Capital One Financial 2026 Q3 Earnings Call

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? 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%.