COF | Capital One Financial Corporation | earnings call 2026-07-29
Verbatim transcript (source: faster-whisper-small.en)

Good day and thank you for standing by. Welcome to the Capital One Q2-2026 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 1-1 on your telephone and wait for your name to be announced. To withdraw your question, please press star 1-1 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 everyone. To access the live webcast of this call, please go to the investors section of Capital One's website at CapitalOne.com. A copy of the earnings presentation, press release, and financial supplement can also be found in the investors section of Capital One's website 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. Richard and Andrew are going to walk you through this presentation summarizing our second 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. Capital One does not undertake any obligation to update or revise any of this information, whether as a result of new information, future events, or otherwise. Numerous factors could cause our actual results to differ materially from those described in forward-looking statements. And for more information on these factors, please see the section titled forward-looking 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 three of tonight's presentation. In the second quarter, Capital One earned $3 billion, or $4.73 per diluted common share. As a reminder, the Brex acquisition closed in early April, and we have provided additional details related to the purchase accounting in the appendix of tonight's presentation. The results for the quarter included several adjusting items related to the Discover and Brex acquisitions, which are outlined on slide three. Net of these adjusting items, second quarter earnings per share were $5.81. Relative to the first quarter, revenue increased 4% and non-interest expense grew 7%, resulting in pre-provision earnings growth of 1%. On an adjusted basis, pre-provision earnings were flat quarter over quarter. Our provision for credit losses decreased $1.1 billion, or 27% to $3 billion in the quarter. The provision reflects $3.7 billion of net charge off of $662 million. Turning to slide four, I'll cover the allowance in greater detail. The $662 million allowance release in the quarter brought the allowance balance to $23 billion. Our total portfolio coverage ratio decreased 26 basis points and now stands at 5.02%. I'll cover the drivers of the changes in allowance and coverage ratio by segment on slide five. In our domestic card segment, we released $705 million of allowance. The coverage ratio decreased by 41 basis points and now stands at 6.99%. The decline in the coverage ratio was driven by continued favorable observed credit in the quarter and a modest decrease in the consideration given to economic uncertainties. In our consumer banking segment, we built $115 million of allowance. The allowance build was primarily driven by strong growth in the auto business. The coverage ratio ended the quarter at 2.39%, three basis points higher than the first quarter. And finally, in our commercial banking segment, we released $59 million of allowance. The allowance release was primarily driven by specific reserves on loans that were charged off in the quarter. The commercial banking coverage ratio decreased eight basis points quarter over quarter to 1.62%. Turning to page six, I'll now discuss liquidity. Liquidity reserves ended the second quarter at about $144 billion, down 21 billion from the prior quarter. Our ending cash position decreased by about $22 billion to approximately 55 billion. The decrease in cash was primarily driven by growth in our loan portfolio, wholesale funding maturity late in the quarter, and the impacts from Brex. Our preliminary average liquidity coverage ratio was 165%, and our preliminary average net stable funding ratio was 136%. Turning to page seven, I'll cover our net interest margin. Our second quarter net interest margin was 8.01%, 14 basis points higher than the prior quarter. The increase was largely driven by a nine basis point impact from one additional day in the quarter. The remaining increase was driven by a lower rate paid on retail deposits and a $5 billion decline in average cash balances. Turning to slide eight, I will end by discussing our capital position. Our common equity tier one capital ratio ended the quarter at 13.7%, 70 basis points lower than the first quarter. The combination of $2.7 billion of share repurchases, approximately 40 basis point impact from the Brex transaction, and an increase in risk-weighted assets more than offset net income in the quarter. With that, I will turn the call over to Rich. Rich? Thanks, Andrew, and good evening, everyone. Slide 10 shows second 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. As a reminder, we closed the Discover acquisition on May 18, 2025. So period end balances for the prior year quarter now include the addition of the Discover portfolio. For items like purchase volume and revenue, we'll still need to discuss the partial quarter impacts of adding Discover. In the second quarter, we also added Brex to the domestic card business and moved our small legacy corporate credit card business from the commercial bank to domestic card. Second quarter purchase volume grew 26% year over year, primarily driven by the addition of a partial quarter of Discover purchase volume. We also posted a modest acceleration in legacy Capital One purchase volume growth and benefited from modest tailwinds from the addition of Brex and the corporate card business. Legacy Discover purchase volume grew just under 2% year over year. Purchase volume for the legacy Capital One businesses inclusive of adding Brex and corporate card grew about 14% year over year with the significant majority of the increase coming from the acceleration of underlying organic growth before the addition of Brex and corporate card. Ending loan balances increased 2.6% year over year. The legacy Discover card loans shrank 1.5% from the prior year in line with our expectations for the temporary brownout of Discover loan growth. Excluding Discover, ending loans grew about 5.3% year over year, driven predominantly by a modest acceleration in the organic growth of legacy Capital One loans and aided by the addition of Brex and corporate card. 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 30% from the second quarter of 2025, largely driven by the addition of a partial quarter of Discover revenue. Excluding Discover year over year revenue growth was 9.5% driven predominantly by underlying organic growth in legacy Capital One purchase volume and loans. Revenue margin for the quarter was 17.4%. The domestic card charge off rate for the second quarter was 4.71%, down 39 basis points from the prior quarter and down 54 basis points year over year. The delinquency rate was 3.39% at quarter end, down 31 basis points from the length quarter and down 21 basis points from a year ago. We're seeing similar credit trends in both the legacy Capital One and legacy Discover portfolios. Domestic card non-interest expense was up 38% compared to the second quarter of 2025, driven by the addition of a partial quarter of Discover as well as continuing technology investments. Operating expense and marketing both increased year over year. Our choices in domestic card are the biggest driver of total company marketing, but choices in our consumer banking business have an increasing impact as well. Total company marketing expense in the quarter was about $1.7 billion, up 23% year over year, driven by the addition of Discover, as well as higher legacy Capital One direct marketing in our domestic card and consumer banking businesses, increased media spend and continuing investments in premium benefits. Pulling up, our marketing continues to deliver strong new account originations to build an enduring franchise with heavy spenders at the top of the domestic credit card market and to grow checking accounts on a national scale in our consumer banking business. We continue to lean into marketing to take advantage of these compelling market opportunities. Slide 12 shows second quarter results in our consumer banking business. Global payment network transaction volume for the quarter was approximately $190 billion. Network transaction volume increased 156% compared to the partial quarter of transaction volume in the second quarter of 2025 and the successful completion of Capital One debit customers, the conversion of Capital One debit customers to the Discover network. The sequential quarter increase was about 9%. Auto originations were up 19% 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 $9.2 billion or about 11% year over year. Average loans were also up 11%. Compared to the year ago quarter, ending consumer deposits grew about 5%. Average deposits were up 19%. Our digital first national consumer banking business continues to grow and gain traction. Consumer banking revenue for the quarter was up about 26% year over year, driven predominantly by the addition of a partial quarter of Discover operations as well as Discover revenue synergies and growth in auto loans. Non-interest expense was up about 24% compared to the second quarter of 2025, driven largely by the addition of a partial quarter of Discover as well as higher marketing to drive growth in our national consumer banking business, increased auto originations, and continued technology investments. The auto charge off rate for the quarter was 1.43%, up 18 basis points year over year and down 21 basis points from the sequential quarter. The year over year increase is 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 up 11 basis points from the linked quarter and down 52 basis points from the prior year. Slide 13 shows second quarter results for our commercial banking business. Compared to the linked quarter, both ending and average loan balances were up about 1%. Ending deposits were down about 1% from the linked quarter. Average deposits were essentially flat. The commercial banking net charge off rate for the second quarter increased 24 basis points from the sequential quarter to 0.53%. The commercial criticized performing loan rate was 4.4%, down 55 basis points compared to the linked quarter. The criticized non-performing loan rate was down 8 basis points to 1.32%. In closing, second quarter results continued to reflect solid top line growth and strong credit performance. We're now 14 months into our planned 24 month integration of Discover and integration is going well. With the successful completion of converting Capital One's debit customers to the Discover network, second quarter results include the full quarterly run rate debit revenue synergies. Our results also include about one third of the quarterly run rate of the announced operating expense synergies. We remain on track to deliver the full $2.5 billion of announced synergies. For years, we have been working backwards from the dramatic transformation of the business marketplace with modern technology, data, and AI. We are in the 14th year of our technology transformation from the bottom of the tech stack up. We're way down that path and we continue to invest in some very powerful foundational capabilities as well as AI infrastructure and specific AI experiences. We also continue to invest in growing our heavy spender franchise at the top of the market, including rewards, lounges, unique access to experiences, and breakthrough digital capabilities. And we continue to lean into our unique quest to organically build a digital first full service national bank. Many of our opportunities are enhanced by the Discover acquisition, which of course also brings the new opportunity to grow and scale our own global payments network. We continue to invest in network acceptance and technology. As we've discussed, these investments will continue to be reflected in the efficiency ratio. They are also the engine that powers long-term growth and returns. Pulling way up, we continue to build momentum from the game-changing acquisition of Discover. Even though some individual variables in our deal model have moved since the announcement, and we have acquired Brex and brought in-house the technology that supports Capital One Travel, we still expect our earnings power on the other side of the Discover integration to be consistent with what we expected at the time we announced the deal. And now we'll be happy to answer your question. Jeff. Thanks, Rich. We'll 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 questions after the Q&A session, the investor relations team will be available. Josh, please start the Q&A. Thank you. As a reminder, 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 1-1 again. And our first question comes from Terry Ma with Barclays. You may proceed. Hey, thank you. Good afternoon. I wanted to start off with Brex. Rich, you had previously indicated that you could accelerate Brex's growth almost from day one through stepped-up marketing and TechSpan. So I'm just curious to what extent have those investments already been absorbed into the current expense run rate? And then once an investor sees more tangible benefits become more visible, never follow-up. Thank you, Terry. Just to comment on Brex for a second, I don't believe we said from the second we get it, we will be able to accelerate their growth. What we said is pretty much from the second that we do this acquisition, we're going to be able to start mobilizing the solutions that many of which don't require full integration and those solutions can be very beneficial and help us lean in and really accelerate Brex's growth. So it's been over 100 days since we closed the deal and we are as excited as ever about Brex. We acquired Brex because of its success in the attractive corporate card market and for its bottom of the tech stack infrastructure and its world-class talent. And we just continued to be impressed with all of those striking capabilities. And together we're making good progress in building out foundational capabilities that will support the business going forward. Brex is already experiencing some of the early tailwinds that will come with our brand and we expect these to only grow stronger over the next few months. They are also benefiting from the cost of funds impact of moving to our balance sheet. We have already stood up a program to share high potential leads from across our businesses with Brex and we are seeing very promising early results at the outset. We will scale into this approach more aggressively over time. Now some other benefits that we bring are going to take a little bit longer. Over the coming months as we test and learn we will start leaning in with marketing dollars. Fully leveraging the marketing machine of Capital One requires a little more technical integration. We'll have to set up data pipelines and calibrate our models for Brex's customer base. So that will come a little further down the road. For travel business we will be focused on the hopper build out through the balance of this year. So bringing our travel portal to Brex will likely follow that work. We expect that Brex will also bring many benefits to Capital One especially bringing Brex capabilities to our small business, card business. These benefits will require integration and will be unlocked over time. So we are already moving to bring benefits to them. Most of that is not yet reflected in our investment dollars because really most of the work has been sort of working to put capabilities in place. Got it. That's helpful. And then for my follow-up regarding loan growth, that continues to improve each month in the card business even in spite of the Discover Brownout. So as we kind of look ahead to Discover Origination being fully on Capital One's platform, how should we think about growth in the card business after that and then also the associated marketing that is required to kickstart Discover Growth again? Thank you. Thanks very much Terry. So maybe what I'll do with your question is I think it's really getting at this thing that I perverbially call the Discover Brownout. So let me just comment on that and then I'll come back and talk about marketing spend. So as we mentioned previously, the Discover card portfolio is going through a bit of a loan growth Brownout as several factors combine to pressure loan growth in the near term. Following Discover's credit expansion in their card business in 22 and 23, they dialed back their origination programs and credit line management by a fair amount toward the end of 2023 and largely sustained those dial-backs. Since we took over, we have been trimming on the margins of Discover's credit policy in areas where we are less comfortable with the resiliency of the underlying customers really with respect to high-balance revolvers. As a result of these collective pullbacks, the portfolio has been contracting and continues to face some headwinds to growth as these more recent smaller vintages mature. As we mentioned, the card outstandings were down 1.5% year over year. Now it's worth noting that the flip side of these pullbacks and the Brownout has been strong credit performance and we're glad to see that playing through the system. So let's talk about returning to growth and getting on the other side of this Brownout of Discover volume. The Brownout is temporary since over time we will bring to bear a number of capabilities as we move Discover originations and existing customers to Capital One's technology. Getting Discover onto Capital One's technology will allow us to unleash our models, full spectrum, underwriting and lean into spender capabilities to power more originations, higher spend volume and ultimately higher loan volume over time. We remain excited about the longer term potential and let me just talk a little bit about where we are on that journey. On the Discover front book, 50% of Discover originations are now on Capital One's tech platform and we expect to be fully on our tech stack for new originations by the end of the third quarter. And we're now leaning into a combination of testing and rolling out capabilities that have powered our card growth at Capital One and that we believe will be enhancing to the Discover book and the Discover new flow of applicants. We are already seeing several positive green shoots but it's early but our read is confirmatory of our hopes there. On Discover's back book, we will begin the major conversion waves later this month but we will not be fully on Capital One's tech stack until the first quarter of next year. Until we'll have to wait a bit longer to see these benefits fully manifest. Basically, we're migrating the remainder of the back book in waves, a wave in July, a wave in January. So these are, you know, we'll go in phases. With respect to the brownout, we expect continued contraction in the near term but as we can unleash more of Capital One's tech and capabilities with Discover on the other side of our conversions, we're looking forward to returning to growth. I do want to also mention in parallel to Discover's dial back of card loans. They also dial back on personal loans and, you know, we have also sort of mechanically during the integration dialed back on a little bit on on the personal loans as well. That brownout will continue and in fact increase and the bottom the bottom sort of the bottom of the brownout will, you know, will be somewhere around the fourth quarter of this year but then we look forward to leaning into that growth over time. So pulling up on the brownouts, they are a natural and temporary part of the deal. None of them are reflective of any concerns we have long term and in fact, all of it is really just part of an integration and integrating of credit policies and we look forward to, you know, stepping on the gas a little bit more gradually in the coming months. You asked Terry about marketing spend. We will lean into marketing more on the Discover side as well. Really marketing is really mostly a front book thing. So we are as we speak leaning more into the marketing so that we can now generate some very good flow of applicants to Capital One. So that will be one of the numerous things that we're leaning into over the course of the next year. Next question please. Our next question comes from Sanjay Sakrani with KBW. You may proceed. Thank you. I think my first question is for Andrew. If I look at the NIM and sort of you alluded to this in your prepared remarks, it seems like the liquidity portfolio came down over the course of the quarter ended lower but was still high on average. So I estimate there was at least a 10 basis point plus drive on the NIM as a result. Is that a safe assumption to make as we enter into the next quarter you should have a higher NIM going into the third quarter? Thanks for the question, Sanjay. As you said in the first quarter we did have elevated cash levels from the Discover home loan sale at the end of 2025 and then we had really strong deposit growth in Q1 that was aided by tax refunds and at that point we ended the quarter with around 75 billion of cash and so in the second quarter it came down quite a bit from growth and from the maturity that I had referenced in the Q1 call as well as the cash impact related to BRACs which all of those things drove the ending balance down 20 billion but average only came down about five. So as you suggest looking ahead there should be a bit of an catch-up that happens in the third quarter as the average cash catches up to the ending cash and then also as a reminder in the back half of the year we have one more day in each of the quarters so that adds a nine basis point tailwind to NIM and so if I just pull up on all of those things I'd be remiss if I didn't just highlight you know clearly any significant changes in our balance sheet could impact NIM over time and our NII is almost perfectly neutral to rates over time but if and when the Fed moves there could be an impact to NIM at least in the short term given the timing of the repricing of deposits and assets but that effect should level itself out over time. So last quarter I pointed you to the back half of last year as a pretty decent proxy for a NIM level after we closed on Discover and so there will of course be quarterly variability from day count and other seasonal factors but I continue to point you to that as a pretty good indicator of where our structural NIM is going to be likely in at least in your term. Okay perfect I guess I have the same questions from last quarter. Rich maybe just to go back to Harry's question on expenses I guess as we think about the incremental expenses for the investment in practice and marketing and such should we think about the impact to adjusted operating efficiency ratio as more marginal on a go-forward basis versus what we've seen with Brex and Hopper now in the run rate. Just trying to get a sense of the margin because you do also have the remaining two-thirds of the OpEx synergies coming as we move into next year as well so we'll appreciate some color there. Thanks. Yeah thanks Sanjay. The efficiency ratio will continue to reflect our revenue and expense trends, our investment imperatives and the realization of synergies and you know as we discussed the debit revenue synergies are essentially in the numbers the operating expense synergies are more back loaded and as we mentioned earlier we've realized about a third of the operating expense synergies to date and we're on track to achieve the remaining operating expense synergies by the second half of 2027. And then of course we continue to lean into our investment imperative including foundational technology, AI and the longer-term growth opportunities created by our technology transformation and of course you know Discover and Brex. So these investments are very important to the sustained growth and returns of the company over time. The efficiency ratio is one of many drivers of the returns of the company with all the moving pieces. We've chosen to focus our conversation on earnings power but and you know as we said we expect the earnings power of the combined company and the other side of Discover integration to be consistent with what we expected at the time we announced the Discover acquisition inclusive of Brex and the insourcing of technology that supports Capital One travel and inclusive of all these you know investments we've been leaning into. So implicit in that there needs to be an efficiency ratio that makes the numbers work but you know we're not specifically guiding on that but I think that the combined financial performance of the company continues to track with this guidance we've given on earnings power coming out the other side of the integration. Next question please. Thank you. Our next question comes from Ryan Nash with Goldman Sachs. You may proceed. Hey good morning everyone. Good afternoon everyone. Rich you know maybe to build a little bit on Sanjay's question. If you look back to when the deal was announced and you put the companies together and you layer on Synergy that got to a return that was you know 20% plus or minus you know given everything that you shared with us today it sounds like there's some more investments that you want to make and understand you want to preserve optionality but the right way to think about it this should be at least a 20% return business and what are some of the investments that could push it higher or lower in this environment? We you know they're clearly was you know Discover brings strong earnings power and we bring a lot of synergies to this deal so earnings power has been a very important part of the conversation and a really important part of the value equation with respect to this deal. The you know a number had I just want to savor there and there are a number of variables that that have moved and are moving as we go along here. The the brownout on Discover loan growth which will continue for some time and we talked about you know that mitigating you know in coming quarters but but it is still an important factor. The flip side of the loan pullbacks has been better credit performance. Generally credit has been performing quite well. Capital One margins have had a a strength as there's been accelerating retail deposit growth the full Walmart P&L as part of these things and then we've had this investment imperative which you know in a sense really has two big categories to it. One category is really the investment in technology and AI to you know capture the moment to to capitalize over time on the an extraordinary transformation that's happening out there and we we are way down the path of of our technology transformation but there are still important investments that we are making and we continue to lean in to that and and then on the other side we have you know many of the emerging growth opportunities that are going to be a very important part of the the growth and value equation over time. So the but but the striking thing in some ways back to the phrase the more things change the the more they stay the same. It is striking that out the other side of this we you know we expect and earnings power very consistent to what we talked about at the outset we're not we're not branding a precise number because there are a lot of things about Capital One performance they don't lend themselves to you know precise settling out with precise numbers but when we look at the earnings power as as reflected in ROTC we feel you know we're headed for a performance very consistent with what we expected along the way. As part of that we are you know when I when I talk about the investments that we're making and we are really leaning into that long list of investments that we talked about with an equal energy we are driving efficiency in one minus all of that across the company and a bunch of that comes from the flip side of our tech transformation the ability to save tech costs even as we invest in other tech costs you know the savings of legacy tech costs the the efficiencies that we're driving in the operations across the business but I just want to say that we we are kind of living two lives at once here really leaning into opportunities and really really so carefully managing the expenses to be able to simultaneously deliver the earnings power that we expected at the at the outset of this deal and to be positioning ourselves to create value for our investors in the extraordinary years that are unfolding in front of us. Got it maybe as my follow-up Rich when I look at the you know the capital in the slides obviously capital came down almost 70 base points quarter but if you remove the impact of Brex you know you brought back a little more stock this quarter yet capital ratios were sort of largely unchanged and I guess you know now that the you know the deal is closed do you think we could see a further step up in the buyback from here and how do you think about a path towards the stated the slated capital targets thank you. Yeah Ryan I'll take that one and let me just start by focusing on the words you ended with which is the 11 percent we define as a long-term capital need as opposed to a target and we continue to think that need is 11 percent you know we just got the recent car results but every year when when that comes out we've just seen quite a bit of volatility looking back over the last few years that going from you know in the low tens to seven percent and so our our need is derived by our internal modeling it's just far more stable and as we've had for a number of years now we continue to believe that 11 percent is that need where we manage our capital at any given moment in time factors in a variety of of planning assumptions including expectations for for growth and forecasted capital accretion from earnings a regulatory environment AOCI stock price the macroeconomic environment but I'd also say that beyond that laundry list of specific considerations there's also a philosophic point that we view capital as having you know asymmetric value particularly in in times of stress providing a ton of both offensive and defensive value in those periods and so this you know multi-pronged approach has enabled us to maintain you know a strong combination of returning capital but also strong returns and the flexibility to take advantage of growth opportunities over time so you know we're not in a race to drive it down as quickly as possible to to any specific number but hopefully that gives you a sense of how we're thinking about capital next question please our next question comes from Darren Beller with wolf research she may proceed hey guys thank you look it looks like you included a partial quarter of Brex as well as legacy corporate card in the domestic purchase volume so I'm just trying to triangulate if you can give us a sense what would the pro form of domestic card purchase volume growth look like on the quarter just given the acceleration we've been seeing across the industry I think we can calculate some of it but a little help on some of the details would be great yeah we didn't provide the breakdown of the specific amount of of Brex you know we did provide from a purchase accounting perspective the closing balance sheet and all the associated amortization schedules but you know given the relatively small percentage of of Capital One to our current uh relatively small percentage of Brex within the context of Capital One the the P&L and and balance sheet on a you know run rate basis just aren't that uh material that said that we're we're incredibly excited about the long-term term prospects of adding Brex and think that the the growth that this platform provides will drive significant accretion but you know we don't intend to to break out any of the specifics of of the P&L okay I'll just hey um Darren let me just remind you of exactly what we said in the call right we did say that if you just look at the legacy Capital One domestic card business there was a modest acceleration and that the combination of that plus the addition of Brex and corporate card was about 14% with the you know significantly majority of that driven by the legacy piece that's all that thanks guys just one quick follow-up would be I know last quarter you had mentioned there was some comments earlier about expenses but more specifically you mentioned marketing pushed back from first quarter into the remainder of the year so just just was this still a play in this quarter if we could just revisit the marketing expense expected more broadly when considering the investments in Discover Brex and recent quarters we took the recent quarters and we averaged them out given some of the timing is that a good way to think about run rate marketing levels for the company going forward thanks again guys yeah there there is seasonality in that Darren and maybe look back at history you know no one year is perfectly the same as others but there tends to be that upward slope and particularly in the back half of the year relative to the first half what we were highlighting in the the first quarter was just that some of the the spend that we had initially anticipated happening in the first quarter was getting pushed into the second and so we just wanted to make sure that that point was was well known but you know obviously the actual levels of marketing spend are just going to be dependent on the opportunities that we see in the moment so I don't want to give you a you know perfect schedule of the percentage of the annual spend in any one quarter but you know if you look back at history there's some pretty clear trends in terms of the back half relative to the front half next question please our next question goes from Rick Shane with JP Morgan you may proceed hey guys thanks for taking my question this afternoon look I want to pull the thread a little bit more on Brex Rich you've talked about this pretty clearly on the call that when you when we think about and the questions have sort of lined up with this the optimal outcome for Capital One as a standalone business is optimizing ROTC and margin Brex has existed in a world for most of its life where it was benchmarked exclusively on growth you sort of now have to balance that within Capital One how do you optimize the real outcome of Brex with still sort of keeping an eye on what investors really care about or seem to care about in terms of maximizing ROTC and margin in the near term I hope the overall objective function of Capital One isn't the maximization of ROTC in the near term we all have our eyes on it and we are we are heading to a very good exit rate on the other side of this integration but but I want to just talk about Brex and value creation you know there we all know that you know tech startups power metrics that are not or you know vertical earnings based and sometimes you know they can feel a far far cry from from how life works in a in a mature public company but we feel that Brex's approach to creating value is very consistent with Capital One's founding approach when we created the company all the way to today and that relates to taking a horizontal economic view you know in the founding of Capital One I I looked at business said it's it's it's really striking that financial you know big banks and everything are just so focused on vertical earnings but really banking is an annuity business one uh invest quite a bit of money to create annuities that last for a long period of time and so uh what we did was build a massive horizontal we called it horizontal accounting basically where you know as we thought about investments or originating a cohort of accounts we estimated the the lifetime economics of that the cost to to create those etc and before the investment during as it played out and then and then at the end of it all we measured it to see if indeed value is created and this approach to rigorous financial decision making horizontally the investing in annuities and and creating long term value is the financial basis of how Capital One works and how we create value so when we looked at Brex obviously Brex the the world was you know looking at their power metrics but we rolled up our sleeves and looked at Brex was creating valuable annuities they don't have as deep and rigorous horizontal accounting system I wouldn't expect them to but even as recently as today I was in a conversation talking about the you know the continuing work we're doing on the Capital One side looking at Brex investments and how each tranche of investment is is looks like it's paying off over time and our observation was these are very value creating you know not every tech company's investments are value creating but from everything we've seen the the approach Brex has especially when we onboard them to a more kind of systematic horizontal accounting system it will fit right in to the value creation philosophy of Capital One and what we have found in building Capital One when we have these growth opportunities is that actually the more you really go in and measure the value creation opportunity very often the more we invest because we can validate that these things really create value over time Brex is in an amazing window of opportunity they've got a tiger by the tail they are they are going after three markets at once the the commercial card market the payables marketplace and the expense management business they're going after it with an integrated solution strikingly that solution is something that is needed from small companies all the way to large corporations it's an amazingly large market so we we are are going to lean in and and provide the resources and capabilities to help Brex you know get even create even more value but along the way we're going to very rigorously measure to be sure that what we're investing in generates the value on the other side but what we see continues to you know validate our acquisition thesis and I want to say too having seen and hung around a lot of young companies over the years I continue to be amazed at the sophistication how this business is run and the and the opportunity to create value here thank you next question please next question comes from Robert Wildhack with autonomous research you may proceed hi guys I wanted to ask about domestic card loan growth over the last several periods just for Capital One you know that's bounced around I think the low threes and you said 2.6 percent in the second quarter so those have all been below the longer term trend can you just remind us what's behind the slowdown there and then like bigger picture anything structural besides you know law of large numbers as to why Capital One domestic card loan growth wouldn't eventually come back to the longer term average when you're talking about domestic card you're talking overall including discover in our performance so we've we've talked about discover is going through a shrinking right now so that certainly is holding back the loan growth of Capital One the when we if I separate out the discover brownout effect Capital One continues to deliver very consistently solid loan growth it's not there's there's things you know when I look at the various growth metrics and compare them with the industry looking at legacy Capital One versus a number of the leading players in the industry on all the growth metrics Capital One is is delivering you know very strong performance there is one thing on the loan growth side that I would highlight and it's the flip side of very good news here payment rates have come in continue to come in pretty high which we always cheer for because it it it it pays off typically in terms of stronger credit but it does hold loan growth back a little bit but but but so if we look at the the the metrics here not all of which I understand we share with you we've got discover is going through a brownout and shrinking the legacy Capital One is is growing strongly on all dimensions and particularly you know account origination purchase volume a lot of the very important metrics and then when we look another thing that we do it's not something we publish but we take the originated up market part of Capital One so we effectively proxy what the other players in the industry do who just don't go out and and intentionally originate in subprime so when we separate and look at the originated up market part of Capital One this thing is absolutely humming and and is you know right up there at the top of the league tables in in the in the key growth metrics so and that by the way is is powered by the continued quest to win at the top of the market to win with heavy spenders and it's the flip side of our investment agenda that we have on the on the heavy spender side so but Robert I understand that you know discover is going to you know hold us back for a little bit you know and and even even on the other side even on the other side of the integration you know I think it's reasonable that that Capital One legacy Capital One will be a faster growing institution than discover why would that be just that discover is a is a is a much narrower play in the credit card business of it focused on the prime side of the marketplace and it's been a really great stable play Capital One is legacy Capital One is it's got so many other growth factors growing in card it's probably going to continue to lead the way but for right now we're living with a little bit of a brownout holding our business back thank you thank you next question please our next question comes from Don Fandetti with Wells Fargo you may proceed hi Rich can you talk a little bit about the credit card migration I know there's been some testing moving it over to discover network where are you on that is it encouraging and then do you see a scenario where maybe you could move a little more volume over than you initially thought when you struck the discover deal we're talking about Don you're talking about moving Capital One cards to the discover network correct yes it's always gets confusing because we're also of course moving discover cards on the Capital One platforms and things but yes just to clarify what we're talking about here earlier this year we completed the conversion of our debit card business to the discover network and we're very pleased with how that went I mean I think that thing has just been I would call it a smashing success as we look at this so now you know as we think about building credit card volume on the discover network there's two ways to do that with the front book and the back book and so what we are leaning hard into right now is testing originating legacy Capital One branded accounts on the discover network as well as testing the conversion of existing Capital One accounts to the discover network as we lean into that and on the other side of those tests we will then make our final choices about how you know what what credit card volume that we're going to move over what timing in parallel an important companion of course is scaling up the volume that the volume of investment in the network as we increase international acceptance and you know further build the brand and what we're doing the way to think about I mean the the the quest to build international acceptance will be an always thing so for us the key is what we want to do is to slope the work so we're gonna we're gonna we're gonna slope our quest on both sides of this exercise with respect to acceptance international acceptance well let me in fact start with domestic acceptance so discover has it just blows my mind how great their domestic acceptance is there are a few scattered gaps and we are just leaning all in to literally close them all so that that's a that's a that's a thing that's going great progress and and we're so pleased on the domestic side internationally again it will be a long quest but what we're doing is sloping the the while we're working to lift everywhere we're particularly leaning in to lift acceptance to a higher level in the places our customers go the most and not surprisingly we find that where do they travel the most they travel to mexico the caribbean canada the uk and those are the top four destinations we're particularly leaning in there to really move the needle uh and enhance acceptance there the other sloping that we're working on combined with our testing is sloping what we move and um you know focusing more on moving things that customers or products things that don't involve as much uh international travel and so um that are you know strategically we're just working so hard to get as much volume as we can on the network and we're going to slope the acceptance work and slope the migrations to be able to create great customer experiences and maximize the volume that we move over time do you think you need international issuing ultimately some suggest that you do or is that something you'll solve down the road uh international um uh acceptance is um there are multiple ways to build that international issuing by the way is a is a great way to do it because what what we're talking about there is having a local player issue uh our cars and in that way they they sort of uh you know they can help really drive the acceptance in their own uh geog local geography so um that is one of four ways to build acceptance internationally in fact uh you know again i'm amazed at how discover with their relatively small scale built the the impressive international but it's still uh not yet where uh you know we would love it to be as a destination so uh the ways to get there from here and discover has used all four of these one is partnering with other networks and this has been a really important part of discovers uh strategy they have partnered with networks in uh japan china india i mean there is there is massive acceptance in some of the biggest uh countries in the world coming from network partnerships a second way to do it is with card issuing financial institutions american express has particularly leaned into this approach it's a great approach we have some cases of that with discover it's been less of a lever for discover than for mx but it that that's another one and by the way just a small point uh as an issuer ourselves in canada and the and the uk we look forward to getting our own issuer boost there on acceptance a third lever is partnering with merchant acquirers and finally the fourth is going directly to merchant uh this is the playbook discover is used we will continue uh to uh invest in this playbook and uh there's of course uh you know a a flywheel benefit that comes with the more acceptance we get the more volume we can get uh you know how that flywheel works but those will be the four levers that we lean into in this journey next question please our next question comes from john van car with evercore he may proceed good evening back to the investments that you're making i understand you're unable to provide us with the efficiency ratio or expense growth expectations regarding your investments into the network but anyway you can help us with what inning you're in in terms of the investments i know rich you said in the past that these would be sustained investments for a number of years um any additional color where you stand now now that you've been you've been down the path you've seen the debit migration you've talked about the testing now and uh and you've just walked us through in that previous answer of some of the approaches what inning are you in with how you look at the investment required here well the first thing i want to say is you know when i give the big list of investments and i and i know for the last you know uh sort of our whole lives at capital one we've always in some ways been the company that's investing in our future but there's certainly been a lot of a discussion that you all have noticed uh about the the long list of investments that we're leaning into the first thing i want to say is i wouldn't want anyone to draw the perception that like massively moving the needle of capital one investments is is investing in the network or international acceptance it is an important sustained investment we will do for as far out as we can see but i wouldn't want to leave the impression that's like the you know at the top of the list of what we're you know we're spending a lot more money than that uh on uh on uh capital one technology ai and uh and uh you know maybe the biggest single item is is well i don't know there are several but but uh investing to win with heavy spenders the top of the market so i want to say this is just one of the many things on the list that said the to your point i i believe i believe that the for as far out as we can see we'll be investing in international acceptance but here's the key thing we're not our strategy is not hinging on we have to invest so much to get to a point where then finally we can have this big bang moment and move a whole bunch of customers this is why i went back to the power of the sloping we we we take our customers and cards and and just analyze you know what customers are international travelers and we can empirically see that some customers have never traveled outside of the country for 20 years i mean we we can we can see and really understand where they're coming from we have good ways to understand on the front book what is happening and uh it's partly a customer point and a product that they're choosing point and then um when when we look at where customers travel that also is so sloped so again i think that while we will be investing as far out as we can see in the network by sloping the investment we can get a lot of progress in a focused way and continue to you know create the ability to move more customers as soon as we can and in that way we don't have to wait for some for some day to try to monetize the power of this network we're already living it on the debit side and we can lean into it on the on the credit card side and the benefits accrue right along the way with the investments okay thank you for that and then just separately um regarding the migration comments that you answered in the previous question um what um of the of the back book cards that you would ultimately move over how would you approach the the testing and then ultimately moving over migrating capital one back book over to the discovered network would it start with the basic non-premium cards and and would you only focus on those that are expiring in a given year and that's how you would focus on the the migration of that back book eventually um well that that's a that's a that's a very uh uh astute question uh that you asked there so let's talk about this first of all like we always do in testing we we do a lot of testing just so that we understand uh what uh customer reactions to various things are going to be so uh our testing is is pretty broad so that we can then um you know um not not find out later we were too narrow because we didn't think expansively enough from a testing point of view then if you look at the the factors to consider in in migration so you first of all the front book is it it's it's a much easier thing well it's a much more straightforward thing to talk about uh the front book because we can just put um you know certain cards certain customers on the discovery network and there isn't a migration event and so uh that's a very attractive way to build business when we're talking about migrating the existing book which is which also uh is attractive um the the the key levers there the key factors to consider is international travel that's at the top of the list um how extensively our cards are on file because the more cards that the customer has on file the more friction there is in uh in changing card numbers um and uh and um a a natural you know and and one thing we're looking at in some cases is is moving at uh expiration time because one would already uh some of those frictional elements would already be there at that time so uh all of these things are part of our test agenda and our strategic considerations next question please our next question comes from here about here with thank you America you may proceed hi uh good afternoon thank you for squeezing me in here i wanted to ask about touch on credit for a second uh and i'll just ask both the parts of my question up front just firstly on the june loss rate it was down quite a bit month over month i think like 45 basis points anything to call out there was there a sale or something or was that just how much better credit got there and then just the second part was just you know just pulling up rich if you could just talk about how the consumer is fairing but more importantly how the capital one customer is fairing like you've been investing a lot in marketing growing it our recent vintages performing in line to what you expected just any comments on that thank you me here let's start with the june performance i don't have the june loss rate number right in front of me but here what is is comment about the quarter and and about june so obviously credit continues to come in very strongly the probably the single indicator we looked at at we look at the most is uh delinquencies and in our card business the while the june loss rate was particularly strikingly strong the june delinquencies for the month moved in line with seasonality and by the way in pretty much every month over the course of 2026 the delinquencies have moved a little bit better than our calculated seasonality so june again a very strong month but i just want to point out it's it's the first month that didn't actually beat seasonality but it's still there's great strength there and the charge offs were amazing and all of that so again we just see a very positive credit picture but i just wanted to make those comments about june rich i could just interject there's nothing to call out in the june domestic card charge off right okay yeah so the let's talk about the consumer and then and then let's turn to capital one customers so the u.s consumer and the overall economy uh remained resilient resilient despite the high energy prices and everything when when you pick up the news every day one would think the world's falling apart but actually the portfolio that the consumer uh continues to perform remarkably well the unemployment rate in june was lower than in february before the iran conflict began jobless claims remained low job creation has rebounded over the past few months consumer spending that remains strong um now as a result of inflation real wage growth turned negative in april and may on a year over year basis but it was back in positive territory ever so slightly in june as inflation ticked back down when we look at bank balances and debt servicing burdens of our customers these look a bit stronger than a year ago across income levels and our domestic card business our credit metrics continued to improve on a year over year basis in the quarter um and you know the i i've i've chatted a little bit about that but but the strong uh credit performance also um the strong credit performance we also saw on the auto side auto credit metrics are strong as well and um so what i what i want to do now is turn to um leading indicators when we look at our own customers so we talked about delinquencies we talked about how strong delinquency performance has been pretty much every quarter uh this year um other metrics that we look at payment rates i talked about that earlier they are meaningfully above free pandemic levels across all of our customer segments and that is a slows down growth a little bit but it's a healthy sign of of customer credit quality spend levels we continue to see healthy spend growth driven both by account growth and by steady growth in spend per customer when we look at revolve rates revolve rates have stabilized over the past year at close to pre-pandemic levels for our major products and segments now none of these observations are conclusive on their own but i think collectively they uh paint a picture of of uh strength of the consumer and certainly strength uh within our own portfolio let me uh turn now to the front book of new originations in our card business our front book of a new originations continues to perform strikingly well we're seeing our 24 and 25 originations frankly in both legacy capital one and discover um well let me let me separate it out in in legacy capital one we're seeing our 20 2024 and 2025 originations coming in better than 2022 and 23 and a bit below pre-pandemic levels which is pretty striking given you know and that is not a thing that i think is being universally observed in the card business but but it's a thing that we we have seen strength in our originations for really throughout this whole post-pandemic period and it's one of the things that gives us the confidence to lean into our originations spend that money on marketing that we talked about it etc one of the factor from a credit view is recoveries coming out of the pandemic our recovery's inventory was was unusually low but that inventory has increased rapidly over the past couple of years and has contributed to the improvement in our overall loss rate over that time uh discovers losses peaked later than legacy capital ones and they're now seeing the same dynamic be a tailwind to their losses but looking ahead our recovery's inventory should taper off a bit from in the next year or so because the inventory of recent charge-offs will itself be going down uh so uh that that's uh um i hear that that's a look at leading indicators but if i pull way up uh we see real strength uh in the consumer and strength across our business performance in card and in auto and that's why while we keep a very uh you know wary eye on the economy and the um and and uh international developments we um we are leaning in with with a lot of positivity into our growth strategies next question please our next question comes from erica najarian with ubs he may proceed hi uh good evening um i i wouldn't prolong this call if this question wasn't important but you know i think investors really want clarity on this and rich and andrew you keep mentioning that your earnings power is expected to be the same as you anticipated when you first announced a discovered deal so i was hoping to unpack that a bit so i i was looking through your disclosures i wasn't sure what you were using for the baseline but in 2027 consensus eps sorry but at the deal announcement consensus eps for capital one standalone is about 21 you mentioned over 15 accretion to 2070 ps at the announcement that rounds up to let's call it like 24 50 if we use 16 17 accretion last quarter you mentioned that when you were thinking of rotsy you weren't thinking of cet1 all the way down to 11 percent so if you use 12 and a half percent on the current share count you can get to a mid-20s rotsy pro forma what is wrong with that line of logic well erica let me just unpack a couple of the assumptions that you made that don't actually tie to things that we've said and i just want to be really clear here um you know first of all our assumptions that we laid out and i'd encourage you to go back uh when we announced the deal in february of of 24 but what we said was we were taking consensus estimates for both capital one and discover and we made the adjustment to discovers loss forecast uh just based on the things that we had seen during uh diligence then with respect to rotsy at the time the weighted average uh consensus for cet1 was 12 and a half percent and so when rich last quarter highlighted that we're defining earnings power as rotsy we just wanted to remain consistent with that denominator of 12 and a half for the sake of doing the the math it is not saying that that is uh that that is our target you know as i answered before you know in terms of what we believe our capital need is we believe our capital need is 11 but um we're just doing the math on rotsy at 12 uh at 12 and a half for the sake of of comparability and so with respect to eps of course share price assumptions have moved there's just a number of things that have moved uh in terms of those assumptions particularly as they relate to individual line items and that is why we keep coming back to like the rotsy as our definition of of earnings power next question please and our final question comes from moshi ormbuck with t.d cal and you may proceed great thanks so much rich you talked you know about growth in the non-prime auto and in the high-end card business could you talk a little bit about the non-prime card business because that's been a business when you've grown it it hasn't required as much upfront investment as you know as the high-end um just you know and you've also talked about the consumer doing relatively well so are there prospects for acceleration there and i've got to follow up uh moshi uh thank you uh i i know that you are one over the many decades we have uh uh worked together that that um uh has such a such an interest in this and it's a very very um uh appropriate interest because it is a very important part of capital one even though you you saw that the uh the percentage is down to what 26 percent did we see it because it dropped down a bit because of the discover portfolio just in terms of the portfolio uh subprime uh percentage but um uh moshi across well in both card and auto we continue to uh our our strategy has remained very much the same we continue to uh get a lot of traction uh in the business performance continues to be uh strong you know when i point at the uh higher growth at the top of the market um that is really just pointing out the the traction that capital one is getting um in in our investments at that part of the market but we continue to be very uh pleased with how things are going uh at the lower end of the market the growth rates are a little lower uh these days than uh they're lower than what we see at the higher end of the market but we always give take what the market uh has to give us but performance is stable credit performance in that part of the marketplace i should have mentioned this earlier is is very consistent really across the credit spectrum we we don't in our own numbers see this uh k shape economy that a lot of people talk about although to be fair we don't really participate in the the lowest end of the marketplace where maybe those things are being experienced in the economy so moshi things continue to go very well we're leaning in the marketing efficiency of that part of the business is you know it's it's a lot uh less costly uh to acquire accounts there and we continue to uh lean in um really uh very hard there and the growth is is very solid it's a little less than at the high end it's it's it's less than at the high end but the value creation continues to be high and everything about it seems uh quite stable and also one other thing this part of the marketplace is so um benefited by continued investments in technology data and uh the power of machine learning and over time ai because uh this is all this part of the marketplace is all about data analytics modeling um and uh that that is a power alley of capital one so uh uh you know while you you the the marketing investment isn't isn't maybe the highest in that part of the marketplace uh want what you know uh there's a lot of focus in our uh tech and data and ai investments to uh be able to uh be able to be even more successful in that underserved part of the market thank you for your question sure and maybe just as a quick follow-up you talked earlier about the horizontal pnls that you kind of do for each of your products and when you think about how capital one as a company is viewed externally i mean do you think you get recognition for the for the you know for the streams of earnings that you're creating uh and the value that that's creating and if not would there be a way whether it's some degree of disclosure of examples of that like are there is is there i mean i mean do you think that you're getting appropriate recognition in the stock for it and and what could you do about it uh motion it's a great question um i i i believe that uh we probably don't get appropriate recognition in the stock but i think um the and and i think it would i don't think there's an easy way for us to sort of uh publish the aspects of our horizontal accounting but but i would say this um when you look at the i guess we have uh uh i'm in my what is it 30 second year of of uh you know running this company oh well since we had our ipo and 40th year over overall in building this uh franchise and one of the very very first things we did was put in uh horizontal accounting and an npv based methodology for everything that we do and um i i think it's hard to um to prove that the power of that to investors but i think maybe the power manifest in the three and a half decade history of capital one and the ability to grow the company so significantly and to generate strong earnings along the way and the the corner stones of that of that approach have been starting with strategy making sure that the businesses that were in lend themselves to above you know they are structurally attractive and give the opportunity to generate above hurdle returns which is why we don't do half the things other banks do and then secondly uh the whole investment philosophy that we have that the the strategic philosophy that we focus on long-term value the uh in the the financial horizontal p and l investment approach that we use um and the uh and the way that over time you know we have a whole methodology of uh retrospective measurement how our various programs are performing and relative expectations relative to hurdle rate and all of these kind of things uh in a way that i think you know has really demonstrated the power of this and so when i then um say to investors we are at a time where we have exceptional opportunity going forward that opportunity um there there's sort of uh two different buckets of investment related to what i'm describing as just extraordinary opportunity we see going forward one is on the the business side the the um you know the horizontal p and l measurement of our investments across these emerging businesses and so on and the the other thing is a choice that we do at capital one which doesn't lend itself to such precise horizontal p and l uh mocha as you know which is building the technology foundation of the company i don't know a way to create a horizontal p and l for a data ecosystem or the move to the cloud so there's some things that we do that we work backwards from what is the bone structure that that we need to win and we and we go out and build that and we are seeing that while it's going to be impossible to measure the return on some of these things i think if there are a way we're a way to do it over time it would turn out to be the most high yielding investment that we've ever made so it's uh it's a bit of a tough way to make a living for capital one and for our investors but i think it's a key reason this approach most is a key reason we're here today and a and a central reason that we have the opportunity set that we have and i look forward to our investors enjoying the returns from patient commitment to this approach thank you that concludes our Q&A session and our call for this evening thank you very much for joining us on this call thank you for your interest in capital one have a great evening thank you this concludes today's conference call thank you for participating you may now disconnect