DFS - Earnings call transcript Q3 2017 | Discover Financial Services

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Operator

Good afternoon. My name is Julie, and I will be your conference operator today. At this time, I would like to welcome everyone to the Discover Financial Services Third Quarter Earnings Conference Call. All lines have been placed on mute to prevent any background noise. After the speakers’ remarks, there will be a question-and-answer session. Instructions]. [Operator may you your begin Streem, conference. Craig

Craig Streem

and you, welcome everybody call. today’s to Thank

Relations on earnings financial in Investor our two section investorrelations.discover.com. which our Moving of find presentation, slide you can of website, the

and GAAP certain third compares Our the business company’s and the XX-Qs could and file the are financial course speak quarter forward-looking on discussion And as XXXX investors. which which and non-GAAP forth measures differ financial information in in earnings today’s we and to today cause management these statements reconciles the today. financial prospects, explain conjunction set have earnings to and company’s risks that and from to on of of report about which subject only to X-K that performance our to useful in information, SEC future review why materials, are with are uncertainties that contains website information materially In with XX-K within measures these actual the SEC. was press and we we are provided and release, results statements you urge with forward-looking discussion. today’s Factors provided an our

completes David Our the rest Mark of Executive and call developments comments, will you question-and-answer through will Graf, will Officer his take session. Mark Nelms, there for include a and our third the quarter our from presentation. today Chairman Chief then covering be and remarks Officer highlights Chief time After Financial earnings

as can accommodate question you possible. During participants the we one limit and session, follow-up, to yourself please many so one ask I’d Q&A as to

on will the presentation. three call Now, over it’s the of to my to page David, who pleasure begin turn

David Nelms

call. for thanks to and Craig, listeners joining Thanks, today’s our

pleased income For $X.XX, continue fastest particularly in to as share the of of focus third the Earnings loan achieved a XX%. In We years. we revenue total strong per our prime growth XX%. we six all loan growth. and than growth return services, were I’m net on drove with equity growth, payment growth of lines. of $XXX profitable more on on total delivered million XX%, product delivering we X% across grew quarter, volume

Looking specifically growth growth evenly customers. and of existing new about card, between accounts loan split was at

the last competitive new has issuers to offers of products year of back third the While unusually of competitors, fall quarter aggressive highly a year characterized was a from some on bit. this number appeared

However, our remain discipline strategy and unchanged.

members first product offer We for flagship cash creates the customer back continue features cash to bonus sustain earn in back their and card engagement. and the unique to innovate enhance match to like meaningful our card double allows us benefit new Discover and with year

marketing approach Our tense drive competitive to drives expenses. in customer a without and engagement consistent a sales growth and less significant opportunity have increase receivables strong and created and Overtime, voluntary lower both attrition than growth. environment slightly more enhanced

card. For our unique strong path the any consistently remain their a has feature loyalty of service we Discover service customer In in set revolvers is The resulted introduced among low members performance prime the our forefront features to our their to in Discover and expanding available for our customer Enrolled free The have outstanding advertising, highlighted has Discover but consumers’ and an will of attrition an Customers monitor helping and find personal on the innovations identity commitment if and you the customers help base. the alert breach our of includes volume Equifax foundation which on of reflecting in we unexpected websites. hand Equifax events. remind call right security we minds. that been in a the serve that to them and on you. like breach The customers treat aware became focusing alert for potential been are we well it card increased thousands us you that because part theft consumers providing receive have to in response treat numbers card data risky loyal we created we we before even increase all July credit. from on to In breach, members. social of

investment of this of We members goal their for reports has features they our from the latest and already feature notify us. credit of surpassed will also year. monitor This our card new the and example simplicity innovative the feature The enrollments with number them in account openings. any is provide our full expect ongoing to

continued Our new investment our alert of element technology. in is features one

technology and bank us. differentiation for As a is critically important direct

by differentiate features new and features mobile innovative our marketplace. a recognized ranked when customer highest quarter these in competitive all was companies. was It appeal JD like app Discover our among U.S. Power Our satisfaction further Freeze alert The credit last in of card service

technologies operating and and credit in continue provide capabilities digital that that and experience We analytics sustainable advanced as new efficiency invest learning a mobile to as customer will machine well benefits. enhance

future consumer buoyed labor market, debt feel consumer to rising card payment in employment. The Federal reached finances sentiment moment, positive and continues add to Turning credit which a over robust a lowest The heavily levels home expectations ratios about remains above XX% rate our its with prime of to The largely while levels. their would consumer October, and that to consumers costs finances highest level by have prices level since well recently loss our its their lowest XXXX. payment its and since Reserve debt released remains in service whose income credit fell indebted portfolio consumer the to early healthy, XXXXs. Moreover, our personal income a share income line the prospects below ratios risen, in performance serve survey for I for and to remains manageable those at industry decade. of average. the medium U.S.

to economic growth competitive growing Given for to us and the makes quality remains to value. to prime because conducive receivables our drive commitment it shareholder sense long-term great environment continue loan creating

fact but emerging year to reduced in attentive similar the later, lines personal by one market where last back have Mark and portfolio. area loans, is in significant of remain over it back about segments we data more cutting talk we’re some card exposure volume channels. the where open credit broad scaling course, through taking we’re sourced Of the action in origination of will

While remains by the environment number favorable unfortunately Harvey, Maria. and affected a hurricanes for customers our were most, Irma of

of million of activities. and customers For range most hurricane, our fees as the collection late we a X.X in benefits impacted by areas proactive suspensions such offer

customers continue Cross. revenue to approach results ask and relentless equity. Mark? loan now more and I’ll strong we donating customers by support communities the $X to on return to financial in along serving drive summary a growth will robust our to discuss and our Additionally, In Red differentiated our detail. these American with provided Mark million on focus

Mark Graf

and everyone. evening David by Thanks begin addressing I’ll our good four. slide financial summary on results

strong million the we primarily of consumer continue up invest alluded well year. very years it once last year-over-year a margin is income combination provision that as by portion EPS current to in revenue was loan normalization ongoing growth. benefits as supply growth only consistent the industry, limited Operating of And for this of in coincidently of return our terms rose of we a to third tax of loan to $X.XX, loan book, expenses last XX% $XX our again the the as quarter $X.XX by The of X% as quarter. and prior quarter in returns, was growth several expansion. seasoning in contained in on driven personal increase a a credit The in exception XX%. the the strong growth. equity was both driven Our and including is evidenced largely with to

to to standard in merchandise of card the year driven this revolving slide Growth spurred strong growth as revolvers. balances well. in Promotional growth loans X% increased Turning prior particularly balances Total drove five. X% receivables. increase, by by growth among sales credit over much contributed

our result loan simplified last primary down presence, to strong also rate products. experience with expanded XX% from and X application our growth loans as lending percentage quarter, We Personal achieved increased year, thanks is the other from this points consumer engagement in a prior digital active growth in student in in the balances but tightening loan loan portfolio Private in aggregate, XX% we unsolicited certain these lead organic changes and our will underwriting of personal X% of that our to quarters. year-over-year. coming growth increased deceleration expect further rose our standards channel a

on student As efforts focus with a another digital are result we on business loan year a our track for contest, XXXX. in expanded of marketing record originations in of

on you our to active the the can see right-hand of Moving network, by accounts. driven X% volume Services increase in segment, five, primarily PULSE slide proprietary year Network of year-over-year, rose Payment that our volume volume In Discover rose the the from results card an side strength at payments on third And grew largely [ph] franchises. rose Club X% newer driven faster XX%. volume. Diners Partners quarter increase by from prior a during an from AribaPay volume XX% rate finally, with

on completely this engagement in Moving million should and rewards a increased half the our with slide consistent in Total from resulting higher positioning. expense we I of this by driven that of quarter. year income full Net increased category expect ago, guidance points. this combination from you balances, by income a previously to result uptick in revenue greater remind basis balance rewards to said and an rate year as market than sheet to million down loan feature $XXX and second or a interchange higher offset customer non-interest is would interest X% that rotating XXX you six. of more our rates opted have was year we our XXX $X XX% revenue discount was the

quarter to loan Total portfolio charge-offs by a increase driver on by XX towards sequentially the margin promotional interest card charge-offs XX.XX%, yield. As and promotional of the Prime rates third yields. prior seven, in the at increased points proportion of loans shift the ago student points in card short-term a point quarter higher ending yields increase in shown and point were to student offset student increase XX XX rate and driven XX-basis Higher an private drove a basis loan interest increase and of XXXX, mix lower bolstered balances increases year relative loan by in a slide a yield, points the yield year from XX-basis higher higher and higher. partially basis XX.XX%. offset our part in net balances. from rate margin the rose prime basis

On the year-over-year. moved $X.X rates generated billion basis and of XX% Average in XX we during Consumer higher sequentially X liability year-over-year. points increased once the the quarter, points robust our balance rising consumer growth slightly balances deposits. basis or side again deposit sheet, third

betas with rise rate rise. more will deposit toward expect future gradually continue normalized any levels to We

as activities, year-over-year. as $XX headcount average that X% compliance slide I made to David slide nine. highlighted X% higher and would provided compensation growth assistance operating discipline to fees as period. point well and initiatives discuss by that also the you areas business growth, salaries. higher results spoke primarily million hurricane. higher Turning leverage our benefits invested as current the higher expense of these Employee eight, were on even Professional technology expenses investments in to was produce or in out earlier. credit growth affected support operating rose by we of driven now strong positive the and customers I’ll we we revenue David for in in the

impact provided accelerate charge-offs ultimate of did from accounting we in of their by on this than we impact basis X hurricane Rico. driven areas. recent customers year and greater the not likely fell basis relief Puerto rose prior While of the and maybe hurricane view points primarily $XX of million point the net affected accounts, to XX said, somewhat aging these Maria sequentially. recognition severe That charge-offs the the points on Total Hurricane from amount, more by an

sequentially. driven primary along rate the charge-off spoken the to in have loan points increase growth loan basis year-over-year about student year-over-year sequentially. As net we the drivers vintage. net increased card years supply seasoning basis principally quarters last Personal Private points credit of charge-offs in rose seasoning basis basis basis past XX several in points XX student year-over-year the of increase XX loan quarter. The prior in is and from and large X and net the the charge-offs. with year, Credit point due XX few a the loan points of normalization rose charge-offs net XX charge-offs been basis prior points fell

expectations a we’ve originations. performing market broad curtail we quarter, book line of last with personal that’s identify As actions loan the to not indicated taken sub-segment in and those

charge-offs. see through can the the personal quarters, rise you quarter, build. loan our In flow loans in impact This charge-off net as these rate the reserve will future

million $XX the the future expect not will over sub-segment We of the exposure assets. exceed remaining this lives of

in denominator personal pulling be our rates impacted segment. net the back course, rate effect with total of were Of also products. across effective lending the will on by the originations sequentially up for loan associate portfolio, all delinquency the charge-off XX-day the primary

loan at delinquency XX-day rate increased total sequentially XX basis and Looking basis points XX our receivables, points year-over-year.

common at slide million through Tier points basis sequentially balances we our repurchases. XX, returned share equity stock on to Looking grew and dividends X shareholders capital declined capital of as ratio $XXX and loan XX common

to quarter, a Looking an ahead would this our opportunity It existing beneficial the have preferred may currently fourth though trade. to shares. we refinance be appears

would dilution in $X.XX the would from result to quarter diluted to be factors. fourth However, share. if This tune the executed per of two it $X.XX

when retain incurred the quarter significant of dividend we products. total we generated the XX. lending First, for loan We we our payments. need sum a from up all existing take three capitalized to shares. a preferred to issued the period X% with And overlapping second, fees charge To earnings growth slide the on primary would would contributions have of

Our it and low. consumer to risen normalized With season, both deposit static loan plan below ratio helping ratio equally the respect upgrades to remain historical business execute and betas and at growth while the payout bring capital charge posted conditions XX%, to closer industry strong our have levels. credit, remained while strong our growth capital in deposit average loan our we’re continuing norms on target leading to with

equity. growth, with disciplined a NIM strong to XX% on profitable XX% fueled healthy commitment return operating Our and expansion growth revenue performance

remain our evidenced by concludes expenses of as well one the remarks. efficiency in managed industry. formal ratios best addition, That the In

Now Q&A. operator open to our back line turn I’ll the call the Ruth, to for

Operator

Instructions]. Certainly. [Operator

KBW. The first question comes from line from of Sakhrani Sanjay

is line open. Your

Sanjay Sakhrani

on because give off Mark, a the a the and growth for us XXXX, as hoping is there builds you lot I go inflection half. and charge could last into we’re rate the know was have year with future going provisions I framework you over Thanks. that allowance seen and

Mark Graf

you the expectations meet willingness equation is would growth the will we place when it would this to say we’ve got I’m space I ahead. point XXXX fill it away I years a take I And we Sanjay. year the about time, that. acquisition what of stay guess point, I’m high. until business us did would that costs that where January broad heard the say from the sub-segment at we’re provision the in quite loan cost this wait about that the we in going high is with phenomenon make have of a strong mathematical drive in the the that place from at builds to normalization the to any drive demonstrated in we’re segment, that Yeah, personal of if this prime seeing that we’re experiencing number increases in just returns where We we bit build a loan guidance of very small our loan it book I as call talk credit few growth we’re going in supply the personal ago you aside, continued seeing. is you have X% on the side not little and profitable find to this channel is we about well are completely card on quarter, times consistent a credit set ways honestly. there provision market running mean provision. I What it seeing to seen the aggregator And seasoning spoken standpoint have growth that the growth there. as back of talk as segment takes too of tell the at the

comfortable. that we feel think discipline is the I there such So,

provision right has growing building for While it’s reasons we’re growing long-term. been value shareholder as for the the and been investing expense

Sanjay Sakhrani

Okay. what And revenue higher was basis, what the yields. was up the if got my move I drove you year-over-year guess follow in And mean. a sequential hurricane any on I I impact if NIM. on wondering there

Mark Graf

hurricane the of amount significant at line a identify that been Sanjay. can point in we time this hasn’t there Yeah revenue impact in

of QX time already X this of is or The walk a contributed depends give basis of because market funding rates about contributed things biggest bunch basis the around. margin terms the In it’s points the it about to mix contributed about and the from QX, X Credit mix X, X, was rate X of take. another points, X. receivables and was about contributed another about receivables then rate funding about piece the

margin. So, if you up, those that all add increase in basis-point the quarter-over-quarter get you XX

feels again it So, very strong.

to of positioning And of think the the are balance as that nature of prudent from the then, good assets I be of sheet we’re asset-sensitive. funding assets management coming seeing and that also on the benefiting just the well. We’re

Operator

Your comes from Ryan Please with Goldman Sachs. go Nash next question ahead.

Ryan Nash

just this was if the supply quarter. is due much related in Can And book? Thanks. to are question talk on you a of how versus versus the build how you from guess, at can the to growth how much of normalization? different seasoning contextualize I much reserve XX you the of was up guess maybe the that maybe charge-offs, look you are reserve about build credit back side year-over-year, losses maybe from that the that seeing breakdown you I

David Nelms

a touch I there, any try in it of in all follow-up, couple miss Ryan, I just and will it. give credit lot case for and things. I A quick one I’ll you of would on different say

system you went That’s outsized has the is the student want First earlier, out continues is provisioning this and take conversion way. of vintage uptick the we through think primary that provisioning bringing be the well nature be diligent end, to $XX you you about delinquencies charge-off as personal to million ago would business. there the that reflecting to about if of working don’t it’s as build is course of for I of of points. the an I up on my at then clear. had if weren’t loans that X that primary but say, in related that material. [ph] our on And about been a of drove a just talked for talked tune to provisioning normalization all, of There you the would card was equation, the in to the to of that getting probably million, a we and related getting there, build look factor saw the in around, of is I ahead small about too you specifically the to much, can then, $XXX see little quarter. growth. glimpse the higher rate piece downplay at driver second That the million see the driver delta rate build, But, you of if that a time quarter too, only and probably this platform, supplement bit to $XX about say loans new was seasoning student we loan we couple that days a that book as the can reserve really a basis guess. which

where the So, be strongest at the growth end is say, the of DTL exception the of to the [ph] day, portfolio are provisioning. really continues we seeing are I the seeing it greatest we where with would

Ryan Nash

And just could maybe if I ask quick a question on Got personal. it.

look there. the basis did basis points, increase, quarter-over-quarter yet about maybe seasonality saw does in loan in a at it growth like some there You XXX on come was growth year-over-year

on progress just rates maybe expect comments back to Thanks. you how do and you that your business? expand pulling about could in So, growth

David Nelms

in and very to the The piece continue to see expect rates have is, defined segment. a in not you a of business, and affected would of we would that further book take result I continue identifiable the gigantic. Yes. it’s actions good and that news it’s slow as growth taken

see it don’t permanently from the regard. to about I continue think am that think standpoint, are not would So, that way. decelerate abandoning in would I I we in any I overly in though rates concerned you question. sub segments expect growth

that time figure and need just constructive to a out back way us to at do work. in I some a go fashion. looking models further a think little look will And of them take at bit to to we

Operator

comes question next Instinet. Carcache Bill Your with from Nomura

open. is line Your

Bill Carcache

have Thank decelerate a you. your Good evening. Mark, rate year-over-year would seen hurricane improvement month. to we there last in delinquency saw we or that benefit underlying an anyway? Was change improvement the

Mark Graf

a say… I seen would have would improvement of way. You bit seasonal a any

Bill Carcache

sorry. year-over-year. mean, I’m I

change… Sorry, sorry, I mean, Mark. year-over-year

Mark Graf

it. you with of again there On change, benefit yes, loans. have to formation exception Okay, personal year-over-year would got slowed rate answer, segment of has in is absent seen do sub I small the that the hurricanes. the the a honest think delinquency

have carving formation modest rate impact, which clear, one that absent here. would definitely hurricane be to out But relatively has was you Just slowed. improvement. we’re us, for And delinquency the seen

Bill Carcache

Okay. and -- this amount And that increased quarter a as the sorry, by that exceeds rate net in rate now X.XX% allow. reserve X.XX% X.X% we’ve of charge-off follow-up, or your card seen greatest to

start deceleration to to we that formations that see particularly driven should So, start the here, we increase rate reserve just about? in talked of that in slow rate DQ

Mark Graf

has that of is has would are looking level is we I growth rate of growth parse underlying increased. happen. I delinquency already up, are way say, what it the about the it, what’s when I think slowed, absolutely looking really rate of off The And to reserves of rate expect in happened, Bill, while charge-offs formation What kind assets. the the

have part you’re level being of we’re with seeing going a the seasoning if is piece assets what there. seasoning going of the through to that higher greatest process driver, that So, of

So, increase you’re growth increased that roll-on reflect quarter-over-quarter-over-quarter. seeing that seeing we’re to that

the ago, So, driver, a X% stronger that it’s as seasoning up driving it’s that. the really into quarters comes curve, just the a not that’s of this couple growth from quarter

Operator

go Morgan. JP Your question ahead. Rick Please comes with from next Shane

Rick Shane

provide curve bit help which when about more XXXX. lag little for be understand to it provision you to would on and Mark, can are loans reserving But when look, think between is, love into loss I’d us that. about not the the conceptually, you and think wanting guidance I a added

that provision year, to throughout help think the how growth XXXX? about loan might into model steady the Given us

Mark Graf

it, I a seasoning of as that impact Rick, element From opposed normalization can. Yes. absolutely to pure

it about the vintage or give you So, curve losses you I take. about vintage, months way normal for tend peaks seasoning think to typically about you XX card originate think a loans, or is, after normal take that a

way about way curve of think about months loss vintage the loan, card that that starts at the think drop very Student shortly zero end really So, at the work. somewhere in about would impact until on out it to seasoning similar pattern; it It’s XX the offs the kick peak to the of then comes a loans three kind it’s and thereafter. of or follow rate loan losses, bell curve the to of loan increases the stabilize portfolio that years a card enough interestingly deferral. out doesn’t just back

out. graduates drops student or So,

period; are out that because biggest six it’s that’s about same deferral curve logical, You deferral it, unemployed And think when months that XX you that ends, in comes with if basically the thereafter. have peak student underemployed. and losses would period taken a kick occurring is when losses a months or

just about process. XX them, kind similar logical tad earlier, a is So, follow XX to peak but Personal pretty it’s out very a think to a bit way loans they again, tend really curve, the maybe similar months to of process. like

larger than the year curve growth, every peak preceded our from you crisis, you’re the think that one has under been as So, of that area the year providing it’s since And the it. about vintage for. of new loan that really credit

the I say like in what correct, that is would not visualize while growing. So, it under the the mathematically crowd area me, it’s [ph] peak of is as curve [indiscernible]

months at one off larger and larger falling You large the replace replace at into have and coming a XX. to vintage that’s XX it

Rick Shane

to little XX. nice a reserve painting starts you’re the because that, XX-month just refine build of in that bit, And around a done front reserving job picture. us You’ve actually month

Mark Graf

in, it begins peak around but as you range before that month That X, XX, climb the somewhere it somewhere is kicks month of XX, X, That’s that in correct. curve. in earnest -- actually

absolute of to XX the XX, somewhere when under the just peak be the be month if have think So, to going between curve of it peak about call losses mathematically, you’re really recognized. month, is going right, that the you bulk and is

Operator

go Fargo. next Your with Don Wells Fandetti question ahead. Please comes from

DonFandetti

capital a David, cycle? why continue the so investors it little this at portfolio returns ask is as clearly drill in bit see point because a in You answering have in just Discover you hard lot good growing down of remarks, this you pulled to competitors Can sometimes that back. just talked bit a stuck, have the much excess have you their question? early and card little but about I a time

David Nelms

say, reward for three years of was it really it’s is the probably than intensity, cash faster growing market now one ago. we would two saw particularly I thing, ago, around peak certainly the one programs. years when And competitive year ago, absolute

expensive. And actually per invested things were getting And so, too at because ago that’s impacted year response that we where cost dropped with year. margin the than our our tighter some of rates year just last even account this a and -- impacted has it also credit some

little as growth. sales year really growth same store kind it’s our a basically, we -- slowed rate was when it bit, almost So, because thing had last were of

looking of some maybe we’re have on. our Competitors that so, features pulled back. new it’s But aggressive with We’ve little a And more period. been consistent, appealing and at so to back consumers. bit

no often specifically the launch, it’s targeting over launches cash little And and had offers, a promotional but of there new just the ago, bit a of back attrition had a feature given those combination. We dramatic some and So, year more top not we bonus. new new lot is product accounts.

Don Fandetti

makes revolvers. hard to peaked your Got in And acquisitions like minus little shifting still data how the more they points sense. of is of And it. -- you saying you it’s a and bit were were one away competition. Do large plus That some then, from see or? kind banks actually on feel quarter this competition business transactors to

David Nelms

going thing in best banking. the still it’s Well,

wouldn’t I over but characterize So, competition. ago. the as robust But, year anything a it it was top

a up noticed can’t up and think been higher else no passed. mean, that really I we a And to by craziness if it’s probably think on be money-losing I properly after frankly definition interchange. decade. over income, you seems understand revolvers why focusing you make rewards and And on I volume. couldn’t interest have It has our competitors the of is going paying that. So, some prime have everyone preposition few has transactors a than strategy

we’re consistent So, pursue to continuing strategy. that

Operator

Your Chris with from comes Please Brendler ahead. Buckingham Research. next go question

Chris Brendler

we evening. how just Mark, walk can helpful. that positive was forward Good Obviously, funding higher market that on the that about loan the could, pencil my could can would through as imagine they’re rate comment those look you continue on. going does you really directionally. talk forward, but directional was How mix I going are if rates I thanks. but I mix? going Hi, help briefly The be us had give great. hoping will funding ready, and NIM and you all the if trend

Mark Graf

Sure.

I but quarter last Full would I by beginning year I as So, or higher on the very XX gave NIM in to expect year this this have not to guidance probably is that year the much. think basis increase fourth defined at year was of I the we points. would you, be, tell year NIM full X.XX. so I think our an I slightly think and

close year reported So, expansion XX that you basis out more modest basis on than but maybe nature, so have some at X.XX year year. XX, last a you’d higher further in the really points full XX,

it. way would think be about it real So, to the

channel, in this deposits in group way growth kind to about up our get done minus we least of which in positioned the is balance plus the but asset is channel. continuing that what has to sheet target be feel asset-sensitivity, good fashion sensitive rate pretty that or to continue and really strong done the an market treasury work the business that is environment that position sensitive X% and put also We

So, the good about feel trajectory NIM. at

Chris Brendler

And that personal loans. related, Okay. on also, the don’t you point? just look I potentially? the size or expect follow-up grow negative it. then, a you to may was of portion have you to it this decided at do loans Did have And personal missed continue portfolio you

Mark Graf

pullback, guess, is really might see on you I grow. slightly overall be point the would expect principally you It’s it a see So, I loans terms balance, than year. time affected we would smaller behind year of us a the But as this points. say, it vintage next book. percentage would very small portion low continue It didn’t will digit the to I this personal at result portfolio to of single provisioning impact. a but is if in We of size in small. did, would

I over in at there economic associated million think is $XX remaining said remarks lives assets prepared is risk those we of them. with the what the probably earlier

Operator

Jefferies. Please next from John Your ahead. with question go Hecht comes

John Hecht

I’m about gross entering where and very that you guess on growth. accelerated both quarter, Yes. looks you can little the year’s as last look you are sort recoveries of see us, at vintage, bit to little are a And about basis, quarter versus bit loss down how nuances well? at have of you this a vintage, you the time, it I I Rick Thanks tell Shane’s the are a fourth net the like look fourth point this latest on come wondering, questions much. starting at of guys how guess, following credit. you vintage the in because content year’s say?

David Nelms

a it closer process. But simply year have successively environment. try kind A say lower I would and card normalized every think than vintage pre-crisis to in we if it curve I’ll peaking just there, getting earlier, in that that seasoning closer still answer is about closer what curve we is, and you and in of vintage and that seen spoke about lot the say, book

about We than but pre-crisis Kind to shrink continues the of if unsustainably every consistent about way it, what you better norm gap low. pre-crisis think we historic think So rates vintages that’s that norms, to are been performing year. said I the the said. loss historic would have that

already things question, response We of continue fees, opportunities put charge to it’s value our the as will earlier lend-centric Margin key leg with on don’t in his think kind that in compounding one earlier season inconsistent to We pushing David that of normalized And expectations. business really stool. the to alluded see a I to model. XX/XX. below the books is be that’s to model;

Expenses, any it’s efficiency lowest produced mean, of got in I [ph] the purpose ratio probably. I margin lot we’ve issuer. think, general don’t a more of the So,

stool, of expenses shape. the I third the is leg pretty So, think in

good growth. think value quality quality leg fourth in years that makes in And ago environment. the back that So is believe sense pullback But on books loan will [ph] in the of do when the that’s see a you right for to growth loan can shareholders, pull our I our it’s quality don’t to on with how DTL few this back pull we growth. compound stool card we we need to year, demonstrates extent the that this the we have, thing put that we

John Hecht

that And second expecting talked up. heard guys we’ve betas everybody is others deposit and question, move commentary through you this about to quarter

just can how duration. focused betas overall of next talk the the I’m issuing the So, you about, might on impact deposits Where you wondering, been have and especially year? tenure that

Mark Graf

Yes.

our focused particularly to maturities. think indeterminate those all be We find of I on deposit the So, we are of stickiest the base.

lot that So, to. I think that’s tend pay an awful of we to essentially area an

in one the the things about and are of move profile. funding products CD profile. at as then, cost out focus look emphasize issuer a to things products think that getting those we funding to the I our the really there the upcoming if solutions because to the to Most and product, around say, And tend product, get most to access retail about you those duration think well of and profile, rate maturities other of the As we aspiration. we the of and tend need that as tend look as brokered curve, some well, would suite bit we stagger we they effective greatest we funding we those stack out given are CD

John Hecht

So, taking months say, now the it consistent ago? was, six what with all is that, duration

Mark Graf

It’s a little longer actually.

Operator

Your next comes ahead. O’Neill. Donat Please with question from Sandler Chris go

Chris Donat

is mentioned balance anyway, might are transfers. XX% I a by the have of amount big It that But your this, was looks sense to are remarks I’m me to portfolio like source the you’ve transfers the your they one could year-on-year. just your amount loan of mix? transfers get done in you’ve of you of trying up been balance how balance growth. quantified wondering prepared know, in Mark, past I -- in if you that

Mark Graf

chosen us actually they mean, that’s new reengage It’s range, way only have general deprioritize senior book them somewhere when I be right look would you with in think get their to guesstimate. would at continue legacy customers not I back also a wallet, to in the be, the a it. think to card in way, good to we look good attract it, customers We that No. about a below. as XX hair to a And the very pretty but handle who’ve them again product. active at on

So, have returns we’ve great on they the us. process disciplined produce to for got around pretty continued and returns that

So, is your good. pretty guesstimate

Chris Donat

wanted brought against don’t opine Ohio a I how then that -- hear maybe rehear the qualify I hope with as going a I ask MX by Mark. Attorney something to David, Supreme [indiscernible], And case the Court you General. little But or it. to on you’ll if forward-looking. -- much then, know And they’re deciding the the

going in pick-up in the you’re not phrased might not by be your would than do discount be actually, only think do this it’s fee -- volume. you’d rate, year? pilots, jump I But that. that used Just if where if in more to you something would hog discount you how obviously would a you think before merchants in steering something I’m like cut whole and environment imagining offset a allowed that about

strategically However you might pricing should your we discount for mean perspective? what steering think from about

David Nelms

there -- change, really what I’m think premature on I an that. We’ll comment would then think we’ll more I speculative. comments after it’s see this. sure is be to have that happens. actual And are if It

Chris Donat

then. patient be I’ll Okay.

David Nelms

Thanks.

Operator

Graseck Stanley. line Morgan of go Your Instructions] [Operator next ahead. Please question comes with Betsy the from

Betsy Graseck

reward here. little you just about mentioned Couple bit higher. the of know year I thinking as is cost, of One we’re half is second follow-ups

and to rewards us I but about are out what where the of feel current that’s a your your Could forward? thinking offering, rewards you’re in of lifecycle a us competitive seasonal you some you sense the going thinking a that of as we’ve how also to think you little give bit you sense rewards. a give there in you’re pattern, as dynamics seen pullback around have

Mark Graf

comment, the to will of thinking, directly lifecycle I’ll what seeing. let kind speak David what we’re but we’re I speak to I’ll the

see $X,XXX to level very throughout we course it’s months. a max third year the with we three in a high feature rotating pretty the was we of in restaurants chose to that terms easy the particularly spending Whenever run quarter because X% of in So, to of category. choose out Betsy, that quarter attractive category, that quarter. over to restaurants, engagement tend

So, driver what that would you of be that quarter. the saw in

tends you really got the quarter as you’ve what typically We year. quarter, big of more that Amazon in is to costly than principally the promotion This also be tend the around season. do half to seen is the what a fourth would driver. have holiday It first

around coming where not engagement been certainly a the about our these we we’re XXX any in getting in that guidance. at while; now, arms level good losing line programs I say, pretty am seeing in. XXX with sleep would right we’ve think based running of I whatsoever going generally to on for we’re come So, we’re

David Nelms

going as And still some be Betsy, of to a there I we customers Discover continue ago. year mix really higher We would a will the upward say discipline customers that in discover more forward portfolio. versus it while kept have bias our

are seeing and the the as comes so, you bit And category, if better with stayed away. what is, the and competitive the a slowed of results some in this are the seeing less benefit stuff just intensity attrition we we crazy marketing course

points terms guess and basis we’re below a or of -- my more cost. competitors cash in XX number of probably absolute Our back is,

place feel to revenue a we’re able I and we’re to the sustainable happy that drive and so, stay And just be it’s course. very

Betsy Graseck

forward outlined is quarter us the the you in sense you EPS to XQ. a going EPS? if ongoing no-go And decision? but your Okay. about fourth to benefit separately, give to what’s then, the to press know what then, potential I as refi mentioned the go, And that the in benefit, just to as speak the you you well? just Could could Mark, drive healthy

Mark Graf

Yes.

up issue; Betsy at windows. and the something event we conditions obviously in time, be EPS market rate the able end I closing that coupon having corporate benefit at go, last an on a news I don’t What say, we the would XXX have open pure this least I point just also in full us in can window, decision something to didn’t drive of would would the basis, run not type saw cause or or some would basis to what say show would points a coupon. of So, impacts. just where front corporate would me I numbers have no-go

So, benefit. a pickup in significant pretty it’s

existing to X, on call first The December us is that the have pref. available we date

doing Bloomberg And first. so, obviously and on if and you a studying keep it we it something, your up eyes end we’re there intensely, will see

Operator

Your next ahead. Moshe question Credit comes from Orenbuch go Please Suisse. with

Moshe Orenbuch

growth bit you coming tax from I you piece, the talk how kind couple it customers Great, a much of kind to loan mentioned would ago of provide? business. about it mean the details mean, the promotional willing a rate existing any and thanks. questions little As has about the other is be of new you I primarily in drove Could card customer? the of been

Mark Graf

Moshe. some concrete data would perspective you say things. one, on my I couple of that from give different pretty I’ll

coming between, is on us about book wallet also product you the on and that could call legacy XX-XX the It back somewhere bouncing of from fashion. customers continue the -- tells the about quarter, customer tells from XX-XX, engaging We new -- are choosing to perfect, the is to it board value it the and customers that me new and seeing Discover if legacy customer like the top back with sounds offering, just up book. always end XX-XX there. This that XX-XX; view it’s that we keep

will because they but customers important die. will. So critically Not existing morose, sound those our run, of the in are to both long

have to customers, because new get the you door have So, revolving have attract legacy you customers new you problem. customers. a just trying your token, a to the By if same disengage,

good really health of the categories spend, there. the around for feel So, by merchandise the volume time growth standard was driver far the biggest Moshe. would say way this about both I

a piece. promos yes, more book, actually is even bit used aggressively there are little a big So, back promos it. but the merch We’ve piece standard spend stimulate of to

Moshe Orenbuch

I where you detail kind in customers brought of -- Discover -- channel? -- couple is where since distinguish personal guess But, of of the a single-digit they other percentage. acquire I know, these a one large attention… the just about in Got loan credit are for there industry, more little your that what Follow-up, maybe out that small portfolios particular decide it. the spectrum they responsible a at end it’s or to the them What particularly

Mark Graf

Yes.

You think a that. sold for We quiet want got was so to we market was really highlight I this? little don’t said broad the we cross see what channel notion reasons. cross that it market, is, channel, on competitive where a wasn’t It a to it be exactly have bit say these we specifically folks.

we today, that out think, The tag I one it other said somebody taken already so have is highlight the had of loan. specific but it seen, underperformances the I call said, would was think, there we a where we’ve on factor, another not quarter, again, personal I we earlier mentioned in thing,

So would characteristic [multiple be one that one speakers] piece. was

say reasons, certainly largely think issues this. want the And competitive overall we we this in darn I saying, it didn’t percentages, ring you But if Again, the give said did, to the it affected comfort of and we size and book have low it here I book. have pretty I we exactly Beyond the we but is it size, earlier would would was think that’s that, be digit behind small. don’t think, for this fenced. single and I us

Operator

of Bruce Please Merrill of Your comes with America the Lynch. go question line Bank next from Ken ahead.

Ken Bruce

to discussion competitively intense. I there has guess, a question little My becoming lot relates been market a first the question back pulling and less folks growth. around of

always what of is the of above any in the just end cut most the change lower prime You kind today? and kind of perplexes the by like the this revolving large of it’s I’m well this still market look the of If credit there around and growing been, of at maybe composition looks the what kind really industry reengagement exactly prime growth back where is is of least borrowers, from. if has the to are is. coming little issuers

David Nelms

the No. issuers total top It’s represent fairly, the a percentage mean I six high a business. of

-- to industry close I you’re to average together, the say them average. So, would you pretty get going

to I’d slowed were offers was marketing of So, people And the there But, lot some out was. ago, bigger to few from a year there how where think a seen frankly, I leading have shifting the say, more one we’ve another. down their and that people crazy probably issuer what growth. marketing is much change

maybe more between and it game zero people moving little So, of where were balances paying a sum was rewards them. bit just

year we And mail level the internet bidding year so, ago, particularly the And on versus the I in what segment, think back terms the the that it’s at direct which well segment. sub-prime if we’re they’ve for I in not offers. people think cash from offers of this the some marketing are, come down were actually volumes, in And back admitted two and greatest some too reductions new headlines have had probably seen the account also that have pulled rich. that then, you’ve some look publicized

is us, Costco, both a things One there the relationship you club had going happened of people ago And it -- lot a in that space. year particularly first Visa exclusive. lot was relationship fighting that were on Club at the the of warehouse losing the Sam’s that who were that And that at impacted accepted fighting were was gaining people hard; and because one wasn’t point the were hard. for time.

abated of kind that for of slowed, us to it market less our It’s those effective easier and have the some makes probably to the that relative is us. that more there kept market has market headwinds is helps. up actually not has but the others. for So, And grow, and shifting

Mark Graf

last Yes, for credit end year. criteria the we cards at our tightened actually of

So, down last year. we’re we than were tighter actually box a upgrading

Ken Bruce

we why I I to appear where than is That’s the to follow as comment out everybody as would bit understand And hear others growing to is saw. you basic the little that point, growers it’s relate little Right. well. layering curious I -- a up profile but as it is, from question why David’s a tenet today that’s faster around guess -- loan there. slow personal there the My high risk couple of follow-up average

us you You quarters late kind the of there you that whether in card that’s is this give business maybe on delinquencies, Can can referenced any just a sense think credit step and of your with the stage to higher ago levels as back something broadly indebtedness. consumer leverage parts seen occurring? more increase you’ve or whether of own see couple of similar you

Mark Graf

I spectrum think the in the leverage increase is across really consumer broadly.

you think one, at the it we And look was then levels at to a card But consumer think out product showing when indebtedness was. coming indexing what of it of by at basically took levels crisis of play. there. I and Fed today. kind like X.XX. those are it’s exactly exactly in was number I point about study space a out space, But if think most the where don’t prime don’t sub-prime to in prominent revolver it say to where really I know it the

think driver accounts close expresses and of incidence federal that of our of a I student I number the personal it’s is drivers were of account board, autos, number increase portfolio loans look rates we our loans the the that balances. think principal But to when in leverage. at the -- across number

severities rates near indebted What is in go the increases incidence a because and does We losses. see they’re are book. meaningful bad, movements Our to customer don’t when therefore really there. delinquencies across darn higher we’re flat more seeing

would consumers the be to carrying meaningfully, time have levers more given below pre-crisis. The arms has that default they seen But, think are of going ratios, haven’t they arithmetic now, consumers that are be largely leverage. would rate it the income So, better changed don’t changed much. the up to the about still are And default bombs. a loss probabilities is way levels exploding have in fixed the really shape more maybe the as The to just debt ticking built you far product. have it’s

is the while feels feels, it healthier. there, it leverage So,

David Nelms

seeing were and thing very out high flattened last growth really this perspective would from ago, auto that’s year loans from in to industry we rates year. year is I add The a

several on outstanding Credit seeing the this flattened grown cards have has student rapid have rapidly chasing card particular. lines quite levels, We year, and that been seen a flat, very in much federal growth loans on credit but loans out. were But of and really some have digit years credit that card hadn’t cumulative single as loans, years industry. been couple we of for people of transactors for those total

kind of of on And both all it’s those that a some show then year and recovery years flattened out. for some couple was so, really think supply things this I after and of there releveraging, a demand recovery

Ken Bruce

Thank your comments. you for

Mark Graf

we Bruce, wrap are ready to

Operator

There are no further questions time. this at

David Nelms

Hey, and for questions interest, of up for thanks your we course, that follow Good available everybody have. your are night. Thanks. you any

Operator

This concludes today’s conference call.

may You disconnect. now

Discover Financial Services (DFS) 24 Oct 172017 Q3 Earnings call transcript