Below is the transcript from the third-quarter earnings call.
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OPERATOR
Good day and thank you for standing by. Welcome to the Capital One Q3 2025 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 1-1 on your telephone and wait for your name to be announced. To withdraw your question, please press star 11 again. I would now like to hand the conference over to your speaker today, Jeff Norris, Senior Vice President of Finance. Please go ahead.
Jeff Norris (Senior Vice President of Finance)
Thanks very much, Josh. And welcome everybody to tonight’s earnings call. To access the live webcast of this call, please go to the Investor section of Capital One’s website, capitalone.com a copy of the earnings presentation, press release and financial supplement can also be found in the Investors section of the Capital One website, capitalone.com by selecting Financials and then quarterly earnings release. With me this evening 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 this presentation that summarizes our third quarter results for 2025. Please note that this presentation may contain forward looking statements, information regarding Capital One’s financial performance and any forward looking statements contained in today’s discussion and the materials speak only as of the particular date or dates indicated in the materials. Capital One does not undertake any obligation to update or revise any of this information. Whether as a result of new information, future events or otherwise. Numerous factors could cause our actual results to differ materially from those described in Forward Looking Statements. For more information on these factors, please see the section titled Forward Looking Information in the Earnings Release presentation and the Risk Factors section of our annual and quarterly reports accessible at our website and filed with the SEC. Now I’ll turn the call over to Mr. Andrew Young.
Andrew Young (CFO)
Thanks, Jeff and good afternoon everyone. I will start on Slide 3 of tonight’s presentation. In the third quarter, Capital One earned $3.2 billion or $4.83 per diluted common share. There were multiple adjusting items related to the Discover acquisition in the quarter including integration costs, intangible amortization expense and loan and deposit fair value mark amortization net. Of these adjusting items, third quarter earnings per share were $5.95. As expected, we continue to refine our purchase accounting assumptions while we are in the measurement period in the quarter. Our adjustments included a modest increase to goodwill along with other refinements. You can find the revised purchase consideration walk and amortization schedules in the appendix of tonight’s presentation. The Results in the third quarter were impacted by the full quarter effect of the Discover acquisition on a GAAP and adjusted basis. Revenue in the third quarter increased $2.9 billion or 23% compared to the second quarter. Non interest expense increased 18% or 16% net of adjustments and pre provision earnings were up 29% or 30% net of adjustments. Our provision for credit losses was $2.7 billion in the quarter. Excluding the $8.8 billion initial allowance build for Discover that we recognized last quarter, provision for credit losses increased about $50 million higher net charge offs from the full quarter impact of Discovery was roughly offset by a larger allowance release. Turning to slide 4, I’ll now cover the allowance in greater detail. The $760 million of allowance release in the quarter brought the allowance balance to 23.1 billion. Our total portfolio coverage ratio decreased 22 basis points and now stands at 5.21%. I’ll cover the drivers of the changes in allowance and coverage ratio by segment on Slide 5. In our domestic card segment, we released $753 million of allowance in the quarter. The primary drivers of this quarter’s release were continued observed credit favorability in both losses and recoveries, as well as a slight improvement in the forecasted unemployment rate. These factors were partially offset by greater consideration of potential economic downside. The domestic card coverage ratio now stands at 7.28%. The allowance balance in our consumer banking segment was largely flat at $1.9 billion. Growth in the auto business was largely offset by observed credit favorability and continued strong vehicle prices. The ending coverage ratio of 2.26% was down three basis points from the prior quarter. And finally, in our commercial banking segment, we released $37 million of allowance in the quarter. The allowance release was largely driven by recent favorable credit performance. The commercial banking coverage ratio declined 5 basis points and now stands at 1.69%. Turning to page 6, I’ll now discuss liquidity. Total liquidity reserves ended the quarter at $143 billion, down roughly $1 billion from last quarter. Our cash position ended the quarter at $55.3 billion, 3.8 billion lower than the second quarter. Our preliminary average liquidity coverage ratio increased slightly during the third quarter to 161%. Turning to Page 7, I’ll cover our net interest margin. Our third quarter net interest margin was 8.36%, 74 basis points higher than the prior quarter. Recall that in the second quarter, the partial quarter benefit from the acquisition of Discover was roughly 40 basis points the full quarter of Discover in the third quarter drove approximately 45 basis points of incremental net interest margin. The remaining increase in NIM in the quarter was largely driven by higher Yield on legacy Capital One domestic card loans and one 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 14.4%, approximately 40 basis points higher than the prior quarter. Income in the quarter was was partially offset by $1 billion in share repurchases, dividends and an increase in risk weighted assets. In the third quarter, we completed our bottoms up capital assessment for the combined franchise. Based on the results of that analysis, we believe the long term capital need of the combined company is 11%. Now that we’ve completed this work, our Board of Directors has approved a new repurchase authorization of up to $16 billion of the company’s common stock. This new authorization becomes effective today and supersedes our previous repurchase authorization. In addition, we expect to increase our quarterly common stock dividend from $0.60 per share to $0.80 per share beginning in the fourth quarter, subject to Board approval. With that, I will turn the call over to Rich Fairbank.
Rich Fairbank (CEO)
Thanks Andrew and good evening everyone. 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. Similar to the second quarter, the Discover acquisition was the dominant driver of third quarter domestic card results, including the impacts of a full quarter of combined operations, a combined quarter end balance sheet and purchase accounting effects. Looking through the Discover impacts, the combined domestic card business delivered another quarter of top line growth, strong margins and improving credit year over year. Purchase volume growth for the quarter was 39%, driven primarily by the addition of a full quarter of Discover purchase volume. Excluding Discover, year-over-year, purchase volume growth was about 6.5%. Ending loan balances increased 70% year over year also largely as a result of adding Discover Card loans. Excluding Discover ending loans grew about 3.5% year over year. While competitive intensity remains high, we continue to see good traction across our legacy card business including strong growth with heavy spenders at the top of the market. The legacy Discover Card loans continued to contract slightly and will likely continue to face a growth headwind due to Discover’s prior credit policy cutbacks and some trimming around the edges that we will implement going forward. While that will create a short term loan growth brownout, we continue to see good opportunities to grow the Discover Card business. On the other side of our tech integration where we can implement growth expansions powered by our unique technology and underwriting. Revenue was up 59% from the third quarter of 2024 with a full quarter of Discover revenue excluding Discover year over year revenue growth was about 6.5% driven by underlying growth in purchase volume and loans. Revenue margin for the quarter was 17.3% including the impact from a full quarter of combined operations and amortization of the purchase accounting fair value mark the third quarter domestic card charge off rate was 4.63%, down 62 basis points from the prior quarter and 98 basis points from a year ago. The third quarter is the seasonal low point for our card losses, but the linked quarter improvement we saw was significantly beyond what we would expect from normal seasonality. Our charge off rate has been improving on a seasonally adjusted basis throughout 2025, following the trend of improving delinquencies that started in late 2024 and supported by strong recoveries. A small share of the linked quarter improvement about 10 basis points was the result of incorporating the Discover Card portfolio for the full quarter. Our domestic card delinquency rate at quarter end was 3.89%, down 64 basis points year over year and up 29 basis points from the prior quarter. The quarterly increase was consistent with expected seasonality. Domestic card non interest expense was up 62% compared to the third quarter of 2024, reflecting a full quarter of combined operations and purchase accounting amortization. Operating expense and marketing both increased year over year. Total company marketing expense in the quarter was about $1.4 billion, up 26% year over year. Our choices in domestic card are the biggest driver of total company marketing compared to the third quarter of 2024. Domestic card marketing in the quarter included the addition of Discover Marketing, higher media spend and increased investment in premium benefits and differentiated customer experiences. Our marketing continues to deliver strong new account originations and to build an enduring franchise with heavy spenders at the top of the market. Fourth quarter marketing will likely be somewhat above recent seasonal patterns. Slide 12 shows third quarter results in our consumer banking business global payment network. Transaction volume for the quarter was about $153 billion. Auto originations were up 17% from the prior year quarter driven by overall market growth and our strong position to pursue resilient growth in the current marketplace. Consumer banking ending loan balances increased $6.5 billion or about 8% year over year. Average loans were also up 8% compared to the year ago quarter ending and average consumer deposits grew about 35% driven largely by the addition of Discover deposits. Looking through the Discover impact, our digital first national consumer banking business continues to grow and gain traction. Consumer banking revenue for the quarter was up about 28% year over year, driven predominantly by the full quarter of Discover as well as growth in auto loans. Non interest expense was up about 46% compared to the third quarter of 2024, driven largely by the full quarter of Discover as well as increased auto originations, higher marketing to drive growth in our national consumer banking business and continued technology investments. The auto charge off rate for the quarter was 1.54%, down 51 basis points year over year, largely as the result of our choice to tighten credit and pull back in 2022. Auto charge offs are improving on a seasonally adjusted basis. The 30 plus delinquency rate was 4.99%, down 62 basis points year over year. Slide 13 shows third quarter results for our commercial banking business. Compared to the linked quarter, ending loan balances were up 1%. Average loan balances were flat compared to the linked quarter. Ending deposits were up about 2% from the linked quarter. Average deposits were down 2%. We continue to manage down selected less attractive commercial deposit balances. The commercial banking annualized net charge off rate for the second quarter decreased 12 basis points from the sequential quarter to 0.21%. The commercial criticized performing loan rate was 5.13%, down 76 basis points. Compared to the linked quarter. The criticized non performing loan rate was up 9 basis points to 1.39%. Pulling up the full quarter of Discover operations and the related purchase accounting impacts dominated our reported results in the third quarter. But looking through these effects, our adjusted earnings, top line growth, credit results and capital generation continued to be strong. The Discover integration continues to go well. We continue to expect that integration costs will be somewhat higher than our original estimate and we remain on track to deliver $2.5 billion in combined synergies. Revenue synergies are largely driven by moving our debit business to the Discover network. That effort is going well and we expect it to be largely completed in early 2026. So we expect revenue synergies to ramp up in the fourth quarter and in early 2026. We’re also making good progress on operating expense synergies. Many expense synergies are linked to platform conversion events which happen at various points throughout the integration period, with some conversions coming closer to the end of integration. Before we get to your questions, I want to pull up and reflect once again on where we are as a result of years of Strategic preparation We have a wealth of opportunities today that put us in an advantageous position to grow and win in the marketplace as it continues to change dramatically. To capitalize on these opportunities at this special moment, we need to make significant and sustained investments. Our acquisition of Discover enhances and accelerates some of these opportunities and of course brings new opportunities as well. Let me start with the Discover Network. This network is a rare and valuable asset, but it is very subscale in a scale driven business. We are already underway with our announced plan to move our debit volume and a portion of our credit card volume to the network. These moves are powering our revenue synergies to fully capitalize on the strategic benefit of being one of the few payment networks. We aspire to move more of our volume onto the network. That will require additional investments in international acceptance and the network brand. While Discover is an extraordinary and unique addition to Capital One’s strategic portfolio, I want to savor the unique position legacy Capital One is in. As a result of years of strategic transformation, we are in the 13th year of an all in technology transformation. This transformation has been from the bottom of the tech stack up, essentially building a modern technology company that does banking. As we move up the tech stack, the opportunities are accelerating. We also stand on the shoulders of our data and analytics capability on which the company was built and our journey to create a national lending brand. Excuse me, just a national brand. One of the most unique journeys at Capital One has been the building of our national retail bank. We have built what we believe is the bank of the future with full service digital banking capabilities enhanced by thin physical distribution of showroom branches in iconic locations. We are the only major bank building a national bank organically and we are enjoying a lot of traction. Having our own debit network accelerates this journey. But an organic growth model requires a lot of investment in marketing for many years and those investments are growing. Let me turn to our credit card business. We are one of a very small number of players who are sustainably investing to win at the top of the market with heavy spenders. The fastest growing part of our card business is with these heavy spenders. But it is very clear that winning in this part of the market takes a lot of sustained investment in standout products, amazing customer experiences, access to exclusive events and a premium brand. It is not lost on us that our biggest competitors in this space have hugely stepped up their levels of investment and we need to do the same. And a new front in this battle will be AI driven experiences. We are gearing up for that. As we moved up the tech stack, we are finding accelerating opportunities in new growth vectors. Some of the ones you have seen are Capital One Shopping, Capital One Travel and Auto Navigator. These opportunities are growing rapidly and we are investing to seize the moment in the marketplace. All of these opportunities stand on the shoulders of our modern technology stack. We continue to invest significantly in those shoulders. There are a number of, excuse me, there are a small number of large modern technology companies fully in the cloud, built on modern applications and data. They are in a unique position to win as the world continues to evolve. We are one of them. Since the beginning of our technology transformation, our journey has been focused on bringing AI into the heart of the business. Many companies will be bringing in third party AI applications which will help transform how work is done. But transforming the business model of banking with AI requires AI to be deeply embedded in the technology, operations, processes, risk management and customer experiences of the company. That is what we have been working backwards from for all of these years in our tech transformation. These opportunities require significant investment in AI and AI talent and we are doing that. Having founded this company and spent these many years building an adaptive company to capitalize on the rapidly changing marketplace, I am struck by the opportunity all around us. But I also know what it took to get here and that was investing what it takes to be in a position to win. Our opportunities are many and they are large, but so too is the investment to get there. But these investments will also be the basis for our sustained growth and strong returns over the longer term. The opportunities we are describing here have been years in the making and you have heard me talking about them for quite some time. Importantly, the earnings power of our combined company that we envision on the other side of the deal integration is consistent with what we assumed at the time of our deal announcement. Even though some individual variables have moved along the way, we are excited for the opportunities that lie in front of us. It is our imperative to lean in and capitalize on them. And now we’ll be happy to answer your questions. Jeff thanks Rich.
Jeff Norris (Senior Vice President of Finance)
We’ll now start the Q and A session. As always, 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 and A session, the investor relations team will be available after the call. Josh, please start our Q and A.
OPERATOR
Thank you. As a reminder to ask a question, please press star 11 on your telephone and wait for your name to be announced. To withdraw your question, please press star 11 again, one moment for questions. And our first question comes from Sanjay Sakrani with KBW. You may proceed.
Sanjay Sakhrani (Equity Analyst at KBW)
Thank you, Rich. Seems like great momentum in the business, but there’s been a lot of chatter about the health of the consumer. Some of the cracks we’ve seen, particularly in subprime and maybe even specifically in auto. Maybe you could just talk a little bit about what you guys are seeing. And we hear a lot about unemployment and looking at these employment stats and maybe just having the reality sort of diverge from what we’re seeing ...
