Capital One Financial Corporation

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Good day, and thank you for standing by. Welcome to the fourth quarter 2022 Capital One Financial Earnings Conference call. At this time, all participants are in a listen-only mode. After the speaker's presentation, there will be a question and answer session. To ask a question during the session, you need to press star 1-1 on your telephone. You will then hear an automated message advising you your hand is raised. To withdraw your question, please press star 1-1 again. Please be advised that today's conference is being recorded. I would now like to hand the conference over to speaker today, Jeff Norris, Senior Vice President of Finance. Please go ahead.

Thanks very much, Victor, and welcome, everybody, to Capital One's fourth quarter 2022 earnings conference call. As usual, we are webcasting live over the Internet. To access the call on the Internet, 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 fourth quarter 2022 results. With me this evening 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 the presentation. To access a copy of the presentation and the 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 factor section in our annual and quarterly reports, which are accessible at Capital One's website and filed with the SEC. With that, I'll turn the call over to Mr. Young. Andrew?

Thanks, Jeff, and good afternoon, everyone. I'll start on slide three of tonight's presentation. In the fourth quarter, Capital One earned $1.2 billion, or $3.03 per diluted common share. For the full year, Capital One earned $7.4 billion, or $17.91 per share. Included in the results for the fourth quarter were two adjusting items, which collectively benefited pre-tax earnings by 105 million. Net of these adjustments, fourth quarter earnings per share were $2.82, and full year earnings per share were $17.71. On a linked quarter basis, period end loans grew 3%, and average loans grew 2%, driven by growth in our domestic card business. This loan growth, coupled with net interest margin expansion, drove revenue up 3% on a linked quarter basis. Non-interest expense grew 3% in the linked quarter, driven by an increase in marketing expenses while operating expenses were largely flat. Net of the adjustments I mentioned earlier, operating expenses were up 2.4%. Provision expense in the quarter was $2.4 billion, driven by net charge-offs of $1.4 billion and an allowance billed of about $1 billion. Turning to slide four, I will cover the changes in our allowance in greater detail. The $1 billion increase in allowance in the fourth quarter brings our total company year-end allowance balance up to $13.2 billion, increasing the total company coverage ratio by 22 basis points to 4.24%. I'll cover the changes in allowance and coverage ratio by segment on slide five. In our domestic card business, the allowance balance increased by $795 million, bringing our coverage ratio to 6.97%. Three things put upward pressure on our card allowance. The first factor was the continued credit normalization in our portfolio. The second factor was a modestly worse economic outlook than our assumption a quarter ago. And finally, we built allowance for the loan growth in the quarter. The impact of the fourth quarter loan growth on the allowance is more muted than typical loan growth, given the seasonal nature of these balances. These three factors were modestly offset by a release in our qualitative factors. In our consumer banking segment, the allowance balance increased by $129 million, driving a 20 basis point increase in coverage to 2.8%. The build was primarily driven by continued credit normalization in our auto business, including lower recovery rates. The second factor also putting upward pressure on our allowance is the impact of a modestly worse economic outlook. These two factors were modestly offset by a release in our qualitative factors. And finally, in our commercial business, the allowance increased $73 million, resulting in a nine basis point increase in coverage to 1.54%. This was largely driven by reserve builds for our office portfolio. Turning to page six, I'll discuss liquidity. You can see our preliminary average liquidity coverage ratio during the fourth quarter was 143%, well above the 100% regulatory requirement. Total liquidity reserves increased by $14 billion to $107 billion. Strong consumer deposit growth throughout the quarter drove cash balances higher and allowed us to pay down prior FHLB borrowings. Turning to page seven, I'll cover our net interest margin. Our net interest margin was 6.84% in the fourth quarter. 24 basis points higher than the year-ago quarter, and four basis points higher than the prior quarter. The four basis point linked quarter increase in NIM was driven by higher asset yields and a balance sheet mix shift towards car loans. This impact was mostly offset by higher deposit and wholesale funding costs. Turning to slide eight, I will end by discussing our capital position. Our common equity Tier 1 capital ratio was 12.5% at the end of the fourth quarter, up about 30 basis points relative to last quarter. The $1.2 billion of net income in the quarter was partially offset by growth in risk-weighted assets, dividends, and share repurchases. We repurchased approximately $150 million of common stock in the quarter, bringing the repurchases for the full year to $4.8 billion. we continue to estimate that our longer-term CET1 capital need is around 11%. With that, I will turn the call over to Rich. Rich?

Thank you, Andrew, and welcome, everybody. I'll begin on slide 10 with fourth quarter results in our credit card business. Year-over-year growth in purchase volume and loans, coupled with strong revenue margin, drove an increase in revenue compared to the fourth quarter of 2021. Credit card segment results are largely a function of our domestic card results and trends, which are shown on slide 11. In the fourth quarter, strong year-over-year growth in every top line metric continued in our domestic card business. Purchase volume for the fourth quarter was up 9% from the fourth quarter of 2021. Ending loan balances increased $22.9 billion, or about 21% year over year. Ending loans grew 8% from the sequential quarter. And revenue was up 19% year over year, driven by the growth in purchase volume and loans, as well as strong revenue margins. Both the charge-off rate and the delinquency rate continued to normalize and were below pre-pandemic levels. The domestic card charge-off rate for the quarter was 3.2%, up 173 basis points year over year. The 30-plus delinquency rate at quarter end was 3.43%, 121 basis points above the prior year. On a linked quarter basis, the charge-off rate was up 102 basis points, and the delinquency rate was up 46 basis points. Non-interest expense was up 12% from the fourth quarter of 2021, which includes an increase in marketing. Total company marketing expense was about $1.1 billion in the quarter. Our choices in domestic card marketing are the biggest driver of total company marketing. In our domestic card business, we continue to lean into marketing to drive resilient growth. We're keeping a close eye on competitor actions and potential marketplace risk. We're seeing the success of our marketing in strong growth in domestic card new accounts, purchase volume, and loans across our card business. And strong momentum in our decade-long focus on heavy spenders at the top of the marketplace continues. Slide 12 shows fourth quarter results for our consumer banking business. In the fourth quarter, we continue to see the effects of our choice to pull back on auto growth in response to competitive pricing dynamics that have pressured industry margins. auto originations declined 32% year over year and 20% from the linked quarter. Driven by the decline in auto originations, consumer banking loan growth continued to be slower than previous quarters. Fourth quarter ending loans grew 3% compared to the year ago quarter. On a linked quarter basis, ending loans were down 2%. Fourth quarter ending deposits in the consumer bank were up 6% year-over-year and up 5% over the sequential quarter. Average deposits were up 4% year-over-year and up 3% from the sequential quarter. Our digital-first national direct banking strategy continues to get good traction. Consumer banking revenue was up 10% year-over-year as growth in auto loans and deposits was partially offset by the year-over-year decline in auto margins. Non-interest expense was up 13% compared to the fourth quarter of 2021, driven by investments in the digital capabilities of our auto and retail banking businesses and marketing for our national digital bank. The auto charge off rate and delinquency rate continued to normalize in the fourth quarter. The charge off rate for the fourth quarter was 1.66% up 108 basis points year over year. The 30 plus delinquency rate was 5.62% up 130 basis points year over year. On a linked quarter basis, the charge off rate was up 61 basis points and the 30 plus delinquency rate was up 77 basis points. Slide 13 shows fourth quarter results for our commercial banking business. Compared to the linked quarter, fourth quarter ending loan balances were down 1% and average loans were flat. Ending deposits were down 1% from the linked quarter. Average deposits grew 7%. Fourth quarter revenue, was down 23% from the linked quarter. The decline was primarily driven by an internal funds transfer pricing impact that was offset by an equivalent increase in the other category and was therefore neutral to the company. Excluding this impact, fourth quarter commercial revenue would have been down about 6% quarter over quarter and up 2% year over year. Non-interest expense was up 2% from the linked quarter. The commercial banking annualized charge-off rate was 6 basis points. The criticized performing loan rate increased 74 basis points from the linked quarter to 6.71%. And the criticized non-performing loan rate was up 17 basis points from the linked quarter to 0.74%. In closing, we continue to drive strong growth in card revenue, purchase volume, and loans in the fourth quarter. Loan growth in our consumer banking business was slower compared to previous quarters as we continued to pull back on auto origination. Consumer deposits grew, and in our commercial banking business, ending loans and deposits were roughly flat compared to the linked quarter. Charge-off rates and delinquency rates continue to normalize across our business and we're below pre-pandemic levels. Total company operating expense net of adjustments was up 2.4% from the linked quarter. Our annual operating efficiency ratio for full year 2022 was 44.5% net of adjustment, a 15 basis points improvement from full year 2021. And we expect that the full year 2023 annual operating efficiency ratio net of adjustments will be roughly flat to modestly down compared to 2022. Pulling way up, we continue to see opportunities for resilient asset growth that can deliver sustained revenue annuities. We continue to closely monitor and assess competitive dynamics and economic uncertainties. Powered by our modern digital technology, we're continuously improving our proprietary underwriting, marketing, and product capabilities. We're focusing on efficiency improvement, and we're managing capital prudently. As a result of our investments to transform our technology and to drive resilient growth, we're in a strong position to deliver compelling long-term shareholder value and thrive in a broad range of possible economic scenarios. And now we'll be happy to answer your questions. Jeff?

Thank you, Rich. We'll now start the Q&A session. As a courtesy to our other investors and analysts who might wish to ask a question, please limit yourself to one question plus a single follow-up. And if you have any follow-up questions after the Q&A session, the investor relations team will be available after the call. Victor, please start the Q&A.

Thank you. One moment for our first question.

Our first question comes from Neil here, Bhatia from Bank of America.

Your line is open. Good afternoon, and thank you for taking my question.

I wanted to ask about just the vintage seasoning or growth map, as I think we've talked about in the past. We've added a lot of loans here in, you know, last year. And as these loans season, I was just trying to wonder if you could maybe talk about just how you see that flowing through into your loss rates and what that does to your delinquency and loss curves here over the next 12 to 24 months? Thank you.

Yeah, thank you. Let me just start with a reminder of what we mean by growth, Matt. As a general rule of thumb, losses on new loans tend to ramp up over a couple of years and then peak and then gradually come down. When we accelerate growth, and especially when those new loans are added to a seasoned back book with low losses, it can increase the overall level of losses of a portfolio. We grew rapidly, for example, just looking back at when we talk a lot about growth math, we grew rapidly in 2014, 2015, and 2016, and had a particularly visible growth math effect in the wake of that growth. At that time, the large front book was adding to a back book that was unusually seasoned because it had survived the Great Recession. Given our recent rate of growth, I think it's likely we'll see some growth math effect again over the next few years. But I think the general normalization trend will be the bigger driver of our credit trajectory. One other thing that's different about growth math going forward is CECL. Under the CECL accounting regime, the allowance impacts of new growth are pulled forward significantly. We haven't seen this effect for most of the pandemic, even as we have accelerated our growth because of the offsetting favorable factors in our allowance. But as our growth continues, a portion of our allowance bills going forward are intended to support that growth.

Okay. Thanks. And then just maybe on your reserve, just trying to understand just some of the assumptions underlying the reserves. Maybe you could just talk about what you're assuming for unemployment reserve, whether you have a recession built into the short term. Any additional color you can help us with there? Thank you.

Sure. I'm here. As I said in the past, we are largely consumers of economic assumptions. In this particular case for unemployment, we are assuming something that's a little modestly higher than consensus estimates for where we will land in the fourth quarter. I think consensus is somewhere around 4.8. Our baseline forecast gets up to around 5%. in the fourth quarter, but it's important to note there's a lot of other things that go into the calculation of the reserve, things like unemployment, or sorry, changes in the unemployment rate, inflation, home prices, wages, all of those factors matter as well, but our unemployment assumption is to be around 4% in the fourth quarter, or sorry, around 5% in the fourth quarter.

Next question, please.

Thank you. One moment, please. Hello? Hello?

Yes, one moment, please. And our next question comes from the line of Ashish Sharma with Capital One.

Hey, Victor, I don't think that's right.

Was that intended for me, Jeff?

Hey, Ryan, why don't you go ahead?

Sorry about that. Hey, thanks, guys. So, Rich, maybe I can ask one of Mahir's questions in a slightly different manner. So, you know, competitors in the industry are talking about reaching, you know, pre-pandemic loss levels by year end or maybe even overshooting those levels. Can you maybe just talk a little bit about how you think about the pace of normalization or maybe even overshooting those? And maybe just talk a little bit about normalization versus parts of the portfolio if you're actually seeing any deterioration. Thanks. And I have a follow-up. Okay. Thanks, Ryan. So, you know, consumer credit metrics remain strong. And, of course, as we've seen, they've been normalizing steadily through 2022 and are approaching pre-pandemic levels. You know, the At first, normalization was more pronounced in some segments more than others. It was, of course, and by the way, this is always the case, that front book new originations tend to be higher. So that would have been shocking had it been different. But the other thing we also said and talked to investors about, it was more Normalization was happening everywhere, but it was more pronounced at the lower end of the market. More recently, we've actually seen more uniform trend of normalization across businesses and segments. So, for example, across various FICO ranges and also across income levels. When we index them on credit metrics back to where they were before the pandemic, the sort of rest of the credit spectrum and rest of the income spectrums caught up to the very recently in the last few months to the lower end. So really, if I pull on that, it looks like the normalization is pretty consistent across the board. Got it. Yeah, go ahead, Ryan.

No, go for it. I'll ask my follow-up when you finish.

So, you know, you asked, you know, various competitors are, you know, forecasting or talking about different times at which things cross, you know, 2019 levels. I think at Capital One, we're not making specific predictions on that, but I think the key thing I would have you look at is the delinquency metrics. Delinquency metrics are the best single predictor of where things are going to go in the near term. And in fact, if we look at flow rates, we can see that very early flow rates into delinquency buckets are pretty normalized. So, you know, we're not giving specific guidance, but we would say, you know, look at the credit metrics, look at the dynamics across other metrics. But we feel this is, you know, it's clearly normalizing as we see it. Got it. And then, Rich, maybe to follow up on the comments regarding the efficiency being flat to modestly down, I think last quarter you were talking about modest efficiency improvement. There have been headlines about the firm reducing some headcount. So I'm just curious, has anything changed in terms of your expectations for efficiency improvement? And I guess given the pace of revenue growth that's expected and contemplated, Is there any acceleration investments that's taking place to drive the stable to modestly efficient and improving efficiency? Thank you. Yeah, Ryan, our efficiency outlook is exactly the same as it was last quarter. If you recall, actually, we guided for full year 2022 for efficiency to be – flat basically kind of flat to 2021 and then modestly down for 2023 relative to 2021 what happened is that 22 came in um you know a little bit lower so our guidance of flat to modestly down it's the same outlook as we had before and uh so they know this there's there's You know, there's not big investments behind that. It's the continued journey of Capital One to lean into our opportunities, to continue to, you know, invest in the tech opportunities that we see and the opportunities to create breakthroughs in the marketplace and continue to transform how we work. But pulling way up the sort of story, if you kind of – pull way back on operating efficiency, the journey that where we've driven 440 basis points of improvement from 2013, you know, well through 2019. And then we had the whole pandemic thing, but if I pull way up the gradual operating efficiency improvement is what we are continuing to, you know, drive for through the, leveraging of our tech transformation, even as we continue to invest.

Got it. Thanks for the call, Rich.

Thank you. And our next question comes from the line of Betsy and Stanley.

Hi. Good evening. How are you? Hi, Betsy. Hi, Betsy. Hi. Okay. So two questions. One, just as we think about the net interest margin and net interest margin outlook. Can you give us a sense as to how you're thinking about deposit betas and how that's likely to roll here over the course of the year? I noticed you talked a little bit earlier about deposit growth was really strong. Maybe give us a sense as to which types of deposits you're really leaning into at this stage. And then help us understand how asset yields are likely to trend given an forward curve, I'm assuming, is the base case. But tell me if you have a different point of view on that. Thanks.

Yeah, Betsy, I'll start with your last question first, which is we are following the forward curve, assuming 50 bps here in the first quarter and holding flat throughout 23 before coming down in 24. With respect to how we're thinking about beta and asset yields as components of NIM, as we get into the latter part of this rate cycle, lagged deposit rates really have a bigger impact than the asset yields that reprice more quickly and did so over the last couple of quarters as the Fed was moving rapidly. And so there's a bit of that sequential dynamic going on in terms of thinking about overall deposit beta and product mix, you know, roughly 85% of our deposits are in consumer. It's where our, our focus lies. And so if you just look at the cumulative deposit beta for the total company, it's around 35% was low twenties last quarter. But if you look at the last increasing rate cycle, I think the terminal beta was around 41. So I could see a terminal beta being somewhere above that, just given competitive dynamics in the marketplace at this point. So I would say the net of all of those factors is likely to be a modest headwind to NIM. We talked last quarter about balance sheet mix. And we are largely back to a pre-pandemic balance sheet mix from where we were a year ago. And frankly, our NIM is roughly in a similar spot. So I would say balance sheet mix over a multiple quarter period isn't likely to be a big driver unless we just see outsized growth in the higher margin card business. And then the other factor that could prove to be a tailwind to potentially offset a little bit of the modest headwind that probably comes from the beta dynamics that I described is we could also see a bit of an increase in card revolve rates from where they are today. So all of those things are just to leave you with kind of a net impression that there are headwinds and potentially some tailwinds, but the one thing I will just note as we look ahead to the first quarter as a reminder in the way we calculate NIM day count has an effect. So the one thing we know for sure is we'll have a 14 basis point or so headwind in Q1 due to having two fewer days in the quarter.

Okay, that's super helpful, Collar. As a follow-up, I just wanted to get a sense as to how you're thinking about the outlook for marketing, obviously a critical driver of growth, and I know it's been something that you've been very successful with in generating that top of wallet customer, but just wanted to see how we should think about that investment as we go into the next year with this NIMH headwind, et cetera. Thanks.

Hey, Rich. We're getting mute.

Sorry. Betsy, yes, we continue to feel very good about the traction that we're getting in marketing. Of course, most of the marketing that we do is in the card business. We continue to see attractive growth opportunities across the business for new account origination. We have continued to expand our products and the marketing channels that we're originating in. We see evidence all over the place of the benefits of our tech transformation that's, you know, giving us some extra opportunity. So we feel very good about that. You mentioned, of course, you know, how do we feel about leaning into this in the context of the potential looming downturn and what we do is we just continue to look all around the edges of our originations and look for places that either we would think might be particularly likely to have a challenge or be vulnerable or things that we see having any kind of performance issues and we sort of trim around the edges. That's what we've been doing for three decades at Capital One, and we continue to do this. So there's a little bit of trimming around the edges, but really the net impression I would leave you on the card side is we continue to lean in. Now, of course, there's the marketing that we do just to originate accounts directly through all the direct marketing media. We, of course, have Our continued investments on the brand side, the heavy spender investments, which are particularly heavy in terms of marketing costs, we continue to get very good traction. On the spender side, our growth, as you sort of look at each sort of range of spenders, the we are getting the most growth at the higher end. So that continues to be a good sign for us. And so we're leaning into that. And then the other thing on the marketing side, of course, is the national bank marketing. You've seen some of the success we're having there. Everybody in banking is sort of leaning into the deposit growth side in the context of changing interest rates and and some deposits leaving the banking system. So our marketing venues get very good traction there. So pulling way up, we continue to feel good about the marketing. We like the traction that we're getting. And we have, of course, a very vigilant eye on the economic environment that we're moving into.

Next question, please.

And our next question comes from the line of Bill Karachi with Wolf Research.

Hi, good evening. Thanks for taking my question. Rich, I wanted to follow up on your commentary around delinquency metrics. At the current pace of normalization, is it reasonable to expect that we could see DQs get back to pre-pandemic levels by the mid-2023 timeframe? And then from there, does your outlook suggest that you expect delinquencies to flatten out Or are you conservatively expecting DQs to drift higher and are prepared for some degree of modest worsening in credit that perhaps goes a bit beyond normalization?

Well, what we have said, Bill, is there are lots of metrics to look at, and I can even talk to you about some of the others we're looking at as well, but number one that we would point our investors to look at is delinquency. And You know, delinquencies entries and individual delinquency flow rates have, you know, we see the normalization happening there, as I mentioned earlier. And, you know, we think there continues, it's interesting, when you look at the delinquencies themselves and most of the credit metrics, they continue continue to just, you know, keep on moving toward what we're calling sort of normalization. Normalization, of course, is not any precise point. But there are also a number of other things that we look at that, you know, I think show sort of the strength of where this thing is headed. And one is on the vintage curves from new originations. They continue to be pretty flat month after month. They're, of course, lagged by several months, but pretty flat. And when we compare individual segments to where they were back in the pre-pandemic period, it's pretty much on top of each other. So that is a good sign. We continue to look at our payment rates, which continue to be elevated. We like elevated payment rates that we've assumed they're going to normalize part of the way down to where they were before. But of course, there's been some mix shift toward more spender within Capital One's portfolio. But payment rates continue to be strong. The percent of customers making just the minimum payment is still below pre-pandemic levels. The percent of customers making full payments is above pre-pandemic levels. Our revolve rate is roughly flat relative to last year and remains below pre-pandemic. So these are all things that are, you know, positive indicators. But I do want to say also, again, there's been some mixed change, you know, in our own portfolio with a bit of a a shift toward the heavier spenders. So many of these metrics may not fully get back to where they were pre-pandemic. But if we pull up on this, what we see is nothing we see is surprising. It would be consistent with a consumer coming off of some of the extreme trends stimulus and some of the extreme pullbacks in the pandemic and returning to more normal behavior. And I think the delinquency metrics are certainly leading indicators of that trajectory.

That's very helpful, Rich. Thank you. If I may, as a follow-up separate topic, can you give us an update on Capital One's strategy for reducing friction at checkout with different electronic consumer wallet solutions? There have been some recent press reports regarding partnerships with other digital wallet providers. It would be helpful if you could just share your latest thoughts.

Before you go, we're getting a lot of background noise, Bill. Could you go on mute?

Oh, yeah, I have. Yes, I will.

So, you know, a phrase that I've often used is the tip of the spear in the transformation of banking is payments, both on the consumer and the commercial side. And the reason I say this is that First of all, it's very prone to significant changes in technology, and also it's not as heavily regulated a space as much of banking is. You don't have to be a bank holding company to be doing a lot of those things. And that's actually the area that we have seen certainly a lot of traction by some very successful tech companies. So Capital One has... you know, we continue to support the various technology players who have developed payment innovations and we continue to develop innovations of our own. There was some news out about in the news today, in fact, about, you know, potentially a new wallet coming out. We are one of seven co-owners of the EWS. And we're one of the thousands of banks that use EWS. But, you know, on that one, we really don't have any specific comments to get ahead of the EWS management team on that.

Next question, please.

Thank you. And our next question comes from the line of Don Fandetti with Wells Fargo.

Hi, Rich. I was wondering if you can talk a little bit about your thoughts on auto credit, and then as a follow-up, what you're seeing on credit card spend, in particular heavy spenders, and whether or not they can sustain the travel and spend numbers.

Okay. Thank you, Don. In auto, So let's talk a little bit about the auto business and maybe a little bit of a comparison to the card business. Just to talk about, you know, auto has many of the very same trends. It has all the same general trends going on with the consumer and the normalization that we have been talking about. The auto business also has some other things that are unique to it. Auto recoveries, for example, auto recoveries inventories are unusually low because the very low charge-offs that we've had in the past few years. The past charge-offs are basically the raw material for future recovery. So the generally good news that has, you know, been in the auto industry of, robust used car prices actually puts upward pressure on our overall loss rate as recovery's inventory build. So we also, in terms of the credit metrics, we have seen more degradation in the very, very low and mostly below where we play in the auto business. Uh, but we have trimmed a little bit around the edges at the, at the, at our own, uh, low end. But, um, uh, basically we continue to feel very good about our originations, uh, from a credit point of view, the biggest, uh, issue in auto is the, uh, margin pressure that has come from the rising, uh, interest rates that have not been fully passed through by the competition. So we continue to feel really good about the auto opportunity, but our pullback is really not a credit-driven pullback so much as it is a margin-driven pullback. But we certainly do see the, you know, we can see the normalization in the auto business.

Okay, and then on the credit card spend, same store, are you seeing moderation? Can you talk about heavy spender trends?

Yeah, you'll notice our own spend growth numbers moderated quite a bit this quarter. We are seeing spend per account, per customer, moderate across our portfolio today. moderating the most at the lower end, but we see the moderation. We see it the least in the very heaviest spenders, but the moderation that you see in our spend growth metrics are driven really by what's happening per account. We continue to get nice growth of accounts. So that is a phenomenon that, and then we kind of asked, well, you know, what should we be rooting for? I think you're seeing a very rational response by consumers to the environment. There was a big surge in spending. I think it's moderating somewhat, particularly at places other than the very highest end of the marketplace. So, you know, I think it's basically a sign of consumers being rational.

Next question, please.

Sanjay Sakrani with KBW.

Thank you. Andrew, first question for you on share repurchases. Maybe you can just help us think about the pace of share repurchases as we move forward, because I know you guys slowed them down, but you've been building capital. Maybe you can just help us with that first.

Sure, Sanjay. In terms of Thinking about the capital, you know that we have moved down over the course of the last couple of years from in the 14th to we hit a low point of 12.1 a couple quarters ago. But as we sit here today, you know, we're just looking at the actual and forecasted levels and the earnings and growth and, in particular, economic conditions. And there's some pretty wide error bars around those factors, particularly with respect to growth and economic uncertainty. And so we feel like at this moment in time that it's good to be a little bit more on the conservative side with risk management of managing that capital, but clearly we have the flexibility around our capital decisions under SCBs. And so, Rich, if you wanted to make any comments about repurchases as well.

Yeah, well, You know, I think we just continue to, you know, generate a lot of capital, and a central part of our strategy is the return of capital through share of purchases and dividends. You know, lately we've dialed back a little bit on that just really as a measure of prudence in an unusually uncertain time like this. I've never met anyone who sort of says that they had too much capital in a downturn. So after very strong levels of buybacks, we've moderated here in this environment. But the strategy of Capital One continues to be the same. And we believe that Return of capital is an important part of the economic equation for investors over time.

Should we assume the fourth quarter pace as a good run rate or just not assume anything?

We're just going to manage it dynamically based on what we see in the marketplace and the factors that that I described before. So, um, at this point you've seen what we've been doing over the last handful of months, roughly $50 million a month. But, um, again, we have flexibility and as we have a bit more certainty of how, uh, you know, the, the coming quarters will play out, that's going to inform, um, our, our actions.

Thank you. Next question, please. Our next question comes from the line of Aaron Saganovich with city.

Thanks. Maybe you could just talk a little bit about the level of marketing growth for the year. You had a bit of a step up, I'd say, in 2022, and the growth rates there are obviously showing a lot of traction in most of your metrics. Is there essentially kind of a a bit of a slowdown but still have the ability to continue to grow and get into the opportunity on the card side?

Yeah, Aaron.

Yeah, the marketing story has several components to it. One is just the – and an important part of that is the sort of real-time response to the opportunities that we see. And we continued – especially talking about card and of course card is, is where most of the marketing is, but you know, we continue to see attractive growth opportunities really across our business and are leaning into them. So that, and it's corresponded with some expansion in opportunities that are just a by-product of our tech transformation. And it's just more access points, more channels, more, um, but better credit models that give a little bit deeper and wider, uh, access to opportunities and, and more granularity, the more granularity that we get from our models, actually, the more we can separate the attractive customers from the less attractive and allows us to lean in more. So, uh, the marketing, the, the pursuit of the, you know, real-time opportunities we see is, um, is an important part of the marketing, and that is going very well. The second important driver, of course, is the continued traction we're getting in our really 10-year journey to drive more and more upmarket with a focus on heavy spenders. And, you know, I think back to when we launched the Venture Card in 2010, but, of course, this journey, and we've been declaring for years that, The pursuit of the top of the market is not something that is an opportunistic one of in and out. And it is much more about working backwards from what it takes to win with heavy spenders and then investing to be able to do that. And that's about great products with heavy reward content, great servicing, exceptional digital experiences. but also more and more the experiences that are consistent with the very high-end lifestyle and so on. So there have been a bunch of investments there. Most of that, not all of it, but a lot of that shows up in marketing. That also has a significant upfront component in terms of not only the direct marketing and the brand building, but also the early spend bonuses that go right through the marketing line, you know, when we, at the early stage of these accounts. So, uh, that's, that's something that we've been growing and sustaining over the last number of years. We love the traction that we're getting. And, um, uh, so we continue to lean into that. And then again, the, uh, the national bank where I just want to comment, I, I, um, We are really pleased with the national bank that we've built. We are the really only kind of full-service national bank that doesn't have a national quest through acquisition to continue to grow. In other words, of all the banks our size or even smaller, The realistic path to growth is to do that through mergers and acquisitions. Our path is an organic one. We've invested quite a bit to create full digital capabilities for almost everything you can do in a branch to be able to be done by a customer digitally. And so that our growth story is not just about savings accounts, but it's very much about checking accounts as well. And this is our quest we've been on for some number of years to build a national bank. That also is, you know, that's physical distribution light and marketing heavy. So a bunch of things kind of come together to, you know, create the, pretty big marketing levels that we have now, but we feel very good about the traction that we're getting. Very helpful. Thank you.

Next question, please.

Our next question comes from the line of Richard Shane with JP Morgan.

Hey, guys. Thanks for taking my question. Andrew, you made the comment talking about the reserve rate on the card portfolio and reflecting the seasonality of the increase in spend and balances from spend-driven accounts. As we move into Q1, should we assume that with normal portfolio runoff but a MIPS shift that

um allowance coverage ratio will actually pick up then because you're going to get a mix shift well there's a number of factors rick that will play into to coverage ratio so why don't i just pull up and lay out the the key pieces and forecast assumptions of our allowance and i will get to your kind of seasonal balance points in a moment. But I think it's important to lay out all of the component parts rather than just talk about one individual one since all of them will affect where coverage goes from here. So the first part of the allowance is we're using models to estimate the next 12 months of losses. And the early period of this forecast is generally more accurate because, as Rich was talking about earlier, we can look at the existing delinquency inventories and flow rates. Beyond those months, we incorporate in the economic assumptions, they become a more significant driver of expected loss content. I referenced that in the answer to the first question that was asked on the call, but the error bars around the loss content widen the further we go out over the course of the year. The second factor impacting the allowance is we start from the year one exit rate for losses and then assume a reversion to a long-term average over the following 12 months. And then the third thing is we net forecasted recoveries against the loss estimates for all of those periods. And so on top of all of those assumptions, we then put qualitative factors in places where we believe modeled outcomes have limitations. And so we end up putting all of those pieces together to evaluate the allowance. The open-ended product of credit card is different than closed-end loans. as we go through those mechanics, because with closed-end loans, we're reserving for estimated loss content for the account. But in a revolving product like CARD, we're only able to reserve for the loss content related to the balances that are on the books at the end of the quarter, as opposed to the projected loss content for the account. Getting to your question, then, when we have elevated seasonal balances in the fourth quarter, we expect a portion of those balances to pay down very quickly. And therefore, those specific balances are likely to have very, very low loss content given the life of the balance is far shorter than the life of the account. So all else equal, the coverage ratio in the fourth quarter has a bit of natural potential. downward pressure from that elevated denominator, as you suggest. But looking ahead, there's a bunch of factors that can impact where the allowance goes from here beyond that single effect. In periods where future losses may increase, we would replace the low loss content of the current quarter with the projected higher loss content in a future period. And for what it's worth, those assumptions also then carry into that reversion period. As we have growth with seasonally adjusted balances, Rich mentioned this before, CECL significantly pulls forward that allowance cost of growth. And then the third factor is coming out of a period where we have unusually low losses like we've experienced over the last couple of quarters, you have lower recoveries to offset the forecasted loss content. So all of those things can put upward pressure on allowance, but we could also have revisions to our economic assumptions, to delinquency flow rates, to just our overall loss content. And so there's pressures in the other direction. And so I appreciate your bearing with me for a long-winded, complex answer, but I think we all saw the complexity and pro-cyclicality of CECL play out during the pandemic when we had to make a bunch of assumptions as the pandemic played out. We built a sizable allowance only to release virtually all of it over the subsequent quarters. And so it's just a very difficult thing to predict given all of the assumptions at play, which is why we are trying to focus you on NACO and having delinquencies as a leading edge indicator of NACO

because that is ultimately where the the real economic cost is felt got it no it's a great answer and i'm glad to bear with you i'll probably read it in the transcript about seven more times so thank you next question please our next question comes from the line of marsh orenbach with credit suisse uh great thanks and um

I was hoping to talk a little bit about marketing. I mean, Rich, you did mention that you're primarily in card and primarily in the upscale customer. But could you just talk a little bit about, number one, what you might be doing kind of in non-prime and how we should think about whether that total marketing spend, given what you see, you know, is likely to be higher in 23 or not?

Yeah, so Moshe, I'm glad you asked the question because I would not want the net impression to be, I think what you were saying is that, is our marketing primarily just in the upscale customer segment? Differentially relative to years ago, we've certainly had a shift to the higher end in terms of our marketing segment. The marketing is also so expensive at that end. And then also the marketing at the higher end tends to, in some sense, lift the boats across the franchise. So the marketing at the higher end is carrying a lot on its shoulders, Moshe. But we do a lot of marketing in the mass market of the card business, including in the higher end of the subprime. segment of the market. Our strategy here is, well, it changes all the, you know, we tweak it around the edges all the time. We've been doing this for pretty much, you know, approaching three decades now at the lower end of the market. And the marketing there is direct marketing, stimulus response, very information-based. And so the, you know, the marketing machine that we've built, which has been enhanced by technology here, is definitely leaning into that opportunity. And I do want to say that, you know, we continue to get good traction in the subprime and prime parts of the marketplace, even as we certainly relative to 10 years ago have a lot more marketing going on at the top of the market. So there's quite a bit going on, and we feel good about the traction there.

Got it. Maybe just to kind of as a follow-up, what would it take for you to see either in the portfolio or in the market for you to do less marketing.

The way this tends to happen is it happens in one little segment, one micro segment at the margin in response to things that we see going on there. I use this phrase a lot, trimming around the edges. And you've heard me use that for many, many years. And this is something that we always do, or sometimes we're expanding around the edges. The net feel of these days is we're doing more trimming around the edges than expanding around the edges. But it is, so it's less about at the top of the house saying, we just believe we should do, you know, obviously at the top of the house, we're looking at all the macro things, but we're we're linking what we see in the macro level to what we're seeing right there in real time or the earliest we can see from our credit metrics. And then using the technology we've continued to invest so heavily in to have a more and more granular diagnosis and at an earlier time, than ever before diagnosis of where anything is deviating from uh the trajectory that we would expect and then you know one is sort of the diagnosis of deviation and this the second thing of course is um trying to get sort of a root cause understanding of what may be driving that and this is something that we continue to know put a lot of energy into and it has led us to trim some uh there's some things that we have seen degrade a fair amount around the edges they're fairly small in the overall size of things but we're certainly glad when we see them and then what we try to do is to link Data that we see to behavior that, excuse me, to sort of an explanation of what's going on from a customer and credit dynamic to be able to see if it makes total sense. So therefore, as things play out, it's less likely. And let's say we go more into a downturn. You know, it's less likely on the card side that you would see a big pullback. The kind of things you'd see is more trimming around the edges, more reduction of the credit lines that are given, and that would be more how it would play out.

Thank you. Next question, please.

I'm John Pancari with Evercore ISI.

Good evening. Regarding the reserve build, in terms of the drivers of the reserve build this quarter, I know you cited loan growth, you cited the macro backdrop, and you cited credit normalization. Is there any way to help parse out how much of the build of $1 billion is attributable to loan growth versus macro versus credit normalization?

Yeah, John, we don't break out those components in part because some of them are actually related to one another. For instance, how we think about qualitative factors and how we think about our base forecast is tied into one another. And so that's why we just wanted to lay out that quarter over quarter, when you look at consensus estimates for things like unemployment, looking ahead at 2023, from where we were as of the end of the third quarter to where we were at the end of the fourth quarter, looking ahead on some of those metrics, we saw a degree of worsening. And when you couple that with shifting forward one quarter and replacing a much lower loss content in the fourth quarter with you know, continued normalization as I referenced it heading into 2023. Those are factors that go into it, but I'm actually not even really able to break out the component parts because they're tied with one another with all the assumptions.

Okay, no, I get it. That's helpful. The normalization point, if I could just ask one more thing on that, was there anything about the normalization, and I appreciate the color you already gave, but is there anything about the normalization that you're seeing that is faster than expected or any change like that that necessitated the size of the build this quarter?

No, and I think Rich touched on some of these in one of his earlier responses, but what we're seeing in terms of normalization is playing out as we expect. It's part of why I wanted to highlight the fact that the mechanics of the reserves though only take into account that 12-month model period and revert from there. And so we're only allowing for the content, the outstanding content at the end of the quarter as well. So even if things play out exactly as we expect, we could see allowance build just like we saw this quarter. It just depends on a whole host of factors.

And I think that concludes our Q&A for the evening. Thank you for joining us on the conference call today, and thank you for your continuing interest in Capital One. The investor relations team will be here later this evening if you have any further questions. Have a good night.

Thank you. Ladies and gentlemen, this concludes today's conference call. Thank you for participating, and you may now disconnect.

The conference will begin shortly. To raise and lower your hand during Q&A, you can dial star 1 1. Music Playing Thank you. Thank you.

Thank you. Thank you.

Good day, and thank you for standing by. Welcome to the fourth quarter 2022 Capital One Financial Earnings Conference call. At this time, all participants are in a listen-only mode. After the speaker's presentation, there will be a question and answer session. To ask a question during the session, you need to press star 1-1 on your telephone. You will then hear an automated message advising you your hand is raised. To withdraw your question, please press star 1-1 again. Please be advised that today's conference is being recorded. I would now like to hand the conference over to speaker today, Jeff Norris, Senior Vice President of Finance. Please go ahead.

Thanks very much, Victor, and welcome, everybody, to Capital One's fourth quarter 2022 earnings conference call. As usual, we are webcasting live over the Internet. To access the call on the Internet, 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 fourth quarter 2022 results. With me this evening 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 the presentation. To access a copy of the presentation and the 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 factor section in our annual and quarterly reports, which are accessible at Capital One's website and filed with the SEC. With that, I'll turn the call over to Mr. Young. Andrew.

Thanks, Jeff, and good afternoon, everyone. I'll start on slide three of tonight's presentation. In the fourth quarter, Capital One earned $1.2 billion, or $3.03 per diluted common share. For the full year, Capital One earned $7.4 billion, or $17.91 per share. Included in the results for the fourth quarter were two adjusting items, which collectively benefited pre-tax earnings by 105 million. Net of these adjustments, fourth quarter earnings per share were $2.82, and full year earnings per share were 17.71. On a linked quarter basis, period end loans grew 3% and average loans grew 2%, driven by growth in our domestic car business. This loan growth, coupled with net interest margin expansion, drove revenue up 3% on a linked quarter basis. Non-interest expense grew 3% in the linked quarter, driven by an increase in marketing expenses while operating expenses were largely flat. Net of the adjustments I mentioned earlier, operating expenses were up 2.4%. Provision expense in the quarter was $2.4 billion, driven by net charge-offs of $1.4 billion and an allowance billed of about $1 billion. Turning to slide four, I will cover the changes in our allowance in greater detail. The $1 billion increase in allowance in the fourth quarter brings our total company year-end allowance balance up to $13.2 billion, increasing the total company coverage ratio by 22 basis points to 4.24%. I'll cover the changes in allowance and coverage ratio by segment on slide five. In our domestic card business, the allowance balance increased by $795 million, bringing our coverage ratio to 6.97%. Three things put upward pressure on our card allowance. The first factor was the continued credit normalization in our portfolio. The second factor was a modestly worse economic outlook than our assumption a quarter ago. And finally, we built allowance for the loan growth in the quarter. The impact of the fourth quarter loan growth on the allowance is more muted than typical loan growth, given the seasonal nature of these balances. These three factors were modestly offset by a release in our qualitative factors. In our consumer banking segment, the allowance balance increased by $129 million, driving a 20 basis point increase in coverage to 2.8%. The build was primarily driven by continued credit normalization in our auto business, including lower recovery rates. The second factor also putting upward pressure on our allowance is the impact of a modestly worse economic outlook. These two factors were modestly offset by a release in our qualitative factors. And finally, in our commercial business, the allowance increased $73 million, resulting in a nine basis point increase in coverage to 1.54%. This was largely driven by reserve builds for our office portfolio. Turning to page six, I'll discuss liquidity. You can see our preliminary average liquidity coverage ratio during the fourth quarter was 143%, well above the 100% regulatory requirement. Total liquidity reserves increased by $14 billion to $107 billion. Strong consumer deposit growth throughout the quarter drove cash balances higher and allowed us to pay down prior FHLB borrowings. Turning to page seven, I'll cover our net interest margin. Our net interest margin was 6.84% in the fourth quarter, 24 basis points higher than the year-ago quarter and four basis points higher than the prior quarter. The four basis point linked quarter increase in NIM was driven by higher asset yields and a balance sheet mix shift towards car loans. This impact was mostly offset by higher deposit and wholesale funding costs. Turning to slide eight, I will end by discussing our capital position. Our common equity Tier 1 capital ratio was 12.5% at the end of the fourth quarter, up about 30 basis points relative to last quarter. The $1.2 billion of net income in the quarter was partially offset by growth in risk-weighted assets, dividends, and share repurchases. We repurchased approximately $150 million of common stock in the quarter, bringing the repurchases for the full year to $4.8 billion. we continue to estimate that our longer-term CET1 capital need is around 11%. With that, I will turn the call over to Rich. Rich?

Thank you, Andrew, and welcome, everybody. I'll begin on slide 10 with fourth quarter results in our credit card business. Year-over-year growth in purchase volume and loans, coupled with strong revenue margin, drove an increase in revenue compared to the fourth quarter of 2021. Credit card segment results are largely a function of our domestic card results and trends, which are shown on slide 11. In the fourth quarter, strong year-over-year growth in every top line metric continued in our domestic card business. Purchase volume for the fourth quarter was up 9% from the fourth quarter of 2021. Ending loan balances increased $22.9 billion, or about 21% year over year. Ending loans grew 8% from the sequential quarter. And revenue was up 19% year over year, driven by the growth in purchase volume and loans, as well as strong revenue margins. Both the charge-off rate and the delinquency rate continued to normalize and were below pre-pandemic levels. The domestic card charge-off rate for the quarter was 3.2%, up 173 basis points year over year. The 30-plus delinquency rate at quarter end was 3.43%, 121 basis points above the prior year. On a linked quarter basis, the charge-off rate was up 102 basis points, and the delinquency rate was up 46 basis points. Non-interest expense was up 12% from the fourth quarter of 2021, which includes an increase in marketing. Total company marketing expense was about $1.1 billion in the quarter. Our choices in domestic card marketing are the biggest driver of total company marketing. In our domestic card business, we continue to lean into marketing to drive resilient growth. We're keeping a close eye on competitor actions and potential marketplace risk. We're seeing the success of our marketing in strong growth in domestic card new accounts, purchase volume, and loans across our card business. And strong momentum in our decade-long focus on heavy spenders at the top of the marketplace continues. Slide 12 shows fourth quarter results for our consumer banking business. In the fourth quarter, we continue to see the effects of our choice to pull back on auto growth in response to competitive pricing dynamics that have pressured industry margins. auto originations declined 32% year over year and 20% from the linked quarter. Driven by the decline in auto originations, consumer banking loan growth continued to be slower than previous quarters. Fourth quarter ending loans grew 3% compared to the year ago quarter. On a linked quarter basis, ending loans were down 2%. Fourth quarter ending deposits in the consumer bank were up 6% year over year and up 5% over the sequential quarter. Average deposits were up 4% year over year and up 3% from the sequential quarter. Our digital first national direct banking strategy continues to get good traction. Consumer banking revenue was up 10% year-over-year as growth in auto loans and deposits was partially offset by the year-over-year decline in auto markets. Non-interest expense was up 13% compared to the fourth quarter of 2021, driven by investments in the digital capabilities of our auto and retail banking businesses and marketing for our national digital bank. The auto charge off rate and delinquency rate continued to normalize in the fourth quarter. The charge off rate for the fourth quarter was 1.66% up 108 basis points year over year. The 30 plus delinquency rate was 5.62% up 130 basis points year over year. On a linked quarter basis, the charge off rate was up 61 basis points and the 30 plus delinquency rate was up 77 basis points. Slide 13 shows fourth quarter results for our commercial banking business. Compared to the linked quarter, fourth quarter ending loan balances were down 1% and average loans were flat. Ending deposits were down 1% from the linked quarter. Average deposits grew 7%. Fourth quarter revenue was down 23% from the linked quarter. The decline was primarily driven by an internal funds transfer pricing impact that was offset by an equivalent increase in the other category and was therefore neutral to the company. Excluding this impact, fourth quarter commercial revenue would have been down about 6% quarter over quarter and up 2% year over year. Non-interest expense was up 2% from the linked quarter. The commercial banking annualized charge-off rate was six basis points. The criticized performing loan rate increased 74 basis points from the linked quarter to 6.71%. And the criticized non-performing loan rate was up 17 basis points from the linked quarter to 0.74%. In closing, We continue to drive strong growth in card revenue, purchase volume, and loans in the fourth quarter. Loan growth in our consumer banking business was slower compared to previous quarters as we continued to pull back on auto origination. Consumer deposits grew, and in our commercial banking business, ending loans and deposits were roughly flat compared to the linked quarter. Charge-off rates and delinquency rates continue to normalize across our business and we're below pre-pandemic levels. Total company operating expense net of adjustments was up 2.4% from the linked quarter. Our annual operating efficiency ratio for full year 2022 was 44.5% net of adjustment, a 15 basis points improvement from full year 2021. And we expect that the full year 2023 annual operating efficiency ratio net of adjustments will be roughly flat to modestly down compared to 2022. Pulling way up, we continue to see opportunities for resilient asset growth that can deliver sustained revenue annuities. We continue to closely monitor and assess competitive dynamics and economic uncertainties. Powered by our modern digital technology, we're continuously improving our proprietary underwriting, marketing, and product capabilities. We're focusing on efficiency improvement, and we're managing capital prudently. As a result of our investments to transform our technology and to drive resilient growth, we're in a strong position to deliver compelling long-term shareholder value and thrive in a broad range of possible economic scenarios. And now we'll be happy to answer your questions. Jeff?

Thank you, Rich. We'll now start the Q&A session. As a courtesy to our other investors and analysts who might wish to ask a question, please limit yourself to one question plus a single follow-up. And if you have any follow-up questions after the Q&A session, the investor relations team will be available after the call. Victor, please start the Q&A.

Thank you. One moment for our first question.

Our first question comes from Neil here, Bhatia from Bank of America.

Your line is open. Good afternoon, and thank you for taking my question.

I wanted to ask about just the vintage seasoning or growth map, as I think we've talked about in the past. We've added a lot of loans here in, you know, last year. And as these loans season, I was just trying to wonder if you could maybe talk about just how you see that flowing through into your loss rates and what that does to your delinquency and loss curves here over the next 12 to 24 months? Thank you.

Yeah, thank you. Let me just start with a reminder of what we mean by growth, Matt. As a general rule of thumb, losses on new loans tend to ramp up over a couple of years and then peak and then gradually come down. When we accelerate growth, and especially when those new loans are added to a seasoned back book with low losses, it can increase the overall level of losses of a portfolio. We grew rapidly, for example, just looking back at when we talk a lot about growth math, we grew rapidly in 2014, 2015, and 2016, and had a particularly visible growth math effect in the wake of that growth. At that time, the large front book was adding to a back book that was unusually seasoned because it had survived the Great Recession. Given our recent rate of growth, I think it's likely we'll see some growth mass effect again over the next few years. But I think the general normalization trend will be the bigger driver of our credit trajectory. One other thing that's different about growth mass going forward is CECL. Under the CECL accounting regime, the allowance impacts of new growth are pulled forward significantly. We haven't seen this effect for most of the pandemic, even as we have accelerated our growth because of the offsetting favorable factors in our allowance. But as our growth continues, a portion of our allowance bills going forward are intended to support that growth.

Okay, thanks. And then just maybe on your reserve, just trying to understand just some of the assumptions underlying the reserves. Maybe you could just talk about what you're assuming for unemployment reserve, whether you have a recession built into the short term. Any additional color you can help us with there? Thank you.

Sure, I'm here. As I've said in the past, we are largely consumers of economic assumptions. In this particular case for unemployment, we are assuming something that's a little modestly higher than consensus estimates for where we will land in the fourth quarter. I think consensus is somewhere around 4.8. Our baseline forecast gets up to around 5%. in the fourth quarter, but it's important to note there's a lot of other things that go into the calculation of the reserve, things like unemployment, or sorry, changes in the unemployment rate, inflation, home prices, wages, all of those factors matter as well, but our unemployment assumption is to be around 4% in the fourth quarter, or sorry, around 5% in the fourth quarter.

Next question, please.

Thank you. One moment, please. Hello? Hello?

Yes, one moment, please. And our next question comes from the line of Ashish Sharma with Capital One.

Hey, Victor, I don't think that's right.

Was that intended for me, Jeff?

Hey, Ryan, why don't you go ahead?

Sorry about that. Hey, thanks, guys. So, Rich, maybe I can ask one of Mahir's questions in a slightly different manner. So, you know, competitors in the industry are talking about reaching, you know, pre-pandemic loss levels by year end or maybe even overshooting those levels. Can you maybe just talk a little bit about how you think about the pace of normalization or maybe even overshooting those? And maybe just talk a little bit about normalization versus parts of the portfolio if you're actually seeing any deterioration. Thanks. And I have a follow-up. Okay. Thanks, Ryan. So, you know, consumer credit metrics remain strong. And, of course, as we've seen, they've been normalizing steadily through 2022 and are approaching pre-pandemic levels. You know, the At first, normalization was more pronounced in some segments more than others. It was, of course, and by the way, this is always the case, that front book new originations tend to be higher. So that would have been shocking had it been different. But the other thing we also said and talked to investors about, it was more Normalization was happening everywhere, but it was more pronounced at the lower end of the market. More recently, we've actually seen more uniform trend of normalization across businesses and segments. So, for example, across various FICO ranges and also across income levels. When we index them on credit metrics back to where they were before the pandemic, the sort of rest of the credit spectrum and rest of the income spectrums caught up to the very recently in the last few months to the lower end. So really, if I pull on that, it looks like the normalization is pretty consistent across the board. Got it. Yeah, go ahead, Ryan.

No, go for it, and I'll ask my follow-up when you finish.

So, you know, you asked, you know, various competitors are, you know, forecasting or talking about different times at which things cross, you know, 2019 levels. I think at Capital One, we're not making specific predictions on that, but I think the key thing I would have you look at is the delinquency metrics. Delinquency metrics are the best single predictor of where things are going to go in the near term. And in fact, if we look at flow rates, we can see that very early flow rates into delinquency buckets are pretty normalized. So, you know, we're not giving specific guidance, but we would say, you know, look at the credit metrics, look at the dynamics across other metrics. But we feel this is, you know, it's clearly normalizing as we see it. Got it. And then, Rich, maybe to follow up on the comments regarding the efficiency being flat to modestly down, I think last quarter you were talking about modest efficiency improvement. There have been headlines about the firm reducing some headcount. So I'm just curious, has anything changed in terms of your expectations for efficiency improvement? I guess given the pace of revenue growth that's expected and contemplated, Is there any acceleration investments that's taking place to drive the stable to modestly efficient and improving efficiency? Thank you. Yeah, Ryan, our efficiency outlook is exactly the same as it was last quarter. If you recall, actually, we guided for full year 2022. for efficiency to be basically kind of flat to 2021 and then modestly down for 2023 relative to 2021. What happened is that 22 came in a little bit lower. So our guidance of flat to modestly down, it's the same outlook as we had before. And so they know there's You know, there's not big investments behind that. It's the continued journey of Capital One to lean into our opportunities, to continue to, you know, invest in the tech opportunities that we see and the opportunities to create breakthroughs in the marketplace and continue to transform how we work. But pulling way up the sort of story, if you kind of – pull way back on operating efficiency, the journey that where we've driven 440 basis points of improvement from 2013, you know, well through 2019. And then we had the whole pandemic thing, but if I pull way up the gradual operating efficiency improvement is what we are continuing to, you know, drive for through the, leveraging of our tech transformation, even as we continue to invest.

Got it. Thanks for the call, Rich.

Tim, please.

Thank you. And our next question comes from the line of Betsy and Stanley.

Hi. Good evening. How are you? Hi, Betsy. Hi, Betsy. Hi. Okay. So two questions. One, just as we think about the net interest margin and net interest margin outlook. Can you give us a sense as to how you're thinking about deposit betas and how that's likely to roll here over the course of the year? I noticed you talked a little bit earlier about deposit growth was really strong. Maybe give us a sense as to which types of deposits you're really leaning into at this stage. And then help us understand how asset yields are likely to trend given an forward curve, I'm assuming, is the base case. But tell me if you have a different point of view on that. Thanks.

Yeah, Betsy, I'll start with your last question first, which is we are following the forward curve, assuming 50 bps here in the first quarter and holding flat throughout 23 before coming down in 24. With respect to how we're thinking about beta and asset yields as components of NIM, as we get into the latter part of this rate cycle, lagged deposit rates really have a bigger impact than the asset yields that reprice more quickly and did so over the last couple of quarters as the Fed was moving rapidly. And so there's a bit of that sequential dynamic going on in terms of thinking about overall deposit beta and product mix, you know, roughly 85% of our deposits are in consumer. It's where our, our focus lies. And so if you just look at the cumulative deposit beta for the total company, it's around 35% was low twenties last quarter. But if you look at the last increasing rate cycle, I think the terminal beta was around 41. So I could see a terminal beta being somewhere above that, just given competitive dynamics in the marketplace at this point. So I would say the net of all of those factors is likely to be a modest headwind to NIM. We talked last quarter about balance sheet mix. And we are largely back to pre-pandemic balance sheet mix from where we were a year ago. And frankly, our NIM is roughly in a similar spot. So I would say balance sheet mix over a multiple quarter period isn't likely to be a big driver unless we just see outsized growth in the higher margin card business. And then the other factor that could prove to be a tailwind to potentially offset a little bit of the modest headwind that probably comes from the beta dynamics that I described is we could also see a bit of an increase in card revolve rates from where they are today. So all of those things are just to leave you with kind of a net impression that there are headwinds and potentially some tailwinds, but the one thing I will just note as we look ahead to the first quarter as a reminder in the way we calculate NIM day count has an effect. So the one thing we know for sure is we'll have a 14 basis point or so headwind in Q1 due to having two fewer days in the quarter.

Okay, that's super helpful, Keller. As a follow-up, I just wanted to get a sense as to how you're thinking about the outlook for marketing, obviously a critical driver of growth, and I know it's been something that you've been very successful with in generating that top of wallet customer, but just wanted to see how we should think about that investment as we go into the next year with this NIMH headwind, et cetera. Thanks.

Hey, Rich. We're getting mute.

Sorry. Betsy, yes, we continue to feel very good about the traction that we're getting in marketing. Of course, most of the marketing that we do is in the card business. We continue to see attractive growth opportunities across the business for new account origination. We have continued to expand our products and the marketing channels that we're originating in. We see evidence all over the place of the benefits of our tech transformation that's giving us some extra opportunity. So we feel very good about that. You mentioned, of course, how do we feel about leaning into this in the context of the potential looming downturn and you know, what we do is we just continue to look all around the edges of our originations and, you know, look for places that either we would think might be particularly likely to have a challenge or be vulnerable or things that we see, you know, having any kind of performance issues, and we continue sort of trim around the edges. That's what we've been doing for three decades at Capital One, and we continue to do this. So there's a little bit of trimming around the edges, but really the net impression I would leave you on the card side is we continue to lean in. Now, of course, there's the marketing that we do just to originate accounts directly through all the direct marketing media. We, of course, have Our continued investments on the brand side, the heavy spender investments, which are particularly heavy in terms of marketing costs, we continue to get very good traction. On the spender side, our growth, as you sort of look at each sort of range of spenders, the we are getting the most growth at the higher end. So that continues to be a good sign for us. And so we're leaning into that. And then the other thing on the marketing side, of course, is the national bank marketing. You've seen some of the success we're having there. Everybody in banking is sort of leaning into the deposit growth side in the context of changing interest rates and and some deposits leaving the banking system. So our marketing venues get very good traction there. So pulling way up, we continue to feel good about the marketing. We like the traction that we're getting. And we have, of course, a very vigilant eye on the economic environment that we're moving into.

Next question, please.

And our next question comes from the line of Bill Karachi with Wolf Research.

Hi, good evening. Thanks for taking my question. Rich, I wanted to follow up on your commentary around delinquency metrics. At the current pace of normalization, is it reasonable to expect that we could see DQs get back to pre-pandemic levels by the mid-2023 timeframe? And then from there, does your outlook suggest that you expect delinquencies to flatten out? Or, you know, are you conservatively expecting DQs to drift higher and are prepared for some degree of modest worsening in credit that, you know, perhaps goes a bit beyond normalization?

Well, what we have said, Bill, is there are lots of metrics to look at. And, you know, I can even talk to you about a few, some of the others we're looking at as well. But, you know, number one that we would point our investors to look at is delinquency. And You know, delinquencies entries and individual delinquency flow rates have, you know, we see the normalization happening there, as I mentioned earlier. And, you know, we think there continues, it's interesting, when you look at the delinquencies themselves and most of the credit metrics, they continue continue to just keep on moving toward what we're calling sort of normalization. Normalization, of course, is not any precise point. But there are also a number of other things that we look at that I think show sort of the strength of where this thing is headed. And one is on the vintage curves from new originations. They continue to be pretty flat month after month. They're, of course, lagged by several months, but pretty flat. And when we compare individual segments to where they were back in the pre-pandemic period, it's pretty much on top of each other. So that is a good sign. We continue to look at our payment rates, which continue to be elevated. We like elevated payment rates that we've assumed they're going to normalize part of the way down to where they were before. But of course, there's been some mix shift toward more spender within Capital One's portfolio. But payment rates continue to be strong. The percent of customers making just the minimum payment is still below pre-pandemic levels. The percent of customers making full payments is above pre-pandemic levels. Our revolve rate is roughly flat relative to last year and remains below pre-pandemic. So these are all things that are, you know, positive indicators. But I do want to say also, again, there's been some mixed change, you know, in our own portfolio with a bit of a a shift toward the heavier spenders. So many of these metrics may not fully get back to where they were pre-pandemic. But if we pull up on this, what we see is nothing we see is surprising. It would be consistent with a consumer coming off of some of the extreme trends stimulus and some of the extreme pullbacks in the pandemic and returning to more normal behavior. And I think the delinquency metrics are certainly leading indicators of that trajectory.

That's very helpful, Rich. Thank you. If I may, as a follow-up separate topic, can you give us an update on Capital One's strategy for reducing friction at checkout with different electronic consumer wallet solutions? There have been some recent press reports regarding partnerships with other digital wallet providers. It would be helpful if you could just share your latest thoughts.

Before you go, we're getting a lot of background noise, Bill. Could you go on mute?

Oh, yeah, I have. Yes, I will.

So, you know, a phrase that I've often used is the tip of the spear in the transformation of banking is payments, both on the consumer and the commercial side. And the reason I say this is that First of all, it's very prone to significant changes in technology, and also it's not as heavily regulated a space as much of banking is. You don't have to be a bank holding company to be doing a lot of those things. And that's actually the area that we have seen certainly a lot of traction by some very successful tech companies. So Capital One has... you know, we continue to support the various technology players who have developed payment innovations and we continue to develop innovations of our own. There was some news out about in the news today, in fact, about, you know, potentially a new wallet coming out. We are one of seven co-owners of the EWS. And we're one of the thousands of banks that use EWS. But, you know, on that one, we really don't have any specific comments to get ahead of the EWS management team on that.

Next question, please.

Thank you. And our next question comes from the line of Don Fandetti with Wells Fargo.

Hi, Rich. I was wondering if you can talk a little bit about your thoughts on auto credit, and then as a follow-up, what you're seeing on credit card spend, in particular heavy spenders, and whether or not they can sustain the travel and spend numbers.

Okay. Thank you, Don. In auto, So let's talk a little bit about the auto business and maybe a little bit of a comparison to the card business. Just to talk about, you know, auto has many of the very same trends. It has all the same general trends going on with the consumer and the normalization that we have been talking about. The auto business also has some other things that are unique to it. Auto recoveries, for example, auto recoveries inventories are unusually low because the very low charge-offs that we've had in the past few years. The past charge-offs are basically the raw material for future recovery. So the generally good news that has, you know, been in the auto industry of robust used car prices actually puts upward pressure on our overall loss rate as recovery's inventory build. So we also, in terms of the credit metrics, we have seen more degradation in the very, very low and mostly below where we play in the auto business. Uh, but we have trimmed a little bit around the edges at the, at the, at our own, uh, low end. But, um, uh, basically we continue to feel very good about our originations, uh, from a credit point of view, the biggest issue in auto is the, uh, margin pressure that has come from the rising, uh, interest rates that have not been fully passed through by the competition. So we continue to feel really good about the auto opportunity, but our pullback is really not a credit-driven pullback so much as it is a margin-driven pullback. But we certainly do see the, you know, we can see the normalization in the auto business.

Okay, and then on the credit card spend, same store, are you seeing moderation? Can you talk about heavy spender trends?

Yeah, you'll notice our own spend growth numbers moderated quite a bit this quarter. We are seeing spend per account, per customer, moderate across our portfolio today. moderating the most at the lower end, but we see the moderation. We see it the least in the very heaviest spenders, but the moderation that you see in our spend growth metrics are driven really by what's happening per account. We continue to get nice growth of accounts. So that is a phenomenon that, and then we kind of asked, well, you know, what should we be rooting for? I think you're seeing a very rational response by consumers to the environment. There was a big surge in spending. I think it's moderating somewhat, particularly at places other than the very highest end of the marketplace. So, you know, I think it's basically a sign of consumers being rational.

Next question, please.

Sanjay Sakrani with KBW.

Thank you. Andrew, first question for you on share repurchases. Maybe you can just help us think about the pace of share repurchases as we move forward because I know you guys slowed them down, but you've been building capital. Maybe you can just help us with that first.

Sure, Sanjay. In terms of Thinking about the capital, you know that we have moved down over the course of the last couple of years from in the 14th to we hit a low point of 12.1 a couple quarters ago. But as we sit here today, you know, we're just looking at the actual and forecasted levels and the earnings and growth and in particular economic conditions. And there's some pretty wide error bars around those factors, particularly with respect to growth and economic uncertainty. And so we feel like at this moment in time that, you know, it's good to be a little bit more on the conservative side with risk management of managing that capital, but clearly we have the flexibility around our capital decisions under SCBs. And so, Rich, if you wanted to make any comments about repurchases as well.

Yeah, well, You know, I think we just continue to, you know, generate a lot of capital, and a central part of our strategy is the return of capital through share of purchases and dividends. You know, lately we've dialed back a little bit on that just really as a measure of prudence in an unusually uncertain time like this. I've never met anyone who sort of says that they had too much capital in a downturn. So after very strong levels of buybacks, we've moderated here in this environment. But the strategy of Capital One continues to be the same. And we believe that Return of capital is an important part of the economic equation for investors over time.

Should we assume the fourth quarter pace as a good run rate or just not assume anything?

We're just going to manage it dynamically based on what we see in the marketplace and the factors that that I described before. So, um, at this point, you've seen what we've been doing over the last handful of months, roughly $50 million a month. But, um, again, we have flexibility and as we have a bit more certainty of how, uh, you know, the coming quarters will play out, that's going to inform, um, our, our actions.

Thank you.

Next question, please.

Our next question comes from the line of Aaron Saganovich with Citi.

Thanks. Maybe you could just talk a little bit about the level of marketing growth for the year. You had a bit of a step up, I'd say, in 2022, and the growth rates there are obviously showing a lot of traction in most of your metrics. Is there essentially kind of a a bit of a slowdown but still have the ability to continue to grow and get into the opportunity on the card side?

Yeah, Aaron. Yeah, the marketing story has several components to it. One is just the – and an important part of that is the sort of real-time response to the opportunities that we see. And we continued – especially talking about card and of course card is, is where most of the marketing is, but you know, we continue to see attractive growth opportunities really across our business and are leaning into them. So that, and it's corresponded with some expansion in opportunities that are just a by-product of our tech transformation. And it's just more access points, more channels, more, um, but better credit models that give a little bit deeper and wider, uh, access to opportunities and, and more granularity, the more granularity that we get from our models, actually, the more we can separate the attractive customers from the less attractive and allows us to lean in more. So, uh, the marketing, the, the pursuit of the, you know, real-time opportunities we see is, um, is an important part of the marketing, and that is going very well. The second important driver, of course, is the continued traction we're getting in our really 10-year journey to drive more and more upmarket with a focus on heavy spenders. And, you know, I think back to when we launched the Venture Card in 2010, but, of course, this journey, and we've been declaring for years that, The pursuit of the top of the market is not something that is an opportunistic one of in and out. And it is much more about working backwards from what it takes to win with heavy spenders and then investing to be able to do that. And that's about great products with heavy reward content, great servicing, exceptional digital experiences. but also more and more of the experiences that are consistent with the very high-end lifestyle and so on. So there have been a bunch of investments there. Most of that, not all of it, but a lot of that shows up in marketing. That also has a significant upfront component in terms of not only the direct marketing and the brand building, but also the early spend bonuses that go right through the marketing line, you know, when we, at the early stage of these accounts. So, uh, that's, that's something that we've been growing and sustaining over the last number of years. We love the traction that we're getting. And, um, uh, so we continue to lean into that. And then again, the, uh, the national bank where I just want to comment, I, I, um, We are really pleased with the national bank that we've built. We are the really only kind of full-service national bank that doesn't have a national quest through acquisition to continue to grow. In other words, of all the banks our size or even smaller, The realistic path to growth is to do that through mergers and acquisitions. Our path is an organic one. We've invested quite a bit to create full digital capabilities for almost everything you can do in a branch to be able to be done by a customer digitally. And so that our growth story is not just about savings accounts, but it's very much about checking accounts as well. And this is our quest we've been on for some number of years to build a national bank. That also is, you know, that's physical distribution light and marketing heavy. So a bunch of things kind of come together to, you know, create the, pretty big marketing levels that we have now, but we feel very good about the traction that we're getting. Very helpful. Thank you.

Next question, please.

Our next question comes from the line of Richard Shane with JP Morgan.

Hey, guys. Thanks for taking my question. Andrew, you've made the comment talking about the reserve rate on the card portfolio and reflecting the seasonality of the increase in spend and balances from spend-driven accounts. As we move into Q1, should we assume that with normal portfolio runoff but a mix shift that that

um allowance coverage ratio will actually pick up then because you're going to get a mix shift well there's a number of factors rick that will play into to coverage ratio so why don't i just pull up and lay out the the key pieces and forecast assumptions of our allowance and i will get to your kind of seasonal balance points in a moment, but I think it's important to lay out all of the component parts rather than just talk about one individual one since all of them will affect where coverage goes from here. So the first part of the allowance is we're using models to estimate the next 12 months of losses and the early period of this forecast is generally more accurate because, as Rich was talking about earlier, we can look at the existing delinquency inventories and flow rates. Beyond those months, we incorporate in the economic assumptions, they become a more significant driver of expected loss content. I referenced that in the answer to the first question that was asked on the call, but the error bars around the loss content widen the further we go out over the course of the year. The second factor impacting the allowance is we start from the year one exit rate for losses and then assume a reversion to a long-term average over the following 12 months. And then the third thing is we net forecasted recoveries against the loss estimates for all of those periods. And so on top of all of those assumptions, we then put qualitative factors in places where we believe modeled outcomes have limitations. And so we end up putting all of those pieces together to evaluate the allowance. The open-ended product of credit card is different than closed-end loans. as we go through those mechanics, because with closed-end loans, we're reserving for estimated loss content for the account. But in a revolving product like CARD, we're only able to reserve for the loss content related to the balances that are on the books at the end of the quarter, as opposed to the projected loss content for the account. Getting to your question then, when we have elevated seasonal balances in the fourth quarter, we expect a portion of those balances to pay down very quickly. And therefore, those specific balances are likely to have very, very low loss content given the life of the balance is far shorter than the life of the account. So all else equal, the coverage ratio in the fourth quarter has a bit of natural downward pressure from that elevated denominator, as you suggest. But looking ahead, there's a bunch of factors that can impact where the allowance goes from here beyond that single effect. In periods where future losses may increase, we would replace the low loss content of the current quarter with the projected higher loss content in a future period. for what it's worth, those assumptions also then carry into that reversion period. As we have growth with seasonally adjusted balances, Rich mentioned this before, CECL significantly pulls forward that allowance cost of growth. And then the third factor is coming out of a period where we have unusually low losses like we've experienced over the last couple of quarters, you have lower recoveries to offset the forecasted loss content. So all of those things can put upward pressure on allowance, but we could also have revisions to our economic assumptions, to delinquency flow rates, to just our overall loss content. And so there's pressures in the other direction. And so I appreciate your bearing with me for a long-winded, complex answer, but I think we all saw the complexity and pro-cyclicality of CECL play out during the pandemic when we had to make a bunch of assumptions as the pandemic played out. We built a sizable allowance only to release virtually all of it over the subsequent quarters. And so it's just a very difficult thing to predict given all of the assumptions at play, which is why we are trying to focus you on NACO and having delinquencies as a leading edge indicator of NACO because that is ultimately where the real economic cost is felt.

Got it. No, it's a great answer, and I'm glad to bear with you. I'll probably read it in the transcript about seven more times, so thank you.

Next question, please.

Our next question comes from the line of Marsh Orenbach with Credit Suisse.

Great. Thanks. I was hoping to talk a little bit about marketing. I mean, Rich, you did mention that you're primarily in card and primarily in the upscale customer. But could you just talk a little bit about, number one, what you might be doing kind of in non-prime and how we should think about whether that total marketing spend, given what you see, you know, is likely to be higher in 23 or not?

Yeah, so Moshe, I'm glad you asked the question because I would not want the net impression to be, I think what you were saying is that is our marketing primarily just in the upscale customer segment? Differentially relative to years ago, we've certainly had a shift to the higher end in terms of our marketing. The marketing is also so expensive at that end. And then also the marketing at the higher end tends to, in some sense, lift the boats across the franchise. So the marketing at the higher end is carrying a lot on its shoulders, Moshe. But we do a lot of marketing in the mass market of the card business, including in the higher end of the subprime. segment of the market. Our strategy here is, well, it changes all the, you know, we tweak it around the edges all the time. We've been doing this for pretty much, you know, approaching three decades now at the lower end of the market. And the marketing there is direct marketing, stimulus response, very information-based. And so the, you know, the marketing machine that we've built, which has been enhanced by technology here, is definitely leaning into that opportunity. And I do want to say that, you know, we continue to get good traction in the uh subprime and and prime parts of the marketplace even as uh we certainly relative to 10 years ago have a lot more marketing going on at the top of the market so there's quite a bit going on and we feel good about the traction there got it maybe maybe just to kind of as a follow-up what would it take you know for you to see

either in the portfolio or in the market for you to do less, less marketing.

Yeah. The, you know, the, the, the way this tends to happen is it happens in one little segment, one micro segment at the margin in response to things that we see going on there. I use this phrase a lot trimming around the edges because, And you've heard me use that for many, many years. And this is something that we always do, or sometimes we're expanding around the edges. The net feel of these days is we're doing more trimming around the edges than expanding around the edges. But it is, so it's less about at the top of the house saying, we just believe we should do, you know, obviously at the top of the house, we're looking at all the macro things, but we're we're linking what we see in the macro level to what we're seeing right there in real time or the earliest we can see from our credit metrics and then using the technology we've continued to invest so heavily in to have a more and more granular diagnosis. And at an earlier time, than ever before diagnosis of where anything is deviating from uh the trajectory that we would expect and then you know one is sort of the diagnosis of deviation and this the second thing of course is um trying to get sort of a root cause understanding of what may be driving that and this is something that we continue to you know, put a lot of energy into, and it has led us to trim some, there's some things that we have seen degrade a fair amount around the edges. They're fairly small in the overall size of things, but we're certainly glad when we see them. And then what we try to do is to link data that we see to behavior that, excuse me, to sort of an explanation of what's going on from a customer and credit dynamic to be able to see if it makes total sense. So therefore, as things play out, it's less likely, and let's say we go more into a downturn, You know, it's less likely on the card side that you would see a big pullback. The kind of things you'd see is more trimming around the edges, more reduction of the credit lines that are given, and that would be more how it would play out.

Thank you. Next question, please.

I'm John Pancari with Evercore ISI.

Good evening.

Regarding the reserve bill, in terms of the drivers of the reserve bill this quarter, I know you cited loan growth, you cited the macro backdrop, and you cited credit normalization. Is there any way to help parse out how much of the build of $1 billion is attributable to loan growth versus macro versus credit normalization?

Yeah, John, we don't break out those components in part because some of them are actually related to one another. For instance, how we think about qualitative factors and how we think about our base forecast is tied into one another. And so that's why we just wanted to lay out that quarter over quarter, when you look at consensus estimates for things like unemployment, looking ahead at 2023, from where we were as of the end of the third quarter to where we were at the end of the fourth quarter, looking ahead on some of those metrics, we saw a degree of worsening. And when you couple that with shifting forward one quarter and replacing a much lower loss content in the fourth quarter with you know, continued normalization as I referenced it heading into 2023. Those are factors that go into it, but I'm actually not even really able to break out the component parts because they're tied with one another with all the assumptions.

Okay, no, I get it. That's helpful. The normalization point, if I could just ask one more thing on that, was there anything about the normalization, and I appreciate the color you already gave, but is there anything about the normalization that you're seeing that is faster than expected or any change like that that necessitated the size of the bill this quarter?

No, and I think Rich touched on some of these in one of his earlier responses, but what we're seeing in terms of normalization is playing out as we expect. It's part of why I wanted to highlight the fact that the mechanics of the reserves though only take into account that 12-month model period and revert from there. And so we're only allowing for the content, the outstanding content at the end of the quarter as well. So even if things play out exactly as we expect, we could see allowance build just like we saw this quarter. It just depends on a whole host of factors.

And I think that concludes our Q&A for the evening. Thank you for joining us on the conference call today, and thank you for your continuing interest in Capital One. The investor relations team will be here later this evening if you have any further questions. Have a good night. Thank you.

Ladies and gentlemen, this concludes today's conference call. Thank you for participating, and you may now disconnect.