Capital One Financial (COF) Q2 2021 Earnings Call Transcript

Capital One Financial (COF 3.55%)
Q2 2021 Earnings Call
Jul 22, 2021, 5:00 p.m. ET

Contents:

• Prepared Remarks
• Questions and Answers
• Call Participants

Prepared Remarks:

Operator

Good day, ladies and gentlemen, and welcome to the Capital One second-quarter 2021 earnings conference call. [Operator instructions] I would now like to turn the conference over to Mr. Jeff Norris, senior vice president of finance. Sir, you may begin.

Jeff Norris -- Senior Vice President, Global Finance

Thanks very much, Holly, and welcome, everyone, to Capital One's second-quarter 2021 earnings conference call. As usual, we are webcasting live over the Internet. To access the call on the Internet, please log on to Capital One's 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 second-quarter 2021 results.

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

To access a copy of the presentation and 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. And now I'll turn the call over to Mr. Young.

Andrew?

Andrew Young -- Chief Financial Officer

Thanks, Jeff, and good afternoon, everyone. I'll start on Slide 3 of tonight's presentation. In the second quarter, Capital One earned $3.5 billion or $7.62 per diluted common share. Included in the results for the quarter was a $55 million legal reserve build.

Net of this adjusting item, earnings per share in the quarter was $7.71. On a GAAP basis, pre-provision earnings increased slightly in the sequential quarter to $3.4 billion. We recorded a provision benefit of $1.2 billion in the quarter as $541 million of charge-offs was offset by a $1.7 billion allowance release. Revenue grew 4% in the linked quarter, largely driven by the impact of strong Domestic Card purchase volume on noninterest income and the absence of the mark on our Snowflake investment a quarter ago.

Period-end loans held for investment grew $6.5 billion or 3%, inclusive of the effect of moving $4.1 billion of loans to held-for-sale during the quarter. The loans moved to held-for-sale consisted of $2.6 billion of an International Card partnership portfolio and $1.5 billion in commercial loans. Turning to Slide 4. I will cover the changes in our allowance in the quarter.

We released $1.7 billion of allowance, primarily driven by observed strong credit performance and an improved economic outlook. Turning to Slide 5. We provide the allowance coverage ratios by segment. You can see allowance coverage declined in the quarter across all segments, largely reflecting the dynamics I just described.

However, coverage ratios remain well above pre-pandemic levels due to continued economic uncertainty as our allowance is built to absorb a wide range of outcomes. Our Domestic Card coverage is now 8.9%, down from 10.5% last quarter. Our branded card coverage is 10.1%. Recall that the difference between branded and domestic coverage is largely driven by the loss sharing agreements in some of our partnership portfolios.

Coverage in our consumer business declined about 60 basis points to 3%. In addition to continued strong credit performance and improved economic outlook, historically high auto values aided the reduction in coverage. Coverage in our Commercial Banking business declined about 25 basis points to 1.7%, with the single largest driver being the improvement in our energy portfolio. Turning to Page 6.

I'll now discuss liquidity. You can see our preliminary average liquidity coverage ratio during the first -- during the quarter was 141%. The LCR continues to be well above the 100% regulatory requirement. Our liquidity reserves from cash, securities and Federal Home Loan Bank capacity ended the quarter at approximately $137 billion.

The $14 billion decline in total liquidity was driven by lower ending cash balances. Our cash position declined in the quarter as it was redeployed to net loan growth, wholesale funding maturities, a modest increase in our securities portfolio and share repurchases. Moving to Page 7. I'll now discuss net interest margin.

You can see that our second quarter net interest margin was 5.89%, 10 basis points lower than the prior quarter. The linked-quarter decline in NIM was largely driven by lower yield in our card portfolio, where the typical seasonal decrease in revolve rate was exacerbated by higher transactor volume and associated higher payments. These impacts were partially offset by the favorable impact from one more day in the quarter. Lastly, turning to Slide 8.

I will cover our capital position. Our common equity Tier 1 capital ratio was 14.5% at the end of the second quarter, down 10 basis points from the first quarter. Loan growth and capital actions were largely offset by earnings growth. During the quarter, the Federal Reserve released the results of their stress test.

Our stress capital buffer requirement, which will be effective on October 1 of this year, is 2.5%, resulting in a total capital requirement by the Fed of 7%. While we saw a decline in this year's SCB, it's important to note that the Fed's stress testing results can move around meaningfully from year to year and are only one of many factors that we use in our capital planning process. Based on our internal modeling, we continue to estimate that our CET1 capital need is around 11%. Turning to share repurchases.

We repurchased $1.7 billion of common stock in the second quarter, the full amount allowed under the Fed's capital preservation measures. We have approximately $5.3 billion remaining of our current board authorization of $7.5 billion. Now let me move on to dividends. In the third quarter of 2020, we reduced our dividend to $0.10 due to the Fed's capital preservation measures.

We chose to continue this reduced level of dividend in the fourth quarter of 2020 out of an abundance of caution. The difference between our historical $0.40 dividend and the reduced level for those two quarters was $0.60 per common share. Therefore, we expect to make up for the reduced level of dividends from the second half of 2020 by paying a $0.60 special dividend in the third quarter of 2021. In addition to the special dividend, we expect to increase our quarterly common stock dividend from $0.40 per share to $0.60 per share in the third quarter.

Both the $0.60 special dividend and the increase of our quarterly common stock dividend to $0.60 will be subject to board approval. With that, I will turn the call over to Rich. Rich?

Rich Fairbank -- Chairman and Chief Executive Officer

Thanks, Andrew, and good evening, everyone. I'll begin on Slide 10 with our Credit Card business. Strong year-over-year purchase volume growth drove an increase in revenue compared to the second quarter of 2020, more than offsetting a modest year-over-year decline in loan balances. And provision for credit losses improved significantly.

Credit Card segment results are largely a function of our Domestic Card results and trends, which are shown on Slide 11. Second-quarter results reflect building momentum in our Domestic Card business. As we emerge from the pandemic, consumers are spending more and continuing to make elevated payments. Accelerating purchase volume growth partially offset the impact of historically high payment rates, resulting in strong revenue growth and a more modest year-over-year decline in loan balances.

High payment rates are continuing to contribute to strikingly strong credit results. Domestic Card purchase volume for the second quarter was up 48% from the second quarter of 2020. Purchase volume was up 25% from the second quarter of 2019, which is an acceleration from the first quarter when we saw growth of 17% versus 2019. T&E spending continues to catch up to overall spending and accelerated through the second quarter.

In June, T&E purchase volume was up 3% compared to June of 2019. At the end of the quarter, Domestic Card loan balances were down $4.1 billion or about 4% year over year. Excluding the impact of a partnership portfolio moved to held-for-sale last year, second quarter ending loans declined about 2% year over year. Compared to the sequential quarter, ending loans were up about 5%, ahead of typical seasonal growth of 2%.

Credit performance remained strikingly strong. The Domestic Card charge-off rate for the quarter was 2.28%, a 225-basis-point improvement year over year. The 30-plus delinquency rate at quarter end was 1.68%, 106 basis points better than the prior year. Provision for credit losses improved by about $3.5 billion year over year.

We swung from a large allowance build in the second quarter last year to a large allowance release this year. Let me turn to Domestic Card revenue margin. Purchase volume growth outpacing loan growth and strong credit were the key drivers of Domestic Card revenue margin, which was up 226 basis points year over year to 17.7%. Revenue margin increased over 50 basis points quarter over quarter, higher than our typical seasonal pattern.

Total company marketing expense was $620 million in the quarter, up $347 million compared to the second quarter of 2020. Our choices in card marketing are the biggest driver of total company marketing trends. As we emerge from the pandemic, we're seeing strong originations and purchase volumes. Our growth opportunities are enhanced by our technology transformation.

We are leaning further into marketing to drive future growth and continue to build our franchise. At the same time, we're keeping a watchful eye on the competitive environment, which is intensifying. Pulling up, our Domestic Card business continues to deliver significant value and build momentum. Slide 12 summarizes second quarter results for our Consumer Banking business.

Auto growth and exceptional auto credit are the main themes in second quarter Consumer Banking results. Driven by auto, second quarter ending loans increased 12% year over year in the Consumer Banking business. Average loans also grew 12%. Auto originations were up 56% year over year and up 47% from the linked quarter.

Pent-up demand and high auto prices drove a second quarter surge in growth across the auto marketplace. In the context of increased industry growth, our digital capabilities and deep dealer relationship strategy continued to drive strong growth in our auto business. Second quarter ending deposits in the consumer bank were up $4.4 billion or 2% year over year. Average deposits were up 9% year over year.

Consumer Banking revenue increased 27% from the prior-year quarter, driven by growth in auto loans and retail deposits. Second-quarter provision for credit losses improved by $1.2 billion year over year, driven by an allowance release and lower charge-offs in our auto business. Credit results in our auto business are strikingly strong. Year over year, the second quarter charge-off rate improved 120 basis points to negative 0.12%, and the delinquency rate was essentially flat at 3.26%.

In the quarter, elevated used car prices drove an increase in auction proceeds, amplifying the normal seasonal benefit we see from tax refunds around this time of the year. As used vehicle prices normalize, they will become a headwind to the auto charge-off rate. we expect the auto charge-off rate to increase from the unusually low second quarter level. Moving to Slide 13.

I'll discuss our Commercial Banking business. Second quarter ending loan balances were down 5% year over year. Average loans were down 7%. Commercial line utilization continues to be down year over year, and we moved $1.5 billion of commercial real estate loans to held-for-sale.

Quarterly average deposits increased 22% from the second quarter of 2020 and 5% from the linked quarter as middle market and government customers continue to hold elevated levels of liquidity. Second-quarter revenue was up 3% from the prior-year quarter and down 6% from the linked quarter. The linked quarter decline is more than entirely driven by a one-time cost associated with moving the commercial real estate loans to held for sale. This decline was offset by an equivalent one-time gain in the other category and is therefore neutral to the company.

Excluding this effect, Commercial Banking revenue would have increased about 13% year over year and 4% from the linked quarter. Provision for credit losses improved significantly compared to the second quarter of 2020, driven by a swing from an allowance build to an allowance release and a swing from net charge-offs to net recoveries. In the second quarter, the Commercial Banking annualized charge-off rate was negative 11 basis points. The criticized performing loan rate was 7.6%, and the criticized nonperforming loan rate was 1%.

Our Commercial Banking business is delivering solid performance as we continue to build our commercial capabilities. I'll close tonight with some thoughts on our results and our strategic positioning. Several key themes are evident in our second quarter results. Credit remains strikingly strong.

Purchase volume and loans are rebounding. We're continuing to invest to propel our future results, and we're returning capital to our shareholders. We are seeing increasing near-term opportunities to build our Domestic Card business as we emerge from the pandemic. We are leaning further into marketing to seize these opportunities.

We are also increasing our marketing for auto, national banking and our brand. We are now in the ninth year of a journey to build a modern technology company from the bottom of the tech stack up. Our progress is accelerating, and the stakes are rising. Competitor tech investments are increasing as technology is increasingly seen as an existential issue.

The investment flowing into fintechs is nothing short of breathtaking. And the war for tech talent continues to escalate, including levels of compensation. We continue to invest in technology and the opportunities that emerge as our transformation gains traction. Our modern technology is powering our current performance and setting us up to capitalize on the accelerating digital revolution in banking.

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

Jeff Norris -- Senior Vice President, Global Finance

Thanks, Rich. We'll now start the Q&A session. [Operator instructions] If you have follow-up questions after the Q&A session, the Investor Relations team will be available after the call. Holly, please start the Q&A.

Questions & Answers:

Operator

Absolutely. Thank you so much. [Operator instructions] Our first question today will come from John Pancari with Evercore ISI.

John Pancari -- Evercore ISI -- Analyst

I want to see if I can get your thoughts on the payment rates. Did you see a peak in the quarter? And if not, if you can talk about the timing of inflection. And then separately, how does that impact your growth assumption for card receivables and the timing on that front? Thanks.

Rich Fairbank -- Chairman and Chief Executive Officer

John, in our card business, payment rates remain at historically high levels. And as you know, government stimulus has been amplifying payment rates. And while these programs have been winding down, customer balance sheets are extremely healthy, and payment rates remain elevated. You can see the payment rate trends in our reported trust metrics.

And while not a perfect reflection of our total portfolio, Q2 payment rates remain at historically high levels. And these high payment rates are muting balanced growth even as spend is very strong. And of course, the flip side of high payment rates is strikingly strong credit performance, which drives strong profitability and capital generation. So we actually are always happy when our customers are paying at high levels, and it's indicative of a healthy consumer, and those high payment rates correlate with the really strong credit results that we continue to see.

We are -- if we look at monthly numbers, we can see, John, a little bit of easing of the payment rates. I don't know if that would be a trend to indicate. It certainly would be very plausible to me that as consumers now step up and spend more and more and they're going out and returning, hopefully, back to normal, it would be a natural thing that payment rates would ease a little bit here and that also credit metrics would move toward normalizing a little bit. So I guess, John, I would say we've seen the earliest of indications of that still running at really quite a breathtaking level.

Jeff Norris -- Senior Vice President, Global Finance

Next question, please.

Operator

Absolutely. Our next question will come from Moshe Orenbuch with Credit Suisse.

Moshe Orenbuch -- Credit SuisseAnalyst

Great. Thanks. Rich, putting together the comments you made about the significant amount of excess capital and then the comment in the release about seeing increasing near-term opportunities to build your franchise. Could you talk a little bit about whether you're looking at primarily kind of organic opportunities or inorganic ones as well?

Rich Fairbank -- Chairman and Chief Executive Officer

Moshe, as you know well because you've been there from the beginning and following us and having great insights, we really built our company as sort of wired for organic growth. We installed in the founding days what I call horizontal accounting, where we track every action and cohort and everything on a lifetime economic basis. And we measure it before and during and afterward to see how it's going. And that -- and so we always put organic at the top of the list.

And here's a great example. I mean while every bank that's -- every national bank that's been created has come through many, many acquisitions, we've had some acquisitions in our journey, but we are really leaning into an organically driven national growth strategy in banking. So -- and as I said a few minutes ago, we see good organic growth opportunities, which are partly a function of the market and where it is right now and very much these opportunities stand on the shoulders of the technology that we've built and some of the innovation that we're rolling out. With respect to acquisitions, we're not putting any energy or strategic focus on doing bank acquisitions.

What we are looking at is technology acquisitions. And really, in fact, there's a spectrum on the technology side with respect to fintechs and tech companies. On the continuum, at one end is just being a partner with them, and then the next notch on the continuum is being a partner and an investor in them. And you saw that with Snowflake, for example, and then there are sometimes acquisitions.

All of those have -- we've been active in all of those places on the continuum over the last few years. And I'm struck by the traction and success that we're having. When we look back at some of the acquisitions of little fintechs, for example, and tech companies, we are very, very pleased with the performance. And in many ways, these things are generally outperforming.

One of the big benefits that we have is that we have a modern tech stack, so do the fintechs or tech companies that we're buying. And so the integration and the compatibility, the ability to attract and then really retain the talent past the sort of the contractual period is something that I think leans in our favor. So lots of positives there. There's one big kind of elephant in the room with respect to acquisitions on the tech side, and that's the valuations.

So we've recently gone to a few of these conversations and said, love the company but not at that price. So we are very aware about the -- where pricing is. But strategically, I think if you kind of open the aperture and don't talk about necessarily this very moment, I think for Capital One, it's an organic-first strategy, but acquisitions of fintechs and tech companies at the right price, and they'll usually be little ones, I think, will help fill out our business and accelerate our opportunities.

Jeff Norris -- Senior Vice President, Global Finance

Next question, please.

Operator

Absolutely. Next, we'll hear from Kevin Barker with Piper Sandler.

Kevin Barker -- Piper SandlerAnalyst

Thank you. Considering the tightening underwriting that we saw in the first -- during 2020, do you expect normalized credit to maybe run below pre-pandemic levels as we go into 2022 and potentially into 2023?

Jeff Norris -- Senior Vice President, Global Finance

Kevin, [inaudible] hearing that.

Rich Fairbank -- Chairman and Chief Executive Officer

Yeah. But I think we -- it was a little echoey, but I think I felt I heard what you were saying there, Kevin. From where we are right now, which is at an extraordinary benign level that virtually has never been seen before in modern times, it's got ways to go to normalize. We are not choosing to make a prediction on where that is, not because we want to be coy about it but because, in fact, I think it's a hard thing to predict these days.

What we like to talk about is the drivers. So talking about the drivers, the consumer is in a very strong place right now. And I think what's striking is -- and I mentioned this earlier, when you look at what the average consumer -- and this is average because the experience for an individual consumer can be way different from what I'm describing on average. But the accumulated sort of surplus that consumers have been able to build up is something that even when the government stimulus monthly benefits ease, I think there is a bit of an accumulated balance there that will be beneficial for the credit performance of consumers.

The -- so we -- there's really only one way for the credit to go from here, and that is in normalizing. I think it starts with a bit of a head start. And I think that the rate at which it normalizes is going to be pretty linked to consumers' choices on payment rates. And as I've mentioned earlier, I think it's a natural thing for payment rates to gradually decline and for credit to gradually normalize.

The directions are inevitable. The timing is speculative. Our view is during this period of time, let's take advantage of the market opportunity that is here, the place the consumer is. But let's also be cognizant of how markets work, how credit markets work in particular and be on the lookout for some of the natural indicators of overheating.

Jeff Norris -- Senior Vice President, Global Finance

Next question, please.

Operator

Thank you. Next, we'll hear from Rick Shane with J.P. Morgan.

Rick Shane -- J.P. MorganAnalyst

Hey, everybody, thanks for taking my question this afternoon. Look, we're -- this topic has come up a couple of times. We're looking at the reserve rates and thinking about them in the context of day one reserve levels. I'm curious how you now reflect on day one allowance coverage and what that could look like on a long-term basis as we return to normal.

I'm curious, in particular, if you think some of the policy initiatives we've seen during the crisis change your long-term outlook in terms of potential loss rates.

Andrew Young -- Chief Financial Officer

Thanks, Rick. This is Andrew. I'll take that. And I think as we look at the allowance, every quarter we're going to take into account a large number of variables and assumptions, which would certainly take policy and other factors.

And so as I reflect back on the ratio that we had upon adoption, a lot of things have changed since then. And so within every single asset class, the mix is going to impact our coverage needs, and then you look at overall -- the balance sheet mix across each of those asset classes will impact things. So I look at all of those factors, and I don't think that the ratio at adoption is necessarily a destination. But I also think that if you put into the formula, like all of the economic assumptions and all of the asset mix, I still believe that the pre-pandemic coverage ratio can still serve as a very rough benchmark of what coverage ratios might look like.

But again, it will take into account each successive quarter, all of the things that we're looking at in terms of the mix and broad economic assumptions, including policy, as you mentioned.

Jeff Norris -- Senior Vice President, Global Finance

Next question, please.

Operator

Thank you. Next, we'll hear from Betsy Graseck with Morgan Stanley.

Betsy Graseck -- Morgan StanleyAnalyst

Hi. Good afternoon. 

Rich Fairbank -- Chairman and Chief Executive Officer

Hey, Betsy.

Betsy Graseck -- Morgan StanleyAnalyst

Just a question here on how you're thinking about the opportunity to invest for that account growth. You indicated account growth is up. Maybe give us a sense as to how much more it's up than usual. I know usually you don't give numbers for that, but it would be helpful to understand the benefit that those marketing dollars is generating today and then how much more you think the opportunity set is here to ramp up the marketing in the back half of the year given the opportunity set that you have in front of you.

Thanks.

Rich Fairbank -- Chairman and Chief Executive Officer

Betsy, yeah, we don't tend to give out the specific account growth numbers, the origination numbers. But they are strong right now. They're not the strongest that we have ever seen. We're pleased that they're really quite strong because obviously, there was some weakness a year ago in those kind of numbers.

So we have seen a very solid performance. We feel really good about the account originations. So we are leaning further into marketing to drive future growth and also to just continue to build the underlying franchise. And as we've said, these opportunities are partly because of what the market has to give right now and partly opportunities that are enhanced by our technology transformation.

And the marketing, of course, is especially going into the card side of the business, but also if you just look on TV, you've seen us steadily investing in national banking. We're very happy with how that's going. And you may have seen for the first time this quarter that we have now gone on national TV in the auto side. So these are advertising that is debuting some of the technology innovations that we have at Capital One, some of the exceptional customer experiences that we've built.

And we're seeing good traction in the origination side of the business. And so we continue to lean into marketing.

Jeff Norris -- Senior Vice President, Global Finance

Next question, please.

Operator

Thank you. Next, we'll hear from Don Fandetti with Wells Fargo.

Don Fandetti -- Wells Fargo SecuritiesAnalyst

Hi, Rich. I was wondering if you could talk a bit about the tech spend outlook. I saw a report that Capital One was hiring a large amount of software programmers to take advantage of the public cloud move. And then you mentioned fintech.

I was just curious if you thought that the regulatory landscape would ever balance out or if that's sort of something that's not going to happen.

Rich Fairbank -- Chairman and Chief Executive Officer

OK. Yes, Don, thank you. So let me talk about tech and the tech hiring. Winning in technology really kind of begins and ends with one thing, hiring world-class tech talent.

And it is the easiest thing to talk about and possibly the hardest thing to pull off in business today as -- because while this principle is -- this talent principle is true in any business, it is profoundly true in technology as the demand for world-class tech talent vastly exceeds the supply. So we've built a tech brand and have had great success in attracting top talent, and we're competing head-to-head with the leading technology companies in the U.S. And we've been leaning into tech hiring for years, and this is a strong year of hiring. Most of the new roles we're hiring for are engineering roles in software development, cloud infrastructure and machine learning.

And these are the most sought-after roles in the world, and we're getting real traction here. But essentially, if you pull way up and we -- it's more than just words when we say it. We've really been living this, which is to, from the ground up, build a technology company that does banking, essentially what Capital One is. The technology and data are increasingly what the business is.

And at the heart of that journey is the tech talent. I also mentioned one other thing, Don, is that the cost of technology talent is visibly moving upward right in front of our eyes. And I wanted to flag that to investors. That is just something that, again, it's the natural consequence of the demand greatly exceeding the supply.

But -- so I think it's going to be hard for most companies -- for all companies to do hiring and get the numbers that they want. We are leaning into that. I think we're in a very good position, but it's -- we're going to need to pay appropriately for that talent. Don, you asked about fintechs and what we feel about fintechs and possibly a comment on the regulatory side.

I just have a tremendous interest in fintechs, and maybe that's because Capital One was an original fintech before there was such a word. And I look at the fintech marketplace, and I think some of these fintechs are bringing great innovations to the market. And we very carefully study these innovations. And I think that we look at these both as threats to our business.

We look at them as opportunities. Maybe we can partner with the fintechs. In some cases, there are acquisitions associated with that. And in some cases, what they're doing are beacons of opportunity that we can pursue.

The fintechs today, I think what banks have to stare at is that fintechs today are benefiting from their modern cloud-based technologies and their innovative and entrepreneurial approach to disrupting markets, the tremendous amount of funding that is out there. I mean for example, these days, the venture capital funding going into fintechs is close to -- I think, I don't have this data right in front of me, but it's close to double the next category in terms of the amount of venture funding going into this. So this is pretty electrifying. And the fintechs benefit from a lower level of regulation than financial institutions have.

Now I don't think right now the success of fintechs that one can look at fintech and say the primary reason they're succeeding in areas sometimes more than the banks are is because they are less regulated. I think they're succeeding for the factors that we talked about. I think when you look over time and envision these fintechs with tremendous growth and being large disrupters, it is an elephant in the room relative to what's the regulatory context, the capital that they're going to be carrying, the regulatory requirements and the levelness of the playing field. So we certainly have a watchful eye on that.

But when we look at the fintechs, the success we're seeing in them, to me, is indicative of the opportunity that exists to reimagine banking. And that's what we've been focused on for years. And then if we kind of take our focus off fintech for a minute and think about Capital One, like the fintechs, we have a modern technology infrastructure based in the cloud. We also have other benefits they don't have, most of them.

We have tremendous customer scale, a powerful brand and literally decades of underwriting and banking experience. So when I pull up, I think we and the fintechs are well-positioned for success, in some ways for the same reasons, in some ways for different reasons. But I think the biggest takeaway of all of this is that the banking industry is changing on an accelerated basis. The competition is unbelievably and increasingly well funded.

And we look at that and we say it indicates the magnitude of change, the magnitude of the opportunity, but it also is a -- indicates an imperative that we need to make sure that during the windows of opportunity that we lean in and invest where we need to invest because these opportunities won't last forever. Thank you, Don.

Jeff Norris -- Senior Vice President, Global Finance

Next question, please.

Operator

Thank you. Next, we'll hear from Sanjay Sakhrani with KBW.

Sanjay Sakhrani -- KBWAnalyst

Thanks. I guess I had a follow-up question on the opportunity in the U.S. card for growth. I assume a lot of the account growth that you're seeing right now is coming in the super prime or the transactor space because of the growth in transaction volumes.

Is that correct? And I guess if we think about the subprime consumer, maybe you could just talk about what their behaviors are today and how you see growth from that segment unfolding. Thanks.

Rich Fairbank -- Chairman and Chief Executive Officer

Sanjay, certainly, what's the biggest newsworthy thing that's happening in the short run is the surge on the super prime side, the return to travel and entertainment spend powered a lot by heavy spenders and that you just can feel in a sense the world pent up and just bursting out. And I think that's sort of the biggest news that we see inside our numbers as we look at it. The subprime business, I think, has been more characteristic of, in general, the sort of mass market of America. And that is that things have not been as dramatic in terms of pullbacks nor are they as dramatic in terms of leaning in.

But we've just continued to take the same strategy we've had in the subprime business, really in the prime business for years. And we are carefully leaning into originations and growing the underlying franchise and then at the right opportunities, raising the lines when we feel that the opportunity and the conditions warrant. So we continue to lean into originations really across our business. And we are opening up credit lines -- gradually opening up credit lines because we see good results.

The consumer is in a pretty good position. Our customers are in a good place. And you remember, Sanjay, we talked about the sort of years of holding back on that. It's not like we're unleashing with credit lines right now, but we are sort of net-net, more on the opening up side than the tightening side at the moment.

And that's, of course, with the watchful eye on all the key indicators and things that naturally will change because of how credit markets work.

Jeff Norris -- Senior Vice President, Global Finance

Next question, please.

Operator

Thank you. And our next question comes from Ryan Nash with Goldman Sachs.

Ryan Nash -- Goldman SachsAnalyst

Hey, good evening, everyone. 

Rich Fairbank -- Chairman and Chief Executive Officer

Hey, Ryan. 

Ryan Nash -- Goldman SachsAnalyst

So Rich, you've mentioned several times that you're leaning into marketing. I guess from the outside looking in, how should we assess the return on these investments? Should it come in the form of accelerating growth or improved efficiency? And I guess, Richard, just on the efficiency point, we obviously saw improvement year over year for the first time in several quarters. It seems like the top line should be improving. This, combined with the technology investments that you're making, at what point do you think you'll be ready to reintroduce the 42% efficiency target? Or what do we need to see for you to reinstate the time line for that? Thanks.

Rich Fairbank -- Chairman and Chief Executive Officer

OK. Thanks. Well, first, a word on marketing. As I said to Betsy, we are leaning into the marketing right now and sort of leaning a little further into it because what we do is always so Windows-driven, as you know, Ryan.

And so that's where we are on the marketing side. So from an efficiency point of view, you notice pretty high levels of spending on marketing. That -- marketing goes up. Marketing goes down.

But that, at the moment, has been more on the upside. Let me turn -- and one thing I want to say about competition, if I could, just because this is very relevant to these growth conversations. And then I'll pivot to the efficiency point. There -- most competitors have been -- the feel of their earnings calls is they, too, are leaning in to the opportunities that they see at the moment.

And we see this. We see competition heating up all around us, especially in rewards, where typically, that's kind of the flash points where you see these things the most. But you see it in the marketing and the media activity. We see it in direct mail numbers.

We see it in the rewards offerings and the heating up of some of that. The competition is intense right now, Ryan, but it's not yet irrational. But I want to just kind of take the moment to reflect on what I call sort of the physics of competitive cycles because I've seen this enough that it's pretty much you can count on these things happening. Now timing is always the question.

But right now, credit is historically good across the industry, and the consumer is in great shape. The longer this persists, the more competition will likely be to extrapolate these trends to inform their decision making. And this can embolden them to make more aggressive offers, market more intensely and a particular one I worry about, loosening underwriting standards. And in this particular environment, the benign rearview mirror could encourage lenders to reach for growth.

And it could be exacerbated by credit modeling that relies on consumer credit data that, frankly, may be very unique to the downturn and not as good for predicting where credit performance is going to be over time. Ryan, if you're building a credit model right now and you're looking back at the data on the last year or two, what are you going to do with that with respect to what that tells you about the next time things turn down? So the -- and there's also a lot of earnings and capital and liquidity in the system. And then you've got the fintechs that are really revving up, as I talked about earlier. Even as we're leaning into this opportunity, we remind ourselves every day that the seeds for the next challenges coming up in the credit cycle as opposed to the economic cycle, in the credit cycle, these seeds are being planted right now.

And so what we do is we don't just look at our models to make decisions. We pull way up, and we have a very watchful eye for the key indicators of these, not only likely, basically inevitable things to happen. And then we will act accordingly. We just never want to be surprised.

Let me turn to talk about operating efficiency. We've been focused on improving our operating efficiency ratio for years. And from 2013 to 2019, we delivered 400 basis points of improvement with a combination of revenue growth and tight expense management. And of course, the pandemic interrupted our progress, particularly on revenue growth.

Now as it turns out, the pandemic also accelerated the technology race and raised the stakes for all players across many industries and, frankly, particularly in banking. And so as I talked about earlier, I think everyone can feel the clock ticking, companies, everybody in banking feeling the clock ticking on their tech readiness, the investment flowing into fintechs, the arms race for talent. And so we are struck by the emerging opportunities in the marketplace. They're significant but the windows aren't unlimited.

So we feel we're very well-positioned on this, but we are continuing to invest in this moment in our technology and in the opportunities that we see out there. So meanwhile, we continue to focus on operating efficiency. Our tech transformation is the engine of long-term efficiency gains, both through revenue growth and digital productivity gains. So continuing to invest in our technology opportunities and driving for efficiency improvements are on a shared path.

So we're still driving toward the same destination of operating efficiency, but the timing of operating efficiency improvement needs to incorporate the imperatives of the current marketplace. And delivering positive operating leverage over time continues to be one of the important payoffs of our technology journey and a key element of how we deliver long-term shareholder value. Thanks, Ryan.

Jeff Norris -- Senior Vice President, Global Finance

Next question, please.

Operator

Absolutely. Next, we'll hear from Bill Carcache with Wolfe Research.

Bill Carcache -- Wolfe ResearchAnalyst

Thank you. Rich, as you think about the process of normalization of payment rates and revolve rates that you described, would you expect that to provide an incremental tailwind to loan growth such that we could actually see loan growth outpace spending growth as we look ahead?

Rich Fairbank -- Chairman and Chief Executive Officer

I think one of the things that I think the banking industry -- I mean we've talked about this relationship between payment rates and growth from time to time, but I think it's been more of an occasional conversation with The Street. And I think the whole banking industry and the investment community has really sort of collectively gone through and learned an important lesson here about the metric that really honestly wasn't talked about that much, which is payment rates and the profound impact payment rates has on both loan growth and, in fact, credit performance. And the striking thing is it's not only empirical, that relationship, but it's intuitive as well, which to me really reinforces there's something very important here. Now as I've said to you, we kind of root for higher payment rates because I think it reflects a healthier consumer even -- and we get paid on the credit side and sometimes paid very well, as you can see here.

But it is a natural thing that will happen over time. The normalization of credit will very likely come along with the lowering of payment rates. And that, in turn, is likely -- sort of mathematically, all other things being equal, that will be a boost to loan growth. So when you say, well -- but I think for those numbers to move significantly enough to, in fact, have loan growth lead the race of growth relative to metrics like spending and some of the other things or, for us, originations and things like that that's kind of quite a journey to do to get there.

I'm not saying that it won't. But I wouldn't run to the bank counting on a loan growth topping the league tables of the various growth metrics. But I think what is baking -- what really essentially is baking in the oven is a gradual normalization of credit correspondingly, for the same reason, a lowering of payment rates. And we are probably seeing the very early -- sort of on a monthly basis, the very early indicators of that phenomenon.

Jeff Norris -- Senior Vice President, Global Finance

Next question, please.

Operator

Thank you. And our final question today comes from Bob Napoli with William Blair.

Bob Napoli -- William BlairAnalyst

Hi, thank you, and good afternoon. Rich, appreciated your comments on fintech and how you're looking at partnering, buying and etc. But I just was hoping to get maybe a little bit more color on your thoughts around what areas of fintech. I know it's been a few years since you bought Paribus, an online price tracking.

But there's a lot of -- there's -- as you talk about all that investment, it's going into a very broad group of -- whether it's buy now pay later, B2B payments, wealth management, business spend management, kind of charge card business spend management areas. So I just wondered what areas are most attractive to you, where we would see partnerships or acquisitions.

Rich Fairbank -- Chairman and Chief Executive Officer

Well, Bob, what we do is -- and you mentioned a bunch of interesting areas, for example. But what we do is rather than say these three areas are our priority areas and let's go look for fintechs, we have a -- and it's one of the -- really one of the benefits of years on our tech transformation is we see opportunities in a lot of areas across the portfolio of businesses that we're in. And so rather than say these three here are the priority, let's go see what we can partner with or buy, what we do is we massively study the fintech marketplace across all the areas that we are also leaning into. Frankly, we study it beyond that because we can learn a lot.

And then what we do is -- the sheer learning alone is worth the effort. And so we go to school on this, and we try to say, well -- a bunch of times, we say, well, look at that. They thought of that idea. We didn't at Capital One.

Very good. Our bad. But look, let's see what we can learn from that. But also along the way, we look across that continuum of partnering, investing or buying these things.

But as we really look from the other end of the telescope, rather than what we need, what we look for is what do we find and especially what do we find relative to a company with the talent and the culture and the business model that would be really accelerative to us. And so every once in a while, we do an acquisition, and -- but there is a lot of focus on that particular business model. We always ask ourselves, could we build that rather than buy it? And then we really look hard at the talent because in the end, what really has made our most successful acquisitions has been that the talent comes and stays and leads, becomes leading executives in the company. And so that's how it works.

And a lot of times, we don't buy anything, but we always come out having learned a lot, Bob. Thank you.

Jeff Norris -- Senior Vice President, Global Finance

Well, thanks, everybody, for joining us on the conference call today. Thank you for your continuing interest in Capital One. And remember, the Investor Relations team will be available in just a few minutes if you have any further questions. Have a great night.

Operator

[Operator signoff]

Duration: 74 minutes

Call participants:

Jeff Norris -- Senior Vice President, Global Finance

Andrew Young -- Chief Financial Officer

Rich Fairbank -- Chairman and Chief Executive Officer

John Pancari -- Evercore ISI -- Analyst

Moshe Orenbuch -- Credit SuisseAnalyst

Kevin Barker -- Piper SandlerAnalyst

Rick Shane -- J.P. MorganAnalyst

Betsy Graseck -- Morgan StanleyAnalyst

Don Fandetti -- Wells Fargo SecuritiesAnalyst

Sanjay Sakhrani -- KBWAnalyst

Ryan Nash -- Goldman SachsAnalyst

Bill Carcache -- Wolfe ResearchAnalyst

Bob Napoli -- William BlairAnalyst

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