Capital One Financial Corporation

Good day and thank you for standing by. Welcome to Capital One Q4 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 the session, you will need to press star one one on your telephone. You will then hear an automated message advising your hand is raised. To withdraw your question, please press star one one 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, everyone, to Capital One's fourth 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 financials, we have included a presentation summarizing our fourth 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 are going to 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 in 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 of our annual and quarterly reports accessible at Capital One's website and filed with the SEC. Now I'll turn the call over to Mr. Young. Andrew?

Thanks, Jeff, and good afternoon, everybody. I'll start on slide three of today's presentation. In the fourth quarter, Capital One earned $706 million or $1.67 per diluted common share. For the full year, Capital One earned $4.9 billion, or $11.95 per share. Included in the results for the fourth quarter was a $289 million accrual for our current estimate of the FDIC Special Assessment. Net of this adjusting item, fourth quarter earnings per share were $2.24 and full year earnings per share were $12.52. On a linked quarter basis, growth in our domestic card business drove period end loans up 2% and average loans up 1%. Period end deposits increased 1% in the quarter and average deposits were flat. Our percentage of FDIC insured deposits grew to 82% of total deposits in the fourth quarter. Revenue in the linked quarter increased 1%, driven by both higher net interest and non-interest income. Non-interest expense was up 18% in the quarter. Operating expense increased 15%, with roughly half of that increase driven by the FDIC special assessment. The full year operating efficiency ratio, net of adjustments, improved 99 basis points to 43.54%. Provision expense was $2.9 billion, comprised of $2.5 billion of net charge-offs and an allowance billed of $326 million. Turning to slide four, I will cover the allowance balance in greater detail. The $326 million increase in allowance brings our total company allowance balance up to approximately $15.3 billion as of December 31st. The total company coverage ratio is now 4.77%, up two basis points from the prior quarter, largely driven by a higher mix of card assets. I'll cover the drivers of the changes in allowance and coverage ratio by segment on slide five. Outside of interest rates, most of our economic assumptions are largely unchanged from the third quarter, and we continue to assume several key economic variables modestly worsen from today's levels. In our domestic card business, the coverage ratio decreased by 16 basis points to 7.63%. The allowance balance increased by $336 million. The predominant driver of the increased allowance was the loan growth in the quarter. In our consumer banking segment, the allowance was essentially flat at roughly $2 billion. Coverage increased by four basis points to 2.71%, driven by a decline in auto loans in the quarter. And finally, in our commercial banking business, the coverage ratio declined by three basis points to 1.71%. The allowance decreased by $37 million, primarily driven by the charge-offs of office real estate loans in the quarter. We have included additional details on the office portfolio on slide 17 of tonight's presentation. Turning to page six, I'll now discuss liquidity. Total liquidity reserves in the quarter increased by $2.3 billion to about $121 billion. The increase was driven by a higher market value of our investment securities portfolio, partially offset by modestly lower cash balances. Our cash position ended the quarter at approximately $43.3 billion, down $1.6 billion from the prior quarter. You can see our preliminary average liquidity coverage ratio during the fourth quarter was 167%. up from 155% in the third quarter. The increase in the LCR was driven by holding more of our cash balances at the parent company versus our banking subsidiary. Turning to page seven, I'll cover our net interest margin. Our fourth quarter net interest margin was 6.73%, four basis points higher than last quarter and 11 basis points lower than the year ago quarter. The quarter over quarter increase in NIM was largely driven by a continued mixed shift towards card loans and higher asset yields, partially offset by higher rate paid on deposits. Turning to slide eight, I will end by discussing our capital position. Our common equity tier one capital ratio ended the quarter at 12.9%, approximately 10 basis points lower than the prior quarter. Asset growth, common and preferred dividends, and the share repurchases more than offset net income in the quarter. And with that, I will turn the call over to Rich. Rich?