Capital One Financial Corporation (COF) Earnings Call Transcript & Summary

So very glad to -- we're very glad to have Capital One with us this afternoon. As everyone knows, Capital One has been a leader in the credit card, private label credit card, auto finance business, digital banking. And it's basically made their strategy to be growing when the industry is a little -- has some question marks and slowing down when the industry has kind of been a little more aggressive. Credit card business is something that's -- they've seen a little bit of a challenge for organic growth. And I think something that recent acquisitions and the new partnership with Walmart could bring that back to or ahead of industry levels over the coming months and years, and it's been accelerating nicely and showing very, very strong metrics in the auto finance business as well. We've got the company's founder, Rich Fairbank, with us, as well as Jeff Norris who's Senior Vice President of Strategy and Investor Relations. So the format will be a fireside chat, so we've got some questions. And we also -- if you'd like to ask questions, let us know, and we'll bring them into the mix.

So I guess maybe what we could start with is -- in the credit card industry, I mean, Capital One, maybe roughly 1.5 years ago, really started investing in marketing dollars, a lot more significantly and it's kind of continued to that, launched a bunch of products. Talk to us about what that's done for Capital One and what that might mean for the portfolio in this year and perhaps next?

So first of all, good afternoon, everyone, and for those listening on the webcast. And thank you, Moshe. I don't know how many years straight now I've been doing this with you, but...

Many.

Many. I'll leave it at that. But -- so we have -- if you actually look back, probably from the time somewhere around 2010, maybe or 2009, when we launched the Venture card. Capital One has been very focused on rather than sort of generic card marketing and more mass market customer base, we've had a very conscious strategy of specifically sub-branded cards stretching up and going after the top of the market, building a brand and doing all the things associated with that with respect to the customers' experience. And so what you're referring to in the last couple of years is a continuation of a strategy that's been there for a decade. And the increase that we've had in marketing is really a manifestation of the continued traction that we have in the business. And while what you see on TV or the products that have very strong reward propositions. And another thing that characterizes what Capital One does is profound simplicity in the structure of the product compared to a lot of complexity that exists in the industry. But also along the way, we've invested very heavily in the customer experience, the servicing experience. The digital experience, we've also built out a different kind of brand personality. We're building cafés as showrooms of Capital One. And it's all part of the journey of continuing to move right towards the top of the market and to build a brand that not only helps sell products at the top of the market, but in fact, lifts the entire franchise. So we've been investing in this for years, and we continue to see growing traction. And the strength of our originations have encouraged us to step out and even increase our marketing. And so Moshe, we're on a pretty extended run of high account originations and a lot of success with our strategy. The -- let me talk for a second about how this translates into growth. At the top of the market, of course, it's a purchase volume spender business. And you can see the metrics that have been at the top or near the top of the market with respect to purchase volume growth for years for Capital One, and we continue to see a lot of traction with our spenders. The -- it has also been the case for our more mass marketed originations that we have originated with relatively low credit lines. And as we see a validation of 1 customer at a time and see a validation 1 vintage at a time with respect to our underwriting, then we open up the lines and grow with our customers. And so you tend to see loan growth coming on a lag basis relative to account growth. And so after a period, a couple of years ago, where we were near the bottom of the league tables in growth where we were holding back on some of the initial line sizes and the credit lines now powered by continuing strong account origination and the unleashing of some of these credit lines a little bit more. This has paved the way for stronger growth in our branded card business. And hopefully, those trends will continue. Along the way, we also have done the deal with Walmart that has helped the growth numbers.

In terms of just following up on the mass market end of the spectrum because I think that's probably where the bigger revenue growth opportunity would be. Maybe if you could just drill down a little bit more? And clearly, I think if that process started in -- somewhere in the second half of 2018, how should we see it evolve over this year and next, I mean, assuming the economy is in reasonably good shape? And maybe you could also just comment on what you are seeing from the performance of those customers as you've started that process of increasing the credit line.

I think you're already starting to see. What you see is, I think, how it will play out that we will continue to -- as long as we see the validation of the success of the recent vintages from a credit point of view, we will continue to open up lines to these customers. And I think the prospects are good for our branded card business to continue to see some nice growth opportunities.

Okay. And you mentioned Walmart. You struck a really attractive deal on the back book for Walmart. Now you're trying to grow the new portfolio. Just talk about the attributes that you're seeking and what that should look like over time.

So we are really pleased with our -- the opportunity to have Walmart as a partner. They have been a very embracing and engaging partner with us, and we've, together, created an attractive product. It's very oriented toward the digital side of their business, which, of course, they are putting the greatest emphasis on growing. So it has the highest rewards for online and purchases plus purchases in the store on the Walmart app. So the first thing I would say is there's a very strong digital lean to where their focus is. And we are working with them to help try to really increase the salience across all the Walmart real estate and all the points of interaction to help get the story out there about the really high value of this product and the benefit of this relationship. So it's still early days with them, but we look forward to building that partnership.

But as the positioning, it's positioned more like -- is it positioned more like a co-brand card, a little bit more upscale? Or is it more in that private-label room? How do you think about that?

Well, we -- the business that we got from Walmart has both private label and co-brand. But what we're talking about here is building the co-brand side of the business and trying to leverage the power of their brand plus the Capital One brand. If you look at the Walmart card, there's a -- Capital One's pretty salient on that card. And in fact, you see on television that we are sort of co-marketing together, and there's a lot of untapped potential upmarket for Walmart. There are many upmarket customers who shop there. And I think one thing that we hope in this journey is they can build deeper credit card relationships with that part of the market as well.

Talk about your thoughts on your more pure private label end of the market. Over the course, really, of the last 10 years, you've essentially entered a number of those contracts. Maybe talk about your thoughts about that business going forward?

So the private-label business, I think, is a very natural sibling business for a big card player like Capital One, and we are putting quite a bit of energy into that business. The thing I would say about the private-label business, specifically, but really all partnership businesses, in general, if I compare it to the branded credit card business, the branded credit card business, you book one customer at a time and it's our own brand and we have them forever. As we know, the partnership business is an auction business and the auction markets have it slow with respect to how intensely frothy they are. So we have our sight set on being a very successful player in the high end of the private-label and co-brand business, but it also takes a lot of discipline to not just chase the market clearing price that sometimes these deals require. So we have no specific growth goals, no Manifest Destiny of what we have to do. Very selectively, we're building partnerships with some of the best brands in America and building partnerships that are designed at both parties when our customers succeed.

Maybe just to kind of give a little bit of a backdrop from a credit perspective like can you talk about what you're seeing from your customers? You alluded to the fact that the mass market performance has been good and allowed you to continue with credit line increases. Maybe drill down on that a little more and maybe what sort of things you'd be watching for, given the current environment and concerns that investors have?

The -- our credit performance is very strong right now. If I didn't read the news every day, I would have -- nothing I see internally would feel quite like the news that I read every day. With our consumers, we see very stable behavior. All the credit metrics continue to be strong, and they have been this way for quite some time. But included in that is, of course, the delinquency rates and the roll rates. But I'd also point at a metric that doesn't get a lot of airtime out there, which is payment rates. So what percent of the balance due out there are customers paying each month, and payment rates have been creeping up -- for Capital One, creeping up a little bit but steadily over the last few years. It's actually put a little bit of damper on growth because when you have a small percentage change in the payment rate on the gigantic portfolio like Capital One, it can impact the growth. But what I think it's a manifestation of is the very same thing that's driving the superior credit. So almost every quarter now, when we keep looking at our data, we are struck by how high the payment rates are and how, frankly, low the delinquencies and charge-offs are. And I think it paints a picture of a stable, rational, relatively confident consumer. I am struck to be this many years into a recession, and in fact, I guess it's really the longest recovery in history. But to be this far in it and see the strength of the consumer and also the general rationality of a marketplace like the credit card industry, that is why I'm kind of surprised to see as much opportunity as there is this deep into the market. But certainly speaks well for the consumer.

So a couple of days ago, one of your large competitors who's both a very large bank and a very large credit card player said that they have found that the best product to get a bank customer relationship has been an unsecured lending product, which for them is basically credit card. Maybe we could transition a little, let's talk about your efforts in the digital bank. And because you've got a very large credit card portfolio, people have sort of thought about it historically in the opposite direction, how you're cross-selling your bank customers. But talk about how that digital bank is marketed and how you see that evolving in terms of the relationships that it can generate over the next several years.

So Capital One's journey to be one of the nation's largest banks has certainly been a different journey for most banks. So most banks started as retail and commercial banks and then they, through acquisitions, got bigger and bigger. And then over time, some of them added a credit card business. Obviously, Capital One started just as a credit card player. But I want to reflect on the fact that it's not an accident in the founding of this company that we chose credit cards. And -- we looked at credit cards and said, they are -- there are so many -- first of all, they're on the forefront of a number of extraordinary macro trends and I'm now speaking of like more than 2.5 decades ago, and many of the things I'm going to say are still true. But it's on the forefront of the payments revolution. It is -- I said it back then and still is the case, but back then, it was the most direct marketed product in the world, which meant that it's at the forefront of the direct marketing revolution. And in the founding idea of the company was maybe unbeknownst to industry, that -- the credit card is going to be at the forefront of the information-based analytical revolution inside banking as well. So riding those trends has been a great thing for building a business. But the other thing is if you stand back and look at where do customers spend their time and what products are at the center of customers' financial lives. In the old days, it would always take you right to the checking account and the core banking relationship. And because of the evolution of how payments have worked, you really have a lot of the core salience in a customer's -- in a consumer's life revolves around the spending relationship, which is on a credit card and really not so much about a bank product. So that has -- and to tie back to my earlier comment of our journey to the top of the market and our emphasis on the spender side of the business, this is the tip of the spear for Capital One to help build a banking franchise because we came as if -- we came from the other end of the business model that all banks have. Our journey is now how do we build out a broad-based national bank. And my answer starts with, well, we have one of the biggest spender franchises in America. And spending is right there at the heart of consumers' financial lives. The other part of our journey, of course, is we're also at the forefront of the technology revolution, and we've gone all in and have announced it later this year we're even going to be out of data centers. So what we are doing is taking some of the core strengths of Capital One, the credit card -- our credit card franchise, our increasingly upmarket brand and the tech transformation of the company. And rather than try to build a bank through 100 acquisitions and with branches on every corner, we're trying to sort of anticipate where the market's going and build the bank of the future and hope the world over time comes toward us. So that's why you see we have a very large direct bank, complements of our acquisition of ING Direct. We have very attractive products that are very attractive, competing against branch-based retail banks. But also, we're putting in thin physical distribution across the nation. Not being a purely direct bank. But really on the shoulders of a retail franchise we have in 20% of the nation, we're putting sort of these banks of the future, digital cafes in key metropolitan areas across the country, and finally, backing it up with strong national advertising. But what we're trying to do is to do something that no bank has done before, which is to build a national bank organically. Not through cobbling together acquisitions but really build it one customer at a time and by building the bank of the future and hoping the world beats a path there.