Discover Purchase Powers Capital One’s Strong Quarter

Capital One’s third-quarter results show a strong U.S. credit market, stronger than many expected. The bank’s net income in Q3 rose 80% to $3.19 billion — or $4.83 per share. This compares with $1.78 billion in the same three-month period the previous year.

Revenue climbed 53% to $15.36 billion, due to $12.4 billion in net interest income and better credit performance. These results came in spite of elevated inflation and a cooling labor market. This shows the company’s resilience.

Many analysts had expected higher losses. But Capital One’s card and auto delinquencies both fell. This enabled the company to free up $760 million in reserves. It also bought back $16 billion in stock, which shows management’s faith that consumers remain steady — even as inflation and borrowing costs stay high.

Capital One’s purchase of Discover earlier this year has changed its card and payments strategy. The Discover business drove double-digit growth year over year. Purchase volumes were up 6.5% and card loans up 3.5% — even without Discover’s extra boost.

CEO Richard Fairbank said the Discover acquisition was the dominant driver of third-quarter card results, calling it “another quarter of top line growth, strong margins and improving credit.”

Fairbank added, “The auto charge-off rate for the quarter was 1.54%, down 51 basis points year over year. Largely as the result of our choice to tighten credit and pull back in 2022, auto charge-offs are improving on a seasonally adjusted basis.”

Capital One’s Discover acquisition helped lead the way for its YoY double-digit growth.

Capital One’s domestic charge-off rate dropped to 4.63% — down nearly one percentage point from last year.

Capital One’s momentum trend matched that of other top issuers. American Express, Chase, and Citi also reported that credit quality was stable or higher. They benefited from higher spending among premium cardholders — prime borrowers are still spending even as some consumers cut back.

Net interest income climbed 54% to $12.4 billion. That’s a sign that higher interest rates continue to boost profitability for major card issuers. Fairbank said Capital One’s best results come from heavy spenders at the top of the market.

Capital One’s focus on creditworthy customers, as well as digital engagement, helped soften the impact of an uncertain economy.

Capital One bought a longer reach from the Discover merger. The company is ready to compete directly with major card networks. It must carefully manage risk — and that appeals to both investors and regulators.

Fairbank also highlighted Capital One’s long-term focus on high tech. The company is building the “Bank of the Future.” It will combine digital banking with some prominent branches and cafes. He said Capital One is embedding artificial intelligence into its systems and risk tools, in addition to customer service. It’s doing this without outside software.

AI will help keep the company flexible. It is bringing Discover’s network fully onboard. This attracts new higher-spending cardholders — although some may dislike the higher costs. Fairbank said new card accounts are performing well, and charge-offs continue to improve.

Capital One’s results show that big card issuers remain confident in consumer credit. It will rely on steady spending and lower delinquencies. The bank will also continue to grow its network. The company has a positive outlook for the next year.