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Capital One Financial (NYSE:COF)
Q4 2020 Earnings Call
Jan 26, 2021, 5:00 p.m. ET

Contents:

  • Prepared Remarks
  • Questions and Answers
  • Call Participants

Prepared Remarks:


Operator

Good day, ladies and gentlemen. Welcome to the Capital One fourth-quarter 2020 earnings conference call. [Operator instructions] I would now like to turn the conference over to Mr. Jeff Norris, senior vice president of global finance.

Sir, you may begin.

Jeff Norris -- Senior Vice President of Global Finance

Thanks very much, Keith, and welcome, everybody, to Capital One's fourth-quarter 2020 earnings conference call. As usual, we are webcasting live over the Internet. To access the call on the Internet, please log into the Capital One website at capitalone.com and follow the links from there. In addition to the press release and financials, we've included a presentation summarizing our fourth-quarter 2020 results.

With me today are Mr. Richard Fairbank, Capital One's chairman and chief executive officer; and Mr. Scott Blackley, Capital One's chief financial officer. Rich and Scott will walk you through the presentation.

To access a copy of the presentation and the press release, please go to Capital One's website, click on Investors, then click on Quarterly Earnings Release. 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. For more information on these factors, please see the section titled Forward-looking Information in the earnings release presentation and the Risk Factors section in our annual and quarterly reports accessible at the Capital One website and filed with the SEC. Now I'll turn the call over to Mr. Blackley.

Scott?

Scott Blackley -- Chief Financial Officer

Thanks, Jeff, and good afternoon, everyone. I'll start on Slide 3 of tonight's presentation. In the fourth quarter, Capital One earned $2.6 billion or $5.35 per common share. For the full year, Capital One earned $2.7 billion or $5.18 per share.

Included in EPS for the quarter were two small adjusting items, which are outlined on the slide. Net of these adjusting items, earnings per share for the quarter was $5.29. Full-year 2020 adjusted earnings per share was $5.79. In addition to the adjusting items in the quarter, we recorded an equity investment gain of $60 million or $0.10 per share related to our equity stake in Snowflake.

For the full year, the investment gain was $535 million or around $0.89 per share. Turning to Slide 4, I will cover the quarterly allowance moves in more detail. In the fourth quarter, we released $593 million of allowance, primarily in our card business. Economic assumptions underlying our allowance included unemployment of around 8% at the end of 2021 and the impacts of the $900 billion stimulus package passed in December.

The release was driven by the strong credit performance we have observed and by the new stimulus bill. In our allowance, we continue to assume that the relationship between the economic metrics and credit quickly reverts to a historical norm, and we've added significant additional qualitative factors for COVID-related uncertainty. In our commercial business, we charged off certain energy loans and released allowance for these specific reserves that were previously established for those loans. Turning to Slide 5.

You can see the allowance coverage levels declined modestly from the prior quarters across our segments but remained well above pre-pandemic levels. Our Domestic Card coverage is now at 10.8%, while our branded card portfolio coverage is 12.7%. Recall that the difference between these metrics is driven by loss-sharing agreements in our partnership portfolios. Coverage in our consumer and commercial businesses also remained elevated at 3.9% and 2.2%, respectively.

Moving to Slide 6, I'll discuss our liquidity position. You can see our preliminary average liquidity coverage ratio during the fourth quarter was 145%, well above the 100% regulatory requirement. Our liquidity reserves from cash, securities and Federal Home Loan Bank capacity declined slightly from the third quarter to end the year at approximately $144 billion, including about $41 billion in cash driven by continued strong deposits. Turning to Slide 7.

You can see that our net interest margin increased 37 basis points quarter over quarter to 6.05%. The increase was largely driven by higher card loan revenue margin as strong credit results led to lower suppression, the impact of third and fourth-quarter deposit pricing actions and a modest decline in our cash balance, which was partially offset by lower yields on cash and securities. Lastly, turning to Slide 8. I will cover our capital position.

Our Common Equity Tier 1 capital ratio was 13.7% at the end of the fourth quarter, up 70 basis points from the third quarter and 150 basis points higher than a year ago. We continue to estimate that our CET1 capital need is around 11%, which includes a buffer over our capital requirements under the SCB framework of 10.1%. As we close out 2020, we have approximately 270 basis points or around $8 billion of capital in excess of our CET1 target. Following the latest stress test results released by the Federal Reserve last month and in light of the strong capital position I just described, we expect to restore our quarterly dividend back to $0.40 per share in the first quarter, pending board approval.

Our board of directors has also authorized the repurchase of up to $7.5 billion of the company's common stock inclusive of share repurchase capacity of up to approximately $500 million in the first quarter based on the Fed's current trailing four-quarter average earnings rule. The timing and amount of stock repurchase activity will be informed by our outlook on the economy, as well as actual forecasted levels of capital, earnings and growth. And with that, I'll turn the call over to Rich.

Rich Fairbank -- Chief Executive Officer

Thanks, Scott. As I think everyone on this call knows, Scott shared with me in November that he would be leaving Capital One to join a tech start-up. While he will be here through March 15, this will be Scott's last earnings call. So I want to take a moment and thank you, Scott, for giving so much of your life to Capital One over this past decade, including the last five years as our CFO.

You've built strong relationships with our shareholders and across the investment community, and you've always brought their external perspectives to our work inside of Capital One. You've been a key advisor and partner for me and for the board and a strong leader in our company. I'm particularly grateful for the legacy you've built, transforming finance technology, strengthening processes and controls, building a great team of talented leaders, including your successor, Andrew Young. We will miss you, and I'm sure you will continue to do great things.

With that, let me turn to our Domestic Card business. Exceptional credit performance was the biggest driver of Domestic Card financial results in the quarter. The Domestic Card charge-off rate for the quarter was 2.69%, a 163-basis-point improvement year over year and a 95-basis-point improvement from the sequential quarter. The 30-plus delinquency rate at quarter end was 2.42%, 151 basis points better than the prior year.

The delinquency rate was up 21 basis points from the linked quarter, consistent with typical seasonal patterns. Fourth-quarter provision for credit losses improved by $1.1 billion year over year, driven by the allowance release that Scott discussed and lower charge-offs. Several factors are driving continued credit strength. Consumers are behaving cautiously, spending less, saving more and paying down debt.

These behaviors have been amplified by the cumulative effect of unusually large government stimulus and widespread forbearance across the banking industry. Our own long-standing resilience choices put us in a strong position going into the pandemic. And our strategic investments in digital technology and transformation are paying off in enhanced capabilities and underwriting that are powering our performance and response to the pandemic. Strikingly strong consumer credit has persisted throughout 2020, even after the expiration of several parts of the CARES Act.

Uncertainty about future credit trends remains high, especially in the context of an evolving pandemic that is difficult to predict. As Scott discussed, that uncertainty informs our allowance for credit loss. We believe that each incremental month of favorable credit reduces the cumulative losses through the downturn rather than just delaying the impact. At the end of the fourth quarter, Domestic Card ending loan balances were down $20.1 billion or 17% year over year, driven by three factors: cautious consumer behavior, reduced spending and demand for new credit, and drove payment rates to historically high levels.

Our marketing pullbacks at the outset of the downturn put additional pressure on loan balances, and we moved a partnership portfolio to held-for-sale in the third quarter. Excluding the impact of the move to held-for-sale, ending loans declined about 15%. Fourth-quarter average loans declined 16% year over year. On a linked quarter basis, the expected seasonal ramp drove ending loans up by about 3%.

Purchase volume continued to rebound from the sharp declines early in the pandemic. For the full year, purchase volume was down 2% in 2020. Fourth-quarter purchase volume was essentially flat compared to the prior-year quarter. That compares to a year-over-year decline of about 30% in the first weeks of the pandemic.

Quarterly purchase volume increased 10% from the sequential quarter, consistent with the expected seasonality and the continued rebound. Despite the rebound, purchase volume growth is still down compared to the double-digit growth we were seeing before the pandemic. Fourth-quarter revenue declined 7% year over year as a result of the decrease in average loans, partially offset by higher revenue margin. The revenue margin was up 121 basis points year over year to 16.91%, largely driven by two factors: strong credit drove lower revenue suppression; and year over year, net interchange revenue in the numerator of the margin is essentially flat, while average loan balances, the denominator of the margin calculation, are down 16%.

Noninterest expense was down $186 million or 8% from the fourth quarter of last year, largely driven by our choice to pull back on Domestic Card marketing when the pandemic hit. Total company marketing trends are largely driven by Domestic Card. Fourth-quarter marketing for the total company was down 21% year over year. On a sequential quarter basis, total company marketing increased significantly in the fourth quarter.

Looking ahead, future marketing will be impacted by how things play out with the pandemic and the economy. In the midst of the pandemic, we're finding opportunities, and we are leaning into them. These opportunities are enhanced by our tech transformation. The ultimate level of our 2021 marketing will depend on our continuing real-time assessment of the marketplace.

Slide 12 summarizes fourth-quarter results for our Consumer Banking business. Driven by our auto business, ending loans increased 9% year over year. Average loans grew 10% for the fourth quarter and 9% for the full year. When the COVID downturn began, we tightened our underwriting box in auto to focus on the most resilient asset.

We believe that several factors drove our growth. The auto market rebound has been stronger for larger franchise dealers, the part of the market where we're focused. Our digital products and services drove growth in direct-to-consumer originations and growth with dealers who want to provide a low-touch car buying experience in response to social distancing. And our dealer relationship strategy put us in a strong position to grow high-quality auto loans.

Fourth-quarter auto originations were down 2% year over year. Competition picked up late in the third quarter and continued to increase in the fourth quarter. Fourth-quarter ending deposits in the consumer bank were up $36.7 billion or 17% year over year, driven by the stimulus-driven surge in deposits in the second quarter. Average deposits were up 19% for the fourth quarter and up 15% for the full year.

Our average deposit interest rate decreased 73 basis points year over year and 19 basis points from the linked quarter as we reduced deposit pricing in response to the market interest rate environment and competitive dynamics. Fourth-quarter Consumer Banking revenue increased 18% from the prior-year quarter. Annual revenue was up 4%. Both increases were driven by growth in auto loans and retail deposits.

Annual growth was negatively impacted by differences in the timing of Federal Reserve rate cuts, preceding our deposit pricing reduction. Noninterest expense in Consumer Banking was up 1% year over year. Fourth-quarter provision for credit losses improved by $275 million year over year, driven by lower charge-offs and a modest allowance release in our auto business. Fourth-quarter credit results in our auto business remain unusually strong even after seasonal linked quarter increases in 24 basis points in the auto charge-off rate and 102 basis points in the delinquency rate.

Year over year, the charge-off rate improved 143 basis points to 0.47% and the delinquency rate improved 210 basis points to 4.78%. Strong auto credit is the result of several factors. In addition to the same general drivers of Domestic Card credit strength, auto credit also benefited from very strong auction values. And our auto forbearance is having a temporary positive impact, particularly on delinquency rates.

We've provided updated auto forbearance information on appendix Slide 18. We expect auto credit metrics to increase from their unusually low levels as auction prices normalize and the temporary impacts of COVID forbearance play out. Moving to Slide 13. I'll discuss our Commercial Banking business.

Fourth-quarter ending loan balances were up 2% year over year, driven by growth in selected C&I and CRE specialties. Average loans were also up 2% for the fourth quarter and 6% for the full year. Quarterly average deposits increased 21% from the fourth quarter of 2019, and average -- annual average deposits grew 14% in 2020 as middle market customers continued to bolster their liquidity. Fourth-quarter revenue was up 10% from the prior-year quarter.

Annual revenue was up 6% for the year. Annual revenue growth from higher loan and deposit volumes and higher noninterest income was partially offset by lower net interest margin. Noninterest expense for the quarter increased by 1% year over year. Provision for credit losses improved by $90 million compared to the fourth quarter of 2019.

The allowance release that Scott discussed was partially offset by higher charge-offs largely related to our oil and gas portfolio. Our oil and gas exposure declined year over year. We've provided a breakout of our oil and gas portfolio composition and reserves on appendix Slide 19. The Commercial Banking annualized charge-off rate for the quarter was 0.45%.

The criticized performing loan rate for the quarter increased compared to both the prior year and linked quarters to 9.5%, driven by downgrades in our commercial real estate portfolio. The criticized nonperforming loan rate rose modestly from the prior-year quarter to 0.9%. I'll close tonight with some thoughts on our results and how we're positioned for the future. It's not a surprise that the pandemic shaped our 2020 results.

For the full year, total company loan balances declined 5%. Annual revenue was essentially flat, including $535 million in gains on our Snowflake investment. Noninterest expense was down 3%, with a decline in marketing and relatively flat operating expense. Provision for credit losses increased by $4 billion.

And earnings per share rebounded from negative territory early in the year to $5.18 for the full year, down significantly from 2019. Three key themes are evident in our 2020 results. The pandemic pressured top-line loan balances and revenue, particularly in the first half of the year. On the bottom line, strikingly strong credit resulted in a return to positive trajectory and record profitability in the second half of the year.

And our long-standing strategic choices put us in a strong position to respond to both the near-term challenges and the emerging opportunities. Turning first to the near-term challenges. Domestic Card loan balances declined sharply as cautious consumers, stimulus and widespread industry forbearance drove historically high payment rates and reduced demand. Lower loan balances put pressure on revenue, efficiency and scale.

The operating efficiency ratio net of adjustments was 46%. It was 46.9%, excluding Snowflake gains. The flip side of this top-line pressure was exceptionally strong consumer credit performance, which drove two consecutive quarters of record earnings in the second half of 2020. And strong second-half earnings, coupled with a smaller balance sheet, enabled us to increase our CET1 ratio to 13.7%.

Today, we've announced our intent to raise the quarterly dividend to its prior level of $0.40 per share subject to board approval, and we've also discussed our plan -- we also discussed our plan for up to $7.5 billion of share repurchases, which our board has already approved. Throughout 2020, we have been well-served by the choices we made before the downturn began. Since our founding days, we've hardwired resilience into the choices we've made on credit, capital and liquidity through good times and bad. As a result, we entered the downturn with strong and resilient credit trends, a fortified balance sheet and deep experience in successfully navigating through prior periods of stress, including the Great Recession.

Our investments to transform our technology and how we work and our efforts to drive the company to digital are paying off. Our transformation is powering our response to the downturn and putting us in a strong position for emerging opportunities as the pandemic plays out. Pulling way up despite the pressures of the pandemic in the near term, nothing has changed about where we think our businesses are headed or the long-term strategic opportunities that are being created as sweeping digital change continues to transform banking. As we manage through the near-term challenges, we also continue to focus on the things that create long-term value when delivered and sustained over time, continuing to transform our technology from the ground up, capitalizing on our transformation to drive innovation and growth, generating positive operating leverage and improving efficiency, and managing capital efficiently and effectively, including significant capital distribution.

And now we'll be happy to answer your questions. Jeff?

Jeff Norris -- Senior Vice President of Global Finance

Thanks, Rich. Scott, let me add my personal thanks for all the coaching and leadership. It's been a pleasure to work with you over the years, and I wish you all the success as you go forward. And now we'll start the Q&A session.

[Operator instructions] Keith, please start the Q&A.

Questions & Answers:


Operator

Thank you. [Operator instructions] We'll take our first question from Rick Shane with J.P. Morgan. Please go ahead.

Rick Shane -- J.P. Morgan -- Analyst

Good afternoon, everybody. And Scott, congratulations. And Andrew, I think when you look at Scott leaving you with a $15.5 billion reserve is probably the best gift he could give you. I wanted to talk a little bit about that.

When we look versus day one, the reserve is now up $5 billion. I'm curious, when we look at the current credit metrics, what do you think the scenarios would have to be to actually really utilize that reserve over a lifetime?

Scott Blackley -- Chief Financial Officer

Hey, Rick, well, thanks for your kind words, and I appreciate both Rich and Jeff saying such nice things. It's been honestly just a privilege to be at this company, and it's certainly a tough place to leave, but let me turn to your question. In terms of the allowance, you're right that when you look at our coverage levels versus our current level of losses and delinquencies, there's a big gap. And I would just point out that that is because right now, our allowance is built to absorb a very wide range of outcomes, which gives sense -- which is sensible, given kind of the circumstances that we are in at the moment.

And so I think that the biggest driver of where the allowance might go and what might drive our leases is, frankly, just certainty. And narrowing down the range of possible outcomes, I think, could come from things like macroeconomic factors like unemployment or pandemic-specific variables like broader rollouts of the vaccine, reduced restrictions on people's movements and activities and things like that. So to me, it feels like that certainty is more likely to happen over time versus a step function. So I think we'll see the allowance kind of play out in measured ways over time.

Rick Shane -- J.P. Morgan -- Analyst

Got it. OK. Thank you. And looking forward to seeing you in the Bay Area.

Operator

We'll take our next question from Sanjay Sakhrani with KBW. Please go ahead.

Sanjay Sakhrani -- KBW -- Analyst

Thanks, and congratulations, Scott. I guess have a question on marketing expense and sort of the efficiency ratio targets that you guys had outlined some time ago. When we look at the marketing expense, it seems like run rate-wise, we're back to 2019 levels on a quarterly basis. Can we -- can you guys actually exceed that going forward if there's opportunity in the marketplace? And then as far as the efficiency ratio is concerned, I mean, how long before we can get back to the 52% target that you had outlined, Rich?

Rich Fairbank -- Chief Executive Officer

So Sanjay, we are not making specific guidance about marketing. As you know, this is -- while there are certain things that are sort of fixed -- mostly fixed about our marketing expenditures, a lot of it is based on real-time assessment of prospects for resilient growth in the competitive marketplace. But let me just kind of pull up and talk about our journey this year with respect to marketing. We pulled back early in the crisis but have since increased marketing spend, as you saw in Q4.

And as expected, the increase from Q3 was meaningfully higher than typical seasonal patterns. Right now, we are seeing opportunities to invest. We continue to invest in our brand and our national banking strategy. And in our card business, we're leaning in where we see signs of strength.

And we feel pretty good about our origination opportunities, and these are enhanced by our tech transformation as well. So we're keeping a very watchful eye on the marketplace, but we do see opportunities, and we're investing in them. And with respect to efficiency, we still believe that we're on the path to achieve the efficiency targets that we had set -- that we had talked about in prior years, driven by growth and digital productivity gains and really enabled by our tech transformation. The pandemic has really impacted the timing of when we get there, particularly on revenue growth.

Now we feel good about our current revenue trajectory, and we're still on the same efficiency journey, but how the pandemic and the recession will play out remain uncertain and how the growth opportunity unfolds. And also the sort of the great credit paradox with the strength of credit also comes the high payment rates, which, certainly, it's a great thing for the overall financial performance of the company, but it's another thing that holds back the growth. So we're leaning in to really -- in the growth opportunities, but -- and we're on the same kind of -- heading to the same destinations we talked about before, but we're not giving guidance about the timing.

Operator

We'll go next to Bill Carcache with Wolfe Research.

Bill Carcache -- Wolfe Research -- Analyst

Good evening. Let me add my congratulations, Scott. I wanted to ask about the buyback authorization. Is it reasonable to expect that you'd seem to be as aggressive as possible and executing on it such that we could see you do the full amount by the end of 2021, assuming a favorable backdrop where the Fed withdraws payout restrictions? And then within that, how are you guys thinking about the regulatory capital impact of the CECL fees for day one and two under the CARES Act?

Scott Blackley -- Chief Financial Officer

Yeah. Thanks for the question, Bill. Look, with respect to the share buyback program, I think the most important thing I just want to underscore is that the $7.5 billion that was authorized by the board really underscores our commitment to returning excess capital to the shareholders, and I think that we're certainly excited to start that journey. As we think about capital deployment, I think the hierarchy there is, first, capital to growth opportunities and then share buybacks and dividends to follow.

And I would just point out that in our past practice, you can see that we manage share buybacks dynamically, and we take into account market conditions, relative value, our holistic view on where we are in our capital position. In the first quarter, we'll be limited to $500 million. I mentioned that based on the Fed rules. After that, the pacing of the share repurchases are really going to be guided by the factors I just talked about and by any regulatory guidelines that we might see.

I'll just say that we find our current valuation compelling. And with over $8 billion of excess capital, we're really looking forward to getting started on the program.

Operator

We'll go next to John Hecht with Jefferies. Please go ahead.

John Hecht -- Jefferies -- Analyst

Thanks very much, guys, for taking my questions. Rich, you embarked on your digital banking transformation several years ago. And at that point in time, it seems the attempt was to scale a traditional bank and using a digital platform where you could do that more for your customers in a really simplified fashion over digital channels, but digital banking, I think, has changed with the development of companies like SoFi and some of the fintech companies kind of getting into, call it, center banking offerings with sort of digital wallets, nonetheless. I'm wondering, is that -- is the development of migration of digital banking overall, does that affect how you see investments going forward to Capital One?

Rich Fairbank -- Chief Executive Officer

Well, everything that we see, John, I think, reinforces the -- our conviction about the strategy that we have and the journey that we're on, and the destination were so energetically pursuing. So let's, and first of all, talk about the pandemic. I don't think the pandemic changed much about the destination of banking, but it changed the timing of that because it accelerated the digital journey. And one thing that's been so striking about banking products and even banking products relative to credit card products is the stickiness and the inertia inherent in the customer relationships that have existed sometimes for many decades.

And so one of the challenges for any digital bank is how do you go after that inertia and create something compelling enough to cause people to switch. And so it's really nice being on, in a sense, the right side of history because we can see the direction things go. What I'm struck by is the amount of acceleration that we've seen in these inevitable trends this year. So that's a good thing for us, and we want to capitalize on that.

Now the other -- along the way, not surprisingly, we've seen the rise of some very intriguing banking fintechs. And we watch with great interest their strategies. In many cases, they have very nice digital customer experiences. In some cases, they have created strategies that the banking industry didn't come up with.

And we look with interest in that and, in many ways, root for their success because it's all part of the same -- their success is a manifestation also of the accelerating change in customer behavior and the opportunity for digital banks. So we have a lot of respect for some of the players. We're impressed by their innovation, and we're energized by their success and the success that we're having. And so as a result, we're leaning in -- continuing to lean in and leaning in a little harder on our own banking strategy.

John Hecht -- Jefferies -- Analyst

Appreciate the context. Thank you very much.

Operator

We'll take our next question from Don Fandetti with Wells Fargo. Please go ahead.

Don Fandetti -- Wells Fargo -- Analyst

Rich, in terms of the fintech discussion, I was wondering if you could comment on buy-now-pay-later. Does that impact your business from a lending competition perspective or syndicated risk standpoint? And is it material enough for us to keep an eye on from a risk perspective?

Rich Fairbank -- Chief Executive Officer

So buy-now-pay-later is a really interesting marketplace. It's kind of ironic because the original buy now, pay later product was the credit card. And so it's interesting to be a very established credit card player and feel a little bit like the old guard is we're watching these innovations on buy-now-pay-later. And I have a lot of respect for and I'm impressed by some of the things -- the success of the point-of-sale lending products.

And point-of-sale lending has, of course, existed since really the beginning of lending itself. I think what's striking here is the way that it exists, of course, in the e-commerce space, the way it's got shelf space right there on -- at the checkout page, the -- some of the elegance of the digital technology, and interestingly, right now, sort of financially how this marketplace works because the striking thing to me is that right now, merchants are actually paying the bill as opposed to consumers. And that tends to create a healthy marketplace. It tends to create better selection dynamics.

Then very often, you see in some of these short-term lending products, they tend to have very high effective APRs and things that can sometimes lead to adverse selection. So I think to me, the thing that I'm most interested in watching from sort of the structure of that marketplace is what happens to the, in a sense, the merchant discount with respect to those products as the competition from lenders heats up in that space. So that's something we'll have to watch. So I think there's a lot for Capital One to learn in this marketplace, and we're watching it closely.

And we really, with interest, look to see how this opportunity evolves.

Don Fandetti -- Wells Fargo -- Analyst

Thanks, Rich.

Operator

We'll take our next question is from Ryan Nash with Goldman Sachs.

Ryan Nash -- Goldman Sachs -- Analyst

Hey, good evening, guys. And Scott, congratulations.

Scott Blackley -- Chief Financial Officer

Thank you.

Ryan Nash -- Goldman Sachs -- Analyst

Rich, maybe just to dig in a little bit further on the efficiency. I understand that you don't want to put a time frame on it. However, if we look at the performance this year, we're in the 46% range, still about 400 basis points from the 42% target that you had laid out. So can you maybe just talk about the path to getting there from a financial perspective? Is it all about the return of card loan growth and the revenue growth that comes with it? Or is there more from the digital transformation on the cost side? And if cost is part of it, can you maybe just talk about what some of those drivers are and what the timing is in terms of us getting there? Thank you.

Rich Fairbank -- Chief Executive Officer

Yeah. So Ryan, if -- the efficiency -- our journey and the success we had over a number of years really until the pandemic sort of set things back a bit was driven kind of mathematically, of course, by the two factors: sustained revenue growth and the efficiencies that were coming particularly from transforming to a more digital operating model. And I think the same things that drove our efficiency ratio down over the years are going to be the same drivers going forward. When -- at the time that we gave the guidance on 42%, we were -- there were a lot of things coming together that not only on the efficiency side, things like getting out of data centers, things like the step-up that in the Walmart revenue sharing relationship, but very much, we were looking at accelerating growth opportunities in our businesses, particularly our consumer businesses.

So the pandemic set that back. And so the -- I would still say the biggest driver of the efficiency gains that we will continue to work toward will be on the revenue side because we still continue to invest in the digital opportunities that are, in fact, enabling the revenue growth. And one thing that we've talked about is that we -- we're now finished with our eighth year of our tech transformation. And in many ways, this will be a lifelong transformation, but we -- this has been a -- starting at the bottom of the tech stack journey.

And over time, we've been working our way up the tech stack. And the more we get up the tech stack, the more the opportunities are things that, well, actually, the world can see, things that customers can experience and things that can more directly enable growth. And that's why I mentioned on my comments about marketing is that some of the marketing opportunities we see are, in fact, specifically enabled by our tech transformation. So therefore, while tech continues to create efficiency opportunities, it is also the basis for a number of our growth opportunities, and we really want to take advantage of those.

We're leaning in. And of course, it takes investment to do that. So that's why I think growth -- revenue growth is -- I would expect it to still be the bigger driver of our efficiency journey on a net basis than on the cost side. But really, the key is having revenue growth that exceeds the growth in expenses, of course.

Operator

We'll take our next question from Moshe Orenbuch. Please go ahead.

Moshe Orenbuch -- Credit Suisse -- Analyst

Great. Thanks. So Rich, in the past, you've always -- you've had a tendency to see the loan growth kind of lag the marketing spend and account growth based upon credit lines and have talked about the need to kind of incubate those accounts and increase their credit lines over time to get that balance and revenue growth. Could you talk a little bit about where you sit in that now given the unusual nature, kind of where we are in the economic cycle?

Rich Fairbank -- Chief Executive Officer

Right. Well, thank you, Moshe. The -- with our strategy of relatively lower lines, we've often talked about how, in many ways, the primary credit risk and the primary growth comes really on the line increase side more so than just the originations themselves. And so what we have often done in times of stress or when there's extra caution, and you will remember, Moshe, in probably 18 months prior to this downturn, maybe two years, we were also talking cautiously about lines because we said we are so long in the tooth on this economy.

And so that has been our strategy for managing risk is to try to hold the lines down where we can continue to lean into the origination side of the business and then open up the lines as we see more of the sun coming out and more opportunity at one customer at a time. So where we stand on that, we've been particularly tight on the lines during this downturn. But I think that as we watch the pandemic play out, I think that we see opportunities one customer at a time. But collectively, pulling up on this, we do see important opportunities for increasing those lines.

And as we do that that can put some momentum around the loan growth in a way that you don't just get from originations, which we're also leaning into.

Moshe Orenbuch -- Credit Suisse -- Analyst

Got it. And maybe as a follow-up. When I would get the question in the past about what could cause rewards rates to kind of moderate or come down, I had said an economic downturn. And obviously, we've got some form of an economic downturn, if anything that's gone the other way.

Any thoughts about kind of intensity of rewards competition and how to think about that into next year or two?

Rich Fairbank -- Chief Executive Officer

Yeah. It's a really interesting question, Moshe, whether rewards rates -- whether a downturn causes reward rates to go down or up. So the case for down, in other words, for people -- for the competition to get less intense about that is that people are pulling back, they're spending less, and they're more concerned about riding through the downturn than they are about trying to grow quite a bit. Here's the flip side to that argument and the thing that I think is dominating in that particular tug-of-war.

And that is that what is most striking about the pullback, probably true in any downturn, but especially in this one, is how much the spending -- how much pullback there has been in spending and what a pullback there has been in spending by heavy spenders. And I think that's not just a point about heavy spenders. It's partly what heavy spenders spend their money on, which is travel and entertainment on a disproportional basis relative to others, and those are the sectors that have been absolutely flacked here. So it's generally the case that the heavy spenders from a credit point of view, everything that we have seen would be consistent that they perform well in a downturn.

They just get more conservative in their spending. Travel opportunities and things like that don't necessarily look so enticing, and certainly, the case in this downturn. And so I think what happens is a response from players to lean into increasing inducement to generate the volumes that people want to get. We have seen significant increases in upfront bonuses.

We've seen increases in reward levels. And I think that's probably a natural thing for us to expect in this particular environment, even though paradoxically, it's associated with so much pullback.

Operator

We'll take our next question from Betsy Graseck with Morgan Stanley. Please go ahead.

Betsy Graseck -- Morgan Stanley -- Analyst

Hi. Good evening. Can you hear me OK?

Rich Fairbank -- Chief Executive Officer

Yeah. Hi, Betsy.

Scott Blackley -- Chief Financial Officer

Yes. Hi, Betsy.

Betsy Graseck -- Morgan Stanley -- Analyst

OK. Thanks. My question is just on how to think about the reserve levels and the reserve release from here. And I know the questions ask a little bit, but the reason I'm raising it is I think you said that your reserve today is based on an unemployment rate of 8% at 2021.

I know there's a lot more inputs than just that, but that's -- that 8% at year-end '21 is similar to last quarter's. Yet at the same time, I know, Rich, you mentioned that every quarter that goes by with good credit is like a reduction of peak, if not a pushout. So how should I triangulate that? Should we be anticipating really more aggressive reserve releases as the quarters come through that are not so bad? Or is there something else going on in the reserving analysis that we should be thinking about?

Rich Fairbank -- Chief Executive Officer

Hey, Betsy, why don't I take that one? So look, I think that the -- as I mentioned a couple of times, I think the biggest consideration in our reserve right now is just the uncertainty and trying to make sure that we're capturing all of the scenarios in thinking about that. And that is resulting in us having a really high level of qualitative reserves on top of our modeled risk. And so even in the current quarter where, you're right, our 2010 fourth-quarter estimate of unemployment at around 8% is consistent with where we were last quarter. During the full year, we're expecting lower levels of unemployment than what we had forecasted or used in our allowance a quarter ago.

And so that, coupled with -- we saw the passage of stimulus, were both factors that drove the release this quarter. But we still have -- even with the positive trends, we put on even more qualitative factors because it's just really hard to forecast where this thing is going to go and how it may play out. And we're -- in the allowance, we continue to expect that we will see the very low levels of credit come up and meet the high levels of unemployment that we see today. And I really do believe that we will, over time, see that play out exactly how that relationship is going to normalize.

And if it doesn't normalize, then we're going to have allowance releases, and they're going to come in over time. But until we start to see kind of more evidence that that relationship is going to stay kind of at the levels where it is, I would expect that we're going to continue to reserve against a variety of downside scenarios.

Operator

We'll take the final question from Bob Napoli. Please go ahead.

Bob Napoli -- William Blair -- Analyst

Thank you, and good evening. And congratulations, Scott, and look forward to hearing where you're heading.

Scott Blackley -- Chief Financial Officer

Thanks, Bob.

Bob Napoli -- William Blair -- Analyst

Rich, a question on the -- just on the tech investments and the -- I don't know if you can quantify at all for us, maybe for, Scott, the amount that you're spending on technology versus several years ago with the growth in those investments. And then maybe more importantly, what do you feel differentiates you the most from other banks or fintechs with the changes or the upgrades and the technology and what's on the road map for further upgrades?

Rich Fairbank -- Chief Executive Officer

OK. Bob, we don't break out our tech investments, but Capital One, I think, relative to banks our size, invests quite a bit more in technology than my sense is of what other banks our size invest in. By the way, our primary competitive set is the big national banks, and they have jacked-up tech budgets. So we don't -- we certainly know also what we're up against.

But let me just talk about again, so philosophically, what we've done. Look, I think when most banks -- I think companies, in general, when they're looking -- everybody knows they've got to invest more in technology. And even as recently as this quarter, so many companies said they're increasing their technology spend. And I almost can't imagine companies not feeling the need to do that as they face an accelerating digital revolution.

The thing that's very common that companies do is they make their biggest investments at the top of the tech stack, meaning the things that are closest to the consumer, investing in apps, investing in experiences for customers or associates or things that can more directly and immediately manifest in improvements, and there's no -- it's a very natural thing to do. Capital One has taken the unlikely journey, the -- a little bit the road less traveled by to have our investment primarily at the bottom of the tech stack. So we're talking down at core systems and data and addressing vendor products and their role in this thing, bringing lots of things in-house, bringing a lot of engineering in-house. And it's been a journey that -- and you know this, Bob, and other investors on this call know that they would often say, I know you're investing a lot.

You're talking about it, but I can't see it. Because the problem is if you were to improve one system in the core systems, it doesn't really manifest itself in something that the outside world can see. And this is really the essence of the challenge that we and our investors who have patiently owned our stock of this journey that we're going through. What we so deeply believe at the outset of this journey and absolutely believe now that in order to compete with the tech companies, in order to be a modern company and be able to go where banking is going to go is one really needs a modern tech stack.

And that's a hard thing for a start-up bank to build. It's a really hard thing for a legacy company to build. Now I think it was a little easier for Capital One, only that we were in a sense, an original fintech three decades ago, and so maybe don't have as much legacy as a lot of companies do, but it's still been a very significant journey. So -- but I think when you say how do we compare ourselves with other companies, I think other companies have.

I think there's a lot of good things other companies that go, and they are doing. They have really nice apps for their customers and everything else. But I think more and more Capital One is built like a tech company and like some of the leading tech companies that are changing the world. And I think it was a little bit of a shock to some folks when one day we said, by the way, we're getting entirely out of data centers and into the cloud.

And that's the kind of thing that could only come as a product of many years of this. And it's not an accident that almost no big enterprise legacy companies have, in fact, made that journey. Now where does -- but what it puts us in a position to do is that -- is to drive for opportunities and act more and more like a tech company and be able to be more dynamic, faster to the market, create -- offer better products, a better customer experience. And that gives us the opportunity to transform how we work, really how a bank works on the inside from risk management, fraud, credit, compliance, operational execution.

It enables us to build our national bank and lean into that. It enables us to win some partnerships that -- in head-to-head competition. We -- I feel that we won by virtue of the -- some of the tech capabilities we had. It enables us to achieve better economics and not so much in saving on -- well, partly tech-on-tech costs like massive vendor costs that we can save.

But at the same time, we're investing a lot in tech so that the big net saving is not so much tech costs as it is the opportunity to reduce analog costs over time. So that's kind of a long answer to your question. But when we look out and said, over time, we're going to want to do that or we're going to want to do this thing over there or we're going to do that thing over there, in each case, we saw a shared path of investment and transformation that we would need to do. And we're well down that path.

We are not done. In many ways, it's a lifelong journey. But I think our opportunities are increasing as we get further down this path.

Bob Napoli -- William Blair -- Analyst

Thank you. Really appreciate the detail and the answer.

Jeff Norris -- Senior Vice President of Global Finance

Thanks, everybody, for joining us on this conference call. I'd like to thank everybody for joining us on this conference call today. Thank you for your continuing interest in Capital One. And remember that the Investor Relations team will be here this evening to answer any further questions you may have.

Have a good evening, everyone.

Operator

[Operator signoff]

Duration: 73 minutes

Call participants:

Jeff Norris -- Senior Vice President of Global Finance

Scott Blackley -- Chief Financial Officer

Rich Fairbank -- Chief Executive Officer

Rick Shane -- J.P. Morgan -- Analyst

Sanjay Sakhrani -- KBW -- Analyst

Bill Carcache -- Wolfe Research -- Analyst

John Hecht -- Jefferies -- Analyst

Don Fandetti -- Wells Fargo -- Analyst

Ryan Nash -- Goldman Sachs -- Analyst

Moshe Orenbuch -- Credit Suisse -- Analyst

Betsy Graseck -- Morgan Stanley -- Analyst

Bob Napoli -- William Blair -- Analyst

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