Capital One’s Q1 Shifts Attention From Spending to Strategy

Consumers are still spending, and for Capital One, that remains the foundation of its cards business while the financial service giant continues to eye longer term artificial intelligence and platform buildouts.

“The U.S. consumer remained healthy, and the overall economy remained resilient through the first quarter,” CEO Richard Fairbank said during the earnings call Tuesday (April 21), adding that income growth is still outpacing inflation and that “consumer spending remained robust,” even as energy prices and geopolitical tensions begin to cloud the outlook.

Capital One’s card franchise continues to expand, supported by steady purchase activity and improving credit trends. At the same time, management is watching closely for signs that higher fuel costs or broader macro shocks could alter behavior.

The earnings materials and commentary from the call indicated that, excluding the impact of the Discover deal, card volumes were up 8% year over year.

Within cards, performance trends suggest a consumer that is still managing obligations. Charge-offs rose modestly on a sequential basis but largely followed seasonal patterns, while delinquency rates moved lower. As noted here, the net charge-off rate was 5.1% in the most recent period, down from 6.2% a year ago.

Auto lending tells a similar story. Losses ticked higher on a year-over-year basis, reflecting a somewhat greater mix of subprime borrowers, but performance remains close to pre-pandemic norms. Vehicle values and recent originations continue to support portfolio stability, even as underwriting has become more cautious in certain segments.

Revenue declined modestly from the prior quarter, while earnings fell short of expectations, in part due to integration-related costs tied to Discover.  Investors sent the shares down about 2% in after-hours trading on Tuesday.

Integration, Investment Shape Outlook

The Discover acquisition remains the defining strategic thread. The integration is progressing, including the migration of debit customers onto the Discover network and the early stages of moving card originations onto Capital One’s platform. Yet that process comes with trade-offs. A temporary slowdown in Discover card growth, driven by earlier credit tightening and ongoing system transitions, is acting as a near-term headwind.

Fairbank described it as a “brownout” period, marked by restrained originations but stronger credit outcomes. The expectation is that once integration is complete, Capital One can reaccelerate growth using its own underwriting models and marketing engine.

That longer-term view is tied closely to the company’s technology strategy. Capital One continues to frame itself as an information-based business, built on a fully cloud-based infrastructure designed to support large-scale data processing and AI. The company is investing in AI capabilities embedded directly into its operating systems, rather than treating them as standalone tools.

AI in the Ecosystem

“All companies will be able to take advantage of AI, but the leverage is vastly greater when AI is embedded in the company’s ecosystem,” Fairbank said during the call, pointing to the firm’s multiyear effort to rebuild its technology stack around data and real-time decisioning.

Those investments extend beyond cards. The recently closed Brex acquisition is intended to accelerate Capital One’s position in business payments, while the decision to bring its travel platform in-house reflects a push to control more of the customer experience. Both moves add to expenses in the near term, even as they are framed as necessary for future growth.

Marketing spend is also set to increase over the course of the year, particularly in cards and consumer banking, as the company seeks to deepen relationships with higher-spending customers and expand its national digital banking footprint. Management indicated that first-quarter marketing levels were seasonally lighter, with spending expected to increase as the year progresses.

Capital One has offered limited formal guidance, but CFO Andrew Young and Fairbank underscored that the company continues to expect its long-term earnings profile to align with initial expectations tied to the Discover deal.

“Our expectation is that the earnings power on the other side of the Discover integration remains consistent with what we outlined at announcement,” Fairbank said, pointing to a combination of synergies, platform scale and continued investment as the drivers of that outlook.