DFS - Earnings call transcript Q4 2017 | Discover Financial Services

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Operator

Good afternoon. My name is Mike and I will be your conference operator today. At this time I would like to welcome everyone to the Q4 2017 Discover Financial Services 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 you. Thank turn now over Craig to I the Streem. will call

your You conference. begin may

Craig Streem

Mike, to earnings Welcome I much. Relations Financial thank very you our of everybody can in on Investor two Information section you investorrelations.discover.com. will slide this of which our presentation, website, find the begin call. afternoons

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

you so participants accommodate to will through question you presentation. possible. developments completes then many take for that Mark and we’d have of that Nelms, a Our yourselves our time Chief comments, as Q&A covering one of and time highlights Officer Chairman rest include and will will follow-up, After ask David as we course today remarks from the Officer one Mark session Graf, during call quarter and Chief fourth and can his we Executive the limit Financial earnings our

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

David Nelms

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

accomplishments, and XXXX the comment of I’d into legislation. on our my results I full recently review get enacted like Before year tax to

in business. people fourth also make While did am which incremental and the benefit believe law in community Mark that in will I new to have truly business, we our the later to will stimulate the growth Discover’s I and do negative our discuss excited about clear the impact quarter results, our on earnings future ability a the consumers XXXX, benefit tend will which Discover. and legislation investments economic to which on,

of slide equity of of these the and economy strength our accelerated customers, EPS more from own resulting on charges, the in growth was disciplined number delivered to our ability a Adjusting to XXXX, which was turn primarily let’s the three we XXXX our key items year results tax new earnings Now per credit. into $X.XX full in-line specifically from in share and to XXXX Benefiting a one-time we get for revenue ongoing included and related passage faster return expectations. with to review $X.XX approach attractive accomplishments. of In a our on which XX%, legislation. and of loan deliver and products to growth

bit while Our have about more some parameters I’ll risk growth made volume well was growth but core portfolio the credit operating meaningful card expenses. and the loan continued point PULSE, our incremental remain In contributed revenue, profit technology in drive newer the which and outlook favorable. in XXXX. year-over-year talk as PULSE, consumers’ all In loss was from up and services a risen, trends volume pleased within Partners before X% make businesses people, important and segment Club expenses, rates addition impactful drove resulting a in investments of growth remains healthy that In reducing issuers franchises increase business well I’m for operating Network adjusted for economic sale Shifting come driven expenses. Diners, tax. a in to marketing payment to of we our increases increase merchant Diners return and volume our later. new and to to in growth to as decisions, XXXX and contributions our continued by to acquired of and and existing our and in from in issuers. new primarily routing capabilities, XX%

ratio. efficient In our efficiency X% strategy than operating a grew XX%. banking revenue class in was direct model, produces resulting ratio faster an expenses, XXXX Our in and best we efficiency

in XXX% of resulting capital Finally we dividends bringing returned the of $X.X targets. closer billion in share ratio us our form and and the repurchases, payout shareholders to to

balanced originated of to business and now other generating increased student billion maintaining mix in card to by lenders, private billion, achieved this of student $XX of four, the on originator XXXX, we business the largest the loans these in another XX% the customers. student year, total faster X% more prime rewards credit. With second to large we The in results than with continuing and $X.X new growth loans from existing believe the and loan We slide year. record pricing, loans come from Moving a discipline accounts XX% focus up in country. new prior are continues loan growth. to revolvers and growth than XXXX Card

manage generating an part focusing families providing designed on offering, expand helpful their to while to collegecovered.com loan loans website market, the looking with making it. students Personal product and help for how important for our tool finances. debt early for college customers We remain of prepare a strong returns about pay continue consolidate and to decisions the and awareness our to student presence in their

we slow. several growth in some the quarters, curtail will and As expect we discussed continue that last taken growth segments the in loans have actions we personal have rate to to

loans. remained Our profitable strategy will on focused quality originating

rising full the increasing was supply X.X% of loss One pursue We net low levels XXXX simply the year. charge severities. years Consumer demand not historic contributing and lenders service debt behaving from still consumers for larger rates, debt lows, rates are several have The credit generally customer for re-leveraging growth. of to of while responsibly. when sake contributed off After in credit will burdens higher charge growth rising rose borrowers from off factor the to are historically both reaching higher consumers still greater near are defaults. and a creditors levels while and losses for

The other factor is in charge net rising offs the playing a of role growth. seasoning

upwards the while offs net In fact vantage which reaches been preceding as on also the charge vintage each pressures us, peak new since each revenue crises larger than has driving puts growth vintage for losses.

vintages with revolver in course Of disciplined performing. prime the segment are how and unchanged are commitment those our growth we profitable remains quite to comfortable

tax people As to not us further enhances it build the only current our value but growth, our also think reform, shareholder about affords in community. and investing we incremental by profitability, the opportunity

they we starting recognize $XXXX service U.S. in first role people. will the full critical All hourly this bonus non-executive received to in Further investment made we deliver The one our for time, XX,XXX wage exceptional $XX.XX to to time employees. customers. based be employees, increasing was over our a play people, time all year, later full

now momentum conditions incremental our favorable our detail. discuss results shareholders consistent term drive on growth and our from strong these In to continue investments portfolio people. and expect and financial initiatives Mark ask customer, the our economic growth focus across loan in in summary, to revenue strong long the in will more profitability. We businesses I’ll and our benefit

Mark Graf

of addressing $X.XX for begin the passage one-time everyone. results today related financial evening the $X.XX earnings Earlier of primarily to a full per legislation. for for good charges, and slide I’ll we was and year. of Dave summary the quarter, five. Thanks Adjusted by items new the these including our EPS $X.XX reported on quarter share for number tax

was XX% than higher Our year’s adjusted fourth comparable quarter EPS period. nearly last

industry, largely growth the by elements fourth credit new a in seasoning unusually loan quarter driven our Operating XX% normalization investments as in income expansion. consistent support rose with the supply the of year-over-year well driven several low of ongoing The growth capabilities, of fourth revenue as increase key and at combination as was level by primarily growth. in last the to and provision an of XX% consumer growth expenses our Looking in of margin expenses strong loan quarter years statement, to last driven the year. is well

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

down also about We primary the last a Personal XXXX strong of in certain quarters. result segments in our XX% peak that standards underwriting of lending several talked quarter the the other the loans achieved from XX% of loan products. in we tightening second increased year, the prior as of for growth from in

coming with quarters performance in continue We organic aggregate, rose Private these but personal loan will a expect in growth strong loan XXXX to student of slow increased balances portfolio that result XX% season. year-over-year peak X% as our during changes.

on growth PULSE from Moving volume network, that the in prior increase our our prior rose slide year. strength Discover results X% Club volume accounts. In can right-hand XX% volume continued XX% volume to side from Diners see of to by year Payment newer segment, with proprietary an higher the compared you the driven on year-over-year, Services active six, primarily payments the rose increases card from franchises. to

feature in Discover market by result this or in compared to XX% of greater rewards our and sales sales rates processing a adjust category rate the of a we card for interest $XXX number balance up changes due X% from XXXX. ago, positioning. of Moving number to days, non-interest a volume and opted slightly processing seven, volume showed balances, in million X% closer revenue slide increased growth year a have on to Total X%. been quarter, quarter. this growth net to the when income of income would resulting as rotating loan million increased driven XXXX $XX a year the to was to days sales combination fourth lower we sheet higher part If card from

first impact We expect quarter the the XXXX. reverse of see to in

Higher of higher, higher an increase in prior to quarter, interest sequentially eight, the higher loan XX a charge ending was promotional basis on the net debt long XX term loan and parts interest term driven tighter point increase in XX.XX%. by rose basis yields year higher As last third XX.XX% to XX yield fourth short points margin quarter of portfolio rate partially loan a points card increases, points by by yields. and card new shift credit in the by the prime in a a of in deposit the ago balances impact to interest and debt basis rates. rate margin drove Total offset drove our a higher. offset drove balances term XX Prime shown higher spreads year promotional yield. year spreads tighter Relative offs. private offs loan basis offs were and and charge student towards and in Relative on student increased credit on increase rates at and offset long yields quarter from slide charge increase the yield from mix higher flat refinanced

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

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

as the and as higher and net XX. continued result now as costs as increased higher growth, prior nine, eligible were machine technologies. basis results and slide tax Total by mentioned a well business average Employee were headcount offs adjustments compensation benefits was rose of also one-time compensation from capabilities, the prior brand Professional XX higher David advertising. invest analytics points million higher a reflect $XXX mobile policies. in Turning changes certain in I’ll learning salaries expenses Marketing sequentially. rose points low year level. driven year’s granted million to to per cost to the ago, of support higher charge discuss and to credit bonus to $XX and basis higher unusually the fees employees slide and acquisition from operating we on digital advanced primarily moment expenses XX

provided For in rate was the total charge is second full X.X%, the year, low quarter which the call. end guidance we net the off of

Credit of for we’ve the in years from net basis quarters, been along have Personal about and sequentially. normalization year-over-year basis loan XX charge-offs the the student points seasoning fell XX talked from offs. prior rose rose charge-offs basis the few prior points charge-offs points sequentially. the card in points several As year-over-year drivers basis of growth quarter. year-over-year primary it XX loan year, basis with basis the points XX Private last increased credit points net driven and past net X and supply increase charge loan the XX

the identified and personal not told $XX we those last up indicated to we to build. Last you over $XX reflected line were of amount million of several As in quarter fourth took book remaining quarter, segment market expected this performing and broad curtail actions exposures quarter, the that we lives the that in these we incremental loans reserved is million loan of in originations. with expectations

all our In back addition, fourth XX-day delinquency segments. with net you quarter. impact of originations the is by see were rate products. also off lending rates the in pulling net through the charge effect rate associated to flow up off across the begin the primary effected loan impacted The in denominator can personal on sequentially charge

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

XX, products. equity loan basis of shareholders total ratio up returned significant quarter share sequentially we primary balances all with capital capital three of points X we XX to slide a stock on Tier generated declined X% at lending contribution common from as Looking grew common To the $XXX sum on our dividends XX, loan slide and repurchases. and through our growth million

growth credit, Our growth loan rates below consumer deposit XX respect basis increased and With charge to of leading the plan to on business historical our loan payout norms to while credit in strong we while XX%, have with and levels. continuing our they well conditions rates closer to posted return ratio target capital ratio and within as normalized equally risen our season, bring off points. helping strong remain our are targets capital execute deposit

fueled growth and operating XX% profitable disciplined before ongoing normalization. X% credit despite increase in revenue strong growth with to commitment tax performance Our profit a

they in loan now due were growth. In X% though investments XX. the this that timing see established a to disciplined growth quarter opportunities to slide technology. to range continue We’ve target well to and managed X% of addition, XXXX on expenses remain of I’ll move elevated loan guidance on based driving growth profitable we

As in actions loan in personal result we’ve the continued of we’ve will growth business. the discussed, deceleration taken

range In contributions require greater of from investments overall the our operating $X.X and expenses digital and from well to order next $X of that year to growth, will to this achieving mobile business, the to XX% of in reflects other a in and growth investments the be quarters higher billion to allocated marketing level So in support of card in and capabilities, target in relatively of support as billion initiatives year. our loan advanced our we the loans. expenses remainder analytics expect savings will communities. the both of expenses XX% levels and student reform. people with machine three learning growth year reinvested to as technologies. be This base continuing one to Roughly incremental amount Planned for operating reinvestment spur include tax

points this between in and customer come categories to rate improvements year some enhanced XXX rotating making rewards are for the of We’ve further the also the to and expect X% XXXX. experience. We we XXX basis

choose it platform, remains we plateau Discover the from In Discover as mix did accounts product towards rate. benefits higher continue rewards our however, last reform. how It to portfolio may all addition, the the originate which space to year; of to in seen to the of Competition has new average shift slightly peers seem be a tax rewards will the It invest

due timing for is XXXX. and from in the to the increase expansion quarter result we expecting reflected Further not into forecast. alone XXXX. market and that between on expansion due expect fourth also the rate based built in increase we Moving to December prime fully XX.X% The of to last and XX.X% for it our sensitive in result margin, would should NIM that NIM are to and in results year asset implied couple full interest outlook more net a year position currently the increase sheet balance we be rate

modestly provided environment the offsetting benefit charge the deposit be higher offs. rate Somewhat higher betas will by interest and

of this year as a of as to supply growing normalization, charge in expect X.XX% seasoning of total continued driven range well rate be to a a as credit result portfolio. net We the off X% the

Let overall constructive. remains that me environment reiterate credit the consumer

looking in our formal as XXXX a are expect to performance drop and momentum will tax our result cuts conclusion, we a XX%. jobs XXXX. tax forward in pleased of effective and significant act. we our rate concludes In Finally, expect with remarks. continued are that rate tax the our be approximately XXXX we in That effective In

[Operator open call line the turn to Q&A. Instructions]. to our the operator back I’ll now for So Mike

compile We to will the moment pause for Q&A roster. a

first from JMP Securities. Scharf David question from is Your

David Scharf

very question. pulling Hi, outlook since the taking the to first for commentary in that anything loan and good last personal the I’m as back my leading profile student afternoon. more card loan of quarter’s of patterns and other passed – I growth your want Listen on and Thanks of three for growth, having serves just is with months wondering, your for you one payment credit see benefit is, the borrower often remains in and personal guidance products? obviously loan other indicator any kind robust there

Mark Graf

debt are of credit to amount lot compared a We supply. loan performance Many incidence has business, a in product higher more across do growth the of the on we are offer operationally has fin lending a this credit we it’s business a only where that cases product card loans to part see business because are that we but and some loans levels focused over-supply and card think the maybe out Yes. the of impact peoples there student with reflecting are our there the what we may personal and also tax or credit in fair in personal in that that easier in in more think to personable so been seeing loan, of an easiest much not board. our and

on a effect, they demand people competitor a phenomenon end supply out not up scores it because get change there or picks then years reduce So and big our indebted but product. of fully average are to even loan same type with really a number consumer, this fairly balance, with when their from not been balance it’s we FICO sure because take maybe sometimes a a and a FICO has of the income a and consolidation up more that loan in new higher from original of

David Nelms

to So David, that over I disciplined reflect few on we think broadly. we loan might have expect managing I It taken consistently will insolated and just slower the wasn’t a it years are are personal the seeing to segments I tag continue think said think of to book in at we are commentary. grow do I discipline. where be were the really we’ve telegraphing few the It is number portfolio, loan we product you can personal challenging a a noting a end right. highlights segments, and day that domination is what global and actions prudently. we by more is we We’ve be that our pretty rate at disconnect were in and this albeit that attempting of They it the it a this

Mark Graf

not is even some to us in the players that making just more a the who attractive money it’s I which to out of very one in very profitable part would cycle. of comment. just contrast point are And other

that took of pleased we performance X% saw the just we of mentioned we on. unacceptable portfolio and overall, segment about we action really are one as So it’s

David Scharf

quick on helpful, side. and that’s Okay, follow-up the rewards just a maybe

see. plateauing whether a still something if be rate the wait the for it seen curious, course in bit that unknown over or the whether this saving tax year to have just guidance and do and is towards again. the competitors the rewards itself we’ll to reverse cushion highlighted not like decided saw the have in little that a potentiality you some an year some You I’m that may last deploy wars act might to that’s rewards still built we of or of of you just feel remains

Mark Graf

the no is David. year on there give there in the best in a it time of to that be at we and Now give as cushion we our business try reflects going this kind built what expect represented. guidance We and

David Scharf

Got it, thanks very much.

Mark Graf

You bet.

Operator

Sakhrani with Sanjay from is KBW. question next The

Sanjay Sakhrani

charge could Mark, to talk a just the likely year just gets for the provision the the off as a higher of also sort question lot – reserves you through expenses some guidance, you impacts Could about the year’s adequacy of this I is think is a appreciate how this it growth the on the the at sort should charge your the of talk that time. there expectations? XXXX. And range but of charge end? to then versus end as off and in year offs kick rate of we relates obviously the Thanks. lower map we into move expense you Is just about provision range? for about on what built rate, expectation buffer next

Mark Graf

lot there on miss it I’ll is a back try in all, come and I at me. anything touch if There Sanjay,

right that guidance just on now, we on first the rewards in I David possibly comment would I I similar the a give buffer thing is made give try best can. and when guidance range. of mean range the to The to say I we would there touch we

move there no business charge I if we of basis our points increase built we off that reflects think that, XX this there land year. expectations that would our in XX, point in in forward. So will is the rate as think best out buffer about saw we of you where

the high increase of similar range hit If we in right a you’d that to have you very end see in charge a at take look offs guidance are giving now, the to XXXX.

that should over how is is think perform think on So likely probably the element to of an we reflect that there year. course the I the business of

would the what circumspect I of to Sanjay answer one couple provisions, a unfortunately. be is about we In guidance terms provision, more provide I say to think around I different about don’t guess so really have things. thinking I on that of

First very adjusted say, manage the a of focus. return all would I through credit with much we cycle risk

who the So that for amount could are we pretty will the probably will how would a extend, to acquisition of significant money arbitrary charge how to target, much going but an on it governs costs off risk? leave extend, credit We really we level, table. the price manage

if way So month the that it the provisioning, time. we about think sheet losses expect transitioning over of that the are the about to we today, to think recognize in that balance is on XX period the coming

So personal one piece in personal to, sub bit little think comments I help we we of of through guidance a on loan we said loan, took We you of that is can rate segments said speak in maybe expected our million right. did the book. give exposure reserve my right. we $XX the Last associated specifically reflected was comments $XX million with quarter in it the of incremental said quarter, that, we that this

incremental where we further to So today. million of that imply coming to that the months, the recognize exposure million listener from course of right the of we should sit expect $XX $XX that XX over

out $XX million So that additional is piece still there.

looking content the we are sheet. So on balance loss at

we in with in all reserves for levels. with coming respects see in we at conformity their very XX are and the GAAP are and we coming comfortable adequate months current what We us feel are reserving our

Sanjay Sakhrani

Okay.

are rate just NIM a are end low you you of the with and your range, NIM, that at of are range that the reconcile hikes and you mentioned couple sensitive. quarter you in have asset On given? the guidance Could guys expecting here you the you sitting fourth

Mark Graf

quarter the in get card repricing so here that as we until prime don’t after really next would accounts date their doesn’t the reflect because I Sure move. of December, you impact now, sit right move Sanjay cycle the fourth the say rate

benefit of you rate really the increase will in December quarter year. this So the first of see the

The to to than asset were would say continue The I gave at last deposit bit a other zero increases be the year different I be sensitive, this continue we little one or last that’s thing is to that it. we will to benefit close expect guidance rate believe betas us. thing year is time time further exactly positioned

cumulative here sit on now As the something is XX, – XX we today, that. product savings beta I at the like XX think

little betas chew into a So deposit bit. will that

probably margin So see point a the you seven eight or I get expansion from would that of would basis expect fed. XX we about associated movement as basis with I of rubric, think points every

Our slightly other higher to well. we higher is interest obviously see impact as offs, charge of see we accrued as will that charge offs slightly

getting will or that So also down that to that seven to bps. eight muting contribute effect us

Sanjay Sakhrani

you. it, Got thank

Mark Graf

Absolutely.

Operator

Your Nomura. Carcache from next is from question Bill

open. is line Your

Bill Carcache

to sideways. They and trajectory downward of Could bias of here recall Thank up They inflect the know and bottom we (b) the you. today, change Good around. And they they you you year-over-year guess months. zero on in during be was where to I I overall then continuing the you a from the a be forward there of on customers we the thinking? up that kind equal? a downward you that are those I the trajectory hovering may using else prime some in right. serve that evening. rates know environment would little move all the kind as the Mark are up you should we seem bit, wonder periodically Is fact if, rates you comment along are term, delinquency but look give to into certainly not bumping when kind near you we look know at near healthy year-over-year (a) change years, macro the year-over-year bounce how of go change know, the actually in delinquency

Mark Graf

have hit in range for of offs, order this we’d for right. increase a I I very [inaudible] pointed [ph] miss say guess if Grab to lot Yeah, know is there ago I you the to me us that guess guidance the to obviously sort that in match delinquencies is, Sanjay Bill response of end would charge charge a out of what saw second our offs, and a upper there. I embedded in it. are we year any I

do trajectory So come a I the of a think little consumer we reasonable flatting a that in bit to there. could person see

that seasonally saw moderated, reflected level was bill despite in fourth our the this you growth high fourth right. delinquencies last think right. I quarter in of as lower The reserve the reserve versus quarter fourth in bill quarter balances

is So I from you What that is would is say know I that reasonable that time. to now. time change think can something

estimates day to and the segment, period right delinquency about Watch down watch the to return just So of flat the looking or if know not a credit trends you know then you at macro trends. always time, you a personal trends react of incidents a implies the so end if flat, of there. a we you’re encourage loans again always incidence if and very lots estimates time. over product product in reacting loan know about also point are for think are our delinquency year student factors. portfolio, you I people, point that pull of degree economic stability really just rates through there’s card Don’t ask rates in out in

Bill Carcache

be and should that building is from growing trajectory comments base you reasonable your and ’XX forward off all larger we the a it that fact in we’re in to else given XXXX, Mark build as that expect equal the XXXX will So know lower reserve than that look here? of continue reserve

Mark Graf

one We don’t I to so you on got apologies. on with Bill, disappoint that provision guide

can’t I trajectory. this comment So on

your with one. you the have come put say pieces that assessment, up sorry think but I and to on I can together

Bill Carcache

can perhaps we pressure your fall can guidance. the to ratio, forward exerted And rate revenues think on Maybe there’s my to could on and whether the I understood. have? it, efficiency see how of on know just rate benefits? know than NIM in that environment downward lot about last the with we you below just looked up do questions You on operating the follow NIM your guidance, leaf some expenses it have curve in the its in like rate see I got skill You leverage your hikes thanks. grow expect faster and should the perhaps a we where you rising point That’s Okay, XX%. implicit can clarify you implicit

Mark Graf

rate August, of wouldn’t hike there’s impact if materialize. outlook, increase were that hikes, obviously indeed really and forward three to in it working the December off ’XX Yeah, we’re curve December April, the

earlier more So in our mentioned cadence. I of we of that’s have couple kind a hikes why

we’ve As improvement basis on a you far growth. rather and basis, meaningful know a or X% a some some with is odd odd X% growth as points X% you you leverage XXX and we XXX seen the X%, our efficiency leverage know pushing and pretty year-over-year positive concerned last towards operating year know, question deliver and this expense operating in revenue ratio over

credit in embedded leverage happy the continue revenue do great the about good managing and model to and very diligently current feel to so. focus we the the see driving to environment we opportunities in are on with expenses So extent the growth

Bill Carcache

That’s great Mark. just… If I could

Craig Streem

can Bill, chance everybody a gets Bill, on. and sure Bill, we follow-up let’s make later

Operator

question is from Goldman Sachs. Your next Ryan Nash from

Ryan Nash

competed be evening he thought quick. Good you it reform, I’ll we was would away tax how quickly. competitor about night he guys. know I a had on make talking David, very last who wondering was

interested your credit or and tighten guys then up in open can should have are related a XX% industry the in go vary. It know I’m guess going follow-up. think across about box then to Obviously this better lead steps the and growth happen that, reinvesting to could the to the talked I this underwriting I view you you XX% unless business to competitively. will taking you what you on So

David Nelms

our would our Well rates would I to know hurdle you industry at other think I so lower accounts growth that that’s that of have profitable, dropped market too would having whatever the some expect just growth been, certainly increased the would in be we our into you marketing case we all think the now missed and marginal because at that that in look – some models those market that would just make to and way means above rate have meet are issuers and that some, we find faster least returns there’d sense, it, for tax as further the that that I know it same us.

plus away, it just that a would away, all been think of I will years of big bunch services said get a competed profits be reasonable the industry It’s than it’s change. was top that I it likely be because better for the I be if of returns of differentiated, it to change. you financial away. a know, mean for that’s very and I tends be this well, temporary think or things a away have anything some all we’re if we’re and on competed return I for mean I you would would there’s a view return has XX% quickly. of competed you you as but terms you were to think averaging look we’ve In and so excess whether brand, know sustainable competed be what other happen reasons. that and been, not equity a if the not industry, lot to parts not a theorist personally at even our

we’re So going post disciplined card. just I stay to think

post card You know act. there’s one discipline more

need that drive competitors parts well. so of aren’t Some of their to business cover doing these to higher other returns

know like I the a So to going in – be least think near opportunity just for it’s you we it’s term feel big at us.

Ryan Nash

it to your mass. have but pre-provisioning of by which version has and job that had you guys Like has eroded a so obviously in own been significant Mark, have if great loans, Got growth, one provisions. led you’ve you of follow-up. growth substantially growing could I higher all done know

vintages. hard it, at the you of looking profitability for outside to know newer from it’s these the us So see

we and Thanks. side this need to do happen. earnings expect will see we that acceleration provisions So the begin what level do of to that to see for on you once off other an

Mark Graf

it what we changed do. to our so a market one competitive consistently willing Yeah, after we we’re would couple isn’t will to intensely any right and in do, the we’ve have that has of day I well, really pretty I at others have I’d I way and Number what and go acceleration talked rubric to things mean of how say defined been for growth, end willing right. have much point that really this It’s that our different how think the about very isn’t model – been Ryan, there. and more a a the to reaction we

a a on the through period for back prime go few willing ago, model. acquisition time industry number to at years were folks our growth you cost wouldn’t rate So card below just our a of work when that was pay receivables of channels

we place lot So see in willing folks our because hurdles as chase things we same of a regard was hurdles back meeting are growth that what growth who weren’t them. meeting pull now previously, we you not hurdles. we and return return had that slow see back would so you know because Today we those decided to slower return know had in met didn’t you that our to growth just to meet

So think profitability approach you we we these discipline the we things I and see meet our when prove back. know underlies don’t things why that’s way model, I we there’s think a that them pull

You a not card point and I earlier the we where know the result they didn’t where talked meeting I where meet return didn’t that segments our about acquisition costs not is we know as to, hurdles. to would meeting loans would return are that you point space chase student and credits

know we’re instances think way of buyback got looking risk on in you return on program demonstrated premium I inside the applying in We five couple to discipline the the a those our want years. of grow for to I strategy a exceed for acquisition them the the think So the decisioning investments returns break we’ve and sense we’re or plus and you even here we strategy.

is So you and pretty a should high governs of strong degree I meaningful that got that think give I criteria think we’ve pretty that, comfort.

David Nelms

point positive been growth very you in the over provision quarter out just EPS last fourth our just one reported headwind while XX in has and adjusted results have is during that the this an leverage on even the thing And a strong the basis I meant an the revenue that have that normalization. has operating months, add growth would a right we XX% to

strong. I So think that’s

Ryan Nash

taking questions. Got it. Thanks for my

Mark Graf

Thanks Ryan.

Operator

is next Suisse. Orenbuch from question Moshe with Your Credit

Moshe Orenbuch

Great, thanks.

Mark Graf

Hey Moshe.

Moshe Orenbuch

were a maybe kind reserving. describe these on to but think to and forecast, you How you effect about hole would follow-up to about effects, of no tax law expect how of a result Not as if the pigeon Mark? you you changes just are in the that come quick the that on So you into other economy the improvement reserve? a trying

Mark Graf

but the consumer I we’re say would we of now say in out not see upside negative figure real yet have to could whether processing any pressed know would the to it in modeling of on the quite still I there borrower, we’re produce our factored provided. don’t on the we in So that is as the major things, expectations right we how and improvement through part hard guidance there.

Moshe Orenbuch

spending about now see you that you consistent to healthy mean kind see of its and – traditional started forecast, with together you discuss especially a volume and guess, other other it’s you X% you you’ve you this what that forecast that it about space growth is some what as back maybe to know given too know I question been And know and in Okay. growth that receivables. much know, ramp you you I acquire able your lenders of X% to put favored the to of the lenders because that then kind to know pulling gives you confidence wonderful, be you know

haven’t from they the competitive if going do know better you to You standpoint, comfortable and get made how continue? why know that’s you in-roads

Mark Graf

as look people accounts and a upfront in little us months a we’ve caused cash go you. to in and know back or the first XXXX growth quarter strong Well, or consistently where have backed on even don’t what some new of hearing we and we’ve had calls, you craziest anything as we’ve our I the restoration us XXXX points the announcements had that see the seen full slower huge some I’m opening things now we maintained and of think subside trends discipline, peoples XX any recent or off, not affected

are players compared low, aways little and keep we’re it. are reasonable really to think that year some us watching them anything the to because if going to levels, I So is but more have their part a is I of in now most rewards sense are to of card focused getting on restores, through my of to see profits think the up business these

and charge see somewhat higher is interchange is thing say don’t The I’d other here. know I from offs you everyone having rising

I you know profitability to rising bound costs. an credit people both cover and So sort need where think is upward of some there improve

David Nelms

reemerge a guidance ago, sense and comments I’d the Moshe, quality if our my And sense to to don’t think that just and go start that stack for I guidance, that revise day minute shareholders. Moshe. we’d does we’re book wrong going end the make the the back competition harken At would we’re doing loans of things miss ahead if makes and onto we and

Moshe Orenbuch

Got it. Thanks. Good job.

Operator

is question Your with Bob from next Napoli William Blair.

Bob Napoli

Good afternoon. Thank you.

the I Just want that clear within on mean on reduction. the to I reinvestment be, to XX% XX% is page XX? of guidance embedded tax reinvestment be the of to

Mark Graf

is correct Bob. That

Bob Napoli

Okay, – where that an and so operating rewards accommodation in and of primarily, that’s and is expense? the

Mark Graf

actually some for was we haven’t some happening point be the and will the investments things other that are well about at guidance into wage that The time employees. that I is going the last as describe what $XX.XX first alluded that expense and minimum windfall really roughly moved in three then investing operating that our really specifically as into first the bonus in communities. That piece investments well of we’re pieces specific really referencing going from our growth. which an that remaining thinking as XX% $XXXX this perspective, in that say we to yet, some David aired would our this the as piece would in XX%, were would is be that hour benefit which I year of that of quarters year, of was to employees in

have do we’re customer heavily that centric right. service, a the business customer So our that’s to as way we in model really view and through think on is those parsing really it and surprising really When focused employees, you so customer, way world having very the attract sense in folks all the the of and paying who by us. delighting those think customer personnel service retain to and the part best are makes do that we contact is investments to you the

David Nelms

even growth in than know otherwise ’XX. the very have growth we we’re than strong far you the was that had you loan lines little that excess the recently in know also obviously some of where expecting in though original lower and it’s would we It’s revenue bit our had, a more targets growth

Bob Napoli

the my businesses. you. that just your sense that in somewhat follow-up, economy sense of is Thank that is pick spend or Do strengthening And or competition business up marketing Discover. did payments the growth your proprietary and in you just you back your do you efforts pulling know

Mark Graf

around want would efforts quarter taken we a around posted call year, that loan the get But the in specific versus some the this combination that of to caution it’s you up I growth. things. of to just don’t of and same growth quarter I X% so other day increase sales way about that’s year, out. we’ve the think going first I this think to us to X% closer days we because the flip that of this having sales of to number

coming our book, growth the back spend. we’re now a talk they less rewards and We of also new competitors think that as of our know sales program when they fewer customers programs were we some more in depressing maybe into that’s getting depression more irrational about some before and Op stealing customers you with are

came the know pleased tough there is really nice over some one customers the was obviously with know that PULSE several you half the and lot growth, side, large that big growth back was was of really network after a the growth On PULSE to years from know we’re growth. whole the that and but helped our player you other you

Bob Napoli

Thank you.

Operator

Hecht Your next Jefferies. John question is with from

John Hecht

charge much how below XX below in we or cycle just Mark, to still talking starting guess very zone. now my and off guys. in we’re long time normalization the been perspective fully those some your averages for you were normalization think questions get quite hit that for from but credit? guess normalized taking I term term or we’re Thanks we’ve do about do long the you of know trajectory about this I gear is averages

Mark Graf

intellectually I go none being is honest, to until where think I post knows cycle, is us we how just that. here have of a act impact disciplined some industry much anybody across think been through new understand normal because card going the more to of behavior the Yeah, don’t

going reach are think like know know point. said not so so or to industry current we what You normal know see in will and is we’re this we low peak call, normalized long a in Clearly losses been seeing. cycle think the are at going disciplined. were we lower the that What normalized they very not clearly cycles because underwriting has we’ve have I point to we is in rates the anything we you a the what call do to for not being loss would time past seen cycle you than when I’m actually this

loss our we that has where been are at We are decisioning embedded cycle underwriting originations, rates those to our cycle. credit be, what point through to book, a our we the never in to believe embedded in underwriting, in tied so accounts the

and returns different view we’re So long than long acquisition very that environments term our originating profitable in taking drives we’re a very in in modeling today. stuff

John Hecht

to helpful. question then guidance. growth loan is the growth the the related that’s second Okay, And guidance,

consistent composition advances in fairly terms that this customers whether aligned of composition change rates versus year. Forgive utilization the details, new or any or me is have maybe of that if the you provided is or in last it’s there year of

Mark Graf

close growth the our on through from to as in the side composition is XX/XX to accounts growth healthy very about current legacy which well new as minds because on The come your you coming portfolio, from is want customers.

You don’t have to they think disengaged. them want

attract to right that the want also behavior. You exhibit new accounts

healthy balanced really get that to a So feels mix.

other you overall, will call loans is in one would it case missed say rate the The out I didn’t say with the I thing thing businesses personal didn’t respect growth I to decelerate. is in the

card portion greater will loans. going and be picked forward student the growth a of So up by

John Hecht

guys. Thanks Perfect.

Operator

is question next Your Rick JPMorgan. from Shane from

Rick Shane

personal have guys, going the you – slow. lending private on about growth is The that excuse industry that me, student of questions X%. composition a wanted organic for most my the loan is but Mark Hey private asked, just growth growth revisit little said been bit. to

bulk curious, So really business. to you the that I growth come am confusion that you’re the think card above that is US do the is going to the going go of or from

Mark Graf

the last is the continue place. moved expect faster that size competitors that faster as loans that year the we than other and growth for of as into this triple in same try grew bulk know second faster you and you hard from year did expect think student student going the say our would would I because not I just this know to we year, the rate way. large of industry the would we in but thing, mentioned think the business I business kind come somewhat loans I and of I coming to than that would grow we private to card as

have rate lower in a we’re we personal years going our it to much businesses. loans, we business As we grow, than the at but last think just mentioned still will of had we than probably much in growth that other where higher any be two

Rick Shane

to that’s growth And okay. striking it, one be is businesses draw US that’s out Got above card. going really to what to actually that the it’s the of only am three X% trying for I rate X% the

Mark Graf

that you could well. I be above level well. as as out was mean it loans take acquired Student loans, if the

portfolio year. this organic past grew XX% Our

Rick Shane

Thank Got very guys. you it, okay. much

Mark Graf

You bet.

Operator

question from Graseck Betsy is Your next Morgan Stanley. with

David Nelms

Hey Betsy.

Betsy Graseck

questions; digitization. Hi, on one evening. good Two

the some you’d doing of that spend that digitization. is mentioned you think around I be investment

highly pretty I think well your is rated. app

to wondering plans do So it? what I What you’re am with looking you have there?

David Nelms

at top to very who keep pleased customers digital we ad as JD competitors we’re functionality know and the been and top You investing app enhancements to and recognized simpler Power versus groups capabilities of looks us have making and consumers. independent by need the to

were just Apple the we customers ways we institutions security their know an only this think in two as you example. that launch financial and for with as and initial example digital alerts that year manage of business You and past new a know additional in with us to yesterday an communicate and for put one account so I announced our their manage having messaging

all to heavily in going be those. We’re investing

on I thing The about increasingly artificial intelligence that centers investments so learning some we’re areas using is in machine like think compliance, and would and so Mark our to are help information even digital, mentioned and other phone call of in script those queuing our on. traditional aid impacted customers saying what to and service is people suggested effectiveness recognizing the and a by and efficiency, then so being sort up with

expenses. and a it positive it’s was a operating fantastic part revenues So us for leverage than trend growing with year that this of big faster

Betsy Graseck

that’s right thinking, all you give Okay, on going tests could then CCAR secondly what and dividend, don’t the we you know And us your period as are the a helpful. and to rules be. I its sense know know

So line have you on you’re or what more payout is especially if versus think that going the with an how going thinking you ratio can stocks the interrupt you in year. keep next is where Do us is payout you gone, given about earnings digi growth buyback? now the into it dividend, payout feel dividend until like of similar to the help know understand you’d do there ratios

Mark Graf

and and guide takes we’ve to of on because I say dividend. record movement goal our publicly think said years is that track I to is dividends So being without I want think what would don’t S&P the we’ve I an consistent also XX increasing of topic, that achiever of know be dividend you specific too a established the

dividend be a think forward. that reasonable we I we’re as about assuming person So thinking look should adjusting

comes One guess. of a dark side Betsy that no really without I perverse the things gift

has about it CCAR. an actually consequence its unintended think you in with tax If reform, interaction

because expressed limited due only DCA law a in to now have tax after loss as rate carried going going NOLs larger losses lower just backs. larger allowed to the carry areas tax and can Specifically have to increase to forward tax going you’re it’s the you’re a be

goes there So dead it’s you stress their brain revise consumption the the the some impact. to likely up, unless if particularly instructions the think which could around the they that refer people fed I adverse known changes those think the scenario severely fed some industry don’t as instructions, for be capital XXXX I

that that, encouraged coming the are we’re that know negative be commentary You a publicly The any that it quarters two to any by that need hopeful by of from coming be real there. we are repurchases first what last but looking for existing this year good at would change they fed there is seen don’t and to out make year be. governed exactly remains so won’t news you know this, impact did we’re reason will CCAR the the see we filing

return again, aware wouldn’t none position of. in of to to this to we I the none be So move a that this would perverse would be just thought capital. position interaction be all you It’s mean we of a needed dividend, wouldn’t in a mean

Betsy Graseck

helpful. Yeah, Thanks. no that’s

Operator

is Ashish question from with Deutsche next Bank. Sabadra Your

Ashish Sabadra

about talked moderating. My was questions from about Thanks. rate the the reserve to also from The that card card reserve X.XX% declined bill, you business specifically X.XX%.

better are that that just than in about, So quarter you just want drove to and delinquency talking what view coming the data from improvement your reserve the to data expected better in third you decline is that understand in monthly the fourth delinquency drove what quarter. know that rate

Mark Graf

everybody, to mathematical a it’s of mind just so, manage reserve that don’t we outcome just how in we reserves, keeps so everybody to Yes remind rate, establish right.

we are see the the forward sheet in month we rate out. embedded the So lost and of kind basically falls XX for reserve reserving the content on period balance then

track. are the said, you think right I that on

of the what variant. saw with increase delinquency we big of the delinquency formation, trend the happen formation and of in the the One impact was rate rate

us XXX But delinquencies earlier, here. good where I we there But addition of of reserve. said a about in loss the at the couple we We set don’t the set the and to remember that number also variables. some feel models as look reserves. very – again I caused forecasting were specific the to others the reserve odd level

I in we think the loss portfolio are content in encouraged the it the and the trends adequately today imbedded of rate delinquency formation. reflects by

Ashish Sabadra

helpful, That’s about growth. to was be going thanks. question then my And

Is earlier you much new customers? how from to in asked when there of up card the business. it to versus comes the follow growth a existing to Just And questions about way think about so about the just Thank thinking you? reforms, capturing credit any to new get think going bucks customers, of you that expanding stimulus thoughts your are there. tax about the from because are we

Mark Graf

growth So portfolio, in new legacy the its to XX/XX roughly I which accounts portfolio breakdown now are we in feels with would that. day the the the in healthy really right so us, very pleased

credit In then in I’ll is you maybe easier say to terms shackles relation tax up it I to that a any like of convince with you opening lot the It’s live for expansion think dramatically. credit bring yourself is reform, if something that, moves box the time. marks, for every bad long or hurdles spend in, more to an awful to couple perspective account our start a credit can I return you the decisions

I think make, incremental investing advertising really cost more the we equation. So would towards side of acquisition be would would and the

Ashish Sabadra

Thank helpful. you, very Thanks.

Operator

The next question is O'Neill. from Chris Donat Sandler with

Chris Donat

good my Thanks question. for taking Hey, afternoon.

big higher and and then the XXXX? because on for like XXXX going ask income to for you your will but having is pass related statement sets – that are like guidance, see anything aren’t on compensation if Just could the it you for I to you of the expenses imaging the movement activities some are out with the just minimum the What expenses, don’t there, some wanted to some be seems I the expecting the of forward billion $X.X got wage or in off there. numbers sort you the of number investment investments the reduce big employees had one

Mark Graf

I remain I support the Yeah more core really would you company. I service I’m what the disciplined to areas think the functions within goal in and say very that is thinking delivery would call

the support well outwardly those really And the in expense we are advertising who and with seeing incremental wage revenue so increase, that minimum the folks earlier. on growth like you actually marketing increased focused call about the as is lift and centers that the talked as

to level just comp say have acquisition and we put the toggle let’s costs. that employees piece willing big may a our spent So what something increase really is and to brand real it. wouldn’t It towards are advertising marketing associated

environment pretty could are back the turn on you quickly. pull to you the If those you, on saw things

David Nelms

and you the base I grow of over The that’s things expenses of spent some you us from and tax bigger, the some actually calls the why say there terms passing a real reinvestments of need And of just I to fairly still I one more, money achieve are pay we quality repaying to were partly, as people like investments of would we expense because and in employees why and so isn’t that well. and support are is aren’t matters starting to help that could degree benefits that aggressive in because as these reasons loss higher time manage revenues paybacks Turnover to minimum well lot the got net are with revenues we think to a so We add, kind the is plan the revenues expensive. the we more help expect returns on on. some and on reinvestment employees so reform, is from involves those making. to implying very really additional a grow we can need training talent some in up attracting if and conclude expect higher would lot that

think think an of out it’s slicing just the it of pie. we So piece we as investment do of kind just– a not

Christopher Donat

Thanks very it. David. Got much

Operator

Pancari next with Your John is question from Evercore.

John Pancari

evening. Good

what the into end tax will XX% rate be think this the think of run the Do will do carry over to timeframe you next XX%, year or of On is that? in year? reform some reinvestment of you XXX% it the the by it

Mark Graf

to expect that course spend would dollars year. of this of I No, expect year over the we the actually see is

John Pancari

is then, of any that and Okay that capitalized?

Mark Graf

in per process depending year. a you lot that a of increased it’s increased capitalized spend, things things I run remind the purposes because necessarily you I of say. brought are you and through. be But of up it, modeling I’d a think brand they small make. that marketing and assume advertising, the They for flow again every There these rate, decisions things it is portion aren’t not just rate at into run And notion are look we about would thought go a the choices we might think some on some make,

than is this cost other So employee a reset maybe spend. bases, I wouldn’t of that overall think about the as some

John Pancari

the Got that that guidance Is moderation is the the or of it, there and some a are little of loan moderation entire implies personal thanks you level. loan Mark the off growth talking growth bit of and factors the Thanks. into XXXX then midpoint lastly on other consideration? outlook, slowing

Mark Graf

is is strong a just given second our year-over-year say would period component the a I tougher growth year. last comparison

And so I two together. those would say mostly things it’s

John Pancari

you. Thank Okay.

Operator

Fandetti with Fargo. Don question next Wells Your from comes

Don Fandetti

know thoughts David, the portfolios growth, on what whether or consent your curious I acquisition. had its are you external or order. Make

high. I think a sort then payments Do at it little so was need you pretty if have ago, sort maybe very been rapidly lifted more in just any flexibility. like or of changing valuations of past while you there be I businesses, assets expressed you’ve digital. feel were. more obviously you as know look And it’s it would the opportunistic of the move a with out an

Mark Graf

I and I Well, whether say see around the world, in sense, buying would for see investments of of that I bunch lot to would partner I of a other know Maybe some likely have vendor but we it’s space. it economic say players, small we payments over opportunity think in time networks suppliers, stuff make probably relationships. that less or some – FinTech to we’ve to with make with great would you us some partnerships first, and a with think start would them take that opportunity could sense

student over opportunistic most usually open attractive say we’ve direct been and even not not would from that are some direct few out that’s out to of of a But lot the out which there portfolios think that space. banking in be we bought up for direct as there come would what’s know off. side, don’t banking to, and consent banking continue consent under On a buying portfolios things I that the are you banking and traditional time. negative continue and obviously the stuff money, make is is order there We you banks I us know just also probably We orders we restricted presumably more will optionality. the loan would

be say strategically. financially on I organic we are things, that growth keep we at and opportunistic primarily else, has So would focused but anything but we’ll are, on fit we’ll it looking and

Don Fandetti

Henry The this time Thanks. Coffey Wedbush. question at last is from with

Henry Coffey

area a think it’s you balances everyone the I moved loan afternoon when Good you of. of interest. one terms to narrow and to or really call. of just say sport, just in as you two very in origination personal then wanted loan you number interesting Student and loans, means

Mark Graf

ahead. Go

Henry Coffey

not And a good sorry. of in the very as you think of opportunities you from but Oh looking profitably the yield of refinance no – equation. in side started view I’m you started looking have it’s you point Have businesses. direct then as school at are growth the

Mark Graf

– from answer you think second really consolidation us Well money as you the pricing to question on to expect – at we’ll make done is loans, but hard and little I there seems first. have school special focus school. so involved, there We’ve what know channel a co-signers primarily in underwriting, a only the you you there should to out, point continue only school specialized, on in is channel. And players disbursement do though very is to is because the the few to is bit

very and there. a their that do and of do students can where well and us out of lowest actually and that unique degrees kind think only we pretty operationally loan few of its education and the at is it APRs so So so we there unsecured we for that really any can that’s get pay help do

question was? first Your

Henry Coffey

It was origination.

Mark Graf

Yeah, margin originations the I and one versus and so number moved originations spot and a originations did Mae the last into we good Sallie year. faster in now two grew Sallie even would our originations have by say of number than is the

are performing. pleased we business with So is that how

Henry Coffey

Great, thank much. you very

Operator

now back will turn presenters. to the the over I call

David Nelms

Mike. Thanks

Mark Graf

you follow available how reach Have for us and we’ll for up all of know a great be you to and evening course much. Thanks. Thank very you.

Operator

This conference concludes call. today’s

now disconnect. You may

Discover Financial Services (DFS) 25 Jan 182017 Q4 Earnings call transcript