Capital One Financial Corporation

Good day, and thank you for standing by. Welcome to First Quarter 2023 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 this session, you will need to press star 1-1 on your telephone. You will then hear an automated message advising 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 your speaker today, Jeff Norris, Senior Vice President of Finance. Please go ahead.

Thanks very much, Amy, and welcome, everybody, to Capital One's first quarter 2023 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, CapitalOne.com, and follow the links from there. In addition to the press release and financials, we've included a presentation summarizing our first quarter 2023 results. With me this evening are Mr. Richard Fairbank, Capital One's Chairman, Chief Executive Officer, and Mr. Andrew Young, Capital One's Chief Financial Officer. Rich and Andrew will walk you through this presentation. To access a copy of the presentation and 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. And for more information on these factors, please see the section titled forward-looking information in the earnings release presentation and the risk factors section in our annual and quarterly reports that are accessible at the Capital One website and filed with the SEC. With that, I'll turn the call over to Andrew.

Thanks, Jeff, and good afternoon, everyone. I'll start on slide three of tonight's presentation. In the first quarter, Capital One earned $960 million, or $2.31 per diluted common share. Pre-provision earnings of $4 billion were flat to the fourth quarter and up 3% relative to the fourth quarter net of adjustments. Period end loans held for investment declined 1% and average loans were flat. Total deposits grew throughout the quarter, increasing 4% on average and 5% on an ending basis. The increase in deposits was driven by strong retail deposit inflows, which was slightly offset by a decline in our commercial deposits. Our strong retail deposit growth drove our percentage of FDIC-insured deposits up 2% to end the quarter at 78% of total deposits. We have provided additional details on deposit trends on slide 18 in the appendix. Revenue in the linked quarter decreased 2%, primarily driven by lower non-interest income, while net interest income was largely flat. Non-interest expense decreased 3% in the quarter, driven by a decline in marketing from the seasonally higher fourth quarter. Operating expenses were up about 2% on a gap basis and roughly flat net of the fourth quarter adjusting items. Provision expense was $2.8 billion, driven by net charge-offs of $1.7 billion and an allowance billed of $1.1 billion. Turning to slide four, I will cover the changes in our allowance in greater detail. The $1.1 billion increase in allowance brings our total company allowance balance up to $14.3 billion as of March 31st. The total company coverage ratio is now 4.64%, up 40 basis points from the prior quarter. In our allowance, our assumptions for key economic variables remain similar to those of last quarter. We continue to assume economic worsening from today's levels on most measures. I'll cover the drivers of the changes in allowance and coverage ratio by segment on slide five. In our domestic card business, the allowance balance increased by $867 million, increasing our coverage ratio by 69 basis points to 7.66%. Our build in the quarter was primarily driven by three factors. The first factor is the impact of underlying growth in the quarter which replaced seasonal balances from the fourth quarter for which we held minimal allowance. The second factor is the impact of removing the relatively lower loss content from the first quarter of 2023 and replacing it with higher forecasted loss content for the first quarter of 2024. Recall that our allowance methodology uses a 12-month reasonable and supportable forecast period before it begins to revert to our historical loss average with additional consideration of qualitative factors. And finally, the third factor in our allowance build was the impact of acquiring the BJ's portfolio in the quarter. In our consumer banking segment, the allowance balance declined by $32 million, mostly driven by the decline in loans. The coverage ratio increased by two basis points and now stands at 2.82%. And finally, in our commercial banking business, the allowance increased by $245 million. The coverage ratio increased by 28 basis points and now stands at 1.82%. The allowance increase was driven by a $262 million reserve build related to our $3.6 billion commercial office portfolio. The coverage on the commercial office portfolio increased about 770 basis points and now stands at 13.9%. We have provided additional details on this portfolio on slide 17 of the presentation. Turning to page six, I'll now discuss liquidity. You can see our preliminary average liquidity coverage ratio during the first quarter was 148%, up from 143% last quarter and 140% a year ago. Total liquidity reserves in the quarter increased by $20 billion to $127 billion, primarily driven by increased levels of cash. Our cash position ended the quarter at $47 billion, up $16 billion from the prior quarter. This increase in our cash position was primarily driven by the strong consumer deposit growth I referenced earlier. We expect average cash balances in the near term to be elevated relative to pre-pandemic levels. In addition to the higher cash, the market value of our AFS securities portfolio grew $5 billion to $82 billion at the end of the quarter. Turning to page seven, I'll cover our net interest margin. Our first quarter net interest margin was 6.6%. 24 basis points lower than last quarter and 11 basis points higher than the year ago quarter. The 24 basis point quarter over quarter decline in NIM was driven by two factors. First, 15 basis points of the decline was a result of having two fewer days in the quarter. And second, the mixed impact of the elevated cash balances that I previously described pressured NIM by approximately 11 basis points. Outside of these two effects, higher asset yields roughly offset higher funding costs. Turning to slide eight, I will end by discussing our capital position. Our common equity tier one capital ratio ended the quarter at 12.5%. flat to the prior quarter. Net income in the quarter and lower risk weighted assets were offset by common and preferred dividends, the $150 million of share repurchase we completed in the quarter, and a 17 basis point impact from the phase-in of the CECL transition. At the end of the first quarter, the unrealized losses in AOCI from our AFS investment portfolio were $6.7 billion. If we were to include the impact of these unrealized losses in our regulatory capital, our CET-1 ratio would have ended the quarter at 10.5%. And we continue to estimate that our longer-term CET-1 capital need is around 11%. With that, I will turn the call over to Rich. Rich?