Q1 2026 Earnings Call Transcript

Good day, and thank you for standing by. Welcome to the Capital One Q1 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. [Operator Instructions] 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 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 at capitalone.com by selecting financials and then quarterly earnings release. With me this evening are Mr.

Richard Fairbank, Capital One's Chairman and Chief Executive Officer; and Mr. Andrew Young, Capital One's Chief Financial Officer. Rich and Andrew will walk you through the presentation summarizing our first 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 those 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, which are accessible at Capital One's website and filed with the SEC. With that, I'll turn the call over to Andrew.

Thanks, Jeff, and good afternoon, everyone. I will start on Slide 3 of tonight's presentation. In the first quarter, Capital One earned $2.2 billion or $3.34 per diluted common share. Included in the results for the quarter were adjusting items related to the ongoing Discover integration and purchase accounting impacts, which are outlined on the slide.

Net of these adjusting items, first quarter earnings per share or $4.42. Relative to the fourth quarter, revenue declined 2%, while noninterest expense declined 9%. Pre-provision earnings in the quarter increased sequentially by about $530 million or 8%. On an adjusted basis, pre-provision earnings increased about $430 million or 6%. Our provision for credit losses was roughly flat at $4.1 billion in the quarter.

Included in the provision costs is about $3.8 billion of net charge-offs and an allowance build of $230 million. Turning to Slide 4. I'll cover the allowance in greater detail. The $230 million allowance build in the quarter brought the allowance balance to $23.6 billion. Our total portfolio coverage ratio increased 12 basis points and now stands at 5.28%.

I'll cover the drivers of the changes in allowance and coverage ratio by segment on Slide 5. In our Domestic Card segment, the allowance balance was flat at $18.8 billion. Favorable observed credit in the quarter was offset by greater consideration to downside economic scenarios related to heightened geopolitical uncertainty. The coverage ratio increased 23 basis points to 7.4%, largely driven by the paydown of fourth quarter seasonal balances. In our Consumer Banking segment, we built $155 million of allowance.

The allowance build was primarily driven by strong growth in the auto business, a slightly higher subprime mix in that growth. and a modestly lower outlook for vehicle values. The coverage ratio ended the quarter at 2.36%, 13 basis points higher in the fourth quarter. And finally, in our Commercial Banking segment, we built $83 million of allowance. The allowance build was primarily driven by a very small number of specific reserves in our real estate portfolio as well as a modest increase in our criticized rate.

The commercial banking coverage ratio increased 7 basis points quarter-over-quarter to 1.7%. Turning to Page 6. I'll now discuss liquidity. Total liquidity reserves ended the first quarter at about $165 billion, up about $21 million from the prior quarter. Our cash position increased by $19 billion and ended the quarter at approximately $76 billion.

The increase was driven by continued strong deposit growth in our retail banking business and the paydown of seasonal card balances. Our preliminary average liquidity coverage ratio was 166%. Turning to Page 7. I'll cover our net interest margin. Our first quarter net interest margin was 7.87%, 39 basis points lower than the prior quarter.

The decline was driven by several factors. First, 2 fewer days in the quarter drove 18 basis points of the decline. Second, we had the normal seasonal effect of lower average card balances. And third, average cash levels were elevated due to a combination of the typical seasonal increase, strong deposit growth in the quarter and the full quarter impact of last quarter's sale of the Discover Home Loans portfolio.

Turning to Slide 8. I will end by discussing our capital position. Our common equity Tier 1 capital ratio ended the quarter at 14.4%, 10 basis points higher than the fourth quarter. Income in the quarter and the seasonal decline in risk-weighted assets were partially offset by $2.5 billion in share repurchases. Before I pass the call over to Rich, I also want to highlight that we closed our acquisition of Brex shortly after the quarter closed.

The consideration paid to shareholders was approximately $4.5 billion. As a reminder, the Brex transaction is expected to decrease the CET1 ratio by a little over 40 basis points in the second quarter. Given the recency of the close, we are still working through the purchase accounting marks and will provide a breakout of those impacts in the second quarter earnings call. With that, I will turn the call over to Rich.

Rich?

Thanks, Andrew, and good evening, everyone. Slide 10 shows first 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. In the first quarter, the domestic card business posted another quarter of top line growth and strong credit results. Year-over-year purchase volume growth for the quarter was 40% driven primarily by the addition of Discover purchase as well as continued strong growth in our heavy spender franchise.

Excluding Discover year-over-year purchase volume growth was about 8%. Ending loan balances increased 69% year-over-year, also largely as a result of adding Discover card loans. Excluding Discover, ending loans grew about 3.9% year-over-year. . The legacy Discover card loans continued to contract slightly and will likely continue to face a temporary growth headwind in the near term due to Discovery's prior credit policy cutbacks and some additional credit policy changes we've made since closing the acquisition.

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 about from the first quarter of 2025, largely driven by the addition of Discover revenue. Excluding Discover, year-over-year revenue growth was about 6.8% driven by underlying growth in purchase volume and loans. Revenue margin for the quarter was 16.9%. The domestic card charge-off rate for the first quarter was 5.1%, up 17 basis points from the prior quarter, in line with normal seasonality.

The charge-off rate improved by 109 basis points year-over-year. About half of this improvement is the result of incorporating Discover's card portfolio into our domestic card business. The rest is driven by the steady improvement of charge-offs we've seen over the past year for both the legacy Capital One and legacy Discover portfolios. Our domestic card delinquency rate was 3.7%, down 29 basis points from the prior quarter and down 55 basis points from a year ago.

On a sequential quarter basis, the delinquency rate trend was a bit better than normal seasonality. Domestic Card noninterest events was up 51% compared to the first quarter of 2025, driven by the addition of Discover. 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 $1.5 billion, up 25% 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. As is usually the case, first quarter marketing was seasonally low and that seasonal trend was amplified this year as the timing of some of our planned marketing investments for the year shifted out of the first quarter into the second quarter and subsequent quarters this year. 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 expect to increasingly lean into marketing to take advantage of these compelling market opportunities. Slide 12 shows first quarter results in our Consumer Banking business. Global payment network transaction volume for the quarter was steady at about $174 billion as the typical seasonal decline was mostly offset by transaction volume growth related to the completion of our conversion of Capital One debit customers to the Discover Network. Auto originations were up 21% from the prior year quarter.

Competitor activity in the quarter remained high, but we continue to be in a strong position to pursue resilient growth in the current marketplace. Consumer banking ending loan balances increased $8 billion or about 10% year-over-year. Average loans were up 9%. Compared to the year ago quarter, ending consumer deposits grew about 35%, driven largely by the addition of Discover deposits.

Average deposits were up 34%. Looking through the Discover impact, our Digital First National Consumer Banking business continues to grow and gain traction. Consumer Banking revenue for the quarter was up about 37% year-over-year, driven predominantly by the addition of Discover operations as well as Discover revenue synergies and growth in auto loans. Noninterest expense was up about 26% compared to the first quarter of 2025, driven largely by the addition of Discover as well as by 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 1.64%, up 9 basis points year-over-year and down 18 basis points from the sequential quarter in line with expected seasonality. Auto charge-offs have been stable at near pre-pandemic levels for the past year. The auto delinquency rate decreased seasonally from the linked quarter, down 102 basis points to 4.21%. On a year-over-year basis, our auto delinquencies improved by 72 basis points.

Slide 13 shows first quarter results for our Commercial Banking business. Compared to the linked quarter, both ending and average loan balances were up about 1%. Ending and average deposits were both down about 1% from the linked quarter. The commercial banking annualized net charge-off rate for the first quarter decreased 14 basis points from the sequential quarter to 0.29%.

The commercial criticized performing loan rate was 4.99%, up 31 basis points compared to the linked quarter. The criticized nonperforming loan rate was up 4 basis points to 1.4%. In closing, first quarter results continued to reflect solid top line growth and strong credit performance. We made expected progress on the Discover integration and synergies in the quarter, including the successful conversion of Capital One's debit customers to the Discover Network.

We remain on track to deliver the expected synergies. Following the quarter, we achieved 2 important strategic milestones in April. We closed the Brex acquisition on April 7. Acquiring Brex accelerates our quest to build a banking and payments company that's positioned to win where the world of business payments is going. As we mentioned at the announcement, we will be leveraging Capital One assets and increasing investment levels to drive enhanced growth at Brex.

And also in April, we brought the technology and capabilities that power Capital One travel in-house. We now fully own the technology that we have built in partnership with Hopper and the Hopper talent we've worked with will join Capital One. We also launched the new Capital One travel app and we're excited to bring our award-winning travel experience to more consumers and businesses as we continue to grow our travel business. Brex and Capital One travel are just two of the opportunities we are investing in.

For years, we've been working backwards from the coming 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. This has involved going 100% into the cloud, building a modern data ecosystem and rebuilding the company in modern technology platforms that can handle big data and AI in real time. We are way down that path, but we are still investing in some very powerful capabilities.

All companies will be able to take advantage of AI, but the leverage is vastly greater when AI is embedded in the company's ecosystem. Our entire technology is architected to enable these capabilities at scale embedded in our modern ecosystem. We continue to invest in building 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 also continue to lean in through 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 brand and technology. As we've discussed, these investments will continue to be reflected in the efficiency ratio, but they are also the engine that powers long-term growth and returns.

And of course, our numbers starting in the second quarter will include Brex and the in-sourcing of our travel business as well. 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 the hopper travel infrastructure. 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 will be happy to answer your questions. Jeff?

Thank you, Rich. We will now start the Q&A session. Remember, 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. And if you have any follow-up questions after the Q&A session, the Investor Relations team will be available. Josh, please start the Q&A.

[Operator Instructions] Our first question comes from Terry Ma with Barclays. You may proceed.

Rich, I'm just curious to get your thoughts on the state of the consumer. There's obviously concern around the impact of higher energy prices of the consumer but your credit results are still very good across both card and auto. So maybe just talk about what you're seeing across your businesses?

Thank you, Terry. The U.S. consumer remained healthy, overall economy remained resilient through the first quarter. The unemployment rate improved slightly in the quarter despite some high-profile headlines about layoffs, the total volume of job losses and new jobless claims remains low and stable. Income growth continued to run ahead of inflation.

Consumer spending remained robust. Because of last year's budget bill, tax withholdings are lower than a year ago and tax refunds are higher. In our Domestic Card business, our credit metrics continue to improve on a year-over-year basis in the quarter. On a sequential quarter basis, our charge-off rate moved in line with the seasonality, while our delinquencies improved relative to what we would expect from normal seasonality.

Our auto credit metro -- as well. Auto losses were slightly higher on a year-over-year basis in Q1, but this was consistent with a modest increase in the subprime mix of that portfolio over the past year. Our auto losses have been back near pre-pandemic levels for over a year and our auto credit is supported by strong performance of recent originations and generally stable vehicle prices. Of course, the new conflict in the Persian Gulf represents a significant cloud on the horizon.

We've already seen energy prices spike sharply over the past 6 weeks. Inflation moved higher in March, largely because of the higher gas prices. So if energy prices remain elevated for an extended period of time, that would be a real headwind for consumers and probably a drag on the overall macro economy. But so far, we've not seen any adverse effects on our portfolio even in our -- either in our credit or in our spend metrics.

We've judgmentally incorporated elevated macroeconomic risk into our allowance through qualitative factors. But we continue to really feel very good about not only our portfolio performance, but good for the credit outlook of consumers and good for the opportunity to continue to lean in to origination and credit line growth in our business. So once again, it seems like every quarter, we're having a conversation just like this. There's a lot of noise in the external environment, but the consumer is showing quite a bit of resilience.

And I want to comment for just 1 second back to the credit card delinquencies moving just a little bit better than seasonality. I don't think we're ready to declare that it's diverging from where it is, but it's certainly good to see that. Of course, there's little a little uncertainty in reading things in a world of tax refunds and other things. But certainly, we think our recent credit number is just another indication of the strength of the consumer and particularly the strength of our portfolio and some of the choices that we've made in credit.

Our next question comes from Sanjay Sakhrani with KBW.

I wanted to start with a question on expenses. The adjusted efficiency ratio came in a little under 50%, understanding that marketing was a little bit lighter than it typically would be I guess, as we look ahead, I know, Rich, you mentioned Brex and Hopper will come into the expense run rate. How should we think about that expense ratio sort of -- or the efficiency ratio sort of migrating over the course of the year?

So thank you, Sanjay. So as you mentioned, Brex and Hopper. Those are 2 investments that are not in the current efficiency ratio and not all of our investments are in the first quarter, certainly those being the biggest highlights of those that are not in there. But we also continue to lean into our investment imperative.

Our expenses, of course, will be impacted by the synergies that grow as we get closer to the end of integration next year. So we'll have to keep that one in mind. . And as I mentioned in the opening remarks, marketing levels will be heavier over the course of the year as we lean in and the impacts of seasonality and marketing play through. But all of these investments are the engine that powers long-term growth and returns.

So they will be reflected in the efficiency in multiple line items. Most importantly, 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, inclusive of the Brex and Hopper travel infrastructure. .

Great. Just one follow-up on the NIM, Andrew. I know you mentioned the few items that sort of affected the NIM this quarter. I wanted to sort of 0 in on the liquidity, obviously, abnormally high understanding the paydowns and such.

But as we think about how those liquidity levels trend into the second quarter and so forth, like does those come down to the fourth quarter level? It's not like how should we think about liquidity on a go-forward basis and its impact on NIM?

Sure, Sanjay. So let me just frame it in a broader NIM story and then I'll double-click into your point about the cash. If we take a step back and look at what happened to NIM over the last number of years, coming out of the pandemic growth in our card business significantly outpaced the rest of the balance sheet, and that pushed are gradually higher. We then closed Discover in the second quarter of last year, and that alone drove up our NIM by about 85 basis points.

So when we got to the back half of last year, the card outpaced the rest of the balance sheet, at least at that moment in time, had largely played through and Discover was in our numbers. And so I would say what you saw in the back half of last year is what I would consider to be a new kind of structural level but there are always a seasonality that impacts NIM in any given quarter. So in Q1, as I said in my remarks, the first thing is we had 2 fewer days bringing down NIM by just under 20 basis points. We typically see higher fewer higher yield card loans in Q1 just as people pay down holiday spend.

And then third, we typically see higher the low-yielding cash driven both by the same seasonal card paydown plus the tax refund and first quarter bonus dynamics even though the average effect of cash tends to be a bit more muted because it tends to be more back-loaded in the quarter. But this year, in the first quarter, we saw not only those seasonal effects, we did see a particularly elevated level of cash. We sold the home loan portfolio in late November, so we had the full quarter of that. We saw strong growth in our retail deposit franchise beyond what we normally see in tax season as we're getting great traction in the market.

And then third, the net flows from taxes this year are a bit more favorable as you've seen publicly highlighted People are getting average refunds that are a bit higher and more people are getting refunds. And so as we look ahead, specifically in the second quarter, there's going to be one more day that's 9 basis points and the same 9 basis point jump as we head to Q3 and Q4. Specifically to your cash point, I do expect that, that cash position will trend down over time, given that it is particularly elevated this quarter. We have about $8 billion of debt maturities in Q2, we typically see a bit of tax payments in the second quarter.

So the direction of travel for cash should be down from here. But if I just take a step back and look more broadly, absent any meaningful change in the balance sheet mix beyond the cash trending down, the structural level for NIM that we saw after we closed the Discover transaction, should persist. But of course, each calendar quarter is just going to be impacted by seasonal impacts. But if you look at the back half of the year, that on a seasonally adjusted basis is a pretty good indication of where you should expect NIM to kind of structurally be.

Our next question comes from Ryan Nash with Goldman Sachs.

I have 2 questions. I'll start with the first 1 and then I have a follow-up. Maybe the first 1 just a follow-up to Sanjay's question. I know, look, the discussion about efficiency and where it's headed has been the big talking point over the course of the last several months.

Rich, you mentioned Brex and Hopper will enter the run rate. So that I think that will increase the pool of investments. But can you maybe just talk about sizing the magnitude of future investments? And -- what is really holding you back from putting out some efficiency parameters out in the future, kind of like what you did in 2019 when you gave us 42 in '21?

And I have a follow-up.

Thank you, Ryan. So as I've been talking about for a number of quarters now, we have a significant investment agenda at Capital One. And in many ways, from the founding of this company. We built a company in a banking industry that is sort of the growth strategy involves buying other companies.

Now it's ironic. I'm saying this in the wake of 2 acquisitions. But we build a company designed to be an organic growth company. All the financial -- the horizontal accounting we put in place, the information-based strategy, the investment in talent, really everything we've done is to build a company that creates value patiently and rigorously by a combination of really identifying strategic opportunities and then leveraging information-based strategy and testing and so on to enable ourselves to create unique growth opportunities.

So that's kind of who we are. Along the way, we haven't really been the company that's been in the guidance business. I know that many companies -- most companies do that probably more than we do. And I know that there's a lot of benefit to investors.

We're not trying to be difficult about that. But what I've really run to reinforce since the founding of this company, we really focus on identifying opportunities, validating the value creation and really leaning into those when the opportunity is there. As I've been saying recently, we have a really striking number of opportunities down the road, longer-term opportunities, some of them closer in opportunities. But the striking thing is the number of them and the striking thing is they all require investment.

Now it's not an accident. We're in this position because we have patiently been working our way through our technology transformation. And as we get up to the top of the tech stack, the opportunities really start expanding. And also, by the way, the tech transformation of Capital One had as its objective function, being able to be an information-based company powered by AI itself.

And of course, that's where the world is going. So -- and then we've got, of course, the Discover and the Brex acquisition. So we don't give -- not that we never do, but as a general matter, we like to share with our investors why we're excited about the opportunities we have and what we're investing in. But what we're -- and so we don't specifically guide to things like efficiency ratio as a general matter, but there is an important grounding that we give to you -- we've been giving to you every quarter related to the despite all the things that have moved since we announced the deal, that the earnings power and the upside of the Discover integration is consistent with what we expected at the time of the Discovery deal inclusive now of the Brex and Hopper acquisitions.

So implicit in there, there needs to be an efficiency ratio that makes the numbers work. There's -- we try to power as much of our efficiency ratio through growth rather than just cutting costs. But the impression I really want to leave with investors is that we have exceptional opportunities. These opportunities have come to us because we have been the company that's been willing to invest in longer-term opportunities than maybe happens in the marketplace.

And at the same time, through this game-changing Discover deal, we are really landing this integration in a way that collectively between the Discover deal and all the investment agenda of Capital One that we're landing this plane in a place where the earnings power is intact relative to the assumptions at the outset. And to be in that position and to be simultaneously investing in these various opportunities really puts our company and our investors in a strong place, longer run. Even though one of the things that comes with the territory is sometimes a little less guidance and a little more investment than maybe happens at the next company.

Rich, if I can just squeeze a follow-up on to that. I appreciate the answer. I think the market appreciates that you've been saying that this is consistent with what you expected when the deal was announced. I think the challenge on the outside looking in is that we don't know the starting point of what it's relative to.

And I think it's certainly weighed on the stock. So I appreciate you don't want to give guidance, obviously, you not have been following the company for a long time. But is there anything that you can share that actually helps the market understand what that means to give comfort that the earnings power is not too far off from market expectations.

So I don't have -- well, let me actually give a little more granularity on 1 point on a couple of things. When we say earnings power, now earnings power is -- can be lots of things. And I -- we've spent a lot of time -- our whole financial focus as a company, be sure we're building a company with robust earnings power. When we're talking in the form of this guidance when we say earnings power, we're talking about ROTCE.

And in a sense, we're talking about ROTCE at a constant level of capital. Just a constant level of capital in the sense not that the capital would be exactly at the same at the beginning of the end, but just as a way to think about earnings power itself. . The capital level assumed in the deal model was 12.5%. So the guidance on earnings power is assuming that same level of capital.

Now at the rate we are going -- the guidance would still hold at higher capital levels, but the actual guidance is based on the 12.5% number. even though that's not a projection of where our capital is going to be at that time. But I share with you that we normalize for the capital to calculate the earnings power, but the earnings power is in a strong position even with somewhat higher capital levels.

Our next question comes from Moshe Orenbuch with TD Cowen.

Great. I wanted to talk about how to think about growth, particularly in your card business, obviously, the auto finance business has been growing quite nicely. It looks like -- I mean, you've had 3 months at which balanced growth had stepped up if you kind of add back the Discover volume spending looks like it's 200 basis points higher growth in Q1 than it was in Q4. And there have been some reports about Discover products, card products that you've been mailing. Could you talk a little bit about how we should kind of think about growth in the card business over the next year?

Thank you, Moshe. The legacy sort of go right to the core of Capital One, the legacy branded card business is powering along very strongly. We do a normalization, for example, of looking at the growth metrics of the booked up market part of Capital One. The best way to proxy what we -- if we had the sort of the score cutoffs that the major competitors do I think you'd be impressed if you saw the growth metrics of the branded card book, it would be basically at the top of the league tables.

But not necessarily precisely apples and apples to the other competitors. My point is the branded card business and particularly the growth metrics of the sort of booked up market part of the business is showing a lot of strength. Even as the card business as an overall matter, is sort of slowing down, not that it's going slowly, but it had such ferocious growth for years. It's settling out into something probably more normal.

A little bit the elephant in the room at the moment with respect to growth is the Discover brown out not to be at all interpreted it as anything alarming. But with respect to the math of that, let's just talk a little bit about this brown out. So following Discover's credit expansion in their card business in 2022 and 2023, they dialed back their origination programs and credit line management by a fair amount toward the end of 2023 and they basically largely sustained those dial backs. Since we took over, we've been trimming on the margins of Discover's credit policies in areas where we're a little less comfortable with the resiliency of the underlying customers.

And it's basically in the high-balance revolver parts of the business. So as a result of these pullbacks, the portfolio contracted a bit in 2025, and it continues to face some headwinds to growth as these more recent smaller vintages mature. So in the first quarter, Discover Card outstandings were down 1.2% year-over-year and the brown out will increase a bit until we get to the other side of the tech integration with Discover. And it's Importantly, worth noting that the flip side of these pullbacks and the brown out has been strong credit performance, and we're very glad to see that playing through the system.

And I sometimes use the phrase, we have to live with all the great credit performance from these choices that we think Discover made good choices and we certainly are happy with ours. As I've said on the other side of our integration, we believe there are good opportunities to grow the Discover business and you think about what do we mean by the Discover business? Because, of course, it's part of Capital One, but there will be -- we're going to be out there marketing Discover and marketing their flagship product and all of these things. And some of the great programs that they had.

So we're going to have a flow into Capital One of a lot of interested prospects and people that apply. We believe that there is an opportunity to expand discovers on the origination side to expand the business above and below their historical focus on prime customers. And that's also, frankly, a point about the existing book that they've already originated over the years. So even as we continue to be more conservative on high-balance revolvers, we will lean into heavier spenders and also expand opportunities for emerging prime customers.

So we are bullish about the opportunities to build on this Discover franchise, both the existing customers and the flow that comes to people seeking to get a Discover card. You mentioned the conversion timing. Let me talk a little bit about that. We have already started originating Discover cards on our platform.

It's at relatively low levels we've been testing. I think we're up to like 8%. No, I'm not even scratched that number. I'm not exactly sure what the levels are, but we expect to have fully transitioned new originations by the end of Q3. In fact, I think it was 8% at this point.

But think of by the end of Q3, basically in September, we will be fully transitioned to the Discover branded originations being booked on Capital One's technology and with Capital One's underwriting and strategies. Now with respect to the back book, we expect that the back book of existing Discover accounts will be fully converted onto our platform by the first quarter of next year. It will be a phased conversion starting late this year going in through the first quarter of next year. And as the customers get on our platform, we're going to be able to start leaning in more into originations and credit line management, leveraging the many credit policies and strategies and opportunities that we have while, by the way, still preserving some very amazing great things that we've learned from Discover and things they've taught us about exceptional things to do with certain customer segments.

And then finally, when you think about that timing, just now that the loan growth benefits will be lagged by another couple of quarters just as the balances build. One other thing. In parallel to Discover's dial back of card loans, they also dialed back personal loans. Those loans are mostly cross-sell to the existing file.

And those cross-sells have been further scaled back sort of for mechanical reasons during the integration process. So there is a brownout in personal loans also during this period, even as we like that business that they have built and do plan to lean into that on the other side. So pulling way up, these brownouts are a natural and temporary part of the deal and have been accompanied by a better credit and even some margin strength along the way. So we're very pleased with how the integration is going.

Pleased with what we find about Discover and their franchise and their credit policies they've used but bullish about being able to bring that into the Capital One technology and credit policy. So kind of pulling way up on your question, their strength in our core branded card business, particularly the higher upmarket you go in terms of the growth metrics. And we'll be held back a little bit by the brown out and -- but we'll continue to lean into the opportunity on the other side.

I could just sneak in a follow-up. Just to kind of follow up on Ryan's question. Is there a way to think about, particularly with respect to Brex, way to think about kind of payback periods because it would seem that's not the longest kind of payback period. I would think that those customers kind of generate revenue relatively quickly. Is there a way to think about that for Brex?

Well, Moshe, we have been very struck as I'm sure many are from the outside with the rapid growth of this business, and we believe that they're not just growing but they're also growing value and they're growing earnings power along the way. So we like very much what they're doing. The one thing just to keep in mind is that what Capital One plans to do with Brex is to rather than rush to do a big integration, we are focused on enabling them to be able to grow rapidly. And so really, it's an enablement strategy of Capital One.

And in fact, much of what really brought Brex to Capital One was the opportunity to leverage some of the resources and capabilities we had that could allow this amazing growth play to really be enhanced. So our focus is going to be on doing that. Now along the way, Moshe, that will mean increasing investments along the way. So that again has a little bit of a deferral of the vertical impact of these benefits but we -- when you think about some of the benefits of -- that we can bring to Brex along the way we bring substantially lower cost of funds.

That's a benefit that sort of happens right away. The brand benefits are sort of a right-of-way thing once the word spreads, but the benefits of the Capital One, the credibility of the Capital One brand, they are already finding they're able to be in conversations that weren't available to them before just by the credibility of being part of Capital One. Over the coming months, as we test and learn, we're going to start leaning in with marketing dollars and sharing some of the high potential leads and the benefits of big databases that we have built and then a little bit more down the road. We will leverage the marketing machine of Capital One that requires a little more of a technical integration.

We got to set up data pipelines. We've got to calibrate our models for Brex's customer base. So that's a little further down the road, then a little further beyond that. We see the opportunities for benefits on the travel side of the business, but we got to focus first on the Hopper build-out on our end.

So what we're going to have here is a rolling set of -- I sometimes have used the phrase, just add water. It's a metaphor I use for a lot of the benefits that we can bring to Capital One are pretty easy to bring without a full integration and there are things that are very easy for them to capitalize in. That will happen on a phased basis. But from a financial point of view, the one thing we should all understand, the more traction we see will probably lean in more and invest more.

So from a vertical impact point of view that in the sort of classic thing that happens with Capital One, sometimes the more success we see a little bit more delayed the current vertical financial benefit is. But we're very optimistic about the value creation here. Thank you.

Our next question comes from Erika Najarian with UBS.

My first question is on capital. Clearly, you have plenty at 14.4% CET1. But Andrew, I'm wondering if you could give us your preview of how Basel III end game could play out for you. Clearly, with your current asset size, you have to be considering both RSA and ERBA. So I'm wondering if you could give us a preview on what the RWA impact could be and how that could potentially shift your thinking on capital allocation?

Sure, Erika. Well, let me start with the Category 2 reference you made. We're currently at roughly $680 billion of assets, so about $20 billion or so below the $700 billion cap, but our threshold. But recall that, that's triggered with a 4-quarter trailing average.

So first of all, it's likely to be a fair amount of time before we trigger that threshold. And there's also uncertainty on whether the threshold remains at $700 billion or whether it's indexed up, given the GDP and other metric growth since the tailoring was first created nearly a decade ago. And so therefore, that would also delay us triggering category 2 if the threshold is indexed up. With respect then to the proposal, the punchline is the effect under the standardized approach for us if it were enacted on a fully phased-in basis today would increase our CET1 by something like 20 basis points.

That is to somewhat offsetting forces, one is the RWA impact is roughly 8% to 9% decrease for us, and that's about a 140 basis point tailwind, and that 8% or 9% decrease by the way, is pretty similar under both standardized and IRBA. Given that IRBA does come with an ops risk charge. So that kind of offsets the slight benefit to risk-weighted assets there. With AOCI, that's the same across most standardized and IRBA, we had something like a $5.2 billion of AOCI and so fully phased in which, of course, the current proposal isn't.

But if we were to fully phase it in, it's roughly 120 basis point headwind. And so that headwind as forward rates follow forwards, we would see some of that AOCI pull to par and I will note that you can be in today's disclosure. We also have begun using held to maturity in anticipation of these rules. So that may further help insulate capital ratios from some of the AOCI volatility.

But again, fully phasing in AOCI where it stands today as a 120 basis point headwind, the 140 basis point tailwind from the RWA is modest is a modest good guy for us. And so the only thing that really differs would be under IRBA that the DTA threshold comes down from 25% to 10%, and so that's a modest decrease to our spot CET1. But again, we don't anticipate electing IRBA just given that it's a modest negative for us. The next part of your question then of what does that mean to capital actions. Look, we're sitting here today at 14.4%.

There's a number of things we take into account when determining the pace of share repurchases, the current and projected capital levels, both as we sit today as well as incorporating in potential regulatory changes, the expected balance sheet growth, the regulatory environment more broadly, market valuations and very importantly, the macroeconomic environment. And so as we manage our balance sheet, our focus is maintaining a conservative posture to ensure resilience and have strong risk management, and we are acutely aware of the asymmetrical value of capital in certain environments. And so we considered all of these factors in the first quarter, and we repurchased $2.5 billion.

Looking ahead, we'll continue to evaluate all of those factors that I just mentioned when determining our future pace.

And if I could squeeze one in, please give an expanding the ROTCE conversation, I just have to follow up to Ryan's million-dollar question on the starting point to EPS to which you responded you're talking about ROTCE at a constant level of capital. I just wanted to make sure we heard correctly. You mentioned you were talking about ROTCE at a constant level of capital and the capital level you assuming deal model was 12%. Now Rich, I think you said something to the effect of the guidance would still hold even at the current capital level of 14.4%, which means that perhaps the numerator is better.

Did we misinterpret that?

So let me clarify. Thank you. I'm glad you raised it because these things matter. First of all, 12.5%, Erika, was the capital level assumed in the deal model.

And so in terms of how we are sort of measuring earnings power, we are holding capital level constant in this particular exercise in this particular guidance. So the guidance on earnings power is assuming that same level of capital. Now my other point was that's not guidance itself on what the capital levels would be. And my thing was that, that -- we're in a pretty strong position here, and that guidance would still hold at some higher capital levels.

I'm not going to precisely get into exactly what is the break point capital level for which it wouldn't. But my point because -- and every quarter, things change. But my point is that I wanted you to know that we normalized the calculation to be at 12.5%. Andrew just talked about our own capital choices.

Of course, these days have been holding higher capital levels than that. But my other point was just that, that guidance does have some ability to hold at somewhat higher capital levels, but we're not going to quantify that precisely because each time we come back to you, I'm sure that breakeven point would be slightly different. But our point is, I think we're and quite pulling way up from the comment I said earlier, we bought this amazing company with Discover and at really the very same time partly because of Discover, but also because of the incredible number of the tech transformation we have been building.

We just have a very significant number of investment imperatives and really the nice part of the story is that we're able we're able to lean into these investment imperatives and still deliver a the Discover integration with the earnings power that we assumed at the at the outset. And by the way, how is all but possible. It's possible a lot of different elements in the financial equation have moved in different directions along the way, but also at Capital One, we have worked really hard to manage the choices we're making the investments, the efficiency of everything else in the company even as we lean in so hard.

And again, the tech transformation enables some of this to happen, this paradox that we can lean in so much into investment and still generate additional earnings power on 1 minus the investment areas, and that's part of the value creation equation that's driven us since the beginning of our technology transformation. So thanks for your question, Erika.

Our next question comes from Don Fandetti with Wells Fargo.

Richard, I was wondering if you could talk a little bit about investors are very concerned around AI job loss risk and how you're thinking about that? Do you build anything into your credit underwriting as you think about unemployment from that factor alone.

Thank you, Don. So gosh, I don't know if I've ever seen it. Well, I suppose there are lots of other things in our world where there are so many different divergent and stated with great confidence points of view on a topic. But certainly, the impact of AI on jobs is one of them and people are -- people who know live deeply in the tech world are at all parts of this spectrum.

I'll give you just a few comments and just get back to your credit point in a minute. It's really informative to go back as we have done at Capital One and look at how it felt. In periods really when the industrial revolution came in, actually, we've gone back and gotten some striking comments around when printing came in, but within the industrial revolution and how it felt then and then, of course, at the various stages of the digital revolution. And if you look at the quotes of what we said with great passion.

It sounds like the conversation today. And then, of course, the reveal is, yes, that was in like 1860. And that's not to say it won't be different this time, but it is a reminder of what it feels like when things change so much. It's always so much easier to see what's going to change, what right in front of you might change relative to what might open up as an opportunity on the other side. So I think if I were to pull way up, just a personal view is I think that people are underestimating the dynamism in our economy.

They're underestimating what happens when jobs get elevated, meaning that people doing those jobs powered by AI can do even more that in a lot of these areas, the demand actually goes up, not in all -- but in some, I think software development being a good example, you can really have demand go up quite a bit. So we are we are not here to prognosticate what's going to happen with respect to employment. I am absolutely here to prognosticate that AI is going to transform pretty much everything about how we live and how we work. I'm probably on the more optimistic side of the spectrum with respect to the implications on the economy and on employment.

But so -- but we have to -- we will watch with great interest all of this. Now from a credit point of view, were there -- credit is very linked to employment. There's no doubt about it. So if anything that drives very significant changes in unemployment can have important credit consequences.

So we will watch carefully. We certainly are not making credit policy choices now in anticipation of things like that. But one of the reasons that we are so focused in our underwriting on resilience and first of all, taking a 3- or 4-decade history in our modeling to see many things that have happened and then putting an important buffer of resilience in there, is to be in a position to adapt when the things we don't anticipate come to be. But pulling way up in spirit of your question, we are at an extraordinary time when I think that we are dealing with the transformation that we are -- have the privilege to live to is up there with fire and electricity.

And all of us have great interest to see where it goes. And importantly, we're building a company to be at the forefront of that and our technology transformation that we began in 2013 -- what that transformation had as its objective function, was working back. Building a company that could deliver machine learning and AI-powered customized solutions in real time because that's where we saw the world going. And we didn't know back then about generative AI.

We didn't know about agenetic AI, but it turns out had we known those things, we would have built what we're building because, in some ways, it's a continuous strategic thread way back from the founding of Capital One, which was all about -- which was building a company, an information-based company bringing customized solutions powered by technology, data, massive scientific testing and statistical modeling. And what's happened over time is that same quest has brought us from a batch to real time and brought us from regression models to neural net machine learning models to the modern world of AI and the amount of data has gone from things measured in terabytes to things starting to look at words like exabytes and -- but in some ways, what we are building and working backwards from has been -- it's all part of the same continuous journey, and we're very excited to be at the forefront of that.

Thank you.

Our next question comes from Mihir Bhatia with Bank of America.

I wanted to start by asking about the Discover network integration. I think -- so maybe just any learnings from the debit conversions and updates on the timing of the credit conversion. I think you gave an update on when Discover originations will start on Capital One technology, but maybe just also an update on how you're thinking about Capital One originations and issuing on the Discover network on the credit side? And then just related to this integration, is that like when we start seeing some of the integration expenses start to wind down and some of the expense synergies come through.

So thank you here. Thanks so much. So the debit conversion, the debit conversion has -- we are very pleased with how that has gone. That conversion is completed.

And we've learned a lot along the way and how we can get better and better as we do these conversions. But one thing that it has shown us is that it has reinforced our belief in the doability and the success that we can have with customers in doing these conversions. So we're very pleased with that. With respect to -- so on the card side, we right now are just in the early stages of testing on the origination side testing originating cards on the Discover network and then down the road really as more of a next year thing would be being able to -- moving credit cards over to the Discover network.

And we -- of course, that is moving a portion of our book over. But what we're doing in -- we're trying to do a lot of things at once. And when I sort of wave my arms and say, Capital One has a pretty big investment imperative, this is an important part of it. We are trying to work backwards from what could create opportunities for us to move more of our business onto the Discover Network.

And in addition to the mechanical aspects of conversion. Importantly, we are investing in acceptance, particularly international acceptance, sloping that effort toward the geographies that have the highest rate of travel by our customers. And we're also building the network brand and the brand credibility. And then along the way, we will do a lot of different testing.

But if we pull way up, we continue to be -- as we were at the time of the deal announcement that we can move not only our debit business, but a portion of our credit card business there and continue and get the flywheel turning in a tremendously scale-driven business. And as the flywheel turns, I think that helps acceptance. It helps conversions. It helps the customer experience, and it helps our economics and enhances the opportunity to then move more business over time.

So it's not an easy journey, and it's a long journey, but we're taking very important steps early on in this. Thank you, Mihir.

And then Mihir, I think you asked something about the expense synergies. So on the expense side, they are more back loaded relative to the revenue synergies since those expense synergies come from the conversion of the technology platforms and then sort of the associated processes and the decommissioning of applications that Rich just talked about. And so the expense synergies happen more iteratively over the integration window and just are more backloaded because they are highly dependent on those technology conversions. That said, we do make or are making some progress on the expense synergies along the way.

But you should expect that we won't be fully at our expense synergies until the conversions are complete, and that will be in the first half of '27. And so on the revenue side, that is much more tied to the debit conversion that is substantially completed at this point. So we're seeing a meaningful portion of the revenue synergies already in our Q1 results and the at least full portion of the revenue synergies coming from debit will be in the Q2 results. But if we put those things together, we still feel very good about achieving the full $2.5 billion of synergies by the time we complete integration in the middle of '27.

Got it. And then just on a different topic, just on the commercial segment and the reserve, the allowance build there. this quarter. Can you just provide a little more color on what that's related to and just your confidence that, that exposure is, I guess, bring fence now and we won't see continuing increases in the allowance build.

Yes. Mihir, you had a little over an $80 million reserve build. I believe the number was, and it's really just tied to a small number of borrowers across C&I. And if you look back through history, commercial losses, just tend to be a bit lumpy.

And so to the allowance as we just have some higher criticized loans and then just worse performance across a handful of specific credits. So I don't think there's anything in particular to see here, and I think you should just expect that there's a little bit of lumpiness in the system as there always is.

Our next question comes from John Pancari with Evercore ISI. .

I'll just ask one question here in the interest of time. On the capital front, just the Brex deal was somewhat unexpected, albeit definitely additive to your longer-term goals. Can you just update us on any incremental M&A interest, how would you approach other opportunities that may arise either in your own active effort to pursue something? Or if something comes up that not by your doing, though, that would be additive to your franchise, would you consider it?

Just want to get your interest in broader M&A.

Thank you, John. As I said, earlier, and I've been saying really since the founding days, our focus is on having an organic growth company and all the capabilities and talent and infrastructure and financial frameworks to be able to do that. We also are a company that works backwards is such a centerpiece of who we are is the way we approach strategy, and we always work backwards. We don't work forward from where we are.

We work backward from where the world is going and where winning is and that has led us to many times declare we're 'going way over there' with respect to transforming our company, and it's an important reason we're here today. Along the way in those journeys, M&A has played sort of an interesting role for Capital One. I've often described it as the purchase of growth platforms. we have been much less focused on sort of buying companies and adding the earnings power of a company to ours, although it's not that we wouldn't do that. But being the growth company that we are.

We're very focused on what are the enablers of us from a structural point of view to be able to win in the carefully selected marketplaces where we have said winning is so important. And Brex was just a classic example of that because we had already declared the commercial card was such an important part of our future. We already had a commercial card. We had already internally declared that we had to go very much in the direction Brex was.

And so we were going down the path of building those capabilities and then this opportunity came along. So I share all that to give you a window that we will continue to be the company that is working backwards from where winning is. We will, of course, continue to look at the marketplace, and there will be times when opportunities, special opportunities align in ways that are a little hard to predict in advance. One other crucial thing that I would say is that most other banks are out there focusing on buying banks.

We are not at all focused on buying banks. We bought banks in our history to transform the balance sheet of Capital One from a capital markets funded company to a FDIC insured deposit funded company but a defining thing about Capital One now is that we have built a modern tech stack and the alignment that we have technologically philosophically, strategically and in terms of talent, is sort of right there with tech companies, and it puts us in a position to be able to successfully do acquisitions of little tech companies that I think for big banks, it would be very, very hard to pull it off and make it work and have the talent stay and sort of all that all those challenges that come along the way.

But I think Capital One's future is much more a future -- with respect to acquisitions, is much more a future of smaller tech companies and companies built very much like ourselves, and therefore, a very different strategy than all -- pretty much all other major banks are pursuing.

And our final question comes from Saul Martinez with HSBC.

Maybe a follow-up to Erika's question on capital. I mean, why not up the buyback from the $2.5 billion per quarter level. I mean you're fully loaded with the new standardized approach, including AOCI and even factoring in back you're kind of over that 14% to 14.5% CET1 range and fully acknowledging all the factors, Andrew, that you've highlighted, growth and uncertainty in regulations, it wouldn't seem like that's an optimal capital level. And just given the growth outlook, at least in the near term, why not be more aggressive in bringing that capital ratio down?

Because you still have a comfortable capital position with a lot of excess capital. So just kind of wanted to get your thoughts on that.

Yes. So you highlighted the reasons that I shared with Erika. And so I would just, first of all say, we have nearly $12 billion of authorization that remains from the Board. We have flexibility under SEB, but the way we approach capital is we think about variety of things when making that -- making our decisions around repurchase pace, and we're always going to err on the side of conservatism and focus on resilience.

And so we are well aware that capital has asymmetrical value in certain environments. And so like we're just going to use the flexibility in the moment to make a call of what level to repurchase at any given time.

And Andrew, I would just add that all of that sort of conservative speech, which, by the way, I would have said the same thing in answering that question. it is still also the case that share repurchases are a very important part of the value creation equation at Capital One. And we're -- we've worked really hard to be a company with the earnings power to be able to be able to create a lot of value, be able to buy back shares and still be -- take a very conservative philosophy with respect to capital. So thank you so much for your question.

Fair enough. If I can squeeze in a follow-up. It's a very specific question. Loan and -- I noticed that you didn't give the outlook for loan and deposit fair value mark amortization this quarter, and I think there was like $1 million this quarter, which is -- and I think you had guided like $98 million for the full year and increasing in '27. But is there adjustment to the balance sheet that caused this?

Or is this just -- do you just kind of feel like this is sort of a consequential number at this point, given the magnitude of the impact?

And Saul, are you referencing for Discover, I presume, right?

Yes, yes, yes. Yes, for Discover exactly.

We finalized the measurement period and so we provided the final amortization schedule in the prior call. And so those are the numbers, I think, especially with respect to NIM, it was something like $1 million. So it was inconsequential in the quarter and it didn't move the metric at all, but I would just direct you back to the tables that we already provided because the measurement period is final and those are the numbers that are going to flow through the P&L going forward.

Concludes our earnings call and the Q&A for this evening. I want to thank everybody for joining us on the conference call today. Thank you for your interest in Capital One. Have a great evening, everyone. .

Thank you. This concludes today's conference call. Thank you for participating. You may now disconnect.