Capital One Financial Corporation

Good day and thank you for standing by. Welcome to Capital One Q2 2023 earnings 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 second 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 at CapitalOne.com and follow the links from there. In addition to the press release and the financials, we have included a presentation summarizing our second quarter 2023 results. With me today are Mr. Richard Fairbank, Capital One's Chairman and Chief Executive Officer, and Mr. Andrew Young, Capital One's Chief Financial Officer. Rich and Andrew will walk you through 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 factors section in our annual and quarterly reports accessible at the Capital One website and filed with the SEC. With that, I'll turn the call over to Mr. Young. Andrew?

Andrew Young Thank you, Jeff, and good afternoon, everyone. I'll start on slide three of tonight's presentation. In the second quarter, Capital One earned $1.4 billion, or $3.52 per diluted common share. Pre-provision earnings of $4.2 billion were up 7% compared to the first quarter and 16% compared to the year-ago quarter. Both period end and average loans held for investment increased 1% relative to the prior quarter driven by growth in our domestic card business. Period end deposits declined 2% in the quarter, largely driven by tax-related outflows. Our percentage of FDIC-insured deposits grew 1% to end the quarter at 79% of total deposits. We have provided additional details on deposit trends on slide 18 in the appendix. Revenue in the linked quarter increased 1% driven by non-interest income. Non-interest expense decreased 3% in the quarter, driven by declines in both operating and marketing expenses. Provision expense was $2.5 billion, with $2.2 billion of net charge-offs and an allowance bill of $318 million. Turning to slide four, I will cover the changes in our allowance in greater detail. The $318 million increase in allowance brings our total company allowance balance up to $14.6 billion as of June 30th. The total company coverage ratio is now 4.7%, up six basis points from the prior quarter. 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 $544 million, increasing our coverage ratio by 12 basis points to 7.78%. Three factors impacted the allowance in the quarter. The predominant factor was growth, as ending domestic card loans grew about $5 billion in the quarter. The second factor was the impact of removing the relatively lower loss content from the second quarter of 2023 and replacing it with higher forecasted loss content for the second quarter of 2024 as part of our 12-month reasonable and supportable period. These two factors were partially offset by an improvement in our economic outlook, which still assumes worsening from today's level, but less so than our outlook a quarter ago. In our consumer banking segment, the allowance balance declined by $20 million, mostly driven by the decline in loans. The coverage ratio was essentially flat at 2.83%. And finally, in our commercial banking business, the allowance decreased by $218 million. In the quarter, we moved approximately $900 million of loans from our commercial office portfolio to held for sale as we pursue the potential sale of a portion of the portfolio to reduce future risk. With that move, we recognized charge-offs that were already largely reflected in our allowance, which was the primary factor driving this quarter's decrease. The decrease in allowance from moving these loans to HFS was partially offset by a build for our remaining commercial office portfolio. We have provided additional details on our commercial office portfolio in the appendix of tonight's presentation. The coverage ratio in the commercial business decreased by 20 basis points and now stands at 1.62%. Turning to page six, I'll now discuss liquidity. You can see our preliminary average liquidity coverage ratio during the second quarter was 150%. up from 148% last quarter and 144% a year ago. Total liquidity reserves in the quarter decreased by about $9 billion to $118 billion, driven by modest declines in both cash and the investment portfolio. Our cash position ended the quarter at $42 billion, down about $5 billion from the prior quarter. We are also disclosing our net stable funding ratio for the first time this quarter. The preliminary average quarterly NSFR for both the first and second quarters was 134%, well above the 100% regulatory minimum. Turning to page seven, I'll cover our net interest margin. Our second quarter net interest margin was 6.48%. 12 basis points lower than last quarter and six basis points lower than a year ago quarter. The quarter-over-quarter decline in NIM was driven by deposit and wholesale funding costs increasing more than asset yields. That impact was partially offset by a continued mixed shift towards card loans and one additional day in the quarter. Turning to slide eight, I will end by discussing our capital position. Our common equity Tier 1 capital ratio ended the quarter at 12.7%, approximately 20 basis points higher than the prior quarter. Net income in the quarter was partially offset by changes in risk-weighted assets, common and preferred dividends, and the $150 million of share repurchases we completed in the quarter. At the end of the second quarter, the unrealized losses in AOCI from our AFS investment portfolio were $7.6 billion. If we were to include the full impact of these unrealized losses in our regulatory capital, our CET1 ratio would have ended the quarter at 10.4%. During the quarter, the Federal Reserve released the results of their stress test. Our preliminary stressed capital buffer requirement, which will be effective on October 1st of this year, is 4.8%, resulting in a total Fed capital requirement of 9.3%. 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?