Capital One Financial is doubling down on the U.S. consumer, as households’ still-solid finances mean they can repay their credit cards and auto loans without falling into financial trouble.
The bank elevated its marketing blitz even further in the fourth quarter as it looked to grow its customer base. It kept growing its business with super-prime consumers who qualify for top-tier credit cards, plus gained comfort among the subprime borrowers who don’t.
And for those prime borrowers in the middle, it expressed confidence that its $35.3 billion
“The consumer is in a great place,” Capital One CEO Richard Fairbank told analysts Tuesday, though he said executives have their “microscopes” out for any signs that borrowers may hit trouble.
The
Some 4.53% of the bank’s domestic credit card balances were delinquent, which Citi analyst Keith Horowitz wrote was slightly better than last year and was “well below” the 4.78% consensus estimate from Wall Street analysts.
The company, like all other consumer lenders, had started seeing more trouble two years ago as borrowers struggled with inflation, higher interest rates and a declining cushion from COVID-era savings.
But McLean, Virginia-based Capital One has long been seeing “stabilization” in its credit metrics, Fairbank said, and even saw an improvement last quarter.
While the U.S. economy showed signs of faltering at the start of 2024, the second half showed “renewed strength,” Fairbank said. There are “pockets of pressure” as inflation and high interest rates continue putting stress on some, he cautioned. Some consumers are still only making their minimum payments on their credit card bills.
But overall, consumers are “in good shape compared to most historical benchmarks,” Fairbank said, confirming the bank’s expectations that worsening credit metrics were stabilizing. Even those with lower credit scores appear “to be doing relatively better” after facing trouble a couple of years ago, Fairbank said.
Vincent Caintic, an analyst at BTIG, wasn’t entirely convinced that Capital One’s credit performance was as good as it could be. The company appears to be “beyond peak losses,” Caintic wrote, but its credit metrics should be somewhat better given Capital One substantially tightened its underwriting as conditions worsened.
“Still, relative to its peers we think Capital One is significantly ahead of the curve on credit and is further along to the inflection point to when underwriting can begin loosening,” Caintic wrote in a note to clients.
The bank leaned into marketing during the fourth quarter, particularly to target the upper income “heavy spenders” it’s been increasingly courting.
Marketing spending hit nearly $1.4 billion during the fourth quarter, the highest level in its
The company has been putting an “awful lot of investment towards the top of the market” where it sees substantial growth opportunities, Fairbank said.
“That is a journey that, as far out as we can see, we will continue to lean into that because there is so much opportunity at the top of the market,” Fairbank said.
At the same time, it has kept leaning into its subprime business, where Fairbank said its options are “profoundly better” for consumers and help people “use credit wisely.”
And though it has also focused on prime borrowers, that’s the sector where Discover has long targeted and done a “very, very good job” of reaching customers. Assuming its acquisition of Discover is finalized, Capital One will make “very sure that we don’t crush the butterfly of this beautiful business model that Discover” has among prime borrowers.
Capital One is awaiting regulatory approval to purchase Discover, which had troubles with regulators that prompted the exit of its CEO and made it a target for an acquisition. Shareholders of each company are set to vote on the merger on Feb. 18, but it’s pending approval from the Federal Reserve and Office of the Comptroller of the Currency.
Investors have hoped that President Donald Trump’s return to the White House may bolster the deal’s chances for approval, with new heads likely soon to arrive at the OCC and
Fairbank remained optimistic that the deal will be finalized early this year.
“It’s a long labor, but we remain well-positioned to get approval of the deal early this year,” Fairbank said.
The bank reported net income of $1.1 billion in the fourth quarter, or $2.67 per diluted common share, underperforming consensus analyst estimates of $2.80 per share, according to S&P Capital IQ. But net income rose sharply from the fourth quarter of 2023, when it had recorded profits of $706 million, or $1.67 per diluted common share.
Earnings were weighed down last quarter by $100 million in philanthropic contributions that Capital One accelerated.