Capital One Financial Corp

NYSE:COF

Earnings Call Transcript 2020-Q4

[Operator]

Good day, ladies and gentlemen. Welcome to the Capital One Fourth 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, Senior Vice President, Global Finance]

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

With me 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 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 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 website and filed with the SEC.

Now I'll turn the call over to Mr. Blackley.

[Scott Blackley, Chief Financial Officer]

Thanks Jeff and good afternoon everyone. I'll start on Slide 3 of tonight's presentation. In the fourth quarter Capital One earned $2.6 billion or $5.35 per common share. For the full year Capital One earned $2.7 billion or $5.18 per share. Included in EPS for the quarter were two small adjusting items which were outlined on the slide. Net of these adjusting items, earnings per share for the quarter was $5.29. Full year 2020 adjusted earnings per share was $5.79. In addition to the adjusting items in the quarter, we recorded an equity investment gain of $60 million or $0.10 per share related to our equity stake in Snowflake. For the full year the investment gain was $535 million or around $0.89 per share.

Turning to Slide 4, I will cover the quarterly allowance moves in more detail. In the fourth quarter, we released $593 million of allowance primarily in our card business. Economic assumptions underlying our allowance included unemployment of around 8% at the end of 2021 and the impacts of the $900 billion stimulus package passed in December. The release was driven by the strong credit performance we have observed and by the new stimulus bills. In our allowance we continue to assume that the relationship between economic metrics and credit quickly reverts to historic norm and we've added significant additional qualitative factors for COVID related uncertainty. In our commercial business, we charged off certain energy loans and released allowance for the specific reserves that were previously established for those loans.

Turning to Slide 5, you can see the allowance coverage levels declined modestly from the prior quarters across our segments, but remained well above pre-pandemic levels. Our domestic card coverage is now at 10.8% while our branded card portfolio coverage is 12.7% recalled at the difference between these metrics is driven by loss sharing agreements in our partnerships portfolios. Coverage in our consumer and commercial businesses also remained elevated at 3.9% and 2.2% respectively.

Moving to Slide 6, I'll discuss our liquidity position. You can see our preliminary average liquidity coverage ratio during the fourth quarter was 145% well above the 100% regulatory requirements. Our liquidity reserves from cash, securities and federal home loan bank capacity declined slightly from the third quarter to end the year at approximately $144 billion including about $41 billion in cash driven by continued strong deposits.

Turning to Slide 7, you can see that our net interest margin increased 37 basis points quarter-over-quarter to 6.05%. The increase was largely driven by higher card loan revenue margin and strong credit results led to lower suppression. The impact of third and fourth quarter deposit pricing actions and a modest decline in our cash balance which was partially offset by lower yields on cash and securities.

Lastly turning to Slide 8, I will cover our capital position. Our Common Equity Tier 1 capital ratio was 13.7% at the end of the fourth quarter up 70 basis points from the third quarter and 150 basis points higher than a year ago. We continue to estimate that our CET1 capital need is around 11% which includes a buffer over our capital requirements under the SCB framework of 10.1%. As we close out 2020, we have approximately 270 basis points or around $8 billion of capital in excess of our CET1 target.

Following the latest stress test results released by the Federal Reserve last month and in light of the strong capital position I just described. We expect to restore our quarterly dividend back to $0.40 per share in the first quarter pending board approval. Our Board of Directors has also authorized the repurchase of up to $7.5 billion of the company's common stock inclusive of share repurchase capacity of up to approximately $500 million in the first quarter based on the Fed's current trailing four quarter average earnings rule. The timing and amount of stock repurchase activity will be informed by our outlook on the economy as well as actual forecasted levels of capital earnings and growth.

And with that, I'll turn the call over to Rich.

[Rich Fairbank, Chairman and Chief Executive Officer]

Thanks Scott. As I think everyone on this call knows Scott shared with me in November that he would be leaving Capital One to join a tech startup, while he will be here through March 15. This will be Scott's last earnings call. I'm going to take a moment and thank you Scott for giving so much of your life to Capital One over this past decade including the last five years as our CFO. You've built strong relationships with our shareholders and across the investment community and you've always brought their external perspectives through our work inside of Capital One.

You've been a key advisor and partner for me and for the board and a strong leader in our company. I'm particularly grateful for the legacy you've built. Transforming finance technology, strengthening processes and controls, building a great team of talented leaders including your successor Andrew Young. We will miss you and I'm sure you will continue to do great things.

With that, let me turn to our domestic card business. Exceptional credit performance was the biggest driver of domestic card financial results in the quarter. The domestic card charge-off rate for the quarter 2.69%, a 163 basis points improvements year-over-year and a 95 basis point improvement from the sequential quarter. The 30 plus delinquency rate at quarter end was 2.42%, a 151 basis points better than the prior year.

The delinquency rate was up 21 basis points from the linked quarter consistent with typical seasonal patterns. Fourth quarter provision for credit losses improved by $1.1 billion year-over-year driven by the allowance released that Scott discussed and lower charge-offs. Several factors are driving continued credit strength. Consumers are behaving cautiously spending less, saving more and paying down debt. These behaviors have been amplified by the accumulative effect of unusually large government stimulus and widespread forbearance across the banking industry.

Our own longstanding resilience choices put us in a strong position going into the pandemic and our strategic investments in digital technology and transformation are paying off in enhanced capabilities and underwriting better powering our performance and response to the pandemic. Strikingly strong consumer credit has persisted throughout 2020 even after the expiration of several parts of the CARES Act. Uncertainty about future credit trends remains high especially in the context of an evolving pandemic that is difficult to predict. As Scott discussed that uncertainty informs our allowance for credit loss.

We believe that each incremental month of favorable credit reduces accumulative losses through the downturn rather than just delaying the impact. At the end of the fourth quarter, domestic card ending loan balances were down $20.1 billion or 17% year-over-year driven by three factors cautious consumer behavior, reduced spending and demand for new credit and drove payment rates to historically high levels.

Our marketing pullbacks at the outset of the downturn put additional pressure on loan balances and we moved a partnership portfolio to held for sale in the third quarter. Excluding the impact of the move to held for sale, ending loans declined about 15%. Fourth quarter average loans declined 16% year-over-year. On a linked quarter basis, the expected seasonal ramp drove ending loans up by about 3%.

Purchase volume continued to rebound from the sharp declines early in the pandemic. For the full year purchase volume was down 2% in 2020. Fourth quarter purchase volume was essentially flat compared to the prior year quarter, that compares to a year-over-year decline of about 30% in the first weeks of the pandemic. Quarterly purchase volume increased 10% from the sequential quarter consistent with the expected seasonality and the continued rebound. Despite the rebound purchase volume growth is still down compared to the double-digit growth we were seeing before the pandemic.

Fourth quarter revenue declined 7% year-over-year as a result of the decrease in average loans partially offset by higher revenue margin. The revenue margin was up 121 basis points year-over-year to 16.91% largely driven by two factors strong credit drove lower revenue suppression and year-over-year net interchange revenue in the numerator of the margin is essentially flat while average loan balances, the denominator of the margin calculation are down 16%.

Non-interest expense was down $186 million or 8% from the fourth quarter of last year. Largely driven by our choice to pull back on domestic card marketing when the pandemic hit. Total company marketing trends are largely driven by domestic cards. Fourth quarter marketing for the total company was down 21% year-over-year. On a sequential quarter basis total company marketing increased significantly in the fourth quarter.

Looking ahead future marketing will be impacted by how things play out with the pandemic and the economy. In the midst of the pandemic. We're finding opportunities and we're leaning into them. These opportunities are enhanced by our tech transformation. The ultimate level of 2021 marketing will depend on our continuing real-time assessment of the marketplace.

Slide 12, summarizes fourth quarter results for our consumer banking business. Driven by auto business ending loans increased 9% year-over-year, average loans grew 10% for the fourth quarter and 9% for the full year. When the COVID downturn began, we tightened our underwriting box in auto to focus on the most resilient assets. We believe that several factors drove our growth. The auto market rebound has been stronger for larger franchise dealers, the part of the market where we are focused. Our digital products and services drove 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 and our dealer relationship strategy put us in a strong position to grow high quality auto loans.

Fourth quarter auto originations were down 2% year-over-year. Competition picked up late in the third quarter and continued to increase in the fourth quarter. Fourth quarter ending deposits in the consumer bank were up $36.7 billion or 17% year-over-year driven by the stimulus driven surge in deposits in the second quarter. Average deposits were up 19% for the fourth quarter and up 15% for the full year. Our average deposit interest rate decreased 73 basis points year-over-year and 19 basis points from the linked quarter as we reduced deposit pricing in response to the market interest rate environment and competitive dynamics.

Fourth quarter consumer banking revenue increased 18% from the prior year quarter. Annual revenue was up 4% both increases were driven by growth in auto loans and retail deposit. Annual growth was negatively impact by differences in the timing of Federal Reserve rate cuts preceding our deposit pricing reductions. Non-interest expense in consumer banking was up 1% year-over-year.

Fourth quarter provision for credit losses improved by $275 million year-over-year driven by lower charge-offs and a modest allowance release in our auto business. Fourth quarter credit results in our auto business remain unusually strong even after seasonal linked quarter increases of 24 basis points in the auto charge off rate and 102 basis points in the delinquency rate. Year-over-year the charge-off rate improved 143 basis points to 0.47% and the delinquency rate improved 210 basis points to 4.78%. Strong auto credit is the result of several factors. In addition to the same general drivers of domestic card credit strength. Auto credit also benefited from very strong auction values and our auto forbearance is having a temporary positive impact particularly on delinquency rates.

We've provided updated auto forbearance information on appendix Slide 18. We expect auto credit metrics to increase from their unusually low levels as auction prices normalize and the temporary impacts of COVID forbearance layout.

Moving to Slide 13, I'll discuss our commercial banking business. Fourth quarter ending loan balances were up 2% year-over-year driven by growth in selective C&I and CRE specialties. Average loans were also up 2% for the fourth quarter and 6% for the full year. Quarterly average deposits increased 21% from the fourth quarter of 2019 and annual average deposits grew 14% in 2020 as middle market customers continue to bolster their liquidity.

Fourth quarter revenue was up 10% from the prior year quarter. Annual revenue was up 6% for the year. Annual revenue growth from higher loan and deposit volumes and higher non-interest income was partially offset by lower net interest margin. Non-interest expense for the quarter increased by 1% year-over-year. Provision for credit losses improved by $90 million compared to the fourth quarter of 2019. The allowance release that Scott discussed was partially offset by higher charge-offs largely related to our oil and gas portfolio. 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.

The commercial banking annualized charge-off rate for the quarter was 0.45%. The criticized performing loan rate for the quarter increased compared to both the prior year and linked quarter to 9.5% driven by downgrades in our commercial real estate portfolio. The criticized non-performing loan rate rose modestly from the prior year quarter to 0.9%.

I'll close tonight with some thoughts on our results and how we're positioned for the future. It's not a surprise that the pandemic shaped our 2020 results. For the full year total company loan balances declined 5%. Annual revenue was essentially flat including $535 million in gains on our Snowflake investment. Non-interest expense was down 3% with a decline in marketing and relatively flat operating expense. Provision for credit losses increased by $4 billion and earnings per share rebounded from negative territory early in the year to $5.18 for the full year down significantly from 2019.

Three key themes are evident in our 2020 results. The pandemic pressured top line loan balances in revenue particularly in the first half of the year. On the bottom line strikingly strong credit resulted in a return to positive trajectory and record profitability in the second half of the year and our longstanding strategic choices put us in a strong position to respond to both the near-term challenges and the emerging opportunities.

Turning first to the near-term challenges, domestic card loan balances decline sharply as cautious consumers stimulus and widespread industry forbearance drove historically high payment rates and reduced demand. Lower loan balances put pressure on revenue, efficiency and scale. The operating efficiency ratio net of adjustments was 46%. It was 46.9% excluding Snowflake gains. The flipside of this top line pressure was exceptionally strong consumer credit performance which drove two consecutive quarters of record earnings in the second half of 2020 and strong second half earnings coupled with smaller balance sheet enabled us to increase our CET 1 ratio to 13.7%.

Today we've announced our intent to raise the quarterly dividend to its prior level of $0.40 per share subject to board approval and we've also discussed our plan for up to $7.5 billion of share repurchases which are board has already approved. Throughout 2020, we have been well served by the choices we made before the downturn began. 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 of fortified balance sheet and deep experience in successfully navigating through prior periods of stress including the great recession.

Our investments to transform our technology and how we work and our efforts to drive the company to digital are paying off. Our transformation is powering our response to the downturn and putting us in a strong position for emerging opportunities as the pandemic plays out. Pulling way up, despite the pressures of the pandemic in the near term nothing has changed about where we think our businesses are headed or the long-term strategic opportunities that are being created as sweeping digital change continues to transform banking. As we manage through the near-term challenges, we also continue to focus on the things that create long-term value when delivered and sustained overtime, continuing to transform our technology from the ground up, capitalizing on our transformation to drive innovation and growth, generating positive operating level and improving efficiency and managing capital efficiently and effectively including significant capital distribution.

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

[Jeff Norris, Senior Vice President, Global Finance]

Thanks Rich. Scott let me add my personal thanks for all the coaching and leadership. It's been a pleasure to work with you over the years and I wish all the success as you go forward. And now we'll 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 question. If you have any follow-up questions after the Q&A session. 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 Rick Shane with JPMorgan. Please go ahead.

[Rick Shane, JPMorgan]

Scott, congratulations and Andrew I think when you look back Scott leaving you with $15.5 billion reserve is probably the best gift he could give you. I wanted to talk a little bit about that, when we look versus day one, the reserve is now up $5 billion. I'm curious when we look at the current credit metrics. What do you think that scenarios would have to be to actually really utilize that reserve over the lifetime?

[Scott Blackley, Chief Financial Officer]

Rick, well thanks for your kind words and I appreciate both Rich and Jeff saying such nice things. It's been honestly just a privilege to be at this company and its certainly tough place to leave. But let me return to your question. In terms of the allowance, you're right that when you look at our coverage levels versus our current level of losses and delinquencies there's a big gap and I would just point out that, that is because right now our allowance is built to absorb a very wide range of outcomes which gives sense, which is sensible given kind of the circumstance that we're in at the moment and so I think that the biggest driver where the allowance might go and what might drive releases is frankly just certainty and narrowing down the range of possible outcomes. I think could come from things like macroeconomic factors like unemployment or pandemic specific variables like broader rollouts of the vaccines, reduced restrictions on people's movements and activities and things like that. So to me it feels like that certainty is more likely to happen overtime versus the step function so I think we'll see the allowance kind of play out in measured ways overtime.

[Rick Shane, JPMorgan]

Got it, okay. Thank you and we're looking forward to seeing you in the Bay Area.

[Jeff Norris, Senior Vice President, Global Finance]

Next question please.

[Operator]

We'll take our next question from Sanjay Sakhrani with KBW. Please go ahead.

[Sanjay Sakhrani, KBW]

Congratulations Scott. I guess I have a question on marketing expense and efficiency ratio target that you guys outlined some time ago. When we look at the marketing expense, it seems like run rate wise we're back to 2019 levels on a quarterly basis. Can you guys actually exceed that going forward is there's opportunity in the market size? And then as far as the efficiency ratios concerned, I mean how long before we can get back to the 52% target that you had outlined, Rich?

[Rich Fairbank, Chairman and Chief Executive Officer]

Sanjay, good evening. We're not making specific guidance about marketing as you know this is while there are certain things that are sort of mostly fixed about our marketing expenditures, a lot of it is based on real-time assessment of prospects for resilient growth in the competitive marketplace. But let me just kind of pull up and talk about our journey this year with respect to marketing. we pulled back early in the crisis but since increased marketing spend as you saw in Q4 and as expected the increase from Q3 was meaningfully higher than typical seasonal patterns. Right now, we are seeing opportunities to invest. We continue to invest in our brand, in our national banking strategy and in our card businesses we're leaning in where we see signs of strength and we feel pretty good about origination opportunities and these are enhanced by our tech transformation as well.

So we're keeping a very watchful eye on the marketplace, but we do see opportunities and we're investing in them. And with respect to efficiency, we still believe that we're on the path to achieve the efficiency targets that we have talked about in prior years driven by growth and digital productivity gains and really enabled by our tech transformation. The pandemic has really impacted the timing of when we get particularly on revenue growth.

Now we feel good about our current revenue trajectory and we're still on the same efficiency journey. But how the pandemic and the recession will play out remains uncertain and how the growth opportunity unfolds and also the sort of the great credit paradox with the strength of credit also comes the high payment rates which certainly it's a great thing for the overall financial performance of the company that's another thing that holds back the growth. So we're leaning into really in the growth opportunities but and we're on the same kind of heading to the same destinations we talked about before. But we're not giving guidance about the timing.

[Jeff Norris, Senior Vice President, Global Finance]

Next question please.

[Operator]

We'll go next to Bill Carcache with Wolf Research.

[Bill Carcache, Wolf Research]

Let me add my congratulations. Scott, I wanted to ask about the buyback authorization. Is it reasonable to expect that you seem to be as aggressive as possible and executed on it such that you continue to do the form up by the end of 2021 assuming a favorable backdrop where the fed withdraws payout restrictions? And then within that, how are you guys thinking about the regulatory capital impacted the CECL [indiscernible] for day one and two under the CARES Act.

[Scott Blackley, Chief Financial Officer]

Thanks for the question Bill. With respect to the share buyback program I think the most important thing I just want to underscore is that, the $7.5 billion that was authorized by the board really underscores our commitment to returning excess capital to the shareholders and I think that we're certainly excited to start that journey. As we think about capital deployment, the hierarchy there is first capital to growth opportunities and then share buybacks and dividends to follow and I would just point out in our past practice you can see that we manage share buybacks dynamically and we take into account market conditions, relative value, our holistic view on where we are in our capital position. In the first quarter we'll be limited $500 million I mentioned that based on the fed rules, after that the pacing of the share repurchase are really going to be guided by the factors I just talked about and by any regulatory guidelines that we might see.

I'll just say that, we find our current valuation compelling and with over $8 billion of excess capital, we're really looking forward to getting started on the program.

[Jeff Norris, Senior Vice President, Global Finance]

Next question please.

[Operator]

We'll go next to John Hecht with Jefferies. Please go ahead.

[John Hecht, Jefferies]

Rich, you embarked on your digital banking transformation several years ago and at that point of time the attempt was to scale a traditional bank and using a digital platform where you could do lot more for your customers and really with simple side fashion over digital channels that digital banking I think has changed with the development of companies like [indiscernible] and some of the fintech companies kind of getting into call center banking offerings with digital wallets with no asset. I'm wondering, does that - the development of migration of digital banking overall, does that effect how you see investments going forward to Capital One?

[Rich Fairbank, Chairman and Chief Executive Officer]

Well everything that we see John I think reinforces our conviction about the strategy that we have and the journey that we're on and the destination we're so energetically pursuing. First of all, talk about the pandemic. I don't think the pandemic changed much about the destination of banking but it changed the timing of that because it accelerated the digital journey and one thing that's been so striking about banking products and even banking products relative to credit card products is the stickiness and the inertia inherent in the customer relationships that have existed sometimes for many decades and so one of the challenges for any digital bank is, how do you go after that inertia and create something compelling enough to cause people to switch and so it's really nice being on in a sense the right side of history because we can see the direction things go.

What I'm struck by is the amount of acceleration that we've seen in these inevitable trends this year. So that's a good thing for us and we want to capitalize on that. Now the other along the way not surprisingly we've seen the rise of some very intriguing banking fintechs and we've watched with great interest their strategies in many cases, they have very nice digital customer experiences in some cases they have created strategies that the banking industry didn't come up with and we look with interest in that and in many ways root for their success because it's all part of the same - their success is the manifestation also of the accelerating change in customer behavior and the opportunity for digital banks. So we have a lot of respect for some of the players, we're impressed by their innovation and we've energized by their success and the success that we're having and so as a result we're leaning in [indiscernible] delaying and leaning in a little harder on our own banking strategy.

[John Hecht, Jefferies]

Appreciate the context. Thank you very much.

[Jeff Norris, Senior Vice President, 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]

Rich, in terms of the fintech discussion. I was wondering if you could comment on buy now, pay later, does that impact your business from a wanting competition perspective or syndicated risk standpoint and bit material for us to keep an eye on from a risk perspective.

[Rich Fairbank, Chairman and Chief Executive Officer]

So now buy now, pay later is a really interesting marketplace. It's kind of ironic because the original buy now, pay later product for the credit cards and so it's interesting to be a very established credit card players and feel a little bit like the old guard as we're watching these innovations on buy now, pay later and I have a lot of respect for and I'm impressed by some of the things, the success of the point-of-sale lending products. And point of sale lending as of course existed since really the beginning of lending itself.

I think what's striking here is the way that it exist of course in the ecommerce space, the way it's got shelf space right there at the checkout page, some of the elegance of the digital technology and interestingly right now sort of financially how this marketplace works because the striking thing to me is that right now merchants are actually paying the bill as opposed to consumers and that tends to create a healthy marketplace, it tends to create better selection dynamic then very often you see in some of the short-term lending products they tend to have very high effective APRs and things can sometimes axiomatically to adverse selection.

So thing to me, the thing that I'm most interested in watching from some of the structure of that marketplace is what happens to the - in a sense the merchant discount with respect to those products as the competition from lenders heats up in that space. So that's something we'll have to watch. So I think there's a lot for Capital One to learn in this marketplace and we're watching it closely and we really with interest look to see how this opportunity evolves.

[Jeff Norris, Senior Vice President, Global Finance]

We'll take next question.

[Operator]

Thank you. Our next question is from Ryan Nash with Goldman Sachs.

[Ryan Nash, Goldman Sachs]

Scott, congratulations. Rich, maybe just to dig in a little bit further on the efficiency. I understand that you don't want to put a timeframe on it. However if we look at the performance this year, we're in 46% range still about 400 basis points from the 42% target that you had laid out so. Can you maybe just talk about the path to getting there from a financial perspective? Is it all about the return of card loan growth and the revenue growth that comes with it? Or is there more the digital transformation on the cost side? And if cost is part of it can you maybe just talk about what some of those drivers are and what the timing is in terms of us getting there? Thank you.

[Rich Fairbank, Chairman and Chief Executive Officer]

Yes, so Ryan. The efficiency our journey and the success we had over a number of years really till the pandemic sort of set things back a bit was driven kind of mathematically of course by the two factors sustained revenue growth and the efficiencies that were coming particularly from transforming to a more digital operational model. And I think the same things that drove our efficiencies ratio down over the years are going to be same drivers going forward. At the time that we gave the guidance on 42%, there were a lot of things coming together not only on the efficiency side things like getting out data centers, things like the step up that in the Walmart revenue sharing relationship but very much we were looking at accelerating growth opportunities in our businesses particularly our consumer businesses.

So the pandemic set that back and so I would still say the biggest driver of the efficiency gains that we will continue to work toward will be on the revenue side because we still continue to invest in the digital opportunities that are in fact enabling the revenue growth and one thing that we talk about is, that we're now finished with our eighth year of our tech transformation and in many ways this will be a lifelong transformation that this has been starting at the bottom of the tech stack journey and overtime we've been working our way up the tech stack and the more we get up the tech stack, the more the opportunities are things that will actually the world can see things that customers can experience and things that can more directly enable growth and that's why I mentioned on my comments about marketing is that, some of the marketing opportunities we see are in fact specifically enabled by our tech transformation.

So therefore while tech continues to create efficiency opportunities it is also the basis for a number of our growth opportunities and we really want to take advantage of those, we're leaning in and of course it takes investment to do that. So that's why I think revenue growth is I would expect it to still be the bigger driver of our efficiency journey on a net basis than on the cost side. But really the key is having revenue growth that exceeds the growth in expenses of course.

[Jeff Norris, Senior Vice President, Global Finance]

Next question please.

[Operator]

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

[Moshe Orenbuch, Credit Suisse]

So Rich in the past you've had a tendency to see the loan growth lag the marketing spend and account growth based upon credit lines and talked about the need to kind of incubate those accounts and increase the credit lines overtime to get that balance and revenue growth. Can you talk a little bit about where you sit in that now given the unusual nature kind of where we in the economic cycle?

[Rich Fairbank, Chairman and Chief Executive Officer]

Thank you, Moshe. With our strategy of relatively lower lines, we've often talked about how in many ways the primary credit risk and the primary growth comes really on the line increase side more so than just the originations themselves. And so what we have often done in times of stress or when there is extra caution and you will remember Moshe, in the probably 18 months prior to this downturn maybe two years we were also talking cautiously about lines because we said we're so long in the tooth on this economy and so that has been our strategy for managing risk is to try to hold the lines down where we can continue to lean into the origination side of the business and then open up the lines as we see more of the sun coming out and more opportunity one customer at a time.

So where we stand on that, we've been particularly tight on the lines during this downturn. But I think that as we watch the pandemic play out, I think that we see opportunities one customer at a time. But collectively pulling up on this we do see important opportunities for increasing those lines and as we do that can put some momentum around the loan growth in a way that you don't just get from originations which we're also leaning into.

[Moshe Orenbuch, Credit Suisse]

Got it and maybe as a follow-up, when I would get the question in the past about what could cause rewards rates to kind of moderate or come down. It's said an economic downturn and obviously we've got some form as an economic downturn. If anything it's gone the other way, any thoughts about kind of intensity of rewards competition and how to think about that into the next year or two?

[Rich Fairbank, Chairman and Chief Executive Officer]

As you know it's a really interesting question, Moshe. Whether a downturn caused this rewards rates to go down or up. So the case for down in other words for people for the competition to get less intense about that is the people are pulling back, they're spending less and they're more concerned about riding through the downturn than they're about trying to grow quite a bit. Here's a flipside to that argument and the thing that I think is dominating in that particular tug of war and that is that what is most striking about the pullback probably true in any downturn, but especially in this one is how much of pullback there is been in spending and what a pullback there has been in spending by heavy spenders and I think that not just the point about heavy spenders. It's partly what heavy spenders spend their money on which is to travel and entertainment on a disproportional basis relative to others and those of the sectors that have been absolutely whacked [ph] here.

It's generally the case that the heavy spenders from a credit point of view everything that we have seen would be consistent that they perform well on a downturn. They just get more conservative in their spending, travel opportunities and things like that don't necessarily work so enticing and certainly the case in this downturn. And so I think what happens is a response from players to lean into increasing inducement to generate the volumes that people want to get. We have seen significant increases in upfront bonuses. We've seen increases in reward levels and I think that's probably a natural thing for us to expect in this particular environment even though paradoxically it's associated with so much pullback.

[Jeff Norris, Senior Vice President, 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]

My question is just on how to think about the reserve levels and the reserve release from here. I know the questions asked a little bit. But the reason I'm raising it is, I think you said that your reserve today is based on unemployment rate of 8% at 2021, I know there's lot more inputs than just that. But that 8% at year-end 2021 is similar to last quarters. Yet at the same time I know Rich you mentioned that every quarter that goes by with good credit is like a reduction of peak, if not a push out. So how should I triangulate that, should we be anticipating in a more aggressive reserve releases at the quarters come through that are not so bad? Or is there something else going on in the reserve analysis that we should be thinking about?

[Scott Blackley, Chief Financial Officer]

Betsy, why don't I take that one? So look I think that the - as I mentioned a couple times, I think the biggest consideration in our reserve right now is just the uncertainty and trying to make sure that we're capturing all of the scenarios in thinking about that and that is resulting in us having a really high level of qualitative reserves on top of our modeled risk. And so even in the current quarter where you're right our 2021 fourth quarter estimate of unemployment around 8% is consistent with where we were last quarter. During the full year we're expecting lower levels of unemployment than what we had forecasted or used in our allowance a quarter ago and so that coupled with we saw the passage at stimulus were both factors that drove the release this quarter. but we still have even with the positive trends we put on even more qualitative factors because it is just really hard to forecast where this thing is going to go and how it may play out and we're in the allowance we continue to expect that we will see the very low levels of credit come up and meet the high levels of unemployment that we see today and I really do believe that we will overtime see that in a play out exactly how that relationship is going to normalize and if it doesn't normalize then we're going to have allowance releases and they're going to come in overtime. But until we start to see kind of more evidence that relationship is going to stay kind of at the levels where it is, I would expect that we're going to continue to reserve against a variety of downside scenarios.

[Jeff Norris, Senior Vice President, Global Finance]

Next question please.

[Operator]

We'll take the final question from Bob Napoli, please go ahead.

[Bob Napoli, William Blair]

And congratulations Scott look forward to hearing where you're headed.

[Scott Blackley, Chief Financial Officer]

Thanks Bob.

[Bob Napoli, William Blair]

Rich question on the just on the tech investment. The amount [indiscernible] if you can quantify at all for us maybe Scott the amount you're spending on technology versus several years ago, the growth in those investment and then maybe more importantly what do you feel differentiate you the most from other banks or fintechs with the changes or the upgrades in the technology and what's on the roadmap for further upgrades?

[Rich Fairbank, Chairman and Chief Executive Officer]

Okay, Bob. We don't breakout our tech investment but Capital One I think relative to banks on our side invest quite a bit in technology then my sense is of what other banks our size invest in, by the way, our primary competitive set is the big national banks and they check [indiscernible] tech budgets, so we certainly know also what we're up against. But let me just talk about again so philosophically what we've done. I think what most banks - I think companies in general when they're looking everybody know they got to invest more in technology and even as recently this quarter so companies said they're increasing their technology spend and I almost can't image the companies not feeling the need to do that as they face and accelerating digital revolution.

A thing that very common that companies do is, they make their biggest investments at the top of the tech stack. Meaning the things that are closest to the consumer investing in apps, investing in experiences for customers or associates for things that can more directly and immediately manifest in improvements and there is no, it's a very natural thing to do. Capital One has taken the unlikely journey, a little bit the road less traveled by to have our investment primarily at the bottom of the tech stack. So we're talking down at courses [indiscernible] and data and addressing vendor products and their role in this things bringing lots of thing in house, bringing a lot of engineering in house and it's been a journey that and you know this Bob and other investors on this call know that they would often say I know you're investing a lot, you're talking about it, but I can't see it because the problem is if you were to improve one system in the core systems, it doesn't really manifest itself in something that the outside world can see and this is really the essence of the challenge that we and our investors who have patiently owned our stock this journey that we're going through.

What we so deeply believe that at the outset of this journey and absolutely believe now that in order to compete with the tech companies in order to be a modern company and be able to go where banking is going to go, one really needs a modern tech stacks and that's a hard thing for startup bank to build. It's really hard thing for a legacy company to build and I think it was little easier for Capital One only that we were in a sense an original fintech three decades ago and so maybe don't have as much legacy as modest companies do. But it's still been a very significant journey. But I think when you say, how do we compare ourselves with other companies? I think other companies have I think there's a lot of good things other companies go are doing. They have really nice apps for their customers and everything else. But I think more and more Capital One is built like a tech company and like some of the leading tech companies that are changing the world and I think it was the little bit of shock to some folks when one day we said by the way we're getting entirely out of data centers and into the cloud and that's the kind of thing that could only come as a product of many years of the and it's not an accident that almost no big enterprise legacy companies have in fact made that journey.

Now where does - but what it puts in a position to do, is that is to drive for opportunities and act more and more like tech company and be able to be more dynamic faster to the market, create, offer better products, better customer experience and that give us the opportunity to transform how we work, really how a bank works on the inside from risk management, fraud, credit, compliance, operational execution and enables us to build our national bank and lean into that and enables us to win some partnerships that in head to head competition. I feel that we won by virtue of some of the tech capabilities we had and it enables to achieve better economics and not so much in saving on - well partly tech on tech cost like massive vendor cost that we can say. But at the same time we're investing a lot in tech so the big in that savings is not so much tech cost as it is the opportunity to reduce analog cost overtime.

So that's kind of long answer to your question. But when we looked out and said overtime, we are going to want to do that or we're going to do [indiscernible] this thing over there or we're going to do that thing over there. In each case we saw a shared path of investment and transformation that we would need to do and we're well down that path. We're not done in many ways it's a lifelong journey but I think our opportunities are increasing as we get further down this path.

[Bob Napoli, William Blair]

Thank you really appreciate the detailed answer.

[Jeff Norris, Senior Vice President, Global Finance]

Thank you everybody for joining this conference call. I'd like to thank everybody for joining us on this conference call today. Thank you for your continued interest in Capital One and remember that the Investor Relations team will be here this evening to answer any further questions you may have. Have a good evening, everyone.

[Operator]

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