is, there have been - well, certainly right now, there is a divergence between the two is extraordinary. I do think that - and the most common thing everybody's talking about is government stimulus. And I believe that is an important effect.

I wouldn't underestimate the collective impact of forbearance across the banking industry as well and again to some extent in rents and other things. But between the strength because the consumer entered the downturn and the various things that are providing some relief, it is clearly disconnecting the relationship that we would otherwise see between unemployment and the consumer's financial health and credit performance.

So, I think it is very plausible that this sort of bank account if you will of cumulatively some good things that the consumer has had available is something that is finite and very plausibly can't last for an extended period of time. I think it still buffers for a short period of time, but if we don't see stimulus, and if the economy continues to really be hurting.

I have trouble envisioning how the consumer doesn't end up getting in a worse place from here. But I did - my points are I think that timing of that can still be buffered by the accumulated benefits. And then my other point is that I think burrowing through the tunnel, I picture a big mountain which is the bad economy and going up and then going down on the other side.

Burrowing through the tunnel and even then, if the consumer has to rejoin that bad mountain, if you will, it's a strange metaphor. I think that some of the worst aspects of that downturn will have been averted by virtue of every month that passes. What I want to do is give it to Scott to comment on how we've handled the allowance.

[Scott Blackley, CFO]

Yeah, thanks, Rich. Rick, so if you think about what we have to do in the allowance, we're starting with delinquency levels that are not connected to the level of unemployment that we're seeing. And so one of the things that we have to do in the allowances is to take those delinquency levels and over time, kind of get them to link up with unemployment levels.

One of the reasons that we are thinking that's happening is that some of the stimulus actually comes in, in a form where it's replacing income. And so even though you've got elevated level of unemployment, you basically are you have a consumer who's, who may be unemployed, counting in the unemployed, calculations, but it's receiving benefits that allowing them to stay current as if they were fully employed.

So as we start to see stimulus unfold here, the real question that we face in the allowance is just how long is that income replacement going to continue? And what does that mean to the total loss content? So those are the kinds of issues that we would face with the allowance?

[Rick Shane, JPMorgan]

Got it. That's very helpful and Rich, I do appreciate the metaphor as well. Thank you, guys.

[Jeff Norris, SVP of Global Finance]

Next question please.

[Operator]

We'll take our next question from Bill Carcache with Wolf Research.

[Bill Carcache, Wolf Research]

Thanks, good evening. Rich, can you discuss the competitive landscape as you think about the potential threats on one hand from the neo-bank sort of the times of the world that operate exclusively online without traditional branch networks in this sort of post COVID environment?

And on the other hand, the Buy now pay later is like the corners and after pays. How do you see their presence impacting the competitive environment in the card business, say, over the next two to five years? And is there any potential benefit to deploying some of your excess capital into M&A and one of those areas or those sort of capabilities, things that you think you can build on their own?

[Richard Fairbank, Chairman and CEO]

So well, Bill, it's certainly quite fascinating and striking to see what's happening on both the banking side and the lending side with respect to these new competitors. Let me talk about the Buy now pay later phenomenon. There has been a point of sale lending forever basically. And it's always been there as another form of financing. And it's interesting in many ways the credit card became the disrupter in point of sale lending.

I never forget when early on in the Capital One journey, I ran into this guy who said, you ruined my business. I'm so sorry. How did we ruin your business? And he said, I ran a furniture store. I made my money on financing and the credit card has kind of put me out of business. And so the credit card has been an incredible efficient tool in a world where point of sale financing has continued. And there's logical reasons they both would coexist.

I think it's really striking what has happened recently, with respect to the Buy now pay later, which there's a couple of striking things going on that are not, haven't been a part of the historical context. One is just the technology, the ease of the whole thing. And with a single click, you can kind of Buy now pay later that has been one aspect of this. And the other is that, merchants are paying the lenders at this point the way the marketplace works.

Merchants paying the lenders which has allowed this to be a pretty financially attractive business for some of these neo-players and has helped keep that industry unassailable. A lot of times you have to race to the bottom in terms of how high the short-term pricing gets etcetera.

So, this is something that's growing rapidly. And I think that it's something that we are looking carefully at and watching and trying to assess where that market is going. We wonder how sustainable the revenue model of that is, with respect to the merchant subsidies in a more competitive marketplace. So, we'll have to keep an eye on that.

But I think, this is another example of how digital technology and the real time instant solutions is where the entire world is going. The history of banking is to deliver solutions on a batch basis to consumers. And I think this is another example of how real time solutions are here. And all banks, if they don't increasingly figure out how to leverage data in real time and bring instant customized solutions to consumers may find themselves in a bad place.

Then you got the whole banking side of the marketplace, the chimes, and some of the other players that I think has also have created a disruptive model. We tend to root for their success, because we are also a disruptor in this marketplace. And the more collectively all of us can get at the - make progress against the highly inertial entrenched behavior of Americans to always bank with their branch bank.

The more we can chip away collectively with that, I think the more opportunity there is for all of us digital players, Capital One included, but we're certainly inspired by some of the things that we see by some of the neo-banks.

[Bill Carcache, Wolf Research]

That's super helpful, Rich, thank you. If I can squeeze in another quick one on auto, can you discuss how your mix of new versus used originations has evolved? And whether there's any particular area that you've been leaning into more heavily?

[Richard Fairbank, Chairman and CEO]

There's not - well, there's been a lot of used, of course, just some of the market conditions that have led to a lot of used car buying. So, I don't have in front of me data with respect to that, but the used car opportunity is a sweet spot for most banks, because the captive lenders can do subsidize their new car purchases.

So, the majority of our entire business is used, and the more the used car market thrives the better it is for Capital One. I think the bigger effect that's going on that we're struck by, in addition to just have all that sort of the tide of auto has risen for all the boats, for all the players, and it's just a kind of a strikingly sort of good time in the industry and technically, we should all know in the middle of the master pandemic, so we got to be very careful.

But kind of little captive, the traction that we're seeing with our digital strategy is particularly we're seeing in auto, because of the very physical nature of how the product is brought. And this is an example of where the pandemic is accelerating things that would happen anyway. But in the auto space, the more they accelerate the sort of direct side not necessarily the pure direct where no one ever goes to a dealership, but the semi-direct or the hybrid direct and thing that just involves faster, more digital solutions.

That plays into the hand of Capital One because we've invested four years in real time, automated solutions and being able to underwrite any car in America on any lot in less than a second, and to be able to provide that information to consumers before they go into a dealership and also lessen the amount of hard work and waiting once you get it.

[Jeff Norris, SVP of Global Finance]

Next question, please.

[Operator]

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

[Don Fandetti, Wells Fargo]

Well Rich, I was wondering if you could talk a little bit about what you're seeing in your commercial real estate portfolio and also given the stress, are there any opportunistic opportunities that you see coming to market?

[Richard Fairbank, Chairman and CEO]

So, our commercial real estate is $30 billion across a range of property types. Relative to most banks, their overall portfolio is more concentrated in multifamily, which we view as more resilient while it's underweight in more volatile sectors like hotel, retail, office and construction.

So in the multifamily space, we have $18 billion in exposure in multifamily. About $13 billion is on balance sheet and about $5 billion in agency low share. And of that, of the $13 billion we have on balance sheet, about half of our exposures in the New York metropolitan area. And, as you know Don, there are real borrower challenges in the market with low rent collections and addiction moratoriums.

So, our focus and the significant majority of our portfolio is in rent regulated in Class B properties which have been historically more resilient in recessions. So the big increase in credit sized performing loans was in the multifamily portfolio. We feel really good about the LTV, the low LTVs that we have backing this book.

But it certainly has our attention that New York's got a number of challenges on the real estate side. And so, we'll very carefully monitor how this plays out. But we feel collectively very good about our overall real estate portfolio and the choices that drove us to where we are.

[Don Fandetti, Wells Fargo]

Okay, thank you.

[Jeff Norris, SVP of Global Finance]

Next question, please.

[Operator]

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

[Moshe Orenbuch, Credit Suisse]

Hey, thanks. Richard, with the front end of the questions you talked a little bit about some of the differences between this and the Great Recession. I guess another one would be the banks and card issuers themselves are actually in a better position than they were at that point. And I'm just wondering if you could kind of talk a little bit about how you think that impacts the competitive opportunity and what you're willing to talk about, what Cap One's plans are with respect to that?

[Richard Fairbank, Chairman and CEO]

Yeah. It's a really insightful comment that you make Moshe because, one of the things that we know that happened in the Great Recession is the consumer was more levered up. But you also had in the banking industry, both banks and non-banks were not providing products that were not nearly as well underwritten. That often had complicated features with them, and there was just a lot of disequilibrium to sort out.

And that really compounded the consumers journey through the downturn that their own condition and also working through some of the things the most extreme, of course, motion was the mortgage products and all the issues there. So, and what happened is a lot of the bad lending practices, I say bad from a credit risk point of view, and also certain consumer practices got driven out in the Great Recession.

And on the other side of it was a very rational, high performing credit card marketplace. And I've said for years on the other side of the Great Recession, I think this is a strikingly rational marketplace. I find it more rational than the other lending marketplaces in which we compete. And each of the players there sort of has carved out a particular niche in there, they're doing well.

So I see Moshe a very rational behavior, even right now in the pandemic. Fortunately everybody pulled back. But first of all, you start with card players have something happening to them that basically is pretty unique across lending products. And that is that our portfolios are shrinking pretty dramatically.

Here commercial in general, people drawing out online increased the volumes. So, I think that we card players are struck by, Oh, my goodness, just with the less spending and all this conservative behavior by consumers, we've been going backwards pretty rapidly, pretty much all of us have. And but I think that, that is the flip side of what comes from the strikingly sound and conservative behavior of our consumers.

So, where did the industry go for from here? I think the industry has pulled back. And I think all of us, in our own way, are trying to figure out, no one's going to fully step on the back gas, no one is all the way pulled back. And I think for everyone, it is how to find the selective opportunity, where you can continue to lean into this thing and book business and it's going to be resilient, even if things get a whole lot worse.

And some of them have tried true strategies motion we've had for many years, our conservatism on credit lines, the avoidances, high balance revolvers, and so on. Our strategy has been so resilience focus, I think that, for us the opportunity to continue to book accounts be very conservative on credit lines, build up the potential energies but continue to be being careful on credit lines, book to protect, grow the potential energy and delay the release to some extent into a kinetic energy to a lot of live growth until we see more clarity on where this economy is going.

So, that's how we're continuing to lean in, even in the context of this for the electrifying economy.

[Moshe Orenbuch, Credit Suisse]

Thanks, Richard. And maybe a follow-up question for Scott. I noticed that revenue suppression had improved fairly significantly. I guess that works relative to actual delinquencies and maybe could you talk a little bit about how that's going to look going forward?

[Scott Blackley, CFO]

Yes, you're right. The suppression is a shorter coverage period than allowance. It really only goes through the point of charge-off and when you've got a low delinquencies, that's improved. So, as long as we see stability in our delinquency levels, that would stay at about the levels where it is now. We started to see them. Delinquencies worsened, that would increase the amount of suppression.

[Moshe Orenbuch, Credit Suisse]

Thanks.

[Jeff Norris, SVP of Global Finance]

Next question, please.

[Operator]

And our final question this evening will come from Brian Foran with Autonomous. Please go ahead.

[Brian Foran, Autonomous]

Hi. Pretty much everything has been asked, like it's a done marketing. So I guess the normal seasonal increase would be maybe $100 million, $150 million, maybe $150 million, $175 million actually. A normal level would be maybe more of $500 million or $600 million.

So are there any - I know you're not going to give a point estimate, but are there any guardrails which you could give maybe that we think is more like a normal seasonal increase to below $400 million so we thinking more like a normal seasonal level to the mid 500 millions in terms of gotten something depend fully on marketing for the fourth quarter?

[Scott Blackley, CFO]

Brian, we're probably going to leave our guidance where it is, but the main thing we wanted people to just know that it's been unusually low at this point and don't get too used to the unusually low level. And so that's why it's the double effect that we're calling for the double effect of the normal significant seasonal increase that we have in the fourth quarter around things like our sponsorships and a lot of things that happened late in the year, as well as the continuation of what happened late in the quarter looking at the marketing levels and card.

A phenomenon that was not visible in the aggregated credit numbers because it just turned out by coincidence, some of the marketing elsewhere in the company around retail, which had really been sort of higher right out of the gate with all the deposit inflows that we've had, we pulled back somewhat on the retail.

[Brian Foran, Autonomous]

Fair enough. Looking then to forbearance in 2009 when you did you load market and that got into a normalized earnings model. So fair to remind people that you still [Indiscernible].

[Richard Fairbank, Chairman and CEO]

Okay, well, Brian, thank you.

[Jeff Norris, SVP of Global Finance]

Thanks, Brian, and thanks, everyone, for joining us on tonight's conference call. Thank you for your interest in Capital One. And remember the Investor Relations team will be here this evening to answer any further questions you may have. Have a great night.

[Richard Fairbank, Chairman and CEO]

Thank you all.

[Operator]

Ladies and gentlemen, that concludes today's conference. We appreciate your participation, and you may now disconnect.