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

Okay. All right. Sorry for the delay, everyone, and thanks for joining us. We're very pleased to have with us Capital One. Capital One has been a leader in the credit card business, a leader in the auto finance business, one of the largest digital banks in the country, if not in fact the largest. And we're obviously at a very interesting time, and we're very pleased to have with us founder, Rich Fairbank, CEO; along with Jeff Norris, the Head of Investor Relations and Strategic Planning. And so we're going to do a fireside chat. We're going to go through some questions. And first, Rich and Jeff, thanks very much for joining us today. And we're happy to be here in person with you.

So maybe to start off, can you talk about the plans for the card book in 2022? How do you see the competitive environment? How do you see Capital One's growth opportunities? What are the areas that are going to be the biggest impact there?

Great. Well, thank you, Moshe. It's great to be here. I don't know how many years straight we've been doing this conference. But welcome, everyone, and to those listening in on the webcast. So we, as you can see from our metrics, are posting some pretty strong growth right now. I think in fourth quarter, as I recall, I think our purchase volume growth in the card business was around 29%, and loan growth around 10%. And then the January numbers we just posted yesterday showed the year-over-year loan growth going up to 13%. So it's a pretty good time for growth at Capital One. And this -- what's driving this, certainly, a very strong consumer environment. The consumer is in as strong a place as I can remember in the decades of doing this, obviously, having had a chance in the last couple of months -- a couple of years to solidify -- on average, solidify their balance sheet. And so consumer is healthy. Consumer demand is quite solid. At Capital One, we are finding continuing growth opportunities that stand on the shoulders of the technology transformation that we have been doing for many years. So that is, I think, powering some unique opportunities for Capital One across our businesses. Also, our -- for years, we have grown accounts, and we have a lot of a bit of a coiled spring of credit line growth opportunity we have, which we are taking some opportunity there as well. The big thing we have our eye on is the competitive environment. And this positive environment is -- all of us, competitors see a similar environment. And it doesn't surprise me that others are leaning into their growth opportunities as well. And I've been around this business long enough to know that as important as how the consumer is doing, credit quality is driven also by the competitive environment. And we do see, on the marketing side, direct mail volumes are higher than they were before the pandemic. Companies are increasing their media spend. And most CEOs in the card business have talked about increasing their marketing spend. So that's not lost on us. Also the environment -- a thing that concerns me about an environment as positive as this, from a credit point of view, is the potential to overheat it in terms of underwriting. And particularly, I think I have a cautious eye on the fintechs, who -- by definition, the young fintechs don't have the years of experience in the credit cycle. If they build models, those models are looking into the rearview mirror of the best credit environment that we've ever had. And with all the money fueling the fintechs and some of the limitations of what they're going to be able to see in their data, I do worry about some unnatural actions happening over time in that space. So pulling way up, we feel that this is a good time to continue to originate accounts at Capital One. We have a very watchful eye on the competition. We are assuming normalization of credit, and some worsening related to the competitive environment will happen. But even in the context of those assumptions, we still see good growth opportunities for us to pursue at this point.

And as you kind of outlined, right -- I mean there are -- you talked about both kind of at the higher end, where you've launched several new products. And at the lower end, you talked about some of the credit line increases. So are there any specific places within the environment that you do feel competition is so intense that you are pulling back in any of the verticals?

No. We are -- we continue to see pretty good opportunities across the board. Let me make a comment about the high end and the low end for a second. On the high end of the market, obviously, there's a lot of competitive intensity you see in the heavy spender market, particularly around rewards and early spend bonuses and things like that. But I still believe that's all in the -- within the normal range of natural competition there, and we still see a good opportunity there. And the fintech competition and some of those other concerns I mentioned would be more relevant for the middle and the lower end of the market. And there, we would just watch very carefully the signs of adverse selection or follow-on impacts from choices that fintechs may be making. Some of them, by the way, are not -- they're hard to observe because many fintechs do not currently report to the credit bureaus. And so that just adds a little more to the -- some of the uncertainty in the environment. But all in all, as a calibration for having been in this for over 3 decades, I feel good about our opportunities to originate new accounts. That's why we're leaning into marketing, and we're going to monitor carefully the environment.

Got you. The -- one of the major launches that you had is the Venture X card aimed at the upscale travel-oriented segment, an annual fee product at the -- in the higher end of the annual fee range and a lot of rewards and benefits. Can you talk a little bit about how you think about the profitability of that product? Is it the product? Is it the customer? Like what is it that the Capital One will get out of that launch?

So let me talk just a little bit about the Venture X and the context of our journey at Capital One. We have, for years, been on a continuing quest to win at the top of the market. And what it takes to win at the top of the market is a lot more than just a nice product. In fact, what we have known for years and have gone all-in, in the pursuit of this is that one needs a comprehensive set of capabilities that include really high-end servicing products that really speak to and are relevant to people at the very high end of the marketplace. A digital experience that would be right at the top of the market and capabilities like fraud management that would enable the card to, as close as possible, as close as we could get to the goal of the card always works. And so -- and then the other part of that is building a national brand. And not just a national brand of being recognized, not even just a brand of having being respected and with loyal customers, but a brand that would be consistent to -- and appealing at the very top of the market. So that's been our journey for a number of years. We've seen some players dabble in the space or they come up with a product that they launch. But I just want to share with you, in our case, it's been a very sustained quest. So Venture has been at -- one of our flagship products at the forefront of that quest, and we've had a lot of success there. And Venture X stands on the shoulders of Venture and steps even higher into new spaces like lounges. Capital One just opened our first lounge in Dallas late last year. We just, along with the Venture X launch, launched our Travel portal, which I think has a very positive customer experience. So all of this is a continuation of a strategy that's been going on for many years. Let me talk a little bit about returns in this business. This is a very competitive business. It costs a lot of money to get accounts. When you get the accounts, if they really are heavy spending accounts, they tend to be very long-lasting, high attrition, first-in-wallet and powered by low credit losses and strong interchange and the ability to also have ancillary products and relationships along the way. We have found that this franchise is very economically attractive. But we found always along the way, you have to dig a hole on the way to those returns with each investment that we make. But we've got a lot of momentum.

Another area of your portfolio has been partnerships and private label and not so many co-brand, but co-brand type cards. At times, you've talked about that as an auction market that you were less favorably disposed towards. Where does that sit in your thought process now?

I think pound-for-pound, the greatest franchise thing to have is a branded card product, where it is entirely our own branded relationship. There aren't limitations in terms of the breadth of relationship we can build and so on. The co-brand and private label marketplace is something like 1/3 of the overall credit card market. So it's a big market. And for any credit card company that chooses to go there, it does give customer access in ways that you just wouldn't get in the normal branded business. One has to have the eyes open for what comes along with the territory. There's 2 things that come along with the territory that aren't there in the branded card marketplace. One is that, of course, the economics are shared with the partner. So now you're taking a pie that, in many ways, is about the same size and sharing it. And secondly, this is an auction-driven marketplace in the sense that every single-digit number of years, typically, these partnerships renew. And some of them can be going to a heavy kind of price-based auction marketplace. And it can feel like you're showing up and having to buy yourself from yourself in order to continue. So with our eyes wide open about this, we still believe, because of the ability to access customers through these channels, we have believed that this is a very good opportunity for Capital One. We are very selective about the partners that we choose, focusing more on partners who are really trying to leverage these products to build a franchise instead of, on the other end of the continuum, partners for whom the goal is to have private label or co-brand cards as a means of making money. And those are 2 very different things. And the things that come with the partnerships and the nature of the relationships with the customers are different in those 2 dimensions as well as the credit opportunities in each case. There are 2 things that Capital One brings to the table that, I think, really helps us avoid the sort of sheer auction marketplace. One of them is the technology that we bring, having now a modern tech stack. And when a partner comes, a partner gets to basically ride on the back and experience and have their customers be a part of the tech journey that Capital One has been on. And that has a lot of appeal. And by the way, that appeal has really escalated in our partnership conversations because it was only about a year ago that we finished the final conversion of our partnership tech infrastructure on to our branded card infrastructure. And that's been a visible from the moon, given a visible from the moon to us sitting on propulsion in the kind of opportunities, the conversations and so on. The second thing is Capital One's ability to underwrite across the whole credit spectrum, which itself has also been propelled by our tech transformation. So those are some of the extra benefits and a little bit the brand and marketing side as well. So that we go into these partnerships with our eyes wide open of the limitations, but looking to team up with partners, who just as much as we do, want to build a long-term franchise.

Maybe shift gears a little into the auto finance business. It's a business that you're actually -- your growth rate there has been pretty high relative to the industry consistently so. And you've kind of managed very -- I would say managed well in terms of having full spectrum lending there as well. And you mentioned on the fourth quarter call that you're now shifting a little more towards the higher end of the credit spectrum rather than the lower. So maybe talk to us a little bit about, number one, what is it that really got you that ability to achieve that growth? And then what are you seeing from the various segments there?

So in the auto business, as we are in the credit card business, we are a pretty broad spectrum lender. So we go all the way to the top of the market as well as the higher end of subprime. To your mix point, when we in our call said the mix recently has been more at the higher end, that's not a strategy change. That's more just taking what the market gives us. And we've just had a little bit extra opportunity there, but there's really no change in strategy. Let me talk just a little bit about our strategy in the auto business. I go back to the founding day, and I used the word founding because we -- my mic still working there? So we, of course, founded our company on with -- credit card was the first business that we built at Capital One. And then we looked around and we said, the auto business, that has tremendous similarities to the card business. It's a -- while the industry back then wasn't sort of using these techniques, it's a very sophisticated information-based business that's about not only consumer credit, which is the business we now -- by then, we were already in, but also very much about the valuation of cars. And ultimately, we felt we could leverage our information-based strategy to be able to really effectively underwrite and thereby bring better deals to consumers and to dealers. The other big component of this strategy, though, is the preeminent importance of dealer relationships. Because the difference in having a dealer relationship versus just having sophisticated underwriting is the dealer gets to choose which business they're sending different directions. So positive or negative selection is a really big factor there. So with that as the strategy, we spent years building that. And the thing, Moshe, that's really, I think, propelled us lately is on the shoulders of our technology transformation. We've been able to bring some really unique technology into the -- for consumers and dealers in the car-buying process. And what we're really talking about here is digital -- the ability to digitally preapprove people for loans. And in fact -- well, really to prequalify them without putting a ding on their credit bureau report, which is a very kind of unique capability that we have at Capital One. And so as you maybe see on TV the ads for Auto Navigator, essentially what we're saying is, instead of going into a dealership and spending a long time and wondering what financing and what cars you're going to qualify for, we created the capability not just to guess, but in fact to actually know down to the exact car on any lot in America, we can underwrite in a fraction of a second. And consumers will know what -- if they chose to go with Capital One, what that deal would be. And this has generated a lot of traction on the consumer side and a lot of traction on the dealer side. So while it's hard to measure these effects, I think, Moshe, this has put wind at our back in this business. And of course, then the whole industry has also had some very unique things going on that have kind of propelled the returns and the growth in the auto business.

Just -- I know that at this time, you don't disclose the results or the KPIs of that product. What would it take to actually -- for that to be something you would talk about publicly? Is it passage of time? Is it a certain scale and size? Like how do you think about at what point you'll start talking about that more publicly?

I think, Moshe, you know me long enough that we tend not to give out the details of the traction we're getting with specific flagship products of ours. But it's certainly a good example, though -- and I encourage any investor to really go take a look and go. If you want to buy a car or just any way if you're just browsing, go take a look at Auto Navigator. And you will find an inventory of pretty much all the cars all over America. You can customize exactly what you want, click a few buttons and put a little bit of information and find exactly what you are financing for that exact car at that exact dealership would be.

Okay. So one of the big topics this quarter with financial companies has been expenses. It's a topic that you did highlight 3 months earlier. It's something that you were seeing as a trend. We talked already a little bit about the marketing side. So when you think about the -- just kind of on an ex marketing basis and you think about the investments that you are making, can you talk a little bit -- is there any way to think about the time frame? Some of these things, I'm sure, will achieve efficiencies after some amount of time. So what's the time frame for this? And when can we start seeing the benefits to Capital One?

When a lot of people and a lot of companies think about technology investment, a lot of times what they're doing is investing at the top of the tech stack. So they're saying, we could invest in this capability, we could invest in this product. And it's a discrete thing with a beginning, middle and end to it. The reality of where the world has gone with technology, led by the 5 biggest tech companies, is there is a revolution in the capability of what modern technology and a company can do. And it's -- other than their unique market position, the fact is that a lot of their success is driven by the tech stack that they sit on. Here's the challenge for corporate America broadly. Unless you're born in the cloud, meaning really basically a company built in the last decade, you're going to have legacy technology. You're not going to be sitting on a modern tech stack. And you can spend a lot of time building applications on top of the tech stack. You can build abstraction layers to ease the burden of dealing with the old technology lower in the tech stack. But the reality we came to fully embrace 10 years ago was that Capital One, even though we ourselves we're an original fintech, we leverage technology and information to build a strategy that was pioneering in so many ways. We realized that a decade ago that where winning is, we need a modern tech stack. And to do that, we've got to rebuild it from the bottom of the tech stack up. And that requires a lot of investment. Moshe, almost any one part of it we invested in, it's hard to see the return on that investment because if you're, let's say, going to the cloud, going to the cloud is a great thing. But by the way, the applications on which the company is built, each application also needs to be modern, built cloud-native and modern. The data ecosystem that you're in needs to be able to handle big data in real time. And so this is basically a strategic quest that we have gone on for 10 years that -- where we just have so deeply believed, where winning is, requires a modern tech stack. The good news is we have a modern tech stack. I mean we will continue to modernize probably forever. But in a sense, Capital One has a modern tech stack. And we're fully in the cloud, 100%, which very few legacy companies can say. And the -- we see growing opportunities not only to create products and new market opportunities, but really the opportunity to transform how we work, transform how risk management works at Capital One, to transform how credit works, how fraud works, how marketing works, how operations. And these are all things that aren't really visible to investors, but every improvement here or there makes its way into our being faster to market or better managed, better risk-managed or ultimately creating a better experience for the customer. And that's why, little-by-little, we are finding our opportunities accelerating on the other side of this journey.

And when you look out at the -- your deposit franchise, it's probably unique in that it's probably -- it's the largest one that's a blend, a true blend of branch-based and an Internet bank and a digital bank. How do you think about the capabilities of the digital bank? And are you at a point where you're -- and you talked about fintech competition in your lending businesses. How do you think about it on the deposit side of the house?

Well, Moshe, that's a really great question. If you look out there, there are, first of all, all the traditional banks. And the traditional banks, the good news is they have lots of customers, checking account customers. They're a wonderful franchise and enduring franchise to have. The challenge for banks, of course, is that they've got a lot of old-school technology, and people are using branches less and less. But they're always going to be there. Then you see a number of players that have built national digital banks, but they've been savings-oriented. And there's -- there are 2 very powerful reasons the banks that have built sort of national banks or as part of financial institutions that they go after the savings is for one thing, it's the most efficient way to build funding. And so it's been an absolutely great funding model. But secondly also, it's not a big lift for a consumer who has got a checking account at one of the major banks to put some savings. It's a couple of clicks, and you can put savings in a bank like Capital One or the other national savings-oriented bank. Here's the thing that's really quite unique for Capital One. We are the one large bank that's on a path, and we're already a national bank. But we're on a path to continue to build a bigger and bigger national bank without feeling the need to go buy banks and merge as the way to get there and without just a focus on the savings business. In other words, we're really investing in that hardest part of the business, which is the checking business. But to do that, it's a lot more than putting an ad on TV about a checking product. When one looks at what people can do in a branch, it's like 100 things that happen in a branch. And Capital One has systematically gone through and digitized just about everything that you can do in a branch. We haven't figured out a way to digitize the safe deposit box yet. So that's going to always be a gap in our offerings, but -- so that on the shoulders of being a physical retail bank in 20% of the nation. We are building a full-service national bank. We're also adding some physical distribution in the form of Cafés. And we're building what I like to think of as the bank of the future, which is full-service, some physical capability and presence and very advanced digital capabilities. And one other thing that with this bone structure, a key part of it is we're also able to offer some very attractive pricing. And that helps the flywheel turn.

Maybe in the time we have left, you talked at the very beginning a fair bit about competition from fintechs on the lending side. Are there any -- and in the past, you haven't -- I mean you've bought some small fintech-type companies. But are there any capabilities actually that you are looking to add that you would -- for which you would think about M&A even on the kind of the bolt-on side?

So probably like every company, we are always actively looking at acquisition opportunities. I think most banks are putting -- other than the already endgame national players, most regional banks, I think, are putting a lot of energy into thinking about other banks that we could buy. And that's not a quest that we are on, per the national banking strategy, which is organic that I just described to you. Where we are putting our energy is looking at acquisitions on the tech side, which is really 2 different parts of that. One is fintechs, and the other is actually tech companies for certain capabilities that they have. We invest in -- we've invested in almost at this point -- minority investments in countless tech companies and fintechs. We were an early investor and, I think for quite a while, Snowflake's largest customer. And that's an example of seeing tech that we really like and joining forces with some of these leading emerging companies. And then we're also looking for companies to buy. A key thing, a key advantage Capital One has is we have a modern tech stack. Pretty much all of these tech companies and all the fintechs, they're already born on the cloud so that when we show up and talk about the possibilities, we are basically sitting there with very compatible technology, a very similar heritage since we come from having been an original fintech, a tech talent model where our tech folks are finishing the sentences of the companies we're looking at. So that's -- I think there's promise there. You haven't seen a lot of acquisitions out of Capital One for one very important reason. There is a thing called the celestial valuations of a lot of these folks. So we're patient investors. We -- but I think -- well, in our future, will continue to be fintech and sometimes tech company acquisitions, probably mostly on the smaller side. But when we look at the ones that we have done, there's a pretty high success rate, not only in terms of building the business that we buy, but in terms of, in a number of cases, that hardest to do thing, which is retain the talent and have them coming from the world of venture capital and everything actually believe that inside Capital One, there's a real opportunity for your business and for you personally.

Well, good. With that -- we've got many more questions. But with that, we're actually out of time. So please join me in thanking Rich and Jeff for being with us today.

Thank you. Moshe, thank you. Really appreciate it.