Core Viewpoint - Capital One is strategically positioned for long-term shareholder returns through its acquisition of Discover Financial and strong credit card portfolio management [1][12]. Financial Performance - Capital One reported a net income of $597 million for Q2 2024, translating to $1.38 per diluted common share, with an adjusted net income per diluted common share of $3.14 [2]. - Pre-provision earnings increased by 7% to $4.6 billion, while the provision for credit losses was $3.9 billion [2]. - The efficiency ratio stood at 52.03%, with an adjusted efficiency ratio of 51.47% [2][4]. Capital and Asset Management - The Common Equity Tier 1 capital ratio was 13.2% as of June 30, 2024, indicating a strong capital position [3][4]. - Tangible book value per share increased by 1% to $99.28, and period-end loans held for investment rose by 1% to $318.2 billion [3]. - Average total deposits increased by 1% to $349.5 billion, with period-end total deposits reaching $351.4 billion [3]. Credit Losses and Allowances - The company built up $1.27 billion in net allowances primarily due to the end of loss sharing with Walmart, with total allowances at $16.6 billion [6][10]. - Total net charge-offs amounted to $2.6 billion, predominantly from the credit card business [6]. Market Position and Strategic Moves - Capital One's market capitalization is approximately $51 billion, with a price-to-book value of around 1.3x [9][10]. - The company repurchased 1 million shares and paid a dividend yielding approximately 1.78%, resulting in total shareholder returns of about 2.5% annualized [10]. - The acquisition of Discover Financial is expected to enhance Capital One's payment processing capabilities and strengthen its market position in the credit card sector [10][12]. Competitive Landscape - Despite a competitive environment with rising interest rates, Capital One has managed to maintain strong net interest income (NII) of over $7.5 billion [7][8]. - The company is well-positioned to capitalize on opportunities in the premium travel card market, especially following Citi's exit from this segment [10].

Core Viewpoint - Capital One Financial operates a unique banking model focused on credit cards rather than traditional deposit and loan services, which presents both opportunities and risks for investors [1][2]. Group 1: Business Model - Capital One's primary revenue source is its credit card business, which generated $961 million in income from operations in Q1 2024, significantly outpacing its consumer banking income of $381 million and commercial banking income of $280 million [2]. - The bank also engages in auto loans, targeting borrowers with lower credit ratings, which can be highly profitable due to higher interest rates charged [3]. Group 2: Economic Risks - The bank's aggressive lending strategy poses risks, particularly during economic downturns when customers with lower credit quality may struggle to make payments, leading to increased defaults [4]. - Historical data shows that Capital One's stock fell over 80% during the Great Recession and more than 40% during the early days of the coronavirus recession, highlighting the vulnerability of its high-risk business model [4]. Group 3: Current Financial Indicators - In Q1 2024, the delinquency rate for U.S. credit card loans rose by 82 basis points year over year to 4.48%, indicating increased financial strain on customers [5]. - The company has increased its provision for credit losses by $151 million to $426 million in Q1 2024, marking a 55% year-over-year increase, reflecting concerns about potential defaults [5]. Group 4: Management and Future Outlook - Management has successfully navigated economic challenges in the past and is likely to continue to do so, but current signs of economic weakness and increasing delinquency rates suggest caution for investors [6][7]. - Investors are optimistic about the stock despite these signs, but the next recession may present a more favorable buying opportunity [7].

Revenue and Financial Performance - As of June 30, 2024, Capital One's total net revenues are primarily derived from lending to consumer and commercial customers, net of funding costs, with significant contributions from non-interest income such as interchange income[7]. - Total net revenue reached $9,506 million, reflecting a 5% growth compared to $9,012 million in the same period last year[11]. - Net income available to common stockholders decreased by 61% to $531 million, down from $1,351 million in Q2 2023[11]. - Total net revenue for Q2 2024 was $9.5 billion, up from $9.0 billion in Q2 2023, while total net revenue for the first six months of 2024 was $18.9 billion compared to $17.9 billion in the same period of 2023[15]. - Net income for Q2 2024 was $597 million ($1.38 per diluted common share), a decrease of $834 million compared to Q2 2023[15]. - Total net revenue for the Credit Card business increased to $6.8 billion in Q2 2024, up 9% from $6.2 billion in Q2 2023[48]. - Total net revenue decreased by $9 million to $880 million in Q2 2024 compared to Q2 2023[67]. Credit Losses and Risk Management - Provision for credit losses surged to $3,909 million, a significant increase of 57% from $2,490 million in Q2 2023[11]. - The net charge-off rate increased to 3.36%, up from 2.82% in the previous year, indicating a rise in credit losses[12]. - The allowance for credit losses increased by 9% to $16,649 million, compared to $15,296 million at the end of 2023[13]. - Provision for credit losses increased by $1.4 billion to $3.9 billion in Q2 2024, primarily due to higher net charge-offs in Domestic Card[31]. - The net charge-off rate increased to 6.00% in Q2 2024, up 159 basis points from 4.41% in Q2 2023[50]. - The allowance for credit losses increased to $6,592 million for the six months ended June 30, 2024, up from $5,285 million in the same period of 2023, indicating a rise of about 24.8%[182]. Assets and Liabilities - Total assets grew to $477,285 million, a 2% increase from $466,652 million[12]. - Total liabilities increased by $1.7 billion to $422.0 billion as of June 30, 2024, primarily due to deposit growth[35]. - Total assets reached $476.1 billion as of June 30, 2024, compared to $464.5 billion at the end of 2023[24]. - Total deposits increased by $3.0 billion to $351.4 billion as of June 30, 2024, driven by the national consumer banking strategy[39]. Capital and Equity - Common equity Tier 1 (CET1) capital ratio increased to 13.2% as of June 30, 2024, from 12.9% as of December 31, 2023[15]. - The Company and the Bank exceeded the minimum capital requirements and were both classified as "well-capitalized" as of June 30, 2024[82]. - Stockholders' equity decreased by $108 million to $58.0 billion as of June 30, 2024, impacted by accumulated other comprehensive loss and stock dividends[35]. - The Company repurchased $150 million of common stock in Q2 2024 and $253 million in the first six months of 2024[88]. Mergers and Acquisitions - Capital One has entered into a merger agreement with Discover Financial Services, where each share of Discover will be converted into 1.0192 shares of Capital One common stock, subject to regulatory approvals[9]. - The company is focused on enhancing its market position through strategic investments and potential mergers, including the merger with Discover Bank[160]. - The merger agreement with Discover Financial Services was unanimously approved by both companies' Boards of Directors, with each share of Discover common stock converting into 1.0192 shares of Capital One common stock[187]. Regulatory and Compliance - The Consumer Financial Protection Bureau's final rule, if enacted, could significantly lower the safe harbor amount for past due fees, potentially impacting Capital One's revenue and market dynamics[10]. - The Bank will be required to submit full resolution plans every three years starting October 1, 2024, as per the FDIC's new rule[149]. - The Federal Reserve is expected to finalize the Company's stress capital buffer requirement by August 31, 2024[148]. Operational Efficiency - The adjusted operating efficiency ratio for the three months ended June 30, 2023, was 40.31%, compared to 43.36% for the same period in 2024, indicating improved operational efficiency[153]. - Non-interest expense rose to $4,946 million in Q2 2024, up 3.2% from $4,794 million in Q2 2023[176]. Consumer Banking and Credit Quality - The total consumer banking segment reported a total of $75,663 million as of June 30, 2024, compared to $75,437 million on December 31, 2023, reflecting a marginal increase[100]. - The overall credit quality of the consumer banking portfolio is monitored through borrower credit scores and delinquency trends, with a focus on maintaining acceptable risk levels[198]. - The delinquency rate for domestic credit cards was 4.14% as of June 30, 2024, slightly improved from 4.17% on December 31, 2023[109]. Investment and Securities - As of June 30, 2024, Capital One's total investment securities available for sale amounted to $79,250 million, with gross unrealized losses of $10,463 million[188]. - The total amount of treasury stock as of June 30, 2024, was $30,548 million, an increase from $30,136 million as of December 31, 2023[179].

Core Viewpoint - Capital One's second-quarter 2024 adjusted earnings fell short of expectations, reflecting challenges in expenses and provisions despite some positive trends in net interest income and loan balances [1][2]. Financial Performance - Adjusted earnings per share were $3.14, below the Zacks Consensus Estimate of $3.28, and down from $3.52 in the prior-year quarter [1]. - Total net revenues increased by 5.5% year over year to $9.51 billion, meeting the Zacks Consensus Estimate [2]. - Net interest income rose 6.1% year over year to $7.55 billion, with a net interest margin expansion of 22 basis points to 6.70% [2]. - Non-interest income was $1.96 billion, up 3.2% from the prior-year quarter, driven by higher net interchange fees and service charges [2]. Expense and Efficiency Metrics - Non-interest expenses increased by 3.2% year over year to $4.95 billion, attributed to rising costs across most components [2]. - The efficiency ratio improved to 52.03%, down from 53.20% in the year-ago quarter, indicating enhanced profitability [3]. Credit Quality - Provision for credit losses surged 57% year over year to $3.91 billion, significantly higher than anticipated [4]. - The 30-plus-day-performing delinquency rate rose to 3.36%, and the net charge-off rate increased to 3.36% [4]. - Allowance as a percentage of reported loans held for investment was 5.23%, up 53 basis points year over year [4]. Capital Ratios and Profitability - As of June 30, 2024, the Tier 1 risk-based capital ratio improved to 14.5%, and the common equity Tier 1 capital ratio rose to 13.2% [5]. - Return on average assets decreased to 0.50%, down from 1.23% in the prior-year period, while return on average common equity fell to 3.99% from 10.70% [5]. Strategic Outlook - Capital One's strategic acquisitions and demand for consumer loans position it for long-term growth, although elevated expenses and a challenging macroeconomic environment present near-term concerns [6].

Group 1: Zacks Premium and Style Scores - Zacks Premium offers various tools for investors, including daily updates of Zacks Rank and Industry Rank, access to the Zacks 1 Rank List, Equity Research reports, and Premium stock screens [1] - Zacks Style Scores are complementary indicators that rate stocks based on value, growth, and momentum, helping investors identify stocks likely to outperform the market in the next 30 days [2] - Each stock receives an alphabetic rating from A to F based on its value, growth, and momentum qualities, with A being the highest score [2] Group 2: Value, Growth, and Momentum Scores - The Value Score focuses on identifying undervalued stocks using ratios like P/E, PEG, Price/Sales, and Price/Cash Flow [2] - The Growth Score evaluates a company's future prospects by analyzing projected and historical earnings, sales, and cash flow [3] - The Momentum Score assesses upward or downward trends in stock price or earnings outlook, utilizing one-week price changes and monthly earnings estimate changes [3] Group 3: VGM Score and Zacks Rank - The VGM Score combines Value, Growth, and Momentum Scores, providing a comprehensive indicator for stock selection [4] - The Zacks Rank is a proprietary model that uses earnings estimate revisions to identify winning stocks, with 1 (Strong Buy) stocks averaging a 25.41% annual return since 1988, outperforming the S&P 500 [5] - Stocks with a Zacks Rank of 1 or 2 and Style Scores of A or B are recommended for higher success likelihood [6] Group 4: Capital One Financial Corporation (COF) - Capital One Financial Corporation, headquartered in McLean, VA, focuses on consumer and commercial lending and deposit origination, providing various financial products and services [7] - COF has a Zacks Rank of 3 (Hold) and a VGM Score of B, with a Value Style Score of A due to a forward P/E ratio of 10.86 [7] - The Zacks Consensus Estimate for COF's fiscal 2024 earnings has increased by $0.22 to $13.40 per share, with an average earnings surprise of 5.1% [7][8]

Group 1 - Capital One Financial's stock has increased over 2,600% since its IPO in late 1994, indicating its potential as a significant long-term investment [1] - The company operates primarily online with a limited branch network, focusing heavily on credit cards and loans, generating $961 million in income from credit-card operations in Q1 2024, surpassing its consumer banking and investment banking income combined [2] - Capital One's business model involves lending to higher-risk borrowers, which can be profitable during economic upturns but poses significant risks during downturns, leading to potential swift stock drawdowns [5] Group 2 - The stock's performance has been buoyed by a bullish market, with the S&P 500 near all-time highs, but this may not reflect the company's stability during economic uncertainty [4] - The dividend yield is relatively low at 1.6%, and the company has a history of cutting dividends during tough economic periods, indicating inherent business risks [5] - While Capital One has shown long-term rewards, it requires a high risk tolerance from investors, and current stock prices are about 18% below all-time highs, suggesting that waiting for a more favorable buying opportunity may be prudent [7]

Financial Data and Key Metrics Changes - Capital One reported Q2 2024 earnings of $597 million or $1.38 per diluted common share, with adjusted earnings per share at $3.14 after accounting for various items [6][7] - Loans held for investment increased by 1% quarter-over-quarter, while average loans remained flat; ending deposits were flat, and average deposits increased by 1% [7] - The provision for credit losses was $3.9 billion, a $1.2 billion increase from the previous quarter, primarily due to a higher allowance [8][9] - The common equity Tier 1 capital ratio ended at 13.2%, a 10 basis point increase from the prior quarter [12] Business Line Data and Key Metrics Changes - Domestic card business saw a purchase volume growth of 5% year-over-year, with ending loan balances up by $11.1 billion or about 8% year-over-year [13] - Consumer Banking segment experienced a 2% year-over-year decline in ending loans, while auto originations increased by 18% year-over-year [17][18] - Commercial Banking reported a 1% decrease in ending loan balances and a 6% decline in ending deposits from the linked quarter [19] Market Data and Key Metrics Changes - The percentage of FDIC insured deposits increased by 1 percentage point to 83% of total deposits [7] - The net interest margin for Q2 was 6.7%, a slight increase from the previous quarter and up 22 basis points year-over-year [11] Company Strategy and Development Direction - The company is focusing on enhancing its marketing efforts to grow its domestic card business and strengthen its franchise, particularly targeting high-end consumers [22][60] - The acquisition of Discover is seen as a strategic opportunity to create a more diversified global payments platform, enhancing the value proposition for merchants and consumers [24][25] - The company is committed to a digital-first national banking strategy, leveraging technology to improve customer experiences and operational efficiency [23][64] Management's Comments on Operating Environment and Future Outlook - Management noted that the U.S. consumer remains stable, with rising incomes keeping debt servicing burdens low despite high interest rates [33] - The company expects the operating efficiency ratio for 2024 to be modestly down compared to 2023, influenced by the termination of the Walmart partnership [21] - Management expressed optimism about the auto business, with a 21% growth in originations in Q1 and 18% in Q2 year-over-year [80] Other Important Information - The company built $1.3 billion in allowance this quarter, bringing the total allowance balance to $16.6 billion, with a coverage ratio increase to 5.23% [8][9] - Total liquidity reserves decreased by about $5 billion to approximately $123 billion, with a cash position of approximately $45 billion [10] Q&A Session All Questions and Answers Question: Trends in credit metrics and reserve rates - Management acknowledged favorable trends in credit metrics across most segments, with a modest increase in reserve rates due to qualitative factors [30][31] Question: State of the consumer and spending trends - Management indicated that the U.S. consumer remains a source of strength, with higher bank balances and stable credit performance despite inflationary pressures [33][34] Question: Deposit competition and expectations for rate cuts - Management discussed the competitive landscape for deposits and the uncertainty around deposit betas during the Fed's rate-cutting cycle [39][40] Question: Loan growth in auto and potential yield compression - Management expressed optimism about auto loan growth, reporting an 18% increase year-over-year, while monitoring the impact of high interest rates on affordability [80] Question: Credit outlook and capital return pace - Management noted that while credit metrics are stabilizing, they are not providing specific guidance on peak charge-offs, emphasizing the importance of seasonal patterns [76][77]

1 Second Quarter 2024 Results July 23, 2024 Forward-Looking Statements This presentation and related communications should be read in conjunction with the financial statements, notes, and other information contained in Capital One's Annual Reports on Form 10-K, Quarterly Reports on Form 10-Q, and Current Reports on Form 8-K. Please note that the following materials containing information regarding Capital One's financial performance is preliminary and based on Capital One's data available at the time of the ...

Core Insights - For the quarter ended June 2024, Capital One reported revenue of $9.51 billion, reflecting a year-over-year increase of 5.5% [1] - The earnings per share (EPS) was $3.14, down from $3.52 in the same quarter last year, indicating a decline [1] - The reported revenue was slightly below the Zacks Consensus Estimate by -0.03%, while the EPS fell short by -4.27% compared to the consensus estimate [1] Financial Metrics - Net Interest Margin stood at 6.7%, matching the average estimate from five analysts [2] - The net charge-off rate was reported at 3.4%, slightly above the average estimate of 3.3% from four analysts [2] - The Efficiency Ratio was 52%, better than the estimated 53.9% from four analysts [2] - Average Balance of Total interest-earning assets was $450.91 billion, exceeding the estimate of $450.15 billion [2] - Consumer Banking net charge-off rate was 1.9%, higher than the estimated 1.8% [2] - Commercial Banking net charge-off rate was 0.2%, lower than the estimated 0.5% [2] - International credit card businesses net charge-off rate was 5%, below the estimate of 5.7% [2] Revenue Breakdown - Total net revenue from Credit Card was $6.80 billion, slightly below the average estimate of $6.85 billion, but showing a year-over-year increase of 9.2% [2] - Total net revenue from Consumer Banking was $2.20 billion, matching the estimate but representing a decline of 9.1% year-over-year [2] - Total net revenue from Domestic Credit Card was $6.44 billion, slightly below the estimate of $6.46 billion, with a year-over-year increase of 9.5% [2] - Total net revenue from Other was reported at -$371 million, better than the estimate of -$443.27 million, reflecting a year-over-year decline of 28.8% [2] - Total net revenue from Commercial Banking was $880 million, exceeding the estimate of $869.94 million, with a year-over-year decrease of 1% [2] Stock Performance - Capital One shares have returned +5.4% over the past month, outperforming the Zacks S&P 500 composite's +2% change [3] - The stock currently holds a Zacks Rank 3 (Hold), suggesting it may perform in line with the broader market in the near term [3]

Earnings Performance - Capital One reported quarterly earnings of $3.14 per share, missing the Zacks Consensus Estimate of $3.28 per share, and down from $3.52 per share a year ago, representing an earnings surprise of -4.27% [1] - The company posted revenues of $9.51 billion for the quarter ended June 2024, slightly missing the Zacks Consensus Estimate by 0.03%, and up from $9.01 billion year-over-year [1] Market Performance - Capital One shares have increased by approximately 10.7% since the beginning of the year, compared to the S&P 500's gain of 16.7% [2] Future Outlook - The current consensus EPS estimate for the upcoming quarter is $3.98 on revenues of $9.67 billion, and for the current fiscal year, it is $13.40 on revenues of $38.48 billion [4] - The estimate revisions trend for Capital One is mixed, resulting in a Zacks Rank 3 (Hold), indicating expected performance in line with the market in the near future [4] Industry Context - The Financial - Consumer Loans industry, to which Capital One belongs, is currently in the top 36% of over 250 Zacks industries, suggesting a favorable outlook compared to the bottom 50% [5] - Another company in the same industry, PROG Holdings, is expected to report quarterly earnings of $0.71 per share, reflecting a year-over-year decline of -22.8% [5][6]