Capital One Financial Corporation

Thank you for standing by. You're currently on hold for today's Capital One second quarter 2022 earnings call. At this time, we are still admitting additional participants and expect to be underway shortly. We do thank you for your patience and please continue to stand by. Please stand by. Good day everyone and welcome to the Capital One second quarter 2022 earnings conference call. All lines have been placed on mute to prevent any background noise. After the speaker's remarks there will be a question and answer session. If you would like to ask a question during this time simply press the star key followed by the digit 1 on your telephone keypad. If you would like to withdraw your question please press the star key followed by the number two. Thank you. I would now like to turn the call over to Ms. Danielle Dietz, Managing Vice President of Global Finance. Please go ahead, ma'am.

Thank you very much, Melinda, and welcome everyone to Capital One's second quarter 2022 earnings conference call. As usual, we are webcasting live tonight over the Internet. To access the call, please log on to Capital One's website at CapitalOne.com and follow the links from there. In addition to the press release and financials, we have included a presentation summarizing our second quarter 2022 results. With me today are Mr. Richard Fairbank, Capital One's Chairman and Chief Executive Officer, and Mr. Andrew Young, Capital One's Chief Financial Officer. Rich and Andrew will walk you through this presentation. To access a copy of the presentation and press release, please go to Capital One's website, click on Investors, then click on Quarterly Earnings Release. Please note that this presentation may contain forward-looking statements. Information regarding Capital One's financial performance and any forward-looking statements contained in today's discussion and the materials speak only as of the particular date or dates indicated in the materials. Capital One does not undertake any obligation to update or revise any of this information, whether as a result of new information, future events, or otherwise. Numerous factors could cause our actual results to differ materially from those described in forward-looking statements. For more information on these factors, please see the section titled Forward-Looking Information in the earnings release presentation and the risk factors section in our annual and quarterly reports. both accessible at the Capital One website and filed with the SEC. Now I'll turn the call over to Andrew.

Thanks, Danielle, and good afternoon, everyone. I'll start on slide three of tonight's presentation. In the second quarter, Capital One earned $2 billion, or $4.96 per diluted common share. On a linked quarter basis, period end loans held for investment grew 6%, and average loans grew 4%, driven by growth across all of our segments. Revenue in the linked quarter increased 1%, or 3%, after accounting for the $192 million gain on sale recognized in the prior quarter. Non-interest expense grew 1% in the quarter, driven by an increase in marketing, which was partially offset by lower operating expenses. Provision expense in the quarter was $1.1 billion, driven mostly by net charge-offs of $845 million and a $200 million allowance bill. Turning to slide four, I will cover the changes in our allowance in greater detail. The total company's $200 million allowance bill in the quarter brings our allowance balance up 2% to $11.5 billion as of June 30th. Our total company coverage ratio decreased 15 basis points to 3.88%. The changes in allowance and coverage ratio varied by segment, which I'll cover on slide five. Across all our businesses, loan growth and a worsening economic outlook drove upward pressure on allowance. In our consumer banking segment, the allowance balance increased by $145 million. The coverage in consumer banking increased 14 basis points to 2.51%. In our commercial banking business, the allowance increased by $152 million. The coverage in commercial banking increased five basis points and now stands at 1.36%. In addition to the allowance billed, there was also $39 million of provision related to unfunded lending commitments. In our domestic card business, we released $128 million of allowance, despite the effects of the growth and worsening economic outlook I previously mentioned. We have seen some signs of gradual normalization in our card credit metrics, but so far the pace of that normalization has been slower than what we assumed when we set last quarter's allowance. The impact of this slower than assumed normalization more than offset the growth and worsening economic outlook leading to the allowance release. We continue to carry elevated levels of qualitative reserves for downside risks related to economic uncertainty. The coverage ratio for domestic card now stands at 6.82%. Turning to page six, I'll discuss liquidity. You can see our preliminary average liquidity coverage ratio during the second quarter was 144%, well above the 100% regulatory requirement. Total liquidity reserves declined $17 billion in the quarter as our liquidity normalizes towards pre-pandemic levels. Cash and cash equivalents declined about $5 billion and now stands at $22 billion. We also had a $6 billion decline in our securities portfolio driven by the combination of the mark from rising interest rates and the continued runoff of the outsized portfolio built during the pandemic. Turning to page seven, I'll cover our net interest margin. Net interest income in the quarter was $6.5 billion, up 13% from the year-ago quarter and up 2% from the sequential quarter. Our second quarter net interest margin was 6.54%, 65 basis points higher than the year-ago quarter and five basis points higher than the prior quarter. Relative to a year ago, the increase in NIM is largely driven by a balance sheet shift as we continued to deploy excess cash and securities into loan growth. The linked quarter increase in NIM was driven by an additional day to recognize revenue. Higher yields on assets in the quarter were offset by higher wholesale funding and deposit costs. Outside of quarterly day count, our NIM from here will largely be a function of the changes in our balance sheet mix, the impacts of interest rates beyond forwards, wholesale funding costs, and the impacts of competition on loan yields and deposit betas. Turning to slide eight, I will end by discussing our capital position. Our common equity Tier 1 capital ratio was 12.1% at the end of the second quarter, down about 60 basis points from the prior quarter. Net income in the quarter was more than offset by share repurchases and growth in risk-weighted assets. We continue to estimate that our long-term CET1 capital need is around 11%. In the quarter, the pace of our repurchases slowed to about $2 billion. The pace of any future repurchases will be driven by a number of factors, including our actual and forecasted capital, earnings, growth, economic conditions, and market dynamics. With that, I will turn the call over to Rich. Rich?