CapOne Earnings Show Accelerated Digital Shift, Improving Credit Metrics

Capital One Financial said on Tuesday (Jan. 26) that, in its fourth quarter, consumer credit metrics improved as consumers continued to pay down debt. In terms of headline numbers, the company said that revenues were down 1 percent to $7.3 billion, which beat expectations of just under $7 billion. Net income came in at an adjusted $5.29, while the consensus had been at $2.80.

The company said that the provision for credit losses was 20 percent lower to $264 million, with a $593 million impact from a loan reserve release.  Management said on the conference call with analysts to discuss results that much of the reserve release was tied to the card business. CEO Richard Fairbank said on the call that the company had seen “exceptional credit performance” during the quarter. Consumers, he said, have been saving more, using credit relatively less and paying down debt, helped in part by stimulus payments.

“We feel good about our current revenue trajectory,” Fairbank told analysts. “But how the pandemic and the recession will play out, remain uncertain and (will affect) how the growth opportunity unfolds. And also, the great credit paradox with the strength of credit also comes the high payment rates, which certainly is a great thing for the overall financial performance of the company, but it’s another thing that holds back the growth. So we’re leaning into the growth opportunities, but we’re not giving guidance about the timing.”

Supplemental materials released by the company in tandem with earnings show that in its credit card business, revenues from the segment were down 7 percent, or $357 million year on year. Ending loans were down 17 percent YOY, by $21.3 billion, to an ending $106.9 billion. Of that tally, domestic cards were $98.5 billion.

The net charge-off rate for the card business as a whole was 2.6 percent, down from 3.6 percent in the third quarter and 4.3 percent a year ago. Drilling down a bit into the card segment, the domestic card business was off 17 percent year over year, or off a bit more than $20 billion. Purchase volumes were flat, according to results.

Consumer banking was strong, buoyed in part by auto loans. Other supplemental materials from the company showed that within autos, loans were $65.7 billion, up from the $60.3 billion seen a year ago.  The company said that within the overall commercial segment, ending loans were up 9 percent to a period end of $68.9 billion.  The latest net charge off rate in this segment was 53 basis points. Supplementals showed that 30 day plus delinquency rates in the domestic credit card business were 2.4 percent, compared to 3.9 percent previously.

With a nod to credit expectations overall, outgoing Chief Financial Officer R. Scott Blackley said current allowances are built to take into consideration a “very wide range” of macro outcomes. As for reserve levels, and among the inputs and assumptions for the economy in general, the unemployment rate is modeled at 8 percent by the end of this year.

The most recent results, management said on the call, were helped by strong digital efforts, which improved underwriting activities.

“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,” Blackley said. “And one thing that’s been so striking about banking products and even banking products relative to credit card products is that 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 to go after that, 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.”

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