Good day, and thank you for standing by. Welcome to the Capital One Q3 2026 earnings call. Please be advised that today's conference is being recorded.
After the speaker's presentation, there will be a question and answer session. To ask a question, please press star one one on your telephone and wait for your name to be announced. To withdraw your question, please press star one one again.
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, Josh, and welcome everybody. To access the live webcast of this call, please go to the investor section of capitalone.com. A copy of the earnings presentation, press release, and financial supplement can also be found in the investor section of capitalone.com, by selecting financials and then quarterly earnings releases.
With me tonight 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 summarizing our third quarter results for 2026. 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, and 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 Statements 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, everyone. I will start on slide 3 of tonight's presentation. In the third quarter, Capital One earned $3.5 billion, or $5.61 per diluted common share.
The results for the quarter included several adjusting items related to the Discover and Brex acquisitions, which are outlined on the slide. Net of these adjusting items, third quarter earnings per share were $6.69. Relative to the prior quarter, both period end and average loans held for investment increased 1%, while period end and average deposits decreased 1%.
Linked-quarter revenue increased 3% and non-interest expense declined 2%, resulting in pre-provision earnings growth of 10%. On an adjusted basis, pre-provision earnings grew 9% quarter over quarter. Our provision for credit losses decreased $73 million, or 2%, to $2.9 billion in the quarter.
The provision reflects $3.1 billion of net charge-offs and an allowance release of $225 million. Turning to slide 4, I will cover the allowance in greater detail. The $225 million allowance release in the quarter brought the allowance balance to $22.7 billion.
Our total portfolio coverage ratio decreased 10 basis points and now stands at 4.92%. I will cover the drivers of the changes in allowance and coverage ratio by segment on slide 5. In our domestic card business, we released $250 million of allowance.
The allowance release was driven by continued favorable observed credit in the quarter, partially offset by greater consideration to downside economic scenarios related to geopolitical risks. The coverage ratio decreased by 13 basis points and now stands at 6.86%. In our consumer banking segment, we built $41 million of allowance.
The allowance build was primarily driven by strong growth in the auto business, partially offset by an improved outlook for vehicle values. The coverage ratio ended the quarter at 2.34%, 5 basis points lower than the second quarter. Finally, in our commercial banking segment, the allowance balance was flat at about $1.5 billion, and the coverage ratio declined by 2 basis points to 1.6%.
Turning to page 6, I will now discuss liquidity. Total liquidity reserves ended the second quarter at about $134 billion, down $10 billion from the prior quarter. Our ending cash position decreased by about $6 billion to approximately $49 billion.
The market value of our investment securities decreased by about $3 billion. Our preliminary average liquidity coverage ratio in the quarter was 163%. Turning to page 7, I will cover our net interest margin.
Our third quarter net interest margin was 8.41%, 40 basis points higher than the prior quarter. The increase was driven by higher yield in the domestic card business, a $13 billion decline in average cash balances, and an additional day in the quarter. Turning to slide 8, I will end by discussing our capital position.
Our common equity Tier 1 capital ratio ended the quarter at 13.8%, roughly flat to the second quarter, as net income in the quarter was largely offset by share repurchases of $2.6 billion, dividends, and growth. With that, I will turn the call over to Rich. Rich?
Richard Fairbank
Chairman, President & CEO
Thanks, Andrew, and welcome everyone to our earnings call this evening. Slide 10 shows third quarter results in our credit card business. Credit card segment results are largely a function of our domestic card results and trends, which are shown on slide 11.
The domestic card business posted another quarter of top-line growth and strong credit results. Year-over-year trends in domestic card results now fully incorporate the impacts of the Discover acquisition. Year-over-year and quarterly comparisons continue to reflect the much smaller effects of adding Brex to the domestic card business and moving our small legacy corporate credit card business from the commercial bank to domestic card in the second quarter of this year.
Third quarter purchase volume grew 11% year-over-year, primarily driven by growth in legacy Capital One purchase volume. The addition of Brex and the corporate card business in the second quarter was a modest tailwind to purchase volume growth, while legacy Discover purchase volume was a modest headwind. Because of the Discover loan growth brownout, legacy Discover purchase volume was essentially flat compared to the prior year quarter.
Ending loan balances increased about 2% year-over-year. The legacy Discover Card loans shrank about 3% from the prior year as the temporary brownout of Discover loan growth continued. Excluding Discover, ending loans grew about 6%.
Revenue was up 5% from the third quarter of 2025, driven by growth in legacy Capital One purchase volume and loans. Revenue margin for the quarter was 17.8%. The domestic card charge-off rate for the third quarter was 3.98%, down 73 basis points from the prior quarter and down 65 basis points year-over-year.
Our charge-offs are benefiting from the steady improvement in delinquencies that we observed in the first half of this year and from strong recoveries performance. The delinquency rate was 3.74% at quarter end, up 35 basis points from the linked quarter and down 15 basis points from a year ago. The linked quarter trend was in line with normal seasonality.
Domestic card non-interest expense was up 9% compared to the third quarter of 2025, driven by continuing technology investments, higher marketing, and the addition of Brex. Our choices in domestic card are the biggest driver of total company marketing. Total company marketing expense in the quarter was about $1.6 billion, up 14% year-over-year, driven by higher direct marketing in our domestic card business, increased media spend, and continuing investments in premium benefits.
As we look ahead to the fourth quarter, we expect the Q3 to Q4 percentage growth in marketing to be similar to the Q3 to Q4 percentage growth we saw in 2025, primarily driven by seasonality. Slide 12 shows third quarter results in our consumer banking business. Global Payment Network transaction volume for the quarter was approximately $191 billion.
Network transaction volume increased 25% compared to the third quarter of 2025, driven primarily by the successful conversion of Capital One debit customers to the Discover Network. Auto originations were up 22% from the prior year quarter. We continue to be in a strong position to pursue resilient growth in the current marketplace.
Consumer banking ending loan balances increased about $11 billion, or about 13% year-over-year. Average loans were up 12%. Both ending and average deposit balances declined about 1% from the linked quarter, driven by volume impacts and choices related to the Discover integration, including the sale of a small IRA portfolio we acquired from Discover.
Legacy Capital One retail deposits continued to grow. Consumer banking revenue for the quarter was up about 17% year-over-year, driven predominantly by Discover revenue synergies and growth in auto loans. Non-interest expense was up about 10% compared to the third quarter of 2025, driven by increased auto originations and continued technology investments.
The auto charge-off rate for the quarter was 1.59%, up five basis points year-over-year and up 16 basis points from the sequential quarter. The year-over-year increase is largely the result of a gradual mix shift in new originations and loans as our subprime mix is returning to pre-pandemic levels. The auto delinquency rate was 4.64%, up 32 basis points from the linked quarter and down 35 basis points from the prior year.
Slide 13 shows third quarter results for our commercial banking business. Compared to the linked quarter, both ending and average loan balances were up about 1%. Ending and average deposits were also up about 1% from the linked quarter.
Revenue increased 6% from the linked quarter, with strong growth in non-interest income. Non-interest expense was up about 1%. The commercial banking net charge-off rate for the second quarter was 0%.
The commercial criticized performing loan rate was 4.4%, down four basis points compared to the linked quarter. The criticized non-performing loan rate was down 10 basis points to 1.22%. In closing, third quarter results continued to reflect solid top-line growth and strong credit performance.
The third quarter is a seasonally strong quarter in most years, with seasonal strength in margins and charge-offs. This year, the quarterly results also benefited from an allowance release. Looking ahead, we expect to lean harder into marketing in 2027, driven by several factors.
We're fully pursuing our origination opportunities, and the window is open across our businesses. Our biggest competitors continue to invest heavily in marketing, and we need to be at the top of our game. Also, we plan to now lean back into Discover marketing.
The trend of marketing increases is also powered by a gradual mix change. Some of the biggest growth areas in the company are businesses where marketing is inherently a much larger component of the business model. That includes our quest at the top of the market with heavy spenders, Capital One Shopping, and our national banking business.
These businesses take a lot of marketing to build, but are great franchises with lower risk, lower capital, and long-term revenue annuities. The Discover integration continues to go well, and we're making good progress on delivering the expected synergies. On a combined basis, we're achieving the expected synergies ahead of schedule.
Our year-to-date results reflect about $1.8 billion of annualized combined synergies, primarily driven by the successful debit conversion early in 2026 and the pace of achieving expense synergies. We have talked for a while now about the earnings power on the other side of integration. You can squint your eyes and see it now in the first three quarters of 2026.
You would need to normalize for the sizable allowance release we've had thus far this year and add the increased marketing we expect in the fourth quarter. Looking forward, you would add in the remaining synergies we expect to get and probably deduct the lost interchange revenue that will likely come from the Visa, MasterCard settlement. Our current view is that the remaining synergies and the Visa, MasterCard settlement are roughly offsetting in magnitude.
With those adjustments, that's a view into the run rate earnings power coming out of this deal, and it's consistent with what we expected at the time we announced the deal. Pulling way up, we've worked for years to put ourselves in a strong position to win in a rapidly changing marketplace. We continue to lean into investments in modern technology, data, and AI.
We continue to gain traction as we build enduring franchises with heavy spenders at the top of the credit card marketplace and with primary banking relationships in our national retail bank. And we are building momentum from the game-changing acquisition of Discover. Now we will be happy to answer your questions.
Jeff?
Thank you, Rich. We will now start the Q&A session. As a courtesy to other investors and analysts who may wish to ask a question, please limit yourself to one question plus a single follow-up.
If you have any follow-up questions after the Q&A session, the investor relations team will be available after the call. Josh, please start the Q&A.
Thank you. As a reminder, to ask a question, please press star one one on your telephone and wait for your name to be announced. To withdraw your question, please press star one one again.
One moment for questions. Our first question comes from Terry Ma with Barclays. You may proceed.
Hey. Thank you. Good afternoon.
I appreciate the color on the fourth quarter marketing and also the outlooks marketing in 2027. As we think about it, how do you measure the return on the investment for those marketing dollars? Maybe, for example, the dollars allocated to the Discover brownout, since there is a lag between deployment of those dollars to account generation to balance growth.
Should we expect you to keep leaning into marketing ahead of the loan growth materializing?
Richard Fairbank
Chairman, President & CEO
Well, thank you, Terry. We built a company that was designed for organic growth. Ironic that I say this at the time we're talking about having done the big acquisition of Discover.
But marketing is right at the heart of this model. As we've talked about many times, we run our company based on horizontal economics, where before an investment, before, during, and after an investment, we horizontally measure the performance and make adjustments if necessary. But the key thing is that methodology is really quite different from vertical accounting where one is trying to see how anything is doing based on vertical performance.
A vertical focus systematically under-weights and underappreciates the value of investment over the longer term. That's why if you pull way up on Capital One with our philosophy of horizontal accounting and building an organic growth company, we have, over the years, invested heavily to be where we are today. Over time, the vertical returns, in some sense on a lag basis, manifest that.
Let's talk about marketing in particular. For starters, the marketing machine of Capital One, much of it is a direct marketing machine that is pretty much stimulus response, measure things pretty quickly with respect to what we're getting in terms of booking new accounts for an investment in marketing. But there's also a whole other component that doesn't lend itself as easily to stimulus response thing, and I put at the top of that list building a brand.
Also included in that is it's hard to measure the return on investments in some of the things we're doing at the very top of the market, the unique experiences, the Capital One Lounges. This will never lend itself to be all of it an exactly stimulus response measurable effect. But what we do is we pull up not only with respect to each choice that we make, but then pull up with respect to larger aggregations like our businesses themselves and look at their performance over time, and that's a very important part of our decision-making.
The other thing I want to say, but if we stand back, it is to your point, Terry, it's striking to notice that the growth rate of marketing over the last number of years has been higher than the growth rate of revenue, the growth rate of other expenses. Of course, one can stand back and ask, but wait a minute, what exactly is going on? That's why I wanted to make the point here in my earlier remarks that the businesses where we are really leaning in and growing the most are businesses that have a high marketing component to them.
Obviously, winning at the top of the market with heavy spenders is a very sort of marketing-intensive business, high cost of acquisition and high cost of things that the customers care a lot about, the building of brand, all of that. But I also want to point out on the national bank, all the other major banks out there, the growth strategy they have is buying other banks. That's not our growth strategy.
We are organically building a national bank and without a lot of branches on the corner, marketing is really the engine for that. My point was there is a gradual mix change going on where marketing is a higher component of our growth businesses and therefore, in some sense, becoming a higher component of our business. But through it all, we continue to be as bullish about marketing and the return on our marketing as we have been really at any time in this journey.
Got it. I guess just as a follow-up, you called out the Visa MasterCard settlement. Any way to kind of quantify the impact to Capital One?
I guess you kind of tied it to the synergies. Is there any more color that you can kind of give? Thank you.
Richard Fairbank
Chairman, President & CEO
Terry, the revised settlement between merchants and Visa and MasterCard is going through the court approval process now. The hearing on final approval will take place in November. I know a lot of people in the investor marketplace or maybe even analysts are saying, "Well, we'll wait to see what happens, and then sort of put it into our estimates." We put a pretty high likelihood on the final approval of this, and so in our planning, we have, for some time, been incorporating our best estimate that we can.
This has a pretty wide error bar. We don't really have a great insight into what that number is going to be. In many ways, we see the same information, the same analysis that you do.
My point was just that we are planning for this to happen. Maybe it won't, but we're planning for it to happen. My point also was that in sort of rough ballpark, if we sort of stand from where we are today, looking at that impact on run rate is in the ballpark of the impact of the extra synergies that are coming our way beyond the annualized number that we mentioned before.
Those are, in a nice way, sort of offsetting. Nice way meaning that for us to kind of give you a window to reach out and touch the earnings power. I think those things are generally offsetting.
Our next question comes from Ryan Nash with Goldman Sachs. You may proceed.
Hey, good evening, everyone.
Rich, maybe to pick up on your ending statements, there were a lot of moving pieces, cost saves, network settlement, reserve normalization, and elevated marketing, I think, were the four things you highlighted. I guess, what are we supposed to take away from that statement? Are you saying that I tried to do math quickly, but returns should be at 20% plus, or is there something else underlying the statement?
I guess, given your response to Terry's question, should we expect that you'll be maintaining these returns, or do you think marketing will eat into some of them? Thank you, and I have a follow-up.
Richard Fairbank
Chairman, President & CEO
Thank you for your question, Ryan. Let's pull way up on the guidance that we've been giving over this since we brought Discover on. Because we don't generally guide on things like specific earnings power, things like that.
But I think the question sort of on everybody's mind has been this kind of amazing deal with Discover. What's going to be the earnings power coming out the other side and when can we sort of validate that we see that? What we've been saying along the way is, there are a number of things that have already sort of moved, but that we still believe that the earnings power coming out the other side of this integration is consistent with what we believed at the time that we made our announcement.
What has happened along the way as we were getting ready for this earnings call and just savoring how much of the synergies have in fact been achieved, that's sort of the biggest thing that still has been waiting to happen as this deal is integrated. Our point was, given that everyone wants to see what is the earnings power and how does Capital One view the earnings power coming out of this deal? My point was with a couple of approximate adjustments, we can actually just see it right now.
We don't have to hold our breath and wait for it. It's really, we can see it right now, and we're not in the precise number business. As you know, in our business and earnings numbers involve the subtraction of very large numbers.
They involve credit numbers that can move around and allowance numbers and things like that. But I think what we have been saying for what we think will come out the other side of this deal is, in fact, manifest right now with a small number of basic adjustments. That is really our point, and we celebrate that it is there to be seen.
That is really the point that we wanted to make to investors.
Got it. Maybe Rich, just as my follow-up. Obviously, there is a lot of macro noise out there, but the credit performance remains very strong.
Just maybe unpack for us what is driving the improvement in card. As you look forward, do you think that we can continue to see this type of improvement given the dynamics you are seeing in the portfolio? Thank you.
Richard Fairbank
Chairman, President & CEO
Okay. Let us just talk about our credit performance. I think Capital One is performing very well in credit, and there is kind of an industry effect there.
I think even on top of it, there are some Capital One very positive things going on. But if we pull up on credit for quite a long time now that extends back into last year, credit has been improving relative just a little bit kind of every month or every quarter. Just coming in just a little bit better than seasonality.
So there has been this cumulatively very significant improvement that has happened. I am talking about delinquencies now. In the last few months, I think what we see is more in line with seasonality rather than outperforming seasonality.
But we are in a very good place with respect to credit. Now, if you think about charge-offs, there are a couple things to say there. First of all, charge-offs are lagged relative to delinquencies.
The charge-offs continue to improve as the delinquencies have improved. Then we have the striking recoveries effect that I just want to sort of reflect on that. Recovery is, of course, an important factor in our overall credit performance.
Our recovery rates have historically been at the high end of the industry, probably as a result of our business mix and our strategy. During the period of post-pandemic normalization, we noted that our recoveries were unusually low because of record low charge-offs during the preceding three years. Those low recoveries were a factor pushing up overall loss rates well above pre-pandemic levels.
Today, we are seeing the opposite effect. Our recoveries inventories are higher than normal because of higher charge-offs in the rearview mirror. This is even more true at Discover, which had significantly higher charge-offs two years ago than they do today.
But even when we adjust for this inventory effect, we see stronger recovery rates on recent charge-offs than what we've observed historically, and we think at least some of that's driven by sustainable improvements in our recovery strategies enabled by our transformation. Pulling way off on credit, we think credit's in a very good place. We'll note that delinquencies have been kind of moving with seasonality for a few months now as opposed to beating it.
But all told, we see it in a very good place.
Our next question comes from Sanjay Sakhrani with KBW. You may proceed.
Thank you. Quick question on expenses again, Rich. When we think about sort of the direction of travel on the efficiency ratio from here, how should we think about it?
Should it be improving from here on out? Just on the settlement, I guess, yeah, it's a subjective thing. It may get appealed and delayed, and I get your point.
Are there any offsets to that interchange reduction that you could think of? Would you pull down rewards to offset some of that impact? I'm just trying to think about the net effect of the decline in interchange per the settlement.
Richard Fairbank
Chairman, President & CEO
Okay. Thank you, Sanjay. Let's talk about the efficiency ratio.
There's a lot of variability quarter to quarter in efficiency ratio, so of course, I wouldn't anchor to any one quarter's results. The efficiency ratio will continue to reflect the realization of synergies and our investment imperatives. We continue to lean into our investment imperative, including foundational technology, AI, as well as important growth vectors like heavy spenders and our national bank and our Global Payment Network.
We will step up marketing investment. As I mentioned also, our biggest growth areas, our businesses where marketing costs are a bigger component of the business model, and which have inherently higher efficiency ratios. But also, of course, they tend to bring lower risk, lower capital, and long-lasting annuities.
So there's a little bit of a geography change across a lot of the line items at Capital One. More gradual from quarter to quarter, but over the longer arc of time can be important. But also just, we continue to lean in very hard to harvest meaningful efficiencies outside of our investment areas, powered by our technology transformation.
So there are a lot of moving pieces. Some of them are structural. We're not giving specific guidance on efficiency ratio, and we've been more focused in our dialogue on earnings power.
There really is this sort of continuing efficiency improvement underneath Capital One and so much of the business that we run. While on the other hand, there's a mix change and a real leaning into investments that make the netting of these sometimes move in opposite directions. Or the netting of these just to lead us not to give specific guidance on efficiency ratio.
With respect to the settlement. In some ways, this settlement's a couple decades in the making, so I think folks could say we've seen this extended so many times, like why are we talking about it now? As I said earlier, from what we can gather, we'd give reasonably good odds that the settlement will happen.
But the way we manage the company when costs are likely to be coming, we put them into our numbers and manage accordingly. So from an expected value kind of point of view, we're absolutely managing to that. That specific change, I don't think necessarily will catalyze any one specific change tactically in what we have because we've been incorporating the expectation of that for a long time in the strategy and the rewards that we set, et cetera.
Thank you. Our next question comes from Rick Shane with JP Morgan. You may proceed.
Hey, guys. Thanks for taking my questions this afternoon. Rich, I am really curious about the Brex acquisition.
When we think about Discover, you acquired a network, but I don't think you would argue that the technology there was cutting edge. Brex obviously has had a very different approach to market, brand-new platform. I am curious how much of the technology from Brex Capital One is actually integrating and adopting and changing your workflows as they're learning from them.
Richard Fairbank
Chairman, President & CEO
Brex is an amazing company. I think you all saw my excitement the day of the announcement, and we have had it ever since. There are many things that are remarkable about Brex, but I do want to say that way up there, one of the most remarkable things is that most founder companies these days are very tech forward, and just in terms of pure tech chops and innovation, they're way up there right at the top.
In addition, the choices that they made amaze me. I have such reverence for it because I think we made a lot of similar choices in the building of Capital One, and that was choices to build for the long term, build from the bottom of the tech stack, and be very reverential about things that will be profoundly helpful later, but that cost more money now. The fact that they have a full modern tech stack that they built themselves for the age that that company is breathtaking.
It's really valuable to, will be very valuable to Capital One over time. We have a great time hanging out with the Brex people, comparing tech practices, learning, and there's so much to learn from them. I think that they've also seen a lot about how a company like Capital One, which has been built as a tech company, has scaled technology, and also taken on things like how do you create a scalable risk management in a highly regulated environment and things like that.
There is a lot of learning. I think one of the areas that Brex is I think most commonly struck by is where Capital One is on the data and analytics side of the business. Of course, we built the company on that.
There's just so much I think that we are sharing, and we look forward to share. Let's talk about integration of technology. We see great upside down the road to integrate a bunch of things, but we're also being very targeted and measured in our approach to integrating our technology with Brex so we can be sure to allow them to focus on growing their business.
Another striking indicator of the quality of what they've built is that we can let whole parts of Brex sort of operate independently, and be confident about that because of their own reverence for risk management and how they build things. As we've contemplated the broader integration, we will slope the work, focusing it, and we already are doing this, focusing on the critical risk management requirements that come with being part of a regulated national bank. Over time, Capital One can leverage Brex's spend management tools to broaden and enhance our offerings for our existing small business personal liability card customers.
We are wildly excited about that opportunity, but that's not something we can sort of reach over and grab that. That's going to require more connection and more integration of certain tech and data aspects of this. So that one's down the road.
We will also integrate Brex's spend management platform with the Capital One Travel Portal, which will allow businesses to manage their corporate travel expenditures and policies, driving growth in business travel revenue. As a side point there, we have really been leaning into our own travel business. I would encourage folks who are cardholders to check out our standalone travel app that we have, and really quite a lot of great things there, and we're building many more things on that.
Anyway, we look forward to that strategic synergy that will come there. Lastly, we will integrate Brex's banking services with ours, which will provide us capabilities to leverage Brex's business banking software with our payment capabilities. Picture this sort of integration phase is the first phase is a little bit more, which I colloquially call adding water, that we try to do the things, the most important integrations, and then add water to help grow their business.
Just comment on that for a sec, Brex is already experiencing some of the early tailwinds that come with our brand. We expect these to only grow stronger over the next few months. They're benefiting from the cost of funds, from moving to our balance sheet.
We have already stood up a program to share high potential leads from across our businesses with Brex and are seeing very promising results at the outset. We will scale into this approach more completely over time. Over the coming months, as we test and learn, we'll start leaning in with our marketing dollars.
What's also coming in this sort of add water phase, but not yet at this moment, is fully leveraging the marketing machine of Capital One, which requires a little more technical integration, setting up data pipelines, calibrating our models for Brex's customer base, and so on. For our travel business, we are going to be focused on the Hopper build-out through the balance of the year. Bringing the travel portal to Brex is probably a next year kind of thing.
Anyway, that is a window into how we view this acquisition. I just want to savor one of the power benefits of a deal like this is taking an absolutely leading technology company that is transforming a financial service marketplace and bring it onto Capital One with our modern tech stack and heritage of building a tech company. I think that we are going to be able to create a lot of opportunity, and it is an opportunity that can uniquely be made possible by this combination.
Thank you.
Thanks, Rich. Next question, please.
Our next question comes from John Pancari with Evercore. You may proceed.
Thanks. Take my question. Rich, I appreciate you walking through the process of how you got to the earnings power and how we should think about that.
Given the way that you framed it and that earnings power is in sight, is it fair to say that based on that, we should not expect a meaningful incremental step up in expenses from here as you continue with your business and network investments, and that this ballpark of where we triangulate, given the math you gave us, that seems like it may be in that 20% ROTCE level, that we should not dial in an incremental step up in expenses as we look forward? Thanks.
Richard Fairbank
Chairman, President & CEO
Well, John, there are a lot of moving pieces in how we think about this company and where we go with our strategy. My real point was the earnings power that you can see out of this combination is now you can pretty much reach out and touch it. We have been saying along the way, we are leaning hard into investments, and a lot of that leaning is already in the numbers that we are printing these days.
There is important leaning that is coming going forward, and I commented things like the top of the market. I am not going to run through the whole list necessarily again. We will continue to lean into investments, and our belief is that we have the earnings power to be able to sustain pretty high levels of investment to help a really nice growth future, and at the same time, deliver strong earnings power reflective of the kind of thing that you see.
Okay. Got it. Thanks for that.
Separately, just around the network, can you just update us on the progress of moving some of the Capital One credit card volumes onto the Discover Network and any of the pilots that you are running? How should we think about the pace of that migration and the timeframe involved? Thanks.
Richard Fairbank
Chairman, President & CEO
Okay. Thank you, John. As I often say, the Discover Network is a rare and valuable asset and the crown jewel of the acquisition.
Discover built an amazing network. To this day, the deeper I dive in the network, it still amazes me how far they came with building out a Global Payment Network with the scale that they had. They were benefited by being an early player going back decades, but I give so much credit to them.
They did not have the scale to fully complete and sort of turn the flywheel. So they were trapped in a subscale situation, doing an amazing job with what they had. Now, Capital One brings the opportunity to build more scale in a very scale-sensitive business.
I do not know if I have seen a more scale-sensitive business than this one. Earlier this year, of course, we completed the conversion of our debit card business to the Discover Network. And we are very pleased with how the conversion went from a customer experience standpoint, the volume retention, and the growth that we're driving on the other side.
We are also looking forward to growing credit card volume on the Discover Network in several ways. We will, of course, continue to lean in to grow Discover-branded cards, which have always been on the Discover Network and will continue to be. We will also build network volume by originating Capital One cards on the Discover Network and by converting Capital One customers from their existing network to the Discover Network.
And we've been conducting tests to help inform our strategy regarding which customers and products we target for moving to the Discover Network and the timing of those moves. In parallel, we will lean hard into enhancing global network acceptance and building the Discover brand. And along the way, we will slope the work as we drive acceptance and slope the work in selecting which products and customers are moved onto the network.
This is not going to be a big bang thing like you saw on the debit side. But we want to make very clear this is what we're working backwards from. And picture us leaning in, really giving it the best opportunity it can, investing to be able to get there, and then sloping the work on the acceptance and the conversion side along the way.
Our next question comes from Andrew Bauch with BMO Capital Markets. You may proceed.
Hi, this is Conan on for Andrew. Thanks for taking the question. My question is on the premium card space and Venture X specifically.
I was wondering if you can talk about the competitive landscape and how you view the lifetime value of an incremental premium card user over time, just given the increase in rewards and marketing spending. Thanks.
Richard Fairbank
Chairman, President & CEO
Thank you. The launch of Venture X is a continuation of our journey over many years to win at the top of the market. It really started back in 2010 when we launched our Venture card, and we have continued.
It is another one of these things at Capital One where we declare where we are going and patiently build something over an extended period of time, which can span, in this case, we are well into our second decade of this quest. Included in this has been the launch of our Capital One Travel portal, the opening of Capital One Lounges, and investments in sort of groundbreaking customer experiences and exclusive services. We have been very pleased with the customer engagement and the traction that we are getting.
With each every year or two, we just keep moving a little bit higher in the marketplace, stretch higher toward the heaviest spenders. Over this period of time, we continue to see that the fastest-growing part of our card business is with the heavier spenders. I think there is so much growth opportunity left there.
The thing we note is the very positive growth trajectory that we get and the very positive customer validation that we get. When we think about economics, let us go back to our journey from 2010. We set out on this quest, this battle cry, we are going to win at the top of the market.
We had Venture and VentureOne, our first two products, and we lean into those, build them to scale, look at the very impressive horizontal returns coming from that franchise. We lean up, we go into Venture X, and we watch how that thing is going and the earnings power of those annuities. Meanwhile, on the small business side, we have had a parallel quest going on with our Venture X business card.
We are very pleased with those results. So we validate along the way with our horizontal economics, the traction with customers, the growth rate, the annuities, the attrition rates, the charge-off rates, that all collectively add up to the overall economics. What we continue to see is a very strong validation of this quest.
Included in it, we know that it involves continuing to invest to grow not only more customers, but to keep growing higher in that marketplace. So we are pretty excited about where we are. Just a comment, you asked about the competitive, maybe just a comment about the competitive position of, for example, Venture X. We feel we're in a great place with Venture X's competitive positioning as a straightforward high-value product.
We see our competitors leaning in very hard, and I think everyone is staking out a bit of a special place in that market at the top of the market. But I think the power metrics that we're seeing from our quest are very impressive.
Our next question comes from Erika Najarian with UBS. You may proceed.
Hi, good afternoon. Just my first question, Andrew, on the net interest margin trajectory from the 8.41. Obviously, the revenue suppression being lower helped the earning asset yields.
Lower deposit balances help with deposit costs. As we think about sort of growth and balances in the fourth quarter and maybe the puts and takes of how to think about the forward curve, could you sort of help us think about the path of net interest margin, at least in the fourth quarter?
Sure, Erika. Thanks for the question. The one thing I would add is just the benefit in the third quarter too, is just the ending cash balances coming down in the quarter.
The average coming down in the quarter was beneficial this quarter as well. Looking ahead, something I noted last quarter, is that all of the structural impacts from the Discover acquisition have largely played out at this point in our NIM. From a rate perspective, our NII is relatively neutral to rates.
The pace and timing of rate hikes could impact NIM in any given quarter, just given the timing of asset repricing and deposit repricing decisions. Over, call it a handful of quarters, the changes in short-term rates should have a largely neutral impact. I would say, longer term, the changes to NIM will be driven by two things.
The first is the seasonality that happens by quarter. Things like day count, revolve rates. You brought up the fourth quarter, holiday spending impacting the denominator.
Those are things that are going to impact quarterly NIM, but they're just not going to impact the ambient level. The other thing ultimately that will impact NIM over time is just the relative growth rates of specific assets and liabilities that will be driven by business choices, by the competitive environment, by customer behavior. At this point, the thing I would reinforce is the structural impacts to NIM have run their course.
So it's more going to be about seasonality and the effects that I just described.
Next question, please. Our next question comes from Don Fandetti with Wells Fargo. You may proceed.
Rich, recently Capital One ranked pretty well on an AI industry report. I guess I have two questions. One, are you seeing specific revenue benefits, market share type gains from these investments?
And number two, do you plan to quantify these benefits?
Richard Fairbank
Chairman, President & CEO
Don, we certainly do not intend to quantify the benefits. But I want to stand back and just talk a little bit about AI and how we think about it, and how central it is to who we are and what we're building. The pace of advancement in AI is just breathtaking.
The world's really, I think, never seen anything like the rate of innovation and change we're now seeing in the world of AI. The AI itself and then generative AI in 2022, agentic AI over the last year, it's just unbelievable. And the pace of change is accelerating.
And it is as clear as could be possible, at least in our mind, that everything is going to change. In our lives is going to change, and in business, across the business world and in banking, it's never going to be the same. But those changes also aren't going to happen overnight.
But let me talk about that. We've talked for a long time about our technology transformation. And you all know that in 2013, we pulled our company together and said, "Look, we set out to build a tech company and a data company, and I'm proud of what we built.
But we're on the wrong side of history with respect to the technology that was modern in the past, but it's not modern now." And we set out to rebuild our technology from the bottom of the tech stack up. But I want to savor what the objective function of that rebuild was. Back then, we're talking more than a decade ago.
The objective function was not so that we could be modern. The objective function of the rebuild was AI, and envisioning how the whole world was hurtling toward a world where everything was going to be about AI in real time. Bringing instant solutions entirely customized to consumers and businesses, and also creating the opportunity to transform how companies work on the inside.
That is what we set out in 2013. It has been the objective function ever since. Now note, we did not predict generative AI, and we did not predict agentic AI, yet AI was the objective function of this transformation.
As I look at the amazing advancements in generative AI and agentic AI, they are part of a continuous curve of that is and the tech stack that it needs. We often say, "Well, if we had known about generative AI or agentic AI, what would we have done differently with what we build?" The answer is, we would have built exactly what we built because we were working backwards from having a modern tech company powered by AI. Let us talk about the AI that is coming to the world.
I think AI is, everybody all over the place in business is talking about AI as they should be. I think companies will adopt AI and get a lot of benefits. This includes banks and as well as other companies.
But I think there will be a, the degree of benefit and the extent to which this is adopted will be across a really wide spectrum. That spectrum relates to whether companies bring AI to improve work as it is done today, or whether companies reinvent how work is done with AI. I think everybody is going to do the former and get a lot of benefits.
In order to do the latter, to reinvent how work is done with AI, I think it is going to need modern tech stack. It is going to need an organization that can work backwards from transformations that transcend business units and sort of collide with a lot of things about how companies are built and organized today. But we are bullish about these opportunities, and when we think about the customer experience, well certainly, I think AI will be transformative for the customer experience because customized solutions in real time are going to be coming out the other side.
But when you think about inside a bank, the opportunity with modern technology data and AI to transform the entire data ecosystem, how software is developed, credit, marketing, risk management, fraud, operations, servicing, cybersecurity, pretty much I think across the board. I think investors will often ask, "Well, where do I see AI? I want to see the app.
I want to see it in the app," or, "What is the manifestation?" I appreciate those will be questions people ask, but it is a little bit like asking the question, "Well, Capital One, you set out to build an information-based strategy three and a half decades ago. Where do I see it?" My answer is, it is all around us. It is everywhere, but I cannot point at an app where you see it.
It's just really in the business model, in the choices, in the way risk is managed, customer experiences, marketing, and everything. I think AI will be experienced by our investors in exactly the same way, and we are really bullish about the opportunity. It also ties back to the question often investors are asking, why do we talk about investment?
Can't we just settle back and just stay where we are with respect to our investment levels? You should all know. My view is we are experiencing something basically like fire and electricity itself, except experiencing it not in the long period of time that those innovations came, but in an incredibly short period of time.
We believe we're very well-positioned, but we know there's a big investment imperative to take advantage of this. It would be, I think, really a disservice to our investors if on the shoulders of what we have built, we held back in terms of investing in this extraordinary, humanity-changing thing that's happening. Thank you.
Thank you. Next question, please.
Our next question comes from Bill Carcache with Piper Sandler. You may proceed.
Thank you. Good evening, Rich and Andrew. As investors debate where we are in the cycle and how much growth runway is left, many believe the Capital One franchise today is structurally more resilient given the Discover combination and the meaningful investments you've made in the digitization of the business, and this quarter's results certainly support that.
While the Capital One in the past has historically gotten down to tangible book value and downturns, it would be helpful to hear how you think the resilience of the business has changed, and whether you believe the business is in a superior position today to weather the next turn in credit, whenever that comes. Of course, it's very favorable today, but it would be great to get your thoughts.
Richard Fairbank
Chairman, President & CEO
Well, Bill, thank you so much for that question. Wow, there's a lot packed into this. You know from the founding of this company, and maybe it's because I spent too many years consulting to companies that were living the consequences of not doing what I'm about to say.
But from the founding of this company, we have been just very focused on building something great for the long term. That means something that not only has nice horizontal economics like we talk about, but something that has resiliency to weather the extraordinary storms that hit companies over time. We built our company with that philosophy.
With respect to resilience, let's talk about what we've done. Always in our underwriting, we don't underwrite to how things like the test cells are performing. We underwrite to a worsening scenario and assume the worsening is business as usual, so that we try to bake resilience into our very choices.
We have various resilience metrics we do. We also take every program that we have at Capital One and evaluate it as part of this horizontal evaluation, but evaluate the resilience of all the different parts of our business. It doesn't mean there's a guarantee of being resilient, but to bake worsening into the business model at all times is, I think, a really important thing.
We also have a conservative capital philosophy. We've talked about that. I think that we've been well-served by that.
But I believe that capital has very asymmetric risks and benefits associated with it, and we take a pretty conservative philosophy there. Let's talk, Bill, about what has changed since the global financial crisis. Certainly, Capital One's business mix.
We have just a lower-risk business mix in terms of the sort of credit content of the company. Way more of a spender-led portfolio. Lots of business at the top of the market with heavy spenders, and I think that will serve us well.
We also, over the years, you may remember, Bill, I'm sure you do, we were vocal for years about managing to avoid the best we could what we called high-balance revolvers that we said they perform incredibly well in the good times, but the issue is resilience. We, at the expense of growth over the years, really managed to do the best we could to minimize high-balance revolvers. By the way, Discover's got more of those than we do, and that's part of the trimming around the edges we've done there that has contributed to the brownout.
They have a great franchise. Along the way, also, the technology of Capital One that we have built allows us to measure things so much better, to monitor things in real time, to monitor with even in some of our areas, use AI-based monitoring that is full file. Instead of sample based, it is full file.
Instead of batch, it is real time. Instead of manual, it is automated. Instead of just flagging something, it is flagging things with root cause diagnosis and suggested solutions.
The early days still on some of that AI monitoring, but that is just an example of where the technology that we have built at Capital One, because from its founding day, we built basically a credit-based company. At the top of a list of what we build is to build the technology that can enhance our resilience. Those are some examples.
I do want to say that one thing that was very wind-aided in the global financial crisis that we should point out, and that is that we had a significant amount of our balance sheet of our loans off balance sheet. Also it was not a CECL regime. So when the sort of the bad times came, our allowance build was way less than it would be pound for pound now with everything on balance sheet and everything with CECL and all that.
I think there are some things a little bit on the other side that we should keep in mind. One of the very strong motivators of the strategic journey of Capital One in the last decade and a half has been the diversification of our business model and moving into businesses that have a lower credit risk, higher expense bases, lower capital requirements, and that migration will continue.
Our next question comes from Darrin Peller with Wolfe Research. You may proceed.
Yeah. Thanks, guys. I'd love to hear your opinion on the potential, just given the political and the upcoming elections for CCCA, and how you believe you could fare, just given the obvious with the Discover Network now, what that could mean for the business both ways, whether it's gaining share or obviously pricing dynamics of keeping things in-house.
Then just also on the topic of Discover, just as you were restarting marketing and originations around it, do you have a sense on the timing before we can see Discover return to positive loan growth? Any way to think about the economics of new balances there versus prior? Thanks, guys.
Richard Fairbank
Chairman, President & CEO
Yeah. Let's talk about CCCA. Interchange has been around for a long time because it's part of a well-established payments ecosystem in the United States that benefits both retailers and consumers alike.
We believe that there is substantial competition in the payments industry already, with banks like Capital One taking a big portion of its interchange revenue and giving it to the consumer in the form of rewards. In fact, when we have looked at the evolution of the international credit-based marketplaces, we find an observation is the banks in those markets probably passed a significantly lower proportion of their interchange to consumers. I'm not faulting them.
It's a choice that was made. The leading banks in the United States, one of them being Capital One, but others as well, have really leaned into taking such a big part of the interchange revenue and giving it to the consumer in the form of rewards. Lots of important things happen.
First of all, obviously, it's a big win for consumers. It stimulates consumer spending, merchant sales. It helps the ecosystem thrive, and it also creates an important, in a sense, political constituency that appreciates the power of what's happening there with consumers across the credit spectrum being able to enjoy their rewards.
I think whether I speak from the legacy Capital One perspective or the Discover perspective, I think the ecosystem works very well now, and a change that would inevitably alter credit card rewards would be undesirable for consumers, merchants, and the economy. That's a view that we have had, and it's a view that we still have even as we own this network.
Richard Fairbank
Chairman, President & CEO
Oh, the brownout. Excuse me. I got so excited about the other topic.
Yes. Let me just talk about the brownout for a second. As we've talked about for a whole bunch of quarters now, the Discover Card portfolio is going through a bit of a loan growth, and I colloquially created the phrase brownout just so it would have a branded term there.
As several factors combined to pressure loan growth in the near term. Following Discover's credit expansion in their card business in 2022 and 2023, they dialed back their origination programs and credit line management by a fair amount toward the end of 2023, and they largely sustained those dial backs. Since we took over, we've been trimming on the margins of Discover's credit policies in areas where we are less comfortable with the resiliency of the underlying customers, like high-balance revolvers.
As a result of these pullbacks, the portfolio has been contracting and continues to face some headwinds to growth as these more recent smaller vintages mature. In the third quarter, Discover Card outstandings were down 2.9% year-over-year. By the way, it's worth noting the flip side of these pullbacks and the brownout has been strong credit performance.
This brownout will not last forever since we will bring to bear a number of capabilities as we move Discover originations and existing customers to Capital One's technology, and that whole movement is way underway. Getting Discover onto Capital One's technology will allow us to unleash our models, full spectrum underwriting, and spender capabilities to power more originations, higher spend volume, and ultimately higher loan volume over time. As of the end of September, 100% of Discover Card originations are on our tech stack.
We are in the middle of our conversion of the back book, and we will complete that in the first quarter. We are just one of our waves. We have several waves of conversion, but one wave happened over the weekend.
You might want to peek at the App Store any of these days. I will not give it away, but check out the free apps on the App Store. You will see the evidence of droves of people moving to the Capital One mobile app.
All these moves will bring Octane back to the portfolio. This quarter, new originations were up year-over-year for the first time since the deal closed. As the back book converts, we are resuming and leaning into customer management programs which have been limited during the conversion.
All these moves, of course, take time to turn into loans. We expect continued contraction over the next several quarters, and then for loan growth to turn positive after that. I am sorry, one other note, just the other area of brownout has been personal loans, and that is going through its own sort of magnified brownout because those loans have shorter duration to them, and so the dial backs have been more dramatic.
But over time, we have the same views for that one, and we look forward to leaning back into that.
Our next question comes from Rob Wildhack with Autonomous Research. You may proceed.
Hi, guys. Just a quick follow-up on the NIM commentary. Andrew, you teased it a little bit, but end of period cash was much lower than average cash in the quarter.
I am wondering if there is any structural or longer-term opportunity to continue mixing away from cash, or is this kind of it? Then just quickly, how about your thoughts on deposit growth and betas and deposit competition through the hiking cycle? There have been some mixed messages so far from some of the other players in that market, so just checking if there is any color you want to share there.
Thanks.
Yeah, sure, Rob. We ended the quarter with just under $50 billion of cash. The third quarter average was about $55 billion, which is in line with where we ended the second quarter.
Cash levels can move up and down due to the timing of deposit, and loan growth has a little bit of seasonality in it. Also need to keep an eye on the timing of maturities and wholesale funding issuances. I do not want to give a specific target given the fluctuation, but I would say the range of this quarter sort of average and ending probably gives you a reasonable benchmark of what will be typical levels.
In terms of deposits, what we saw this quarter, as Rich noted in his talking points, was deposits were down about 1%. We sold a small IRA portfolio as part of the Discover integration that drove a majority of the decline this quarter. If you take a longer kind of aperture, even with that decline, our book has grown something like 3.5% over the course of the last year.
So we feel really good about the business we have built and the ability that it creates for us to have a resilient, high insurance percentage, with deep customer relationship business. With respect then to beta, I would say the recent falling cycle had a lot of noise given we acquired Discover, which drove some mix change. So, I do not believe that that is particularly useful from an informational value perspective.
But if you look at the last rising rate cycle, that is probably a better neighborhood of what we could expect with this cycle's beta. It is important to note that each rate cycle is different. I think the ultimate beta is going to be driven by our product mix, by the opportunities that we see to build those lasting customer relationships, the magnitude and pace of Fed Funds move, but as you said, also the competitive landscape.
So keeping a close eye on that competitive landscape and how it potentially impacts pricing choices and beta. But we are starting from a place of believing that the last cycle is probably a reasonable starting point, at least for our assumptions. We will keep a close eye as this cycle plays out.
Our final question comes from Mihir Bhatia with Bank of America. You may proceed.
Good afternoon. Thank you for taking my question and squeezing me in. I just have one quick one.
I just wanted to clarify the comments around earnings power in 2027 investments. I think, Rich, you said the deal's model earnings power is visible today, making a couple of adjustments from today's results. You also, I think in the Q&A, have talked about a lot of important investment that is still to come, and that holding it back would be a disservice to investors.
We totally understand you want to invest for the long term, but I just want to be clear about the earnings power as we think about 2027, 2028. When you talk about the earnings power that you had projected at the deal, does that include those step-ups in marketing technology spending, or does that spending power come on top of the model, if you will? Just trying to understand if the earnings power already incorporates some of this investment spending you are talking about.
Richard Fairbank
Chairman, President & CEO
Thank you for that question. We have already been leaning into investments significantly in our company. We have talked a lot about that.
A lot is already in the numbers that you see. We are continuing to lean in as well. Some things that are probably going to see more in the future than they have are investment in the Discover Network, which is really just kind of getting underway.
We talked about the growth in marketing, of course, and the investment in AI and capitalizing on this opportunity. We are not generally going to be in the business of being in the year after year giving guidance on the earnings power of the company. I think really our point has been we have wanted to show the earnings power that is on the other side of this deal.
I think our point is you do not have to hold your breath. You can reach out and touch it here. We will continue to lean into investments as we do at Capital One, and there is quite a bit that we are pursuing.
It is also the case that we are very focused on the earnings power in this company and generating quite a few savings on one minus those investments. We just wanted you to be able to reach out and see the earnings power as the dust settles from the integration. We continue to be bullish about the earnings power going forward, as well as leaning into important investment opportunities.
That is a little bit of a window into who we are. I want to reflect on that because from the founding of the company, we did not just say, "We are going to go do what all the other banks did." We very carefully chose businesses that had inherently high earnings power that enabled the delivery of strong earnings power, and at the same time, investing to build a great company for the long term. I think you are seeing it today.
I think it is simultaneously the case that we have a lot of earnings power on display, and we will continue to lean into very high-value investment opportunities. I think that is going to be a key formula for driving great earnings power for years.
Thanks, Rich, and thanks, everybody, for joining us on the conference call this evening. Thank you for your interest in Capital One. Have a great night.
Thank you. This concludes today's conference call. Thank you for participating.
You may now disconnect.
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