Read a disclosure. Thanks, everybody. Disclosure commentary: For important disclosures, please see Morgan Stanley Research Disclosure website at morganstanley.com/researchdisclosures. The taking of photographs and recording devices is not allowed. If you have any questions, please reach out to your Morgan Stanley sales representative. Thank you very much. With that out of the way, we are very happy to welcome back to our conference Richard Fairbank, CEO of Capital One. Thank you so much for joining us again this year. Thank you, Betsy. We've done this many times now. It's great. It's a great tradition. Really appreciate it. Andrew Young, CFO, first time on stage with us. It is. Thanks for having me, Betsy. All right. Thank you. Rich, there's so many things to talk about. I think first thing everyone wants to hear from you is just an understanding on what you're seeing with the consumer. You know, spending, how's that going, and, just general health. Okay. Well, I think the consumer, in a world full of noise and economic noise, I actually believe the consumer is in a really strong place. You know, many consumers still have savings that came from the pandemic. The debt burdens are at historically low levels, and of course, unemployment is breathtakingly low. Of course, there's a lot of economic noise. You have inflation. You have home prices that have been falling now for a number of months. If we pull up, I think, and a calibration for me in more than three decades of building Capital One, I think the consumer is in a strong place. Now let's talk a bit about what we see on the spending side. We've seen some just amazing, you know, growth in spend, you know, in recent, in the last, well, like year and a half. We should all, of course, put in perspective that what the consumer did at the start of the pandemic was to massively cut back. The growth, of course, comes on, you know, after a lot of pullback, so it's not surprising there would be the growth that we've seen. Certainly, the consumer has come sort of roaring back to strong levels of spend. That spend has been moderating over the last, you know, quarter or two, and where we particularly see that moderation in Capital One's own performance, is on a per-customer basis. The spend per customer is really flattening out, and so that the growth that you see in Capital One spend is really driven by a lot of traction in new origination. Oh, nice. Okay. Maybe you could help us understand the opportunity for consumers to actually lever themselves up a little bit more. Do you see that revolving balance increasing from here, or do you feel that, you know, they're basically where they are likely to be for this cycle? Again, if we go back to when the pandemic began, all credit metrics changed dramatically. I mean, delinquencies and charge-offs plummeted to levels like never seen before. Also, sort of the metrics that are a little bit behind the scenes, the revolve rate and the payment rate, they moved to places that, you know, we hadn't seen for a long time. The revolve rate went down, and payment rates went up really dramatically. What we have seen since then, as everything sort of normalizes, you know, delinquencies and charge-offs, talked a lot about the normalizing of those. Revolve rates have headed back toward where they were, but not all the way. A thing I'm kind of most struck by is payment rates and how they are still significantly higher than they were pre-pandemic. There's another phenomenon going on at Capital One, which is a mix effect. We have continued to have a lot of traction, you know, at the higher end of the market with our success with heavy spenders. Their payment rates are obviously much higher. Capital One's payment rates, there's probably a secular element to that. Even nonetheless, sort of normalized for that, I'm, I'm struck that payment rates have not, you know, fully returned to where they were. Let's talk about what happens. As payment rates fall, you know, that tends to power loan growth in the business. I'm one who roots for high payment rates, even if it takes loan growth away, 'cause high payment rates are a indication of a healthier consumer from a credit point of view. Sort of we pull way up on all of those metrics, Betsy, I think, you know, you see normalizations absolutely happening there, but there's still an underlying strength in some of the metrics, particularly payments, that A, indicates the strength, but probably still indicates room to go relative to the consumer fully normalizing. Got it. Okay. Rich, you mentioned how a lot of the growth, or all the growth we're seeing in consumer spend is coming from your new account growth. I noticed recently you purchased Velocity Black and wanted to understand how you think that is going to help your transactor business. How I should think about, you know, the economics of that and the ROI on that, and maybe speak a little bit to how much of this growth is coming from, you know, the high-spend segment? Okay, Velocity Black, is a company that we announced a month ago, the acquisition. It is a concierge, a credit card-- Excuse me, not credit card. Excuse me. It's a high-end concierge that provides travel, entertainment, shopping, and dining services for customers, again, at the kind of very high end of the marketplace. Its business model is a very tech-driven model, but it's tech and humans. I don't think they believe, nor do we believe, that the concierge side of financial services is gonna go to an all tech-based, like, just chatbot way to, you know, travel around the world and everything. Maybe someday it'll be that. I think their vision, and it coincides very much with our vision, is the increasing role that technology would play in the still the human-based services at the higher end of the marketplace. Both as a specific business that we can add to our portfolio, but also a platform that will sit very nicely on the tech stack that we have built. You know, the compatibility of their tech model, our tech model, this made a lot of sense, as just another element in our many-year quest to continue to move up to the very top of the market with heavy spenders. Interesting. Tech was part of the rationale for Velocity Black. What is it about your tech stack that enables this to be, what seems like you're suggesting, relatively seamless? Velocity Black is an AI-driven business model. You know, I think AI, the way financial services companies use AI will come in two forms or two categories. There is the AI that the world provides on a ready-to-consume basis, say, a vendor capability that one can just use or maybe outsourcing certain things to a third party. There's gonna be a lot of that in the world of financial services. The other part of the AI revolution in banking will be where AI becomes integrated into how the company works, how customers are served, how credit decisions are made, how customers are served, for example. That is not something that you can just import from the outside. That relates to the tech ecosystem and the data ecosystem that is built. Velocity Black, their tech stack, our tech stack, are very similar, and there's a compatibility we've seen with Velocity Black and with other companies, tech companies, from time to time that we have bought, where we can assimilate them because they're fully cloud-based. They have modern applications. Their data environment's compatible with ours. So for Capital One, at a time when I think so many banks are gonna be out trying to look to grow by acquiring banks, our model is more focused on technology as the driver of growth. Occasionally we'll find tech-based acquisitions that very nicely fit the tech stack and the tech business model that we have at Capital One. Rich, we've talked for many years about your investments in technology. You're a leader in digital investments, in cloud, clearly, and this is a great example of your ability to then leverage that to drive your business model forward. I guess the question I have as a follow-up is: Are there other opportunities that you're thinking about with regard to either adding this type of tech functionality, or is it more organic from your side? Is it something that you think would lead you into new products or expand your lead in cards deposits? You know, from the founding days of our company, we have really built a business model designed for organic growth. There are always times for almost any company where acquisitions can come along. I think there are some players in this industry whose primary growth model is designed to be about acquiring, like other banks. Our focus when we come into work every day, it's about organic growth. The investment in technology that we have made, really since the founding of the company with our information-based strategy and then with our tech transformation starting 10 or 11 years ago. Where we rebuilt from the bottom of the tech stack up, to a really modern, infrastructure that is designed to be able to go where banking is going in the future and build the bank of the future. As an example, on the retail banking side, you find, most of the players in the marketplace, virtually everyone in the marketplace is one of two models: either the branch-based, you know, regional and national banking model or the direct banks that are savings-driven. Capital One, on the shoulders of this technology transformation, has built, in a sense, a full-service digital bank, where almost every capability that one could find in a branch, we enable that digitally. It's taken a lot of years to sort of get here, but it's what we call building the bank of the future. We have found a lot of traction therefore, and you see our ads on television and so on, of trying to build that full-service bank. It's different from just a direct savings-oriented bank, and I think, again, we were able to get there. That's an example of what we were able to build on top of our modern tech stack. It's also a window into how we think about competing in the marketplace, with all the focus on funding and the challenges in the marketplace. You know, we feel good about our positioning as a full-service digital bank in a marketplace that's changing rapidly. My last question on tech here is: when you hear AI, do you hear? I'm interested in understanding your perspective. Is it new? Is it an extension of what you've been doing for a while? Is it game-changing? How do you feel you're going to be leveraging? I think AI is absolutely game-changing. This is one of the great revolutions in the history of humankind. I'm going to start with that. To me, AI is the latest, you know, natural extension of what happened when the digital revolution began. You know, it began with, you know, silicon chips, and then computers, and then personal computers, and the internet came along. In the late oh-ohs, the world changed because you had, at the same time, the smartphone, the cloud, and AI. Those revolutions all came at the same time. The AI revolution, which by the way, had been waiting for 25 years to happen, but didn't have the horsepower basically to do it in terms of compute and storage capabilities. The cloud basically unleashed from its dormancy the AI revolution that was just waiting to happen. What we've seen subsequent to that is just continued innovations on the same accelerating path. As we have looked at this from the founding days of the company, before we knew of anything like AI, and of course, in the evolving strategy of the company many years ago, as we looked to seeing how AI was going to absolutely change the world, we have worked backwards from a belief that this is the biggest revolution, you know, one of the biggest revolutions in human history. It's going to transform everything about business, how customers are served, how companies work on the inside. We've worked backwards from having the capabilities to be able to leverage it as it continues to evolve. Along comes AI and generative AI, and these are things that, you know, the capabilities we're building are very well suited to take advantage of that. A more pedantic question from a bank investor, perspective is: Does it drive more revenue growth or more expense efficiencies? I'm sure there's a bit of both, but how should we be thinking about, you know, anticipating your use of it will, you know, end up reflecting in the income statement? Well, you know, it's an interesting thing. Most of us, I think, find in business that when you sit down and say: What would we like to be someday? You know, somebody will say, "Well, we'd like to be able to do this someday." Somebody else says, "I'd like to be able to do this someday." over here, something else. Companies then have to make choices. What do we want to be when we grow up? What I've been struck by for many years, if you say, "We want to absolutely win in the world of risk management," or, "We want to be able to create the greatest customer experience. We want to be able to generate and win in the world of how rapidly marketing is evolving. We want to be the most efficient company. We want to have an operation that is incredibly dynamic and, you know, fast to market." Every single one of those, what I'm struck by, and it's different from most things in business, every one of those requires, in my opinion, the same path to get there. That path is through modern technology, an entire tech stack, a talent model, a way of doing business that enables those. We don't have to choose: are we gonna really invest in risk management, or are we gonna go all in on a customer experience or a new product? Other than, in a sense, the last mile, it's really the same journey. Returns are moving higher over time. That's what I'm hearing. Okay. You don't have to confirm that. That's just my takeaway for my own edification. Okay. Let's bring it back down to the product level. I've had some questions come in from investors on credit card book of business. You know, wanting to understand a little bit about what you're seeing in credit performance in the 2021 vintage versus 2022 and how 2023 is shaping up. Anything there to call out? There are many credit metrics to look at a marketplace, you know, in the marketplace. There's obviously, you know, starting with one's portfolio, the delinquencies, the charge-offs, the roll rates, the revolve rates, the payment rates, lots of things to look at. One of the most important places to look when the world is changing is at the performance of new originations. The, the reason is that, from my experience over decades, is that they, you know, new originations always have greater adverse selection, than... You know, in terms of who is applying. When the world of credit is changing, we have often found, you know, customers with credit issues come flocking to get credit cards. Mm When the performance of new originations really, you know, really matters, is probably well, one of the top couple of metrics that I would look at to see how we feel about, certainly see how we feel about growing in the business. There are a couple of ways to look at this. You know, comparing, say, 2019 vintages with recent vintages, let's first thing we would do is compare segment by segment, and so to adjust for any mix changes. When we look segment by segment, what I'm struck by is that new origination vintages are coming in generally on top of 2019 originations, which is pretty striking in a world with so much noise, economic noise. I do wanna put an asterisk to that, which is that along the way, as we have seen the economy move over the last couple of years, as we look very carefully at tiny segments and their performance and look for vulnerable populations, et cetera, we have trimmed around the edges where we see risk looking like it could be heading for, you know, where things could be riskier. The net result of that trimming leaves us by, a little bit by coincidence, at the same vintage performance as years ago. We do another exercise, which we call a like-for-like comparison, where we test originations to the exact credit policy of 2019 and see how they are now. That has higher delinquencies and in a sense, worse credit performance than three years ago, suggesting that on a fully adjusted basis, things are worse now than they were back then. It's not a huge effect, but it is an effect. But we are really pleased that, you know, with the management, continuing management around the edges, we're ending up with performance that's not only consistent with 2019, but the vintages 2021, 2022, they're kind of coming in on top of each other in individual segments, such that Capital One, that's why Capital One is leaning pretty hard into originations. A lot of times investors, you know, have asked, "You know, gosh, there's so much noise in the economy, why are you leaning in on growth?" I say, "Well, on card growth, we're leaning in pretty strongly." Many have noticed, in auto, we pulled back quite a bit, so it's not like one gear for all of the company. It's on a selective basis, though. Particularly in card, we see a lot of opportunity. Would you say transactors as a percentage of new accounts is a higher percentage today than in 2019? Yeah. I know you're doing like-for-like, but given the mix shift towards transactor on a blended average basis, should see better performance over the next couple of years versus in 2019- Well, there are many effects going on at the same time, 'cause we've also had a lot of success in certain pockets at the lower end of the marketplace as well. With respect to transactors, there's a lot of traction at the high end of the marketplace, and that effect by itself, definitely, it's a real effect versus 2019. There are some other successes we're having in areas that have higher losses that in some sense offset that. You know, we do have the student loan repayments starting up again, right? We've been on a hiatus. Students haven't had to repay their debt. How are you thinking about reflecting that in the work you're doing? I think the last ever since the pandemic began, there have been a number of factors that have made it more difficult to get reliable credit reads on consumers and on portfolios. Let's think about those effects. The stimulus, all the forbearance on rent, the forbearance on student loans, as you mentioned, forbearance on other financial products. The FICO drift, where, you know, basically a lot of these things have led to a phenomenon that we call FICO drift, where FICO scores have unmistakably moved to better territory. Our belief has been that's mostly a temporary effect. More concerningly, it's an effect that models can't necessarily see. If all a company does, and this is, I think, particularly a challenge with fintechs, it's not their fault, but fintechs sort of started during this period of time. If all you're doing is looking at data in the rearview mirror, you find very strikingly positive results. The question is, if one believes, as we do, that the these effects are temporary and there's going to be a return to more normal performance, what do you do when your models don't see that? Mm. Partly what we do is we have models that have a, you know, a long, long horizon historically, and we make sure to weight that. The other thing is we actually intervene and just sort of, judgmentally intervene on our decisions to assume that what we're seeing is not as good as it appears. Student loans is an example of that one. You know, who, you know, depending on how the litigation and everything goes with respect to student loans, if students are going to have to resume their payments, I think that will have an effect on credit card and other consumer performance. I'm not sure I'd put it in the category of a huge effect, but maybe for some of those individuals it could be. What we are doing in the meantime is anticipating that effect coming and trying to do the best we can to get in front of it. The other question we have, just on card, and some of the things that are changing or potential, to change, is the CFPB late fee proposal. I wanted to get a sense as to how you're thinking about that. Is there anything that you would need to do to adapt if it were to come through? I want to start with the philosophy that we have taken at Capital One. There are many fees out there in the banking industry. You know, we're a company on the banking side that eliminated overdraft fees, for example. We are a company that built a franchise on having very simple products and very minimal kind of fees. Interestingly, in the credit card business, while that we have some customers, obviously, especially at the high end with annual fees, generally, we've only had two fees: a late fee and a cash advance fee. The reason we have those two fees is each of them is designed to be a deterrent against a behavior that involves a lot of risk. Either, you know, forgetting to make your payments or rushing out to an ATM and pulling, you know, your whole credit line out as a withdrawal kind of thing. That's why those fees have existed. I think it is ironic that the fee that the CFPB has chosen to go after is one that, you know, on our list, is really kind of the, you know, the most important one in the deterrent of behaviors that can really be unfortunate for consumers. You know, that's a dialogue and, you know, that will continue in the marketplace, and people will debate the merits of that. With respect to the impact of that choice, I think for a lot of companies, including Capital One, we have a sizable amount of revenue that comes from late fees. You know, we're still discussing and weighing the, you know, the choices we have with respect to adjusting the business model and the revenue model associated with that. I think that, you know, this is a very important issue that the industry collectively is gonna have to confront. You know, we're certainly working on that. Okay, great. I do have a question just on how you're thinking about allocating capital. You've, you know, indicated that leaning into card, lots of opportunities there. You obviously have a sleeve of your business that is working with partners. You know, we all know about the legal dispute going on with Capital One and Walmart, but maybe you could give us a sense as to how you're thinking about those types of partnerships. Is this an opportunity? Is this an area that you want to lean into, or would you suggest that, you know, your own branded Capital One card is a better way to use your capital? I think it's a wonderful thing to have a branded card business and not have to go out and bid to keep it every number of years. I think, you know, certainly our company has been built around the strategic focus on a branded card business. We have pursued the card partnerships business, co-brand and private label, because being a big player in the branded card business, it is a very natural extension. There are many synergies. A couple of comments on that. First of all, we are not on a quest to go be the biggest player out there in card partnerships. We're already a huge player in the branded card. We're investing heavily in that. There is a big difference. We really look at the marketplace and try to pick partners, depending on what's their motivation, what are they trying to get out of a partnership? If you picture a continuum, on one end of a continuum is the card partnership as the absolute money maker for that retailer or partner. At the other end of the continuum is the partner's focus on having the card be the tip of the spear for building and expanding a franchise of loyal customers. It is that end of the continuum where we are most drawn to because we believe that, you know, that's where you can really leverage the power of a card business, and that's where I think Capital One can offer some of the best in terms of capabilities. Which leads me to one other thing. When you look at the card partnership business, obviously these all go up for auctions, and sometimes, you know, the joke is, you know, the person who won is the one who lost kind of thing. So we all have to be very disciplined about not overbidding in these things. What we have found is that we are getting more and more traction with our tech story because it turns out card partners need the same kind of things that banks need in terms of the ability to serve their customers and to create all the customized solutions for them. What we are increasingly doing is going out there and explaining that, you know, taking advantage of the tech stack that Capital One has, you can climb on our back and just ride the, not only the current capabilities, but the future innovation and the places we go. That has, that's really where I think the future of our card partnerships are going. You've seen some traction that we've gotten of late with Williams Sonoma, REI, BJ's, just recent announcements. The future of card for us is a tech-based synergy with our branded business. That's where I think good opportunities are and potentially the ability to just avoid the, you know, extreme auctions. Well, that's great. Thank you so much, Rich. Really appreciate your insights. Andrew, thanks for joining us this afternoon. Yeah. Thank you. Thank you. Thank you.