Capital One Sees Positives in Consumer Segments Despite Charge-Off Challenges

Card delinquencies and charge-offs offer evidence of consumers struggling to meet their financial obligations.

And credit card balances and delinquencies have been rising as consumer spending remains strong, but government support is dropping from pandemic levels, with all stages of delinquency approaching their highest levels of the past decade-plus. 

Delinquencies occur when borrowers fail to make payments on their debts by the due date. A delinquency is essentially a late payment.

The next step after a delinquency is a charge-off, which signifies that a creditor has classified the debt as uncollectible for accounting purposes. This typically happens when a borrower fails to make payments for an extended period, and the creditor determines that the debt is unlikely to be recovered.

This, as Capital One Financial Corp. reported during Thursday’s (Jan. 25) fourth quarter 2023 earnings call that its net charge-offs were $2.53 billion, higher than the $2.36 billion predicted by analysts and up 77% from the prior year.

The prime culprit? Borrowers falling behind on their auto loans and credit cards. 

“The pandemic was such an absolutely unusual experience for consumers with the stimulus and forbearance, we believe some charge-offs got delayed,” said Richard D. Fairbank, founder, chairman and CEO at Capital One, to investors. 

But it’s not all bad news. 

“We feel good about all of our segments across card, and also the relative health of the consumer,” Fairbank added. 

Read more: Consumers’ Total Outstanding Credit Leaps $23.7 Billion in November

Capital One’s provision for credit losses increased $573 million to $2.9 billion for the quarter. For full the year 2023, the financial provider’s provision for credit losses was $10.4 billion. 

Purchase volume across both domestic card and credit card was up 4% year over year.

Consumer banking revenue was down $419 million, or 17%, year over year, driven by lower auto loan balances, and Capital One’s auto loan originations were down $478 million, or 7%, year over year. 

“We’ve been cautious in auto for a few years now, for reasons that include margin pressure from the interest rate cycle, normalizing credit, vehicle values normalizing and affordability pressures stemming from the combined effect of elevated interest rate and still-high car prices,” said Fairbank, adding that in 2022, Capital One “tightened our credit box around the lower end, and our risks are now stable … we’ve done some trimming around the edges.”

“We became alarmed about credit score grade inflation during the pandemic, and adjusted our model benchmarks so that we weren’t fooled by that,” the Capital One CEO said. 

PYMNTS reported in March that consumers’ savings were insufficient to cover credit card debt, and that significant numbers of households were still tapping into savings to deal with everyday expenses. That means there’s less cash on hand to satisfy the monthly obligations of credit card debt, which doesn’t bode well for consumers with lower FICO scores.

Capital One’s non-interest expenses rose by 18% to $5.7 billion, with marketing and operating expenses up by 29% and 15% respectively. 

Executives attributed marketing spend to the company’s “quest to win at the top of the market, we’ve been going after heavy spenders for 15 years.” 

The Importance of End-to-End Digital Transformations

“We delivered solid results with strong top line growth in 2023,” Fairbank said when kicking off Thursday’s earnings call. “Our modern technology capabilities are driving resilient growth, enabling efficiency improvement, and putting us in a strong position to deliver long-term shareholder value.”

“Technology transformation has been really beneficial, we can leverage more data and more models to identify more opportunities for investment and to create better and more customized solutions for customers along the way,” Fairbank added, noting that Capital One deploys advanced digital tooling and machine learning at scale across underwriting, marketing and more.

The company’s executives also noted that the Consumer Financial Protection Bureau (CFPB) late fee proposal “could impact P&L” during the Q&A portion of the call.