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Good day, and thank you for standing by. Welcome to the Capital 1 Q2 26 Earnings Call. Please be advised that today's conference is being recorded. After the speakers' presentation, there will be a question and answer session. To ask a question, please press *1 on your telephone, and wait for your name to be announced. To withdraw your question, please press *1 again. I would now like to hand the conference over to your speaker today, Jeff Norris, Senior Vice President of Finance. Please go ahead.
Thanks very much, Moshe, and welcome, everyone. To access the live webcast of this call, please go to the Investors section of Capital 1's website capitalone.com. A copy of the earnings presentation, press release and financial supplement can also be found in the Investors section of Capital 1's website selecting Financials then Quarterly Earnings Release. With me this evening are Mr. Richard D. Fairbank, Capital 1's Chairman and Chief Executive Officer, and Mr. Andrew Young, Capital 1's Chief Financial Officer. Richard and Andrew are going to walk you through this presentation summarizing our second quarter results for 2026. Please note that this presentation may contain forward looking statements. Information regarding Capital 1'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 1 does not undertake any obligation to update or revise any of this information, whether as a result of new information, future events, or otherwise. Numerous factors could cause our actual results to differ materially from those described in forward looking statements. And for more information on these factors, please see the section titled Forward Looking Statements in the earnings release presentation and the Risk Factors section of our annual and quarterly reports accessible at Capital 1's website and filed with the SEC. Now I will turn the call over to Mr. Young. Andrew?
Thanks, Jeff, and good afternoon, everyone. I will start on slide 3 of tonight's presentation. In the second quarter, Capital 1 earned $3 billion or $4.73 per diluted common share. As a reminder, the Brex acquisition closed in early April, and we have provided additional details related to the purchase accounting in the appendix of tonight's presentation. Results for the quarter included several adjusting items related to the Discover and Brex acquisitions, which are outlined on slide 3. Net of these adjusting items, second quarter earnings per share were $5.81. Relative to the first quarter, revenue increased 4% and noninterest expense grew 7%, resulting in pre-provision earnings growth of 1%. On an adjusted basis, pre-provision earnings were flat quarter over quarter. Our provision for credit losses decreased $1.1 billion or 27% to $3 billion in the quarter. The provision reflects $3.7 billion of net charge-offs of $662 million. Turning to slide 4, I will cover the allowance in greater detail. A $662 million allowance release in the quarter brought the allowance balance to $23 billion. Our total portfolio coverage ratio decreased 26 basis points and now stands at 5.02%. I will cover the drivers of the changes in allowance and coverage ratio by segment on slide 5. In our domestic card segment, we released $705 million of allowance. The coverage ratio decreased by 41 basis points and now stands at 6.99%. The decline in the coverage ratio was driven by continued favorable observed credit in the quarter and a modest decrease in the consideration given to economic uncertainties. In our consumer banking segment, we built $115 million of allowance. The allowance build was primarily driven by strong growth in the auto business. The coverage ratio ended the quarter at 2.39%, 3 basis points higher than the first quarter. And finally, in our commercial banking segment, we released $59 million of allowance. The allowance release was primarily driven by specific reserves on loans that were charged off in the quarter. The commercial banking coverage ratio decreased 8 basis points quarter over quarter to 1.62%. Turning to page 6, I will now discuss liquidity. Liquidity reserves ended the second quarter at about $144 billion, down $21 billion from the prior quarter. Our ending cash position decreased by about $22 billion to approximately $55 billion. The decrease in cash was primarily driven by growth in our loan portfolio, wholesale funding maturities late in the quarter, and the impacts from Brex. Our preliminary average liquidity coverage ratio was 165%, our preliminary average net stable funding ratio was 136%. Turning to page 7, I will cover our net interest margin. Our second quarter net interest margin was 8.01%, 14 basis points higher than the prior quarter. The increase was largely driven by a 9 basis point impact from one additional day in the quarter. The remaining increase was driven by a lower rate paid on retail deposits and a $5 billion decline in average cash balances. Turning to slide 8, I will end by discussing our capital position. Our Common Equity Tier 1 capital ratio ended the quarter at 13.7%, 70 basis points lower than the first quarter. The combination of $2.7 billion of share repurchases, approximately 40 basis point impact from the Brex transaction, and an increase in risk-weighted assets more than offset net income in the quarter. With that, I will turn the call over to Richard. Richard?
Thanks, Andrew, and good evening, everyone. Slide 10 shows second quarter results in our credit card business. Credit card segment results are largely a function of our domestic card results and trends, which are shown on slide 11. The domestic card business posted another quarter of top line growth and strong credit results. As a reminder, we closed the Discover acquisition in May 2025, so period end balances for the prior year quarter now include the addition of the Discover portfolio. For items like purchase volume and revenue, we will still need to discuss the partial quarter impacts of adding Discover. In the second quarter, we also added Brex to the domestic card business, and moved our small legacy corporate credit card business from the commercial bank to domestic card. Second quarter purchase volume grew 26% year over year, primarily driven by the addition of a partial quarter of Discover purchase volume. We also posted a modest acceleration in legacy Capital 1 purchase volume growth and benefited from modest tailwinds from the addition of Brex and the corporate card business. Legacy Discover purchase volume grew just under 2% year over year. Purchase volume for the legacy Capital 1 businesses, inclusive of adding Brex and corporate card, grew about 14% year over year with the significant majority of the increase coming from the acceleration of underlying organic growth before the addition of Brex and corporate card. Ending loan balances increased 2.6% year over year. The legacy Discover card loans shrank 1.5% from the prior year, in line with our expectations for the temporary brownout of Discover loan growth. Excluding Discover, ending loans grew about 5.3% year over year, driven predominantly by a modest acceleration in the organic growth of legacy Capital 1 loans and aided by the addition of Brex and corporate card. We continue to see good opportunities to grow the Discover card business on the other side of our tech integration where we can implement growth expansions powered by our unique technology and underwriting. Revenue was up 30% from the second quarter of '25, largely driven by the addition of a partial quarter of Discover revenue. Excluding Discover, year over year revenue growth was 9.5% driven predominantly by underlying organic growth in legacy Capital 1 purchase volume and loans. Revenue margin for the quarter was 7.4%. The domestic card charge-off rate for the second quarter was 4.71%, down 39 basis points from the prior quarter and down 54 basis points year over year. The delinquency rate was 3.39% at quarter end, down 31 basis points from the linked quarter and down 21 basis points from a year ago. We are seeing similar credit trends in both the legacy Capital 1 and legacy Discover portfolios. Domestic card noninterest expense was up 38% compared to the second quarter of '25, driven by the addition of a partial quarter of Discover as well as continuing technology investments. Operating expense and marketing both increased year over year. Our choices in domestic card are the biggest driver of total company marketing, but choices in our consumer banking business have an increasing impact as well. Total company marketing expense in the quarter was about $1.7 billion, up 23% year over year driven by the addition of Discover, as well as higher legacy Capital 1 direct marketing in our domestic card and consumer banking businesses, increased media spend, and continuing investments in premium benefits. Pulling up, our marketing continues to deliver strong new account originations, to build an enduring franchise with heavy spenders at the top of the domestic credit card market, and to grow checking accounts on a national scale in our consumer banking business. We continue to lean into marketing to take advantage of these compelling market opportunities. Slide 12 shows second quarter results in our consumer banking business. Global payment network transaction volume for the quarter was approximately $190 billion. Network transaction volume increased 156% compared to the partial quarter of volume in the second quarter of '25 and the successful completion of converting Capital 1 debit customers to the Discover network. The sequential quarter increase was about 9%. Auto originations were up 19% from the prior year quarter and continue to be in a strong position to pursue resilient growth in the current marketplace. Consumer banking ending loan balances increased $9.2 billion or about 11% year over year. Average loans were also up 11%. Compared to the year ago quarter, ending consumer deposits grew about 5%. Average deposits were up 19%. Our digital-first national consumer banking business continues to grow and gain traction. Consumer banking revenue for the quarter was up about 26% year over year, driven predominantly by the addition of a partial quarter of Discover operations as well as Discover revenue synergies and growth in auto loans. Noninterest expense was up about 24% compared to the second quarter of '25, driven largely by the addition of a partial quarter of Discover as well as higher marketing to drive growth in our national consumer banking business, increased auto originations, and continued technology investments. The auto charge-off rate for the quarter was 1.43%, up 18 basis points year over year and down 21 basis points from the sequential quarter. The year over year increase is the result of a gradual mix shift in new originations and loans as our subprime mix is returning to pre-pandemic levels. The auto delinquency rate was up 11 basis points from the linked quarter and down 52 basis points from the prior year. Slide 13 shows second quarter results for our Commercial Banking. Compared to the linked quarter, both ending and average loan balances were up about 1%. Ending deposits were down about 1% from the linked quarter. Average deposits were essentially flat. The commercial banking net charge-off rate for the second quarter increased 24 basis points from the sequential quarter to 0.53%. The commercial criticized-performing loan rate was 4.4%, down 55 basis points compared to the linked quarter. The criticized-nonperforming loan rate was down 8 basis points to 1.32%. In closing, second quarter results continued to reflect solid top line growth and strong credit performance. We are now 14 months into our planned 24-month integration of Discover, and integration is going well, with the successful completion of converting Capital 1's debit customers to the Discover network. Second quarter results include the full quarterly run-rate debit revenue synergies. Our results also include about one third of the quarterly run-rate of the announced operating expense synergies. We remain on track to deliver the full $2.5 billion of announced synergies. For years, we have been working backwards from the dramatic transformation of the business marketplace with modern technology, data, and AI. We are in the 14th year of our technology transformation from the bottom of the tech stack up. We are well down that path, and we continue to invest in some very powerful foundational capabilities as well as AI infrastructure and specific AI experiences. We also continue to invest in growing our heavy spender franchise at the top of the market, including rewards, lounges, unique access to experiences, and breakthrough digital capabilities. And we continue to lean in to our unique quest to organically build a digital-first full service national bank. Many of our opportunities are enhanced by the Discover acquisition, which also brings the new opportunity to grow and scale our own global payments network. We continue to invest in network acceptance and technology. As we have discussed, these investments will continue to be reflected in the efficiency ratio. They are also the engine that powers long-term growth and returns. Pulling way up, we continue to build momentum from the game changing acquisition of Discover. Even though some individual variables in our deal model have moved since the announcement, and we have acquired Brex and brought in house the technology that supports Capital 1 travel, we still expect our earnings power on the other side of the Discover integration to be consistent with what we expected at the time we announced the deal. And now we will be happy to answer your questions. Jeff?
Thanks, Richard. We will now start the Q&A session. As a courtesy to other investors and analysts who may wish to ask a question, please limit yourself to one question plus a single follow-up. If you have questions after the Q&A session, the Investor Relations team will be available. Moshe, please start the Q&A.
分析師問答
Thank you. Press *1 on your telephone and wait for your name to be announced. To withdraw your question, please press *1 again. Our first question comes from Terry Ma with Barclays. You may proceed.
Hey, thank you. Good afternoon. I wanted to start off with Brex. Richard, you had previously indicated that you could accelerate Brex's growth almost from day one through stepped up marketing and tech spend. So I am just curious to what extent have those investments already been absorbed into the current expense run rate? And then when should investors see more tangible benefits become more visible? And I have a follow-up.
Thank you, Terry. Just to comment on Brex for a second: I do not believe we said from the second we get it we will be able to accelerate their growth immediately. What we said is from pretty much the second that we closed the acquisition, we are going to be able to start mobilizing solutions, many of which do not require full integration and can be very beneficial and help us lean in and accelerate Brex's growth. It has been over 100 days since we closed the deal, and we are as excited as ever about Brex. We acquired Brex because of its success in the attractive corporate card market, its bottom-of-the-tech-stack infrastructure, and its world-class talent. We continue to be impressed with all of those capabilities. Together, we are making good progress in building out foundational capabilities that will support the business going forward. Brex is already experiencing some of the early tailwinds that will come with our brand, and we expect these to only grow stronger over the next few months. They are also benefiting from the cost of funds impact of moving to our balance sheet. We have already stood up a program to share high-potential leads from across our businesses with Brex, and we are seeing very promising early results at the outset. We will scale into this approach more aggressively over time. Some other benefits that we bring are going to take a little bit longer. Over the coming months, as we test and learn, we will start leaning in with marketing dollars. Fully leveraging the marketing machine of Capital 1 requires a little more technical integration. We will have to set up data pipelines and calibrate our models for Brex's customer base, so that will come a little further down the road. For our travel business, we will be focused on the hopper buildout through the balance of this year, so bringing our travel portal to Brex will likely follow that work. We expect that Brex will also bring many benefits to Capital 1, especially bringing Brex capabilities to our small business card business. These benefits will require integration and will be unlocked over time. We are already moving to bring benefits to them. Most of that is not yet reflected in our investment dollars because most of the work has been putting capabilities in place.
Got it. That is helpful. And then for my follow-up, regarding loan growth, that continues to improve each month in the card business even in spite of the Discover brownout. As we look ahead to Discover originations being fully on Capital 1's platform, how should we think about growth in the card business after that and the associated marketing spend required to kick start Discover growth again? Thank you.
Thanks very much, Terry. Let me talk about the Discover brownout and then marketing. The Discover card portfolio is going through a temporary loan growth brownout as several factors combined to pressure loan growth in the near term. Following Discover's credit expansion in 2022 and 2023, they dialed back origination programs and credit line management toward the end of '23 and largely sustained those dial backs. Since we took over, we have been trimming some aspects of Discover's credit policy in areas where we are less comfortable with the resiliency of the underlying customers, particularly with respect to high-balance revolvers. As a result of these pullbacks, the portfolio has faced headwinds to growth as more recent vintages mature. Discover card outstandings were down 1.5% year over year. The flip side of these pullbacks and the brownout has been strong credit performance. We expect the brownout is temporary. Over time, bringing Discover onto Capital 1's technology will allow us to unleash our models, full-spectrum underwriting, and lean into spender capabilities to power more originations, higher spend volume, and ultimately higher loan volume. On the Discover front book, 50% of Discover originations are now on Capital 1's tech platform, and we expect to be fully on our tech stack for new originations by the end of the third quarter. We are leaning into a combination of testing and rolling out capabilities that have powered our card growth and that we believe will enhance the Discover book and the new flow of applicants. We are already seeing several positive green shoots, though it is early. On Discover's back book, we will begin major conversion waves later this month, but we will not be fully on Capital 1's tech stack until the first quarter of next year. We will migrate the remainder of the back book in waves — a wave in July, a wave in October, and a wave in January. With respect to the brownout, we expect continued contraction in the near term, and the bottom of the brownout will be somewhere around the fourth quarter of this year, but we look forward to returning to growth over time as we unleash more of our tech and capabilities. I should also mention that Discover dialed back on personal loans as well, and we have dialed back a bit on personal loans during integration, so the brownout will continue and, in fact, increase in the near term before improving. On marketing: we will lean into marketing more on the Discover side as well. Marketing is primarily a front-book activity, so we are leaning into marketing now to generate a strong flow of applicants to Capital 1. That will be one of the many things we are leaning into over the course of the next year.
Our next question comes from Sanjay Sakhrani with KBW. You may proceed.
Thank you. I guess my first question is for Andrew. If I look at the NIM and you alluded to this in your prepared remarks, it seems like the liquidity portfolio came down over the course of the quarter but was still high on average. So I estimate there was at least a 10 basis point plus drag on the NIM as a result. Is that a safe assumption to make as we enter into the next quarter, we should have a higher NIM going into the third quarter?
Thanks for the question, Sanjay. Yes, as you said, in Q1, we had elevated cash levels from the Discover home loan sale at the end of '25, and then we had strong deposit growth in Q1 aided by tax refunds, and we ended the quarter with around $75 billion of cash. In Q2, cash came down quite a bit from loan growth, the maturities I referenced in the Q1 call, and the cash impact related to Brex, which drove the ending balance down about $20 billion but average only came down about $5 billion. So as you suggest, looking ahead there should be a bit of a NIM catch-up that happens in the third quarter as the average cash catches up to the ending cash. Also, as a reminder, the back half of the year has one more day in each of the quarters, which adds a 9 basis point tailwind to NIM. I would note that significant changes in our balance sheet could impact NIM over time. Our net interest income is almost perfectly neutral to rates over time, but if and when the Fed moves, there could be a short-term impact to NIM given the timing of repricing of deposits and assets, but that effect should level out over time. Last quarter, I pointed you to the back half of last year as a decent proxy for a NIM level after we closed on Discover. There will be quarterly variability from day count and other seasonal factors, but that remains a useful indicator of our structural NIM in the near term.
I have the same questions from last quarter. Richard, maybe just to go back to Terry's question on expenses. As we think about the incremental expenses for investment in products and marketing, should we think about the impact to adjusted operating efficiency as more marginal on a go-forward basis versus what we have seen with Brex and Hopper now in the run-rate? Just trying to get a sense of the margin because you do also have the remaining two-thirds of the OpEx synergies coming as we move into next year as well. Would appreciate some color there.
Thanks, Sanjay. The efficiency ratio will continue to reflect our revenue and expense trends, our investment imperatives, and the realization of synergies. As we have discussed, the debit revenue synergies are essentially in the numbers. The operating expense synergies are more back-loaded, and we realized about one third of the operating expense synergies to date. We are on track to achieve the remaining operating expense synergies by the second half of '27. We continue to lean into our investment imperatives including foundational technology, AI, and the longer term growth opportunities created by our technology transformation and, of course, Discover and Brex. These investments are important to the sustained growth and returns of the company over time. The efficiency ratio is one of many drivers of returns. With all the moving pieces, we have chosen to focus our conversation on earnings power, and as we have said, we expect the earnings power of the combined company on the other side of the Discover integration to be consistent with what we expected at the time we announced the Discover acquisition inclusive of Brex and insourcing of the technology that supports Capital 1 travel and inclusive of these investments. Implicit in that is an efficiency ratio that makes the numbers work, but we are not specifically guiding on that. The combined financial performance continues to track with the guidance we have given on earnings power coming out the other side of integration.
Our next question comes from Ryan Nash with Goldman Sachs. You may proceed.
Hey. Good afternoon, everyone. Richard, maybe to build a little bit on Sanjay's question: If you look back to when the deal was announced and put the companies together and you layer on synergies, it got to a return that was around 20% plus or minus. Given everything that you have shared with us today, it sounds like there are more investments that you want to make and you want to preserve optionality. But is the right way to think about it that this should be at least a 20% return business? And what are some of the investments that could push it higher or lower in this environment?
Ryan, Discover brings strong earnings power and we bring synergies to this deal. Earnings power has been a central part of the conversation and an important part of the value equation. A number of variables have moved as we proceed: the brownout on Discover loan growth will continue for some time, though it should mitigate in coming quarters. The flip side has been better credit performance. Capital 1 margins have had strength with accelerating retail deposit growth. Then we have the investment imperative with two broad categories: investments in technology and AI to capture an extraordinary transformation; and emerging growth opportunities that will be important for growth and value creation. Despite changes, we expect earnings power consistent with what we talked about at the outset. We are not branding a precise number because many aspects of Capital 1's performance do not lend themselves to precise figures. When we look at earnings power as reflected in ROTCE, we feel we are headed for performance consistent with expectations. We are simultaneously leaning into investments and driving efficiency; some savings come from legacy tech cost reductions as we modernize, and efficiencies across operations. We are managing expenses carefully to deliver the earnings power we expected at the outset and to position ourselves to create value for investors in the years ahead.
Maybe as my follow-up, Richard, when I look at the capital in the slides, capital came down almost 70 basis points this quarter. But if you remove the impact of Brex, you bought back a little more stock this quarter yet capital ratios were largely unchanged. Now that the deal is closed, do you think we could see a further step up in the buyback from here? And how do you think about a path towards the stated capital need?
Ryan, I will take that one and start with the 11% we define as a long-term capital need, not a target. We continue to think that need is 11%. Each year, CCAR and other factors have shown volatility in an institution's capital requirements, and our internal modeling yields a more stable view. Where we manage our capital at any given time factors in planning assumptions including expectations for growth, forecasted capital accretion from earnings, the regulatory environment, AOCI, stock price, and the macroeconomic environment. Beyond these considerations, we also view capital as having asymmetric value, particularly in times of stress, providing both offensive and defensive value. This multi-pronged approach has enabled us to maintain a strong combination of returning capital while preserving flexibility to take advantage of growth opportunities over time. We are not in a race to drive capital down as quickly as possible to any specific number. Hopefully that gives you a sense of how we are thinking about capital.
Our next question comes from Darrin Peller with Wolfe Research. You may proceed.
Hey, guys. Thank you. It looks like you included a partial quarter of Brex as well as legacy corporate card in the domestic purchase volume. Can you give us a sense what would the pro forma domestic card purchase volume growth look like for the quarter, given the acceleration across the industry? I think we can calculate some of it, but some help on the details would be great.
Great. We did not provide a breakdown of the amount of Brex's contribution. We did provide, from a purchase accounting perspective, the closing balance sheet and associated amortization schedules, but given the relatively small percentage of Brex within the context of Capital 1, the P&L and balance sheet on a run-rate basis are not materially different. That said, we are very excited about the long-term prospects of adding Brex and think the growth this platform provides will drive significant accretion, but we do not intend to break out specifics of the P&L.
Darrin, let me remind you exactly what we said in the call. We said that if you just look at the legacy Capital 1 domestic card business there was a modest acceleration, and that the combination of that plus the addition of Brex and corporate card was about 14% with a significant majority of that driven by the legacy piece.
That is helpful, Jeff. Just a quick follow-up: last quarter you mentioned some marketing was pushed from the first quarter into the remainder of the year. Was this still happening this quarter? If we average recent quarters given some of the timing changes, is that a good way to think about run-rate marketing levels for the company going forward?
There is seasonality in marketing. No one year is perfectly the same as another, but there tends to be an upward slope, particularly in the back half of the year relative to the first half. In the first quarter we highlighted that some spend initially anticipated in Q1 was pushed into Q2, and we wanted to make that point clear. Actual levels of marketing spend will be dependent on the opportunities we see in the moment. I do not want to give a precise schedule of percentage of annual spend by quarter, but if you look at history, there are clear trends of more spend in the back half relative to the front half.
Our next question comes from Richard Shane with JPMorgan. You may proceed.
Thanks for taking my question. I want to pull the thread on Brex. Richard, you talked about optimizing ROTCE and margin as a standalone business while Brex historically was benchmarked on growth. How do you optimize Brex while still keeping an eye on maximizing ROTCE and margin in the near term?
I hope the objective function of Capital 1 is not just maximizing ROTCE in the near term. That said, let me talk about Brex and value creation. Tech startups use power metrics that are not vertical earnings-based, but our approach at Capital 1 has always been to take a horizontal economic view and build annuities. We use horizontal accounting and estimate the lifetime economics of investments, the cost to create cohorts of accounts, and then measure results retrospectively. When we looked at Brex, we rolled up our sleeves and evaluated how Brex creates valuable annuities over time. Brex did not have as deep a horizontal accounting system as we do, which is understandable, but the investments we have seen look value creating. We have been working on integrating Brex into our more systematic horizontal accounting approach and found these investments to be value creating. Often, when you measure the value creation opportunity rigorously, you validate that more investment is justified because it creates long-term value. Brex is in an attractive market attacking commercial card, payables, and expense management with an integrated solution that is needed across company sizes. We will lean in and provide resources and capabilities to help Brex create more value, and we will rigorously measure that each tranche of investment pays off over time. From what we see, the acquisition thesis continues to validate itself.
Next question comes from Robert Wildhack with Autonomous Research. You may proceed.
I wanted to ask about domestic card loan growth over recent periods for core Capital 1; that bounced around in the low 3s and was 2.6% in the quarter. Those have been below longer-term trend. Can you remind us what is behind the slowdown and whether anything structural besides law of large numbers might keep Capital 1 domestic card loan growth from returning to longer-term averages?
When you refer to domestic card, you're referring to the overall business including Discover. Discover is going through a temporary shrink, which holds back loan growth. Excluding the Discover brownout effect, legacy Capital 1 continues to deliver consistently solid loan growth. We compare favorably on key growth metrics versus industry peers. One headwind to loan growth is higher payment rates, which we view positively because it indicates stronger credit but it slows loan growth. If you separate out Discover, legacy Capital 1 shows strong performance on account origination, purchase volume, and other important metrics. When we look at originated upmarket portions of Capital 1 — those that resemble other leading players — performance is strong and among the leaders on growth metrics. So while Discover is holding overall numbers down for a period, legacy Capital 1 should continue to perform strongly on growth measures.
Our next question comes from Donald Fandetti with Wells Fargo. You may proceed.
Richard, can you talk about the credit card migration to the Discover network? Where are you on that testing, is it encouraging, and do you see a scenario where you could move more volume over than initially thought when the Discover deal was struck?
To clarify, you mean moving Capital 1 cards to the Discover network, correct? Earlier this year we completed the conversion of our debit card business to the Discover network and are very pleased with how that went; I would call it a strong success. For credit card volume on the Discover network there's front book and back book approaches. We are testing originating legacy Capital 1 branded accounts on the Discover network and testing conversion of existing accounts. After tests, we will make final choices on what volume to move and timing. A companion effort is scaling up network acceptance as we increase international acceptance and further build the brand. We are focusing acceptance work in places our customers travel to most: Mexico, the Caribbean, Canada, and the U.K. We will slope the work — improving acceptance where it matters most and focusing migrations on product and customer groups that do not involve heavy international travel, to create great customer experiences and maximize the volume we can move over time.
Do you think you need international issuing ultimately? Some suggest you do, or is that something you'll solve down the road?
International acceptance can be built in multiple ways. International issuing is an effective approach because a local issuer can help drive acceptance in a local geography, and it is one of several levers. Discover has used multiple levers: partnering with other networks (e.g., Japan, China, India), partnering with card-issuing financial institutions, partnering with merchant acquirers, and working directly with merchants. We will continue to invest in these playbook elements. There is a flywheel: more acceptance drives more volume, which in turn aids further acceptance. We will use these approaches as appropriate and focus on markets where our customers travel most to get the best returns on investment.
Our next question comes from John Pancari with Evercore. You may proceed.
Good evening. Regarding the investments you are making, I understand you are unable to provide an efficiency ratio or expense growth expectations. Any way you can help with what inning you are in terms of the investments? You've completed the debit migration, you're testing, and you've discussed approaches. Where do you stand now on the investment required?
When I list the investments, I do not want anyone to infer that international acceptance is the top item. It is an important sustained investment, but we are spending more on Capital 1 technology, AI, and especially investing to win with heavy spenders. The investments in international acceptance will continue for as far as we can see, but our strategy does not hinge on a single big bang monetization event. We slope the work across customers and geographies. By focusing investments on where customers travel and where we can move the needle, we can make progress without having to wait for a someday payoff. We are already seeing benefits on the debit side and are leaning into credit in a measured way so benefits accrue along the way.
Separately, regarding migration of the back book, would you start with basic non-premium cards and focus on those that are expiring in a given year to reduce friction when migrating?
That's an astute question. In testing we do broad testing to understand customer reactions comprehensively. The front book is much easier because we can originate accounts on the Discover network without a migration event. For migrating the existing book, key factors include international travel and how many cards are on file; the more cards on file, the more friction in changing card numbers. In some cases, moving at expiration time reduces friction since customers expect a card number change. All of these considerations are part of our testing agenda and strategic planning for migrations.
Our next question comes from Mihir Bhatia with Bank of America. You may proceed.
Hi. Thanks for squeezing me in. I wanted to touch on credit. First, the June loss rate was down quite a bit month over month; was there anything to call out there, a sale, or was it just improved credit? Second, how is the consumer faring and, more importantly, how are Capital 1 customers faring — recent vintages performing in line with expectations given marketing and origination investments?
Richard, I will just interject quickly: there is nothing to call out in the June domestic card charge-off rate.
Mihir, on June performance and the quarter: credit continues to be very strong. We focus on delinquencies as a key indicator. While the June loss rate was particularly strong, June delinquencies moved in line with seasonality. Over 2026, delinquencies have generally moved a little better than our calculated seasonality. So June was a very strong month but not an outlier on the delinquency trend. Regarding the consumer and our customers: the U.S. consumer and the overall economy remain resilient despite high energy prices. The unemployment rate in June was lower than in February; jobless claims remain low and job creation has rebounded. Consumer spending remains strong. Real wage growth turned negative in April and May year over year, but it was slightly positive in June as inflation ticked down. Bank balances and debt servicing burdens look a bit stronger than a year ago across income levels. In our domestic card business, credit metrics continued to improve year over year. Auto credit metrics are strong as well. Leading indicators for our customers: payment rates are meaningfully above pre-pandemic levels across all customer segments, which slows loan growth but is a healthy sign of credit quality. Spend levels show healthy growth driven by account growth and steady spend per customer. Revolve rates have stabilized over the past year near pre-pandemic levels for our major products and segments. Our front book new originations continue to perform very well: 2024 and 2025 originations in legacy Capital 1 are performing better than 2022 and 2023, and are a bit below pre-pandemic levels. That gives us confidence to lean into origination spend and marketing. Recoveries also helped: post-pandemic our recoveries inventory was unusually low but has increased rapidly over the past couple of years and contributed to improved loss rates. Discover's losses peaked later than legacy Capital 1's and that dynamic is now a tailwind for Discover as well. Looking ahead, recoveries inventory should taper as recent charge-offs decline. Pulling up, we see strength in the consumer and across our business in card and auto, which is why we are leaning into growth strategies while monitoring risks.
Our next question comes from Erika Najarian with UBS. You may proceed.
Hi. Investors want clarity on earnings power. You keep mentioning expected earnings power consistent with the original Discover announcement. I was looking through disclosures and trying to reconcile consensus EPS at announcement and the accretion statements. Can you explain what baseline you are using and why that logic may or may not be appropriate?
Erika, let me unpack assumptions. When we announced the deal in February 2024, we took consensus estimates for both Capital 1 and Discover and adjusted Discover's loss forecast based on diligence. When Richard last quarter discussed defining earnings power as ROTCE, he used a denominator of 12.5% CET1 for the sake of doing the math and comparability to the prior analysis. That 12.5% figure was the weighted average consensus for CET1 at the time. That is not saying that is our capital target; as I mentioned earlier, our capital need is 11% as derived from internal modeling. Share price and other assumptions have moved since announcement and many line items have changed. That is why we keep returning to ROTCE as our definition of earnings power rather than a specific EPS number.
Our final question comes from Moshe Orenbuch with TD Cowen. You may proceed.
Thanks. Richard, you talked about growth in non-prime auto and the high-end card business. Can you talk about the non-prime card business: it has been an area where growth didn't require as much upfront investment as the high-end. Are there prospects for acceleration there, and how are those customers performing given your marketing investments?
Moshe, thanks. This is an important part of Capital 1. The subprime percentage is down somewhat, partly because of Discover's addition. Across card and auto, our strategy is consistent. We continue to get traction in the lower end of the market; performance remains strong. Growth rates there are a bit lower than at the higher end, but the marketing efficiency is often better and acquisition costs are lower. Credit performance across our portfolio is consistent across the spectrum; we do not see a pronounced K-shaped outcome in our customer base. This part of the market benefits a lot from investments in technology, data, machine learning, and AI, which are strengths for Capital 1. So while growth at non-prime may be less than at the high end, the value creation remains high and stable, and our tech and data investments should enhance outcomes in that underserved segment.
Quick follow-up: you talked about horizontal P&Ls and how you measure lifetime economics. Do you think the company gets recognition in the stock for those streams of earnings you are creating? If not, could you consider more disclosure or examples to help investors understand the value?
Moshe, great question. I believe we probably do not get appropriate stock recognition for our horizontal accounting and long-term approach. It is difficult to prove that in short term disclosures, but the power of this approach likely manifests in Capital 1's multi-decade track record of growth and earnings power. We developed horizontal accounting early on to evaluate investments across cohorts and to measure outcomes versus expectations and hurdle rates. That has been a cornerstone of how we have built the company. Some investments are easier to track with horizontal P&Ls; others, like the technology foundation and cloud migration, are harder to present as horizontal P&Ls but may be among the highest yielding investments over time. While it is challenging to fully quantify or disclose every aspect of our horizontal accounting publicly, the approach underpins our strategy and long-term value creation. We remain committed to patient investments that we believe will deliver returns to investors over time.
Thank you. That concludes our Q&A session and our call for this evening. Thank you very much for joining us on this call. Thank you for your interest in Capital 1. Have a great evening. This concludes today's conference call. Thank you for participating. You may now disconnect.