Capital One (NYSE: COF) - Q4 2024 Earnings Call

Thanks, Andrew, and good evening everyone. Slide 10 shows fourth quarter results in our credit card business. Credit card segment results are largely a function of our domestic card results and trends, which are shown on slide 11. In the fourth quarter, our domestic card business delivered another quarter of steady top-line growth, strong margins, and stable credit. Year-over-year purchase volume growth for the quarter was 7%. Ending loan balances increased $8 billion, or about 5% year-over-year. Average loans increased about 6%, and fourth quarter revenue was up 9% from the fourth quarter of 2023, driven by the growth in purchase volume and loans. Revenue margin for the quarter increased 55 basis points from the prior year quarter to 18.6%, largely driven by the impact of the end of the Walmart revenue sharing agreement. The charge-off rate for the quarter was 6.06%. The impact of the end of the Walmart loss sharing agreement increased the fourth quarter charge-off rate by roughly 40 basis points. Excluding this impact, the charge-off rate for the quarter would have been 5.66%, up 31 basis points year-over-year. And after 20 consecutive months of second derivative improvement, the 30-plus delinquency rate crossed into actual year-over-year improvement. The 30-plus delinquency rate at the end of December was 4.53%, down eight basis points from the prior year. As a reminder, the end of the Walmart loss sharing agreement did not have a meaningful impact on delinquency rate. On a sequential quarter basis, the charge-off rate was up 45 basis points. The 30-plus delinquency rate was flat compared to the linked quarter. Domestic card non-interest expense was up 13.3% compared to the fourth quarter of 2023. Operating expense and marketing both increased year-over-year. Total company marketing expense in the quarter was $1.4 billion, up 10% year-over-year. Our choices in domestic card are the biggest driver of total company marketing. We continue to see compelling growth opportunities in our domestic card business. Our marketing continues to deliver strong new account growth across the domestic card business. Compared to the fourth quarter of 2023, domestic card marketing in the quarter included higher media spend and increased investment in premium benefits and differentiated customer experiences like our travel portal, airport lounges, and Capital One Shopping. Slide 12 shows fourth quarter results in our consumer banking business. Auto originations were up 53% from the prior year quarter. A portion of this growth can be attributed to overall market growth, while the remainder is the result of our strong position to pursue resilient growth in the current marketplace. As a reminder, our choices to tighten credit and pull back in anticipation of credit score inflation and declining vehicle values were still in effect in the fourth quarter of 2023, resulting in relatively low originations. These choices also drove strong and stable credit performance that positioned us to lean into current marketplace opportunities and return to originations growth in 2024. With four consecutive quarters of originations growth in 2024, consumer banking loan balances returned to growth in the fourth quarter. Ending loans increased $2.7 billion, or about 4% year-over-year, and average loans were up 1%. On a linked quarter basis, ending loans were up 2% and average loans were up 1%. Compared to the year-ago quarter, ending consumer deposits grew about 7% and average consumer deposits were up about 8%. Consumer banking revenue for the quarter was up about 1% year-over-year. Growth in loans and deposits was partially offset by a higher year-over-year average deposit interest rate. Non-interest expense was up about 10% compared to the fourth quarter of 2023, driven largely by the unique fourth quarter items Andrew discussed, as well as increased auto originations and continued technology investments. The auto charge-off rate for the quarter was 2.32%, up 13 basis points year-over-year. The 30-plus delinquency rate was 5.95%, down 39 basis points year-over-year, largely as the result of our choice to tighten credit and pull back in 2022. Auto charge-offs have been strong and stable on a seasonally adjusted basis. Slide 13 shows fourth quarter results for our Commercial Banking business. Compared to the linked quarter, ending loan balances were essentially flat. Average loans were down about 1%. Both ending and average deposits were up about 4% from the linked quarter. Fourth quarter revenue was up 7% from the linked quarter, and non-interest expense was up by about 5%. The Commercial Banking annualized net charge-off rate for the fourth quarter increased four basis points from the sequential quarter to 0.26%. The commercial criticized performing loan rate was 6.35%, down 131 basis points compared to the linked quarter. The criticized nonperforming loan rate decreased 16 basis points to 1.39%. In closing, we continued to post strong and steady results in the fourth quarter. We delivered another quarter of top-line growth in domestic card loans, purchase volume, and revenue. In the auto business, we posted growth in originations for the fourth consecutive quarter and the return to year-over-year growth in loan balances. Consumer credit trends remain stable. Our full year operating efficiency ratio, net of adjustments, was 42.3%, consistent with our guidance of the low 42s, even after incurring $100 million in accelerated philanthropy contributions. And turning to the Discover acquisition, the shareholder votes are scheduled for February 18th, and we continue to work closely with the Federal Reserve, the OCC, and the Department of Justice as our applications continue to work their way through the regulatory approval process. We remain well positioned to complete the acquisition early in 2025, subject to regulatory and shareholder approval. Pulling way up, the acquisition of Discover is a singular opportunity. It will create a consumer banking and global payments platform with unique capabilities, modern technology, powerful brands, and a franchise of more than 100 million customers. It delivers compelling financial results and offers the potential to enhance competition and create significant value for merchants and customers. And now we'll be happy to answer your questions.

Hey, Ryan.

Thank you, Ryan. So let me start by just talking about the health of the consumer and then maybe I'll turn and talk about the credit performance at Capital One. So the US consumer continues to be a source of strength in the overall economy. The labor market remains strong. We saw signs of softening in the first half of 2024, but in the second half of the year, the unemployment rate has been stable and job creation data has shown renewed strength. Incomes are growing steadily in real terms as inflation settles out a bit. Consumer debt servicing burdens are stable near pre-pandemic levels. Consumers have higher bank account balances than before the pandemic. Now, of course, the circumstances of individual consumers and households are highly variable, so talking in averages doesn't always fully cover what's going on. We do see some pockets, as I've been saying for some time now, of pressure related to the cumulative effects of inflation and elevated interest rates among consumers whose incomes have not kept up with inflation or who have high debt servicing burdens. Of course, there's still some inflationary pressure, and longer-term interest rates strikingly have increased since the Fed started lowering rates in September. So we do see a bit of a disconnect between the average consumer and the folks closer to the margin. And you can see that, for example, in payment rates in our card business. On the one hand, card payment rates remain on average meaningfully above pre-pandemic levels, and this is true overall and within each of our major customer segments. On the other hand, the proportion of customers making just the minimum payment is also running somewhat above pre-pandemic levels, which is consistent with our current delinquencies running above pre-pandemic levels. Now, I should add that we're seeing this minimum payment effect across the credit spectrum. I'm not making a point here about the low end of the market or even about subprime. In fact, if anything, the lower end appears to be doing relatively better at the moment. So, just pulling up, I believe we're almost certainly still seeing some pandemic-related effects like delayed charge-offs from the period of unprecedented stimulus and forbearance in 2020, 2021, and 2022. This effect is impossible to isolate, but we can infer it from our own credit trends and industry credit trends over the past several years. But sort of pulling up on the consumer, I think consumers are in good shape compared to most historical benchmarks. There are pockets of pressure, as we've been saying for some time, that have to work their way through before credit loss levels can get down to pre-pandemic levels. But I think the consumer story is very consistent with what I've been saying for a number of quarters, and it is very solid. So let me turn to Capital One credit. Over the course of 2024, our card delinquencies have moved in line with normal seasonality, with losses following about a quarter behind. As a reminder, earlier this year we flagged that changes in the level and timing of tax refunds due to tax law changes were probably changing seasonal credit patterns in our card business. We derived new seasonality benchmarks for card delinquencies based on post-pandemic performance, and those benchmarks have less amplitude in both directions than in the past. So we've now had a full year to look at what we were hypothesizing as the new seasonality benchmark. And as we now look at the whole year, this experience is very confirmatory, and we very much believe that we've got the benchmark right. And when we first saw delinquencies settling out, it is clear that for really the whole year now we've been calling stabilization. We've not been declaring a peak or declaring that credit would improve from here. But we can now look at the whole year and see a really nice stabilization. In the fourth quarter, and again you saw this in the monthly data we just reported, we saw our delinquencies improve on a seasonally adjusted basis in the quarter for the first time since normalization began. And they ended the year slightly lower on a year-over-year basis. So that's certainly an encouraging sign. Looking ahead, we're not giving guidance on future credit, but over time there are a number of forces that play out. Our recoveries inventory will continue to rebuild, and that should be a gradual tailwind to our losses over time, all else equal. Still, high interest rates will probably remain a source of pressure for some consumers, especially those with higher debt servicing burdens. And there still is, we believe, the phenomenon of delayed charge-offs. And of course, this effect is hard to measure and certainly hard to forecast, but over time it should play through. But how long it plays out is just a matter of speculation. I think we will eventually get back to the place where traditional labor market indicators are the main drivers of change in consumer credit, but that will still take some time. And finally, as we move into the new year, we'll keep an eye on the level and timing of tax refunds since we know these can materially affect seasonal movements in card credit.

So, we look forward to the completion of our deal and actually getting inside the financials and the performance and all the details of the businesses at this rather remarkable company, Discover. But as we've talked about, when we look still from the outside, we see just a great opportunity there. And of course, we have said there are three areas that are going to need continued investment. When we think about virtually anything that relates to all the strategic upside of this Discover deal, all roads lead through three areas, kind of obvious areas of continued investment. The first, of course, is compliance and risk management. Discover has really been leaning into that, and we are doing everything we can to prepare to continue to lean into that. We'll do whatever it takes on that front. Obviously, that's an investment. The second is network acceptance. We've talked about how struck we were to find out and confirm just how good the acceptance is in the United States for Discover. You can see in fact they've been putting some ads on TV touting that, and it's a very good story. Internationally, they've been investing there and focusing on where their customers travel, and they've made a lot of progress there. When we look at our customer base at Capital One and where we would love to be over time in terms of being in a position to add more and more volume onto the Discover Network, we think an incredibly important objective is to increase the depth and breadth of acceptance internationally, sloping the work backwards from where our customers and Discover's customers travel. That's going to be a multi-year thing, a very important strategic imperative for us. And then the third one will be building the network brand. We plan to keep the name Discover for the network. We think it's a great brand, and we're really happy with the underlying reality of where acceptance is. We know there are challenges in terms of consumer perception relative to those realities, and we know also we need to build the international reality and then the brand perception that follows that. So those are the three strategic investment areas that we've been identifying really since the start of the deal. And back to your question about how that fits in relative to efficiency ratio, we of course on the Capital One side have had a long, decade-long journey of continuing to improve operating efficiency ratio. And it's striking that that improvement has come even as we have continued to really ramp up investment in technology. Now, the way that paradox works is that we are also investing more in technology, and at the same time getting all the benefits on the efficiency side, both in terms of growth and in terms of cost, that come from such an investment in technology. So the engine that drives operating efficiency ratio strategically will continue at Capital One, and it should continue with the combined institution as well. Now, you ask, will the big three investment areas that we talk about affect the operating efficiency ratio? I think we always at Capital One have strategic imperatives that we're investing in. I think the overall picture of how Capital One's tech journey helps pay investors, one of the important ways investors get paid is through operating efficiency improvement. I think that story stays strategically intact even as we have new investment areas because we'll also have new areas to capture synergy and growth opportunities and things that really wouldn't have been possible for either of our companies alone. So thanks for the question. Operating efficiency is a really important way that we create value for investors, and in the long run, we continue to really see increased opportunities there. Next question, please.

So, Terry, yes. Thank you for the question. Obviously, since the founding of the company, we've always had our microscopes out looking at delinquencies because they're the single best predictor of credit. Of all the metrics, there are many metrics we watch, but that certainly is at the top of the list. And it is a really important and certainly gratifying milestone to where finally the second derivative crossed the horizontal axis effectively. And we certainly note that milestone. The first thing I would say about as we all get our microscopes out to look at trends on a monthly basis is to just talk about seasonality itself. We don't publish a seasonality curve per se because there's no precise benchmark with which to do it, but we certainly like to guide our investors about how we think about that seasonality. For Capital One, it has tended to have more amplitude up and down over the course of a year than most other card players. And one might ask why is that? We believe that the biggest driver of seasonality, while there are several, the biggest driver of seasonality is tax refunds. And since we have a larger subprime book than most other players who really don't do subprime, those customers do tend to have higher seasonality in their credit performance than folks higher up market. So I think that's why Capital One has a greater seasonality effect. And for these customers in particular, tax refunds in terms of the monthly flow of cash can create something very nice that comes seasonally, and some of that makes its way into payments. Now, the changes in the tax withholding rules a few years ago led to fewer tax refunds and lower average refund payments, and the IRS was also paying certain refunds later than before. So that created a lot of noise, as I've been saying on recent calls. You'd think it would be easy to reestablish a seasonality curve, but while credit was normalizing so dramatically, it was sometimes swamping the seasonality effect. But we created this detrended seasonal curve from 2023 to the best we could, and that turned out to be really right on for 2024. If I were to pull up and summarize what we saw in 2024, 2024 settled out with fewer refunds paid than before the pandemic and about 25% lower total refund volume in real terms. Delinquencies moved with our new post-pandemic seasonality benchmarks, which have similar timing. But if I were to summarize what this new curve versus the one we've had for many years, it appears to have about 35 to 40% less amplitude in both directions than in the past. By the way, just a note for a second on auto, all of this also happens in auto seasonality but in an even faster and more concentrated way. We tend to see auto delinquencies at their seasonal low in Q1 and losses in Q2, and this year that seasonal improvement was delayed a bit. So that's the backdrop for now. Talking about the credit performance that we see, if you start, Terry, with the foundation that the consumer is in very good shape, the economy is in quite good shape overall, one would certainly feel there's a gravitational pull toward even better credit in the business that is helped by the math associated with recoveries. Our recoveries rate has been very constant, but the recovery inventory that we have had to collect on got very small during the pandemic and that has been replenishing. So there's a good guy gradually coming as recoveries fully restore. And then that really gets us to whatever effects there are of inflation, whatever effects there are on the consumers on the tails that are not in as good shape as the averages that we all look at. And what we see there is probably the way that the delayed charge-offs are actually playing out. They're probably playing out exactly through these consumers on the tail that are still struggling at the margin. So the credit metrics are looking great. We have more solid benchmarks, Terry. The consumer is in a great place. But I think the bigger picture phenomenon of delayed charge-offs that still has intuitively to play out, and these effects going on at the tail, puts us in a position not to be declaring that things are headed down from here, but it's certainly positive indicators that we see at the margin.

So, we feel very good about the auto business. The credit performance is really striking. In fact, let's just savor something that is an outlier relative to the industry. Our auto delinquencies have remained consistently below pre-pandemic levels, and they've been lower on a year-over-year basis for the past two quarters. So the auto business, when you compare it to our card business, the degree with which we sort of intervened in the business and trimmed credit around the edges might have been even more dramatic than what we did in the auto business over the last few years when we were worried about margin pressures in the business as prices were not being passed through. So there were margin pressures, there were declining vehicle values, and there was inflation of credit scores. All of that led us to pull back, and each of those have been resolving themselves. You asked about margins. The margins are sort of much more normal in the business right now. The great inflation on credit scores is resolving itself as credit normalizes. Vehicle values, we'll have to continue to keep an eye on those. But pulling way up, on the shoulders of a lot of the changes that we have made and the technology that we have massively invested in this business in underwriting, in originations, and in our Auto Navigator platform, all of those put us in a position to feel bullish about leaning into auto. I think all the trends that we see on margins, credit, and competition, we feel good about, and that lines up to a story of leaning in on the auto business. Next question, please.

You know, it's a great question. It's interesting how all of us, some of us were around doing similar things back when, well, Capital One hadn't even come up with the idea for Capital One back when inflation was really raging the last time around. So I think we would be speculating there. But I think, Rick, if we pull up and think about interest rates and their impact, we think about how higher rates as a thing affect consumer credit. Debt servicing burdens for consumers, of course, can get affected. The higher rates, as they work their way through consumer products gradually but not immediately, sort of make their way into higher debt burdens. So you have mortgages that tend to have fixed rates, auto loans have fixed rates, so you have time delays before interest rates make their way to more pressure on consumers. But still, that effect obviously can continue. Most credit cards have variable APRs, so rising interest rates have tended to lead to somewhat higher minimum payments for consumers overall. But if we pull up, I think that if wages stabilize and wages tend to keep up with inflation, I would think on the credit card side, it is plausible that charge-off rates could be very consistent with what they've been in a lower ambient rate environment. I think it gets very challenging when they're suddenly in motion up. But if they stabilize, I'm just speculating here, at a moderate level that's higher than they were for the last couple of decades, I think as wages stabilize to make real incomes move the way they should, I would think that credit numbers could be very consistent with historical patterns. I think the biggest driver of why they're not right now, if I were to speculate, probably number one on my list is really the unprecedented number of years of which charge-offs, with all the government stimulus and the forbearance that so many consumers got a lifeline, that those for whom that lifeline was a little more temporary and its benefit, some of those issues are still resolving themselves in terms of current charge-offs. It's always an interesting thing to just take a look at the area under the curve in credit losses. If we look back over the last number of years, and look at the area under the curve in credit losses, I think that's a really important thing.

Where credit losses would typically have been versus where they were, and you look at the area under the curve and ask yourself, what if all of that were delayed charge-offs? You still have a majority of that area under the curve that would still have to play out in terms of delayed charge-offs. Now, we don't believe that anything close to all of the area under the curve would need to come on the other side. But I think, if you want a one-sentence sound bite, to me, why in such a benign environment credit losses in businesses like credit cards are running higher than pre-pandemic, it is the delayed charge-off effect. Time should be our friend there; that should resolve itself over time, and there are a lot of positive factors behind that putting good gravitational pull in the right direction in this industry. Thank you very much, Rich.

Thanks. So, you know, I think the operating efficiency ratio has really been—hopefully our investors share our excitement that this 700 basis point improvement that has happened since we began our tech transformation in 2013 has been driven by multiple things, but the biggest driver is the technology transformation. Even as we invest a lot, there are also ways to create savings through reduced vendor cost, the really high cost of a lot of legacy technology, the benefits on the cloud, and really the ability to then, on the other side of the technology transformation, sort of rebuild the company and how it operates on a foundation of modern technology. That's a journey that continues, and we see benefits there. I do want to say, though, we've had a lot of beneficial increase in the ratio in the last couple of years, and I wouldn't want people to just take the curve and say, 'Wow, that thing almost looks like it's accelerating down.' We don't give guidance in the short term; there are a lot of very important investments we're making in the business. But what I like to do is point out that when we stand back over a longer time frame and look at the journey of Capital One, this has been a journey for which the efficiency was never the objective function—it was one of the many benefits of a tech transformation. It's very gratifying to see that continue, but the extrapolation from any one year to the next is not something that we would recommend. It's a great long-term story.

Hey, John. Yeah, what I'll say is, it's two independent public companies. We still are operating separately at this point, and there are a number of variables that have moved and will continue to move between now and legal day one. I'm not going to specifically comment on how any one of those variables or metrics are changing since the deal model. What I will say is, we considered a wide range of outcomes across each of the line items, and we continue to be comfortable with the estimates that we included in the deal model. We feel very good both strategically and financially about the deal today, as we did nearly a year ago when we announced it. As we get to legal day one and put the marks on the balance sheet, we'll provide updates on the relevant metrics at that point. Next question, please.

Sure. Let me start with reminding everyone that the one thing for sure we know is that in the first quarter, we have two fewer days, and that will drive a roughly 15 basis point decrease in NIM. But if I kind of pull up and think beyond day count and look at a longer term, a lot of the same forces that I've been describing for the last number of quarters as potential headwinds and tailwinds still exist today. So, you think about the headwinds: first of all, we're very modestly asset sensitive, so you see a small decrease in NIM if rates continue to decrease, and you saw a little bit of that effect here in this quarter. The other one you bring up is deposit beta. Of course, in our rate risk modeling, we make assumptions around deposit betas. So to the extent that betas are lower or slower on the way down, we would be a little bit more asset sensitive in that scenario. So those could be headwinds. But on the tailwind side, the steepening yield curve relative to forwards would be a good guy if that persists. But then probably the single biggest factor, and we've seen this play out over the last number of quarters, is card growth and card becoming a bigger percentage of our balance sheet. All else equal, that is a pretty meaningful tailwind to NIM. So those are really the forces at play that I would highlight for you.

Yeah, I'll wrap my answer to both of those questions into one for you, Mahir. First of all, just goes without saying, but I will say it: we clearly recognize that over the longer term, capital return is a key component of shareholder value creation, and you've seen in prior periods we've executed substantial share repurchases. But in the near term, our pending deal is certainly influencing our approach to capital in a few ways. As you said, we're still under regulatory pre-approval rules for each of our capital actions. Second, we will need to run our own bottoms-up analyses as a combined company to assess our view of the combined capital need, and we continue to be two separate companies, and therefore don't have the ability to do that analysis until after close. And then third, we will need the Fed's approval to go back to operating under the SCB framework. So if I pull up from there and put all of those together, I think it's likely we're going to stay at a slower repurchase pace until we resolve these factors. But after that, we'll have more flexibility. Next question, please.

Hey, Bill. So obviously a really key part of the deal is our excitement about getting the network and being able to add such a key dimension in vertically integrating our business. We talk so much about credit cards all the time, but the debit business is a really important one, and on little cat feet, Capital One has really been investing in our national banking business. Having our own network will be valuable there, and we'll be able to enjoy the vertically integrated economics of owning a network and the scale that comes from pulling Discover and a bunch of Capital One's volume together. Now, I just want to pull back and talk a little bit about Capital One's consumer banking strategy, and debit is of course right at the heart of that. If you pull way up and think about consumer banking, way back to when banks began, you had banks with branches on every corner. Then in the last 15 or 20 years, there have been the evolution of direct banks, and they have been savings-only, offering higher rates, with no physical distribution whatsoever. We, of course, through our acquisitions, have acquired several banks with branches on every corner, and we also acquired the nation's largest direct bank. I announced at the time of that acquisition that this is a great financial trade, but it is also a strategic game changer for Capital One. That was back about 12 years ago. So since then, we have been very steadily, systematically, relentlessly, and patiently pursuing a business model that actually doesn't really exist right now, because we have those two endpoints. But what we're really trying to do is build, in a sense, the bank of the future. We believe that bank of the future is not just a direct bank, and it's also not a bank with a branch on every corner. It is a bank with thin physical distribution. For us, we've got branches, but then also in major metropolitan areas, we have put in cafes that are really basically less about coffee and more about being a hybrid of a branch and a showroom for Capital One, a place people can go and understand that Capital One is there to help them and get a sense for what this company is about and how it may be able to help them live their life more effectively. So this strategy has been about working backwards from what we believe is the bank of the future from a distribution point of view: thin physical distribution highlighted by these cafe showrooms. A very central part of that is digital capabilities that enable something that's very difficult to do: to take just about everything that can be done in a branch and make it available digitally. There are some things like safe deposit boxes we haven't figured out how to create a digital safe deposit box for your valuables, and a few things you just can't get there on a digital basis. But as we've looked at this, we said virtually all the activities that people go to branches for, we want to be able to deliver to them through our thin physical distribution plus massive, full-service digital capability. That's what we've been building over these years. Additionally, to generate business, we need great products. We've been the only major bank out there with no fees, no minimums, and even a recent move of no overdraft fees. Those better deals come from having built superior economics that come from this physical distribution-light model. Now, you asked the question: what will be our debit card strategy? We haven't completed the deal; we haven't fully gone in on the other side of exactly seeing how things are working on the Discover side. But we are very pleased with the results that we're having with our current strategy, including our current debit card strategy, and we are investing heavily to continue to grow that business. You look at the significant increase in marketing over the years; one of the drivers of this is that Capital One is building a national bank organically without a lot of physical distribution, and to get there it takes a lot of marketing. So I think the best way to think about it is Discover gives a shot in the arm and a boost to a strategy we've been pursuing for more than a decade. The best way to think about it is picture just more of the same from Capital One with a little bit of an accelerator.

Moshi, the word that I would use at the lower end of the business—obviously there are parts of the market below where we play, but if we sort of loosely call it the lower end of the non-prime or subprime part of the marketplace—the word that I would use to describe it is stability. Let's look at the key aspects of that. On the consumer credit side, actually the first part of our business to normalize, really to settle out with respect to credit, was the lower end of the market. That's been very stable. Our originations in that segment, and really pretty much across our business, are coming in on top of each other for years, so that has a stability there as well. Competitively, it's a very competitive part of the business that has many non-traditional players in addition to regular card players. The competitive intensity is high, but we watch it very carefully. With the stability of performance and the strength of the consumer, in both the card and the auto side of the business, we continue to lean in in a very similar way that we have. For card, it's just been very consistent for years. With auto, we kind of pulled back quite a bit in that part of the business, and we're leaning in as we often have done historically. So we're leaning into both of them, and we're really pleased with the stability and strength of the metrics that underlie those businesses.

Sure, Moshi. So what's going to happen in future quarters starts with what happened this quarter. I just want to reiterate a couple of the drivers of this quarter as a jumping-off point. As I said in the prepared remarks, coverage was down 33 basis points by two things. The bigger effect being that we typically have seasonally higher balances in the fourth quarter that require very low levels of coverage, and that denominator effect from those balances put downward pressure on coverage. The other effect was that the allowance we needed for what I'll call non-seasonal growth was offset by favorable observed credit performance, so we added zero dollars of allowance balance to the numerator, but the non-seasonal growth impacted the denominator. In the first quarter, I just wanted to provide that backdrop to say the seasonal balances will run off, so there will be a corresponding upward pressure on coverage, all else equal, from that effect. But beyond that, it's really going to come down to growth and our loss forecast. To the extent that loss forecast improves, changes in coverage could be modest in the near term as we just reflect the uncertainty of our projections in the allowance. But eventually, the improved loss forecast is going to flow through the allowance and continue to bring the coverage ratio down as uncertainties become more certain. So while the direction of travel would be down, the pace and timing is going to depend on a variety of factors, one of which will include the mix of businesses, as you say. But when it's denominated to the whole portfolio, the relative growth of different forecasted loss portions of the book aren't going to have a material impact to coverage, just given that the new originations as a percentage of the overall book in any given quarter is relatively small. The only thing I also want to remind you of is, I know our investors look at history as a potential guide for levels of coverage, and I just want to remind you that we called out the roughly 50 basis points of impact to coverage from the termination of the co-branding agreement with Walmart. So that created a step-function change in coverage relative to our prior history as well. Next question.

Well, if we think about our purchase volume, our growth in overall purchase volume continues to be driven by growth in our branded card customer base, and the branded card includes both our consumer and our small business. The growth that you see, and that we've seen for several years now, is certainly powered by strength in originations, and some strength in originations at the higher end of the market. But the other way to think about your question is at a customer level. On a per-customer basis, what's been happening to spend growth? Even as our spend metrics were growing overall, the spend growth per customer in our consumer business had been largely flat through 2023 and really the first half of 2024. Then they started to pick up midway through last year and grew further in Q4. I don't have in front of me the small business card numbers; they're embedded in the numbers that I gave you. So the fact that we have seen spend per customer finally pick up here is striking. Whether it will continue and exactly what's driving it is hard to say, but I did want to point out that positive trajectory as the year finished off.

Yeah, Don, why don't I take that? So recent originations in our card business—we continue to see stability in the performance of our originations. It's really striking. We've been calling this out consistently over the past few years: vintage over vintage, we're seeing mostly stable risk levels over time. Also striking is that our overall front book of new origination vintages continues to perform in line with pre-pandemic vintages. Now, when you compare with pre-pandemic vintages, you can't look at 2019 because 2019 very quickly got sort of corrupted by the pandemic, so we're looking at 2017 and 2018 when we make these comparisons. From a Capital One point of view, I think this stability in origination performance, quarter over quarter and the consistency with pre-pandemic, is the result of our intervention to deal with inflated credit scores and the high level of industry supplies that were flooding particularly the subprime marketplace back there. So we trimmed around the edges and continued to very closely watch the origination of vintages, and that has led to a sustained stability on the part of Capital One. Some of our most recent vintages—again, we're still looking, you've got to look like six months in the rearview mirror to see much—but we continue to see some very positive results there. We also have looked at industry data that shows some gapping out in vintages over the last couple of years. So I think the industry effect is not probably consistent with what we have described. If I were to explain why, because I think they're very capable companies doing this, I'm not sure that most of the industry adjusted for inflated credit scores. We intervened on our models with a belief that the university was suddenly giving out A's that should be B's, basically, and so we intervened and then kept validating along the way. But for a while, we didn't have validation; we just intervened because we believed it was the right thing to do. So I think what has been seen if you look at just overall industry originations is, as you say, some gapping out, and I think that would be the biggest driver. Next question.

Okay. Yeah, so the approval process continues to move forward. We made substantial progress in recent months. We remain actively engaged with the Fed and the OCC about our merger applications, and it is the Fed and the OCC who ultimately decide on our merger application. Late last year, we received approval from the Delaware State Bank Commissioner, which we needed because Discover is a state-chartered bank. We of course had the big public hearing in July, and that went very well, we feel. Earlier this month, we finalized a joint proxy statement with the SEC, setting up the February 18th shareholder vote, so that was good progress. Finally, we are also engaged with the Justice Department as they play a key role in advising the Fed and the OCC on the competitive aspects of the deal, and we continue to believe that this transaction is both pro-competitive and pro-consumer, bringing our best-in-class products and services to a broader set of consumers and small businesses and really enhancing opportunities and benefits for merchants as well. Pulling way up, it's certainly a long labor, but we remain well positioned to get approval of the deal early this year. I'm really proud of the work everyone is doing here, and we look forward to getting this over the goal line.

So, I don't think we're in a position to—it's not just because we want to be coy about it—we're not in a different place than we were at the time we announced the deal. We should point out that we are working really hard preparing for integration, but we are still separate companies. Discover is working incredibly hard on their compliance, and I know they're doing preparations for integration as well. We certainly are not getting an inside view of their numbers, their performance, their business model. So we're mostly sort of where we were at the outset. But if we pull up to your point, Discover operates with a significantly lower operating efficiency ratio than Capital One. That's certainly a good thing for the combined company. I think it is also the case that Discover has had a heritage of probably less investment in certain areas than Capital One, and in a few cases, they're sort of making up for lost time there. Having not seen on the other side, we assume that there are some areas that we will—and we've assumed this from the beginning—we're going to need to step up the investments. Obviously, on the risk management side, there's a lot of investment to be done. Whether what ultimately needs to be done compares with what they're investing, all of that remains to be seen. We obviously had assumptions in our deal model about leaning in on that. But what we get—there's going to be a lot of effects that are all pretty significant that just go in different directions. A company with an amazing efficiency ratio, a company that's probably underinvested in a number of areas relative to Capital One, and we would shore up some of those investments. We also get a lot of synergy that comes from bringing overlapping businesses together; that's a very strong effect. The investment areas—the three that we're pointing out—we are talking about investing in those at a level that's a lot different than what Discover has done traditionally. Obviously, the risk management one we've all talked about, and they're leaning in hard now on that. International acceptance—they certainly, again, I'm amazed with their not-that-great scale what they've done, but we would expect to invest at a higher level than they have there. In terms of the network brand, I want to make a comment about the network brand and some of this other investment. We have sloped our card business—the business that we think most naturally and easily can go to the Discover Network—and it involves folks that aren't big international travelers, for example. We've sloped the work there; we think it's very straightforward to move this business front book and back book to Discover. Some of these investments that I'm talking about leaning into are particularly important for the longer-term opportunity of being able to move more business than what we put into our deal model. In doing that, we sloped our whole customer base and imagined sloping it in terms of what part of the business fits most naturally within the context of the capabilities and the brand of Discover's network. As we want to move more, we're going to need the bar to be raised relative to acceptance and brand. That's why I think these other investments we're talking about will be multi-year, they'll be over time, and they'll be things that help make the deal pay off even more in the longer term. Next question.

Yeah, so thank you, John. So let me take Discover just in a minute. If you pull way up on Capital One, for a long, long time, Capital One has been a full-spectrum player. We have had for several decades a subprime business that is tailor-made for the information-based strategy we have because it's all about surviving and winning on the credit side of the business. But in that business, we've also very much focused, relative to others who play in the space, on offering exceptionally good deals. It's not just about surviving on the credit side, but really giving great deals, helping people use credit wisely. In fact, the deals that we're offering are very simple and profoundly better than a lot of the deals available in the marketplace. That business is a very stable part of what we do at Capital One, and we continue to lean into that. Probably the most dramatic thing that's been happening in the last decade in Capital One's card business is, as you reference, the quest toward the top of the market. That is a journey that, as far out as we can see, we will continue to lean into because there is so much opportunity at the top of the market. Obviously, it takes a lot of investment, but the key indicator to us is that when we stratify out the segments of our business by spend levels, the part that's growing the fastest consistently year after year at Capital One is the heaviest spenders. There's just so much upside north of where we are; we will continue to invest in that. Now, if you stand back and think about our card business, while our subprime business has been going along and we keep leaning into that, there has been a gradual mix shift upmarket for the company. Even within each segment—the subprime book, the prime book, and certainly the top of the market—there has been a gradual mix change with a spender-first philosophy that permeates our business. Some of that you can see in just some of the structural changes in the payment rates at Capital One. So I believe that what you see and what you have seen for many years is a good prognosticator of how the future of legacy Capital One would likely go: continued leaning in across the spectrum, but differentially an awful lot of investment toward the top of the market and the most growth opportunity there. Now let me turn to Discover. Discover interestingly has taken a very different approach than Capital One. While we have taken a very broad approach playing in all parts of the market, Discover has had a very focused strategy on the prime part of the business, and they've done a very good job there. We certainly always admired them from the outside. So we will be bringing into our company a significant increase in that portion of the market, which probably differentially got a little less emphasis. It's not like we weren't playing there, but if anything, we had a greater emphasis probably north and south of that part of the business. From a mix point of view, we certainly will be bringing in a business that's very homogeneous relative to the very heterogeneous business that we have. On the other side of all of that, if I were to summarize our strategy, it will be to continue everything we were doing as Capital One because we're getting a lot of traction in that, and then making very sure that we don't crush the butterfly of this beautiful business model that Discover has in the prime part of the market. We will go in there and, while integrating things like technology and some of the risk management processes and a lot of things, do everything that we can to make sure that we don't directly or even unwittingly sort of crush the really nice butterfly of what they do. In that way, we hope to bring in a growth business that Discover has and add it to the very complementary growth businesses that Capital One has, and collectively continue to try to get the best of both worlds, bringing along the way some better efficiencies and really bringing top technology to all aspects of the business.

Well, thank you everyone for joining us on the conference call today, and thank you for your continuing interest in Capital One. Have a great night, everybody.