Capital One CEO Says Discover Acquisition Will Build ‘Something Special’

With less than one month to go before its acquisition of Discover Financial Services, Capital One is on track to deliver synergies and forge an expanded consumer card and digital banking footprint in what the latter’s CEO, Richard Fairbank, said will create “something really special.”

The combined entity, Fairbank said, will create a “leading consumer banking and payments platform” that he said toward the end of the call comes as “Discover brings us a growth platform both on the network side and with respect to their card franchise that allows us to preserve the best of what they do and leverage a lot of Capital One’s capabilities.”

In discussing the acquisition, Fairbank highlighted what he said would be “unique capabilities, modern technology, powerful brands, and a customer franchise of over 100 million customers that spans the marketplace … combining proven and complementary banking and credit card businesses with a global payments network. It leverages Capital One’s technology transformation and digital capabilities across a significantly larger customer franchise.”

Looking ahead, and in the wake of the Discover deal, Fairbank said that “We’re trying to build a bank with leaner economics that comes from not having branches all over the place, and also to be very, very modern in its technology and its digital experiences.

“In terms of the customer base that we attract to self-select a more digitally first kind of experience. … The benefit of the Discover acquisition relative to that … is that the benefit of vertical integration with the network allows our thin margin business to strengthen its margins and allows us to lean in harder and invest even more in building, organically, this national bank, which has never really been done before,” Fairbank said. “But that’s the key way that the Discover acquisition is going to help turbocharge our national bank.”

Increased Spending, Improving Metrics

Earnings materials from Capital One, detailing its results for the first quarter, showed that the firm released $458 million in reserves tied to its domestic card business. That action, as CFO Andrew Young said, was “driven by continued favorable credit performance in the quarter, partially offset by higher consideration to our downside economic scenario and increased qualitative factors to account for heightened uncertainty.”

Management noted on the call that the macro environment may be volatile, but consumers continue to spend on their cards. Purchase volume growth in the latest period was up 5% to nearly $158 billion. Loans in the card business were up 4% year over year to $6.4 billion.

Though the headline charge-off rate for the quarter was 6.2%, up 0.25% year over year, excluding the impact of the Walmart loss sharing agreement that ratio was 5.8%, which was actually a 0.17% improvement.

“Our delinquencies have been improving steadily for several quarters on a seasonally adjusted basis. The 30-plus delinquency rate at the end of the first quarter was down 4.25%, down 23 basis points from the prior year,” Fairbank said, and he added that “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 and build an enduring franchise with heavy spenders at the top of the marketplace.”

Within the consumer banking business, ending loan balances were up 5%, and deposits were up 8% at the end of the period. Automobile loans showed improvement in delinquency rates and charge-off ratios.

Consumers Still Strong

Asked by analysts about the state of the consumer, Fairbank said, “The U.S. consumer remains a source of strength in the economy. That’s true for almost any metric that we look at. … Payment rates are improving on a year-over-year basis. Now, of course, the circumstances of individual consumers and households will vary, as they always do, and what we look at often with national metrics is averages. And as we’ve discussed before, some pockets of consumers are feeling pressure from the cumulative effects of inflation and higher interest rates.

“We’re still seeing delayed charge-off effects from the pandemic, although our improving delinquencies suggest that this effect may be moderating. But on the whole, I’d say the U.S. consumer is in good shape,” said. “While the average customer is doing well, some customers at the margin are likely feeling stress from inflation and elevated interest rates.”

Spending has in fact shown an uptick subsequent to the end of the quarter and into April, said Fairbank, where the firm has “seen a recent increase in retail spending, particularly electronics in the past few weeks. Maybe that’s a pulling forward of purchases in light of the tariffs. We’ll have to see over time.”