Discover Is a Done Deal as Capital One Targets ‘Digital Experiences’

The acquisition of Discover Financial is in the rearview mirror, having been completed in May. For Capital One, the focus is on building scale with the combined entities and on building out a national banking brand.

Tuesday (July 22), the company posted second quarter results that along with earnings supplementals revealed spending growth on credit cards and some mixed credit trends.

CEO Richard Fairbank stated on the conference call with analysts, “We’re fully mobilized and hard at work on integration, which is going well. … We’ve been on a quest to build … an integrated banking and global payments platform that’s positioned at the forefront of the opportunities that will come as technology and data transform financial services.”

Spending on Cards

The Discover acquisition, CFO Andrew Young told analysts, adds $106.7 billion in deposits. A decline in charge-offs at legacy Capital One was more than offset by the addition of the partial quarter of the Discover portfolio, the CFO said, adding that the consolidated domestic card coverage ratio now stands at 7.62%.

The company’s year-over-year purchase volume growth for the quarter was 22% higher than a year ago, which includes Discover’s addition; excluding that business, year-over-year purchase volumes were 6% higher. Ending loans grew about 4% year over year excluding Discover.

Management stated that Capital One’s legacy domestic card portfolio would have had a net charge-off rate of 5.5% down 55 basis points year over year.

“Our digital-first national consumer banking business continues to grow and gain traction powered by our technology transformation,” Fairbank said.

Looking ahead, said Fairbank, “Revenue synergies we have already identified come from moving our debit business and a portion of our credit business onto the Discover network,”  while the firm, through the next several years, looks to “move more volume and capitalize on the tremendous scale benefits of the network. We need to achieve greater international acceptance and then build a global network brand. This will enable moving bigger spenders onto the Discover network.”

Digital Initiative

As for the digital initiatives, Fairbank told analysts, “We have been rebuilding the company from the bottom of the tech stack up, essentially building a modern technology company that does banking. As we move up to tech stack, the opportunities are accelerating. We are also the beneficiary of decades of investment in our data and analytics capabilities and the building of a well known national brand.”

The digital growth is happening organically, said Fairbank, who contended that “on the shoulders of our modern tech stack, our full-service digital banking offerings, our thin physical distribution of showroom branches, and our national brand, we are enjoying a lot of traction and the acquisition of a network propels us forward even more.”

Harnessing that data with AI, he said later in the call, will streamline operations, risk management and the customer experience.

“We’re trying to build a bank that is right at the heart of consumers and businesses’ financial lives with primary banking relationships and primary spending relationships” among its more than 100 million customers, such as through Auto Navigator, the online car shopping and financing platform.

“We’re continuing to build enhanced capabilities across digital experiences, product offerings, lounges, and special preferred access,” Fairbank said.

Asked on the call about the state of the consumer, Fairbank said, “The U.S. consumer is in a great place here. … We see the U.S. consumer as a source of strength in the economy. The unemployment rate remains low and stable. … Consumer debt servicing burdens remain stable and near pre-pandemic levels. In our card portfolio, we’re seeing improving delinquency rates and lower delinquency entries, and payment rates are improving on a year-over-year basis.”

He added that there are “some pockets of consumers [that] are feeling pressure from the cumulative effects of inflation and higher interest rates. And we’re still seeing some delayed charge-off effects from the pandemic, although the improving trend in our delinquencies suggest these effects are moderating.

“But on the whole, I’d say the U.S. consumer is in really quite good shape,” he said. “Of course, like all of you, we’re keeping a close eye on the potential impact of tariffs and other public policy changes.”

Shares were up 3.5% in after-hours trading on Tuesday.