We have not given guidance on full year charge-offs. We tend not generally to give guidance on full year charge-offs, but we very much like to give you the feel of how things are going. So, we are very much — see credit settling out. You can see the trends that continue on the second derivative of delinquencies and that’s a very positive thing. There is another factor that affects charge-offs, which is recoveries. And the recoveries have been — we’ve been saying for quite some time, recoveries are lower than usual because of the very low charge-offs we saw over the past three years. So that, all else equal, pushes up net losses relative to pre-pandemic levels. And that impact is probably larger and more prolonged for us than some of our competitors, because we tend to have higher recovery rates than the industry probably as a result of our business mix and our strategy, and we tend to work most of our recoveries in-house rather than selling debt.
So, we see a longer tail of recoveries from past charge-offs than most do. So, by the way, the recoveries, we had talked about recoveries, they’re probably sort of been at their bottom in terms of that brownout and over time probably heading in a more positive direction, but that also impacts the relationship between charge-offs pre-pandemic and where they are today. So, pulling way up, we don’t have guidance for credit for the year. We continue to be very happy about charge-offs the way after years of — after a long period of normalization that charge-offs are settling out. We’ve given — we just wanted to flag that the seasonality, let’s just comment — let’s pause for a second on the seasonality. It still remains to be seen whether the tax refunds are just lower, end of story, or whether they’re later.
The key thing right now is they are lower cumulatively than they have been — than they were pre-pandemic for this period of time. And what we’ll take a look at is how it plays out from here to see how much was just later and how much was lower. But what we’re saying is to the extent that it’s lower, then that impacts in the very near term the charge-off numbers that we had talked about before. But it doesn’t change our view about credit settling out, doesn’t change our view about very positively about the consumer, about credit performance. But it’s just something we wanted to flag across both the credit card and auto business.
Rick Shane: Thank you. Very helpful.
Jeff Norris: Next question, please?
Operator: Thank you. Our next question comes from John Pancari with Evercore ISI. You may proceed.
John Pancari: Good afternoon. I guess back to the Discover combination, any update to your thoughts around the timing of the deal close? I know the Fed and the OCC just extended the comment period. And I know you put out there you expect late ’24, early ’25. So, any change in terms of your expectation around the timing of the close or any of the key financial metrics that you set out?
Richard Fairbank: Okay. Thanks, John. So, let me comment on the Federal Reserve and the OCC extending the comment period. It’s standard practice for the Federal Reserve to extend the comment period on bank mergers. We expected the extension and we don’t take any signaling on our deal from the Fed’s decision here. So, with respect to the overall timing, the Fed and the OCC typically take several months to work through bank merger applications in consultation with the DOJ on competition questions and they engage frequently with our team along the way. And of course, that process is underway and we continue to have the same views about the timing of all of this that we did at the time of the announcement.
John Pancari: Okay. Great. Thanks. And then, separately, just regarding the — your expectation on the CET1 front, for a pro forma CET1 ratio of about just shy of 14%. Any change to that expectation? And any change to your thoughts around buyback activity in the near term? Could you remain active on that front? Thanks.
Andrew Young: Yeah, John, with respect to the deal, I’ll just say, as we talked about when we announced it, we at the time used a blend of consensus estimates of where we would have the CET1 at the time of close. There’s a number of variables that are going to move between now and Legal Day One, not just the standalone performance of each of our companies, but balance sheet marks, some of which are driven by credit and stock price. And so, I’m not going to be in the business of recasting every time a little number moves, but I will say our valuation of the deal considered a wide range of outcomes, and so we remain just as excited today about the financial and strategic benefits of the transaction as we did when we announced the deal.
With respect to our standalone repurchases, Capital One’s, I’ll note that the agreement with Discover does not prohibit us from buying shares. I noted in my prepared remarks, we were blacked out for a period leading up to the deal. And afterwards, the SEC has safe harbor rules that limit the daily average amount of purchases we can do for a period of time after the announcement. So, as a result of those limitations, Q1 had a pace that was less than what we’ve done in recent quarters. I will also just note that there’s also blackout restrictions on repurchases during the proxy vote period. But again, outside of those blackouts, we’re not prohibited and we’re able to continue repurchasing shares.
Jeff Norris: Next question, please?
Operator: Thank you. Our next question comes from Moshe Orenbuch with TD Cowen. You may proceed.
Moshe Orenbuch: Great. Thanks. Rich, putting aside the tax refund thing, I mean, you’re — we’re sitting here looking, you’ve still got what has been a somewhat persistently high inflation environment and the potential for increases in unemployment. Given the nature of your portfolio, you’ve got kind of lower-end consumer and higher-end consumer, how do you think about that, those factors in terms of thinking about what type of charge-off level you’re going to reach over some period of time, not a particular point in time, but over some point in the next year or two, like where you think about that? Are they driving a higher level of charge-off expectations? Or how should we think about that?
Richard Fairbank: Moshe, so our — I think what you’re partly getting at is because we have part of our portfolio is subprime consumers, how do we feel about how they’re performing and sort of in the context of an environment of higher inflation and so on. Let me just comment a little bit about the subprime consumer. In the global financial crisis, we observed that credit metrics in subprime moved earlier in both directions. Subprime, we saw that, but then we saw sort of everything move proportionally. In fact, subprime moved frankly somewhat less proportionally than prime as a multiple, but obviously all portfolios worsened quite a bit during the global financial crisis. In the pandemic, subprime credit improved more and more quickly than prime, but it also began to normalize more quickly, too.
And of course, that’s in the context of lower income consumers seeing disproportionate benefits of government aid and then unwinding that over time. And subprime is, of course, not synonymous with lower income, although they are somewhat correlated. So, on the other hand, so if we look at how they have been doing, the income growth from – for, let’s take, lower-income consumers has been consistently higher over the past several years. And we have seen really quite other than the tax refund effect, which does show up more in our lower end part of our customer base than the higher credit end, really we have seen the subprime performance be very strong. It just worsened faster, and then on a proportional basis, everything caught up with it, but it frankly always seems to be a first mover and it settled out frankly a little bit earlier than — started settling out a little bit earlier than the rest of our portfolio.
So, based on current performance, we feel very good across the credit spectrum. We also — it certainly catches our attention when we see the inflation specter sort of become greater lately. So, we have a real eye on that. As you know, we continue to look at the marketplace and trim around the edges and so on. But the net impression that I would leave you is, we continue to feel very good about really the full spectrum of our customers. We continue to lean into the growth opportunities. We have for some time just been doing some trimming around the edges and just being a little tighter on the credit lines and things like that credit line increases. But the impression that I want to leave with you is that we are still pretty — feel good about this marketplace and the growth opportunities there.
Moshe Orenbuch: Got it. And maybe just as a follow-up question. You alluded to or Andrew alluded to the fact that you expect that late fee — you can still kind of achieve your objectives from an efficiency ratio even with the late fee coming into effect. But could you talk a little bit about your thoughts about any mitigating efforts that you’re planning or in the process of doing? Or is it something that you’re going to try and use from a competitive standpoint to take share? How do you think about it?
Richard Fairbank: Okay. Thanks, Moshe. So, let’s just pull up and reflect on the fact that the CFPB’s rule on late fees is scheduled to take effect on May 14th. We are prepared to implement the rule on this timeline if necessary, but ongoing litigation efforts continue to create uncertainty on the ultimate outcome and the timing of the rule. As we’ve said before, when the rule is implemented, there will be significant impact to our P&L. We expect that this impact will gradually resolve itself within a couple of years from the implementation of our mitigating actions. These mitigating actions include changes to our policies, products and investment choices. Some of these mitigating actions have already been implemented and are underway.
We are planning on additional actions once we learn more about where the litigation settles out. Ultimately, these mitigating actions will play through different line items in the P&L and we’ll mitigate the impact of the late fee rule on our P&L within a couple of years of their implementation.
Jeff Norris: Next question, please?
Operator: Thank you. Our next question comes from Don Fandetti with Wells Fargo. You may proceed.
Don Fandetti: Yes. Rich, can you provide your latest thoughts on auto lending? I know a lot of focus has been around cards, but — and used car prices have been a little bit lighter recently as well as the tax issue, maybe talk a bit about a potential pivot there?
Richard Fairbank: Yeah. So, we’re feeling very good about the auto business. So, let’s just pull way up. Auto industry margins have recovered somewhat over the past few quarters. Our origination volumes in Q1 were up 20% on a year-over-year basis and quarter-over-quarter basis, and we’re pleased with that growth. Now, there are still headwinds to the auto business. Affordability remains a concern due to the combined effects of high interest rates and still high car prices. And even as car prices have normalized significantly from their peaks, they haven’t yet reached a new equilibrium. So, we anticipated the risks in this business tightening up credit back in 2022, I think several quarters before some of our competitors. As a result, the performance of recent originations from ’22 and ’23 has been really strong and frankly even better than our pre-pandemic originations.
And vintage over vintage, that risk remains stable. And as margins have recovered a bit, we’re seeing an opportunity to lean back in. So, our years of investments in industry-leading technology and credit infrastructure have allowed us to remain nimble and enabled us to make targeted adjustments to our origination strategies where we see opportunities for growth or emerging risks. So, looking ahead, we remain confident in the business that we’re booking and bullish about the opportunities for growth. So, we continue to set pricing in terms that we’re comfortable with and feel good about the opportunities that we see in the market. And after talking for really a couple of years about sort of dialing back, I think this is sort of a period where it’s moving more into a leaning-into-it situation for Capital One, and we’re, I think, very benefited by the choices that we made over the last couple of years and seeing very strong performance in our vintages.
Don Fandetti: Thank you.
Jeff Norris: Next question, please?
Operator: Thank you. Our next question comes from Sanjay Sakhrani with KBW. You may proceed.
Sanjay Sakhrani: Thank you. Rich, I think your point on tax refunds clearly very valid one. Interestingly though, to your point on the second derivative, that’s improved quite nicely even into March. And I think when I look at the tax refund stats now from the IRS, it seems like you’ve seen a catch up in refunds and it seems like the average refund numbers have kind of come in line with last year, if not slightly higher. So, I think those are improving too. Is there a lag effect there? So like should we see that more pronounced if that’s the case in April and May? How has it been in the past?
Richard Fairbank: Yeah. So, I can see that you’re a student of tax refunds. Just think of all the areas of expertise that you’ve developed over the years trying to really get your head around this credit card business, things that neither you nor I thought we would really have to learn. Let me make a couple of comments here. So, a key question is what are we benchmarking things to? So, relative to — if we talk about relative to last year, the things were even lagging relative to last year and they’ve actually crossed over — very, very recently crossed over the curve from last year, which I think you’re referring to. But then, last year, really was somewhat of an outlier relative to pre-pandemic. Now, one might ask well, “Why didn’t we just use last year as the seasonality benchmark?” Last year itself was an odd year, and from a credit point of view, with all the normalization, it was hard to read things through the noise.
