DFS - Earnings call transcript Q4 2019 | Discover Financial Services

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Operator

Good afternoon. My name is Erica, and I will be your conference operator today. At this time, I would like to welcome everyone to the Fourth Quarter 2019 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. you. Thank Instructions] [Operator

turn Investor over Relations. now Streem, Mr. Head of Please the will to call Craig I go ahead.

Craig Streem

Welcome Erika. you, everyone afternoon. this Thank to

We of our the Relations X Web can will on Investor in presentation, investorrelations.discover.com. find section which you begin of Financials the site, usual as earnings Slide

today's statements that contains our press differ to materially. earnings refer are to risks appear actual and presentation. discussion today that cause to Our uncertainties regarding results statements forward-looking notices on certain forward-looking the and subject that may release Please

comments, Our Roger call the through then Officer, a will year time accommodate quarter we today yourself, our will there Financial include formal of as you And question Hochschild, to and rest limit remarks please so from participants his of Q&A highlights. And you John one as plenty CEO, for Chief take full don't if mind, can many Greene, and one the our covering earnings be John XXXX will when up And fourth presentation. session. follow completes possible.

pleasure my Roger. over to the call it's to turn Now

Roger Hochschild

to call thanks to fourth And for highlights guidance our quarter full today's as XXXX. metrics for turn key listeners by John reviewing Craig. Thanks, the call. I'll and Then year. as well the over performance joining to the begin our results review elements for

long-term lending return owning network. banking and our together healthy high net the $X reflect consumer our and billion of that a brings global Discover equity after These income of and another $X.X with attributes was the with year own or per good direct of model benefits XXXX share, for very of return potential business tax positive results on XX%.

in advanced for continuing our to and return have and set up returns strengthened us continued investments further us returns technology the to brands' expanding and competitive allowed Discover shareholders, beyond. while XXXX, XXXX position Our to excess acceptance our These strong important investments in globally. make robust capital flexibility our in

our performance on loans with of as U.S. also strength benefited was ongoing we X%, Looking expenses at XX.XX%, advances the our And in capability. Total The continued continued the servicing in a targeted line specifics. margin target, of some and operating consumer the economists in grew economic credit and and We our growth expectations. robust net remained from of are environment range. interest the management risk in XXXX. in forecasting achieved

in However, given duration the the mind. manage economic unprecedented we that credit expansion, of will with

key business focusing with We expanding continue relationships to payments Spain. invest the partners UK, New France acceptance Zealand, and global acquirers our markets in on in XXXX, adding like network in by and

gains in The payment both a great driven segment issuers. existing new our Our team by year, primarily from business. increase strong acquirers services generated at PULSE volume from and income, volume XX% and had pretax adding PULSE

all growth strong Turning higher reflecting to X%. our total we Slide the in in with had merchandise opposed card was engagement. X, and both up loan promotional loans our member products, majority In solid this card card as activity, growth of balances yielding business, loans

are that relevant customers to for greater leveraging our partnerships We example, to merchant to features enhancements even introduce prospects, to value service partners. and continue and including provide

conversion from models and with good is acquisition business, in through of process. our growth We lending enhancements in increased up brand, X%. had organic receivables Discover Loan year also student the benefiting improvements a the awareness

the loans. student for strong largest second We private benefit provider from position continue as to our

a personal X% Our XXXX, loan our in grew above expectations. portfolio touch

credit our had of us personal increase Our investments originations, credit significant maintaining performance, loan a risk. analytics on and in while impact level modeling an enabling to have acceptable

continues in to expectations. in the The vintages with loans primary as normalization impact well our XXXX very was consumer line in Turning the was abate. driver credit from of to Slide X, of credit industry seasoning performed and recent the

when earlier, I we'll and call. about fourth underlying later in have credit good feel to XXXX more the the environment performance guidance we and say discuss As trends overall we credit said XXXX, enter we economic about quarter as and

shareholders. to John by detail. about solid over our We call saying in Discover's credit want I the I finished turn continuing very discuss combining solid by value to generating wrap am customers, members excited up and John, results XXXX now I'll and how on to outstanding prospects more create growth financial risk to I footing, team effective returns loan management. Before our for for ask

John Greene

Roger and addressing advanced X%, statement. losses by X% due driven ongoing analytics. a key loans. our Operating and investments increase expense platforms lesser supply-driven interest expenses credit the by X% of begin digital income and growth at for by Provisions and I'll driven in Slide increased primarily normalization Revenue, extent growth in loan to summary looking the up net increased results you, to of quarter, X% collections, support good compensation in by Thank continued elements mainly X, consumer industry. loan expense, afternoon, financial average everyone. higher on to were this

But Moving came emphasize loan the card covered I standardized merchandise smaller from to balances, contribution metrics. X. that growth Roger the receivables to Slide in majority from wanted key balances. with already promotional a of the

primary We XXXX. to growth of will expect card driver merchandise a balances continue be in

was remainder in of from receivables new accounts XX% the the under existing with cardholders. Just from increase

organic up were the Looking year loan X% student prior X% receivables with the total increasing at loans, portfolio student year-over-year. from

performance X. prior in services by on segment, line from the key the Slide the spending. the network volume product. our payment year, PULSE Within X% with year, increased over to Discover rose driven growth in strong Volume in card X% Discover prior Turning

Moving brokered $XXX funding revolve by coupon and lower prior a by lower an deposits. and rate grow direct-to-consumer $X.X balances, loan lower The unfavorable of reflecting increase direct-to-consumer deposits maturities the the interest impact continue interest in was This higher prime million billion offset year. cost of a rate rate, average higher a to to partially the was from Net of increased balances quarter, promotional funding we higher charge-offs. X% driven mix and income as or lower Slide X. favorable

Total increase in fees for were the the or $XXX quarter, primary noninterest transaction up an million loan discounts processing X%. drivers increase $XXX income was of Net and revenue. or $XX million higher X% was The million up revenue interchange year-over-year. and

Turning to Slide XX.

Our funding quarter, unfavorable to net rate expectations. principally quarter, consistent was with the down Relative XX.XX% of fourth year-over-year factors; the to was just second, mentioned; lower I for X our margin interest impact was basis first year promotional points NIM This prime and partially sequentially. interest the points XX decreased in offset the the and funding third prior due a higher the three decrease and basis partially mix. These a lower rate; a rate, a and higher to the rate, NIM balance fees. basis Relative points of revolve impact were higher favorable and by due an by BT revolve XX quarter third, rate offset rate BT charge-offs. fees prime unfavorable to

a interest yield points and rate, decreases from partially ago primarily by loan This charge-offs. basis offset decreased XX.XX%, X reflecting Total driven prime balances. by point and card basis rate year lower fees BT XX a to revolve was promotional higher in yield decrease higher

Consumer now billion the as consumer the we balance XX% liability total from in points actively deposit quarter managed side funding. rates up quarter grew $X funding deposits make XX average decreased costs of third the our the and of basis sheet, lower. On

to other Fed vigilant for stable observers rate market manage we'll this costs. funding prudently funds remain a opportunities deposit year, Although our and expect

contributed were Operating to from average mainly fees higher, analytics continued $XX year. million cost. by $XX to benefit third driven as XX. in Professional million professional analytics reflecting higher driven was fees. Slide and The recovery increase costs. prior information to in well fees. technology, staff was in by Cost our higher and the party Employee million support Turning processing in increased $XX advanced salaries expenses $XX infrastructure or higher, also compensation increases X% as investment million investments

performance supply The to that on Total the offs primary extent, in with stable the from risk well here takeaway the continuing normalization increased our credit. basis expectations. Turning within seasoning growth lesser the credit to and driver Slide a year to loan credit and return driven charge and points remains be net is consumer prior of XX. XX overall

Card XX-plus was The basis disciplined prior and higher business, Credit points charge XX reflecting points basis basis increased year line offs the X our prior performance credit our card was from underwriting another XX quarter. basis solid sequentially. This management. net rate points and the from delinquency card year-over-year credit and XX points in

quarter. year charge with the plus expanded to delinquency the XX typical offs was from basis a outreach personal saw aided to uptick modest charge including In Student as gains to continues portfolio in consistent seasoned. seasonal and We in offs the XX performance pattern. co-signers. compared points student third loan basis collections, points in by loans, efficiency XX loan rate be The prior credit down rose quarter

tightening continue detection. We as prior a see and of fraud credit to our improved result improve credit

temporary leaving in we restructuring TDRs an billion you'll billion aspect a modification This preview completed number subject our programs. that in on to debt But up completed terms, important are wanted by have I billion, total card our December an hardship see In also XX% we fact, disclosure year. Discover clarity enhancing from equates growth rate. an program. to of balance trouble receivables, successfully had increase and will provide customers half in our the helping now success of $X.X revenue. the and credit XX-K. greater Before the credit, TDR through reducing that above customers report over $X.X successfully who of To of receivables prior costs this had the of to from account and additional credit At demonstrates was XXst, $X.X benefit overall programs

Let's XX. turn now to Slide

decreased tier capital common offset sequentially, and by points partially Our loan earnings. reflecting strong basis equity XX ratio returns, growth one

the includes last total consumer earlier, XX% XX% months. buybacks, ratio, up deposits as was payout noted funding. now Our average make we over of And which XX

to the and a for of performance. compared our business Slide performance XX XXXX guidance against provides summary XXXX year,

for its the green check-marks against to see our team and the of each for congratulate want solid objectives key I metrics, against execution financial all of XXXX. You'll

our guidance for provides XXXX. slide The of a outlook following and summary

We recession will that see First, in next any consensus XX to we the do indicators share months. view remain macroeconomic not a the point that environment stable.

healthy We consumer unemployment to remain remaining expect levels. near and the U.S. current the

XXXX We year business us that remained changes and backdrop these in financially consumers also indication at XX strong rate up low, growth are note Fed our no sets Based a profitable year resilient. debt for factors, This returns. assumed of plan. we've an that household levels on another service

guidance Now turning to the elements. specific

loan range X%. of growth in to the X% expect we First, to be

expenses and for $X.X growth $X.X to operating continue on brand of future expect be invest range we to we increase awareness in with billion, Next, considerations. our as the to billion spending incremental to

in environment our reflecting a seasoning year, be this X.X% to charge-offs credit growing range net expect of the portfolio. stable percent the X.X% to We of and

an remains a and model. to target which shorter. Our XX.X%, guidance for for our regulatory generative list under capital CECL phase-in achievable noted capital due our bit continues you've is target sure XXXX purposes CETX ratio to be the of business I'm

and In taken to fact, longer a rewards guidance look we've NIM. on decided provide fresh for rate no specific

The by continue. around rewards increasing ongoing the the The vary rate X depending to from and points to rate expect on been to to due shift card, X% annual the can the trend more quarter-to-quarter basis has card we category. this X

In driver NIM, been largest changes of single net terms margin Fed actions. in interest of the has

specific as patterns this, calls. deposit earnings and part as on elected spending provide quarterly to drivers, the guidance we've Given our such comment but other of not we'll beta

topic So the onto with of that, CECL. move I'll

the XX% towards to. end basis. to now our above last be earnings $X.X the XX% I guided adjustment XX% that of we'd be end On day-one incurred call, the or billion We north would to expect year approximately indicated range the adjustment

the credit impact, will business, reserve determined. the In change point mix estimates are day-two the economic in overall in performance the of upon time depend outlook, quarterly terms of at the which

next. Additionally, quarter will our introduce reserve one some the could changes volatility the quarterly impact seasonality and from of business to

of As our enable high model of returns, business is which overtime. capable offset us the generating you've capital to largely CECL should seen, implications

a and business executed XX%. on capital with to we strong expectation a and very and Wrapping loan very growth had positioning Credit with in our up targets, deposits growth XX% we're on our line our return year share by in for and was equity. performance and buybacks. year and return a Slide pleased delivered XX. loan allocating growth with our total XXXX. plan generated XXXX of In capital robust In on strong We conclusion, X% XXXX, we remained consumer

That concludes remarks. formal our

Erika operator So the for the to I up turn will call line her back to open Q&A.

Operator

our will We Goldman Instructions] take question Ryan from first Nash Sachs. [Operator with

Ryan Nash

then And that day-one updated that on impact day-two message initial is you’re So the from driving CECL be have John, The mentioned others. outlook where higher thanks on I guidance? first, to we've slightly new what is incurred what XX% guess for heard the than call, from adding you day-one you loss. second builds on don't different the any the from quarter's said accounts since higher increase. last reserve

So just one, that's you're a that wanted more I fact the day-two and Thanks, we else I that and sense, is impacting should think how adding does have or accounts factoring to get it? to follow something growing -- about faster there up. faster impact,

John Greene

me So with start let one day impact.

the the And do modeling, recoveries the recovery and that quarter, think and guidance, I of moved at factors. number performance on was had revising preparing very observable with The strongly. up at fourth look ended last which to point a the still a did middle as as a portfolio the view and took the And certainly of included recovery take CECL of taking back team and modeling job I implementation, overall stellar to in one most my we history call, we through recent specifically recovery. we said history, fantastic very, we a to for assumptions. initial terms XX%, the was of that performance XX% came hold assumption a look it

So that was in the primary driver change of day-one.

of call third impact our higher. has books amount impact which would And student day-two significantly and the first had we I under incurred terms third increase to volume, a terms that day-one than day-two, day-two on on we would in that do quarter be certainly my the higher with quarter as of of in to higher was modeled, In basis. products, the loan put related said

CECL. seeing to actually in Now, that points some the we're of that volatility

would look So say as XX%. all would we and day-two a our around range product be proxy relative for good at that year, a the the I mix take throughout

it. would message bunch I But mix performance, a that working initial any impact it's and dynamics the to that we're hope delinquency consider of and the you I provided. there. the putting So helpful slight that And caution about provided we're lot how to quarter products number nuance macroeconomic business. as observing, we're so that on obviously, portfolio that's through to model specificity book of preliminary on that I also and think rates in a a the But be the including CECL, there's one this I've enough outlook,

Ryan Nash

for And of the then I you. guess a follow up both

and So look and XX% you that of was expense where at X.X% if I is about growth, to running. guide expense the ahead which expectations I guess are

be the how the into year? are And size that second, So a think investments off here in of entering first, you investments? need feel Roger, phase are to of for John, investments? what you investing? from Or are And these we about then one incremental you this make should elevated any we can seeing new some there paybacks

John Greene

and I'm have then start up. will Ryan, I'll Roger a sure follow

bit by going here. to little editorializing with I'm a start So

at then the return overtime, two you And the generating. use among ratio lowest to the we could the if returns we've terms under over has returns a -- argument in the on And highest time, among it's points look one are given in the look that data you we're how industry. that simple given the much invested make those in perhaps generated efficiency at company industry. equity, if of So also that this

appropriate specifically. So thought looked for to best two we'd as was XXXX, shareholders. we it we the returns put invest, the long there And at generate plan we was term together there where for items our was where

or to to functionality and add So number in and around consideration not. appropriate that's and resiliency it's going awareness standpoint continued scale a million, then a from infrastructure investment brand And forward. investments and our also ensure in believe around be $XXX meaningful

Roger Hochschild

just to payback. And maybe what build terms in of the on John said

a continued Some efficiency sort say investments. others, strong will then of dual more of also you immediate, multiyear we And growth expenses, more be it's so about car as returns. story I'd our drive but think broadly loan expect but our

also John of efficiencies majority our the lines for targeting the And vast look so expenses, we flat But as building our awareness the we're our technology We're terms close looking CPAs different will non-card in and the across to growth we across expense very be so brand as P&L. products. in of are the and year-over-year, around that well building think of in future. driving are some marketing investments of significantly products, investing the our some brand that helpful I in as

John Greene

follow one comment. up just then And

on get rich to to analytics are a managing effectively share company this my my has of we cost costs and of I've payback a going So ensure tradition these background, had and management certainly investments.

some Rodger are these shorter-term. of longer-term, as some are said, So of these

We every that our to getting dollar we're for will for appropriate monitor continue and paybacks we're ensure spending, shareholders.

Operator

take Sakhrani will We with KBW. Sanjay from next our question

Sanjay Sakhrani

dig I to in related again to wanted impact CECL. guess on I day-two

could to triangulate more was provision So give I wondering, John, you about bit the sort XXXX? on for should we if little think how help us us of a

John Greene

I've around of about last So mentioned poster figure as my as early, sort in XX% comment, day-two. anchor I and you that a think guided as Sunjay. It's

certainly say lower. quarter a mentioned. that's higher, to be we of little third be would the in exceed the number a quarter-over-quarter, you that that it year, student originate just lot might terms loans for know about decent a I and So way the of it, little And a might XX% day-two think will I

factor beyond specific. service of I'd mix be But be that, important more any being So if by doing I one know know of you will it. an don't

Sanjay Sakhrani

fairly what revenue and loan relation on getting wondering And a growth lot growth about we rewards in and was might I then on do the other rate. whole guidance different would to significant if direction around suggest, data thinking Is NIM not and point I am loan loan growth growth think loan it about i.e. commensurate, would that factor to than lead there's it assume a incorrectly? fair what not growth. should it be to or that

John Greene

in direction. the No, I you're think definitely right

I want a that to couple things point So just of there's out.

So we planning prepared assume as Fed I said remarks, in rate our assumptions. my in no changes

from forecasting of -- the our as from that terms has that and deposits, standpoint, NIM. direct-to-consumer if funding and service. level deposits increasing in of problem historically cheaper a So alluded remarks, prepared around in would this it the changes, funding also been a to I are overall certainly focus that impact which We're

continue terms some will originated deposits, is the I balance being do I that appropriate deposits there of towards our we the cost cost of of very to that mindful sheet we in making time also funding. sure the mentioned can that fund what see work think an of to at but the over also target, we're longer-term level

went if your side. call pretty action, things stable, And for want That's or So to terms you company opportunities could deposit look model. we continue to the been on will a well, pricing be whether there that two but basis on put of then the point into pricing in has the your side.

Operator

next our take from John will question Pancari Evercore. We from

John Pancari

quarter. the question just give could wondered the separately, But in you the know on if was TDRs? TDRs, that giving will for of delinquency you more you for that to I a quarter? was And of us do and then I build have loan loss what reserves us be the recorded TDRs disclosure K. the much the you How $XX for related have million ratio the

John Greene

XX delinquent from change. days remains the and that's So it no TDR are more said so major than previously consistent, a consistent so remain performance this for only standpoint we that X% there, quarter,

that if balance on it. the reserve that of super call. would kind it the don't not and I take down that's it did, the be know of call, helpful of walk provisioning, nuances through to this In I probably terms going break of we’re would

pass mind. that you will we if So one don’t on

Sorry, I specific, can't John. more be

John Pancari

fine. the it, get guess I No, one I TDR on more topic. that’s

of base are cited, in -- card lot TDRs linked given the $X.X X% the talk peers looks much know the lenders too a space. that's Discover outpaced seeing TDRs your seeing much peer under billion of just your makeup the the that a what other about has Just TDRs can't up really certainly like. increase usage increase up increase you But of institutions. that in in about differently and are the versus your I quarter that then is you, larger year-over-year What in increase you you of it that XX% were seeing.

John Greene

have come So population. we populations saying And some start our that solid back cash certain TDR we'll in TDRs. those let around me on off to we process. analytics between the tests and by and really are see flows we once specific observe test will adjust And we is indeed and up that show and improving, it test we will when then program populations any based accordingly then differences open that

I'm doing. other So talk really going what about to not folks are

and very, and customer end take work we've differences There them we an also helping us, have in of up, be through our real end sticking think satisfied for of with seen is continue they approach that terms some we where their in base, and outcomes that, to backup customers. difficulty them of very up credit terms lines open XX% some

to soon around going have a smaller the what if going are effort three a happen The worthwhile see these at as we beliefs the account impact in payments. what's remain in is in the made edges, taken look our TDR, good is they make to terms to on based we're in of those So TDR and are delinquency But as unless particular successful programs. that they they financial populations. buckets take

what seeing hope credit in would you through a overall the and flow. of and exactly work is you're help and approach what with to book cash So an terms solid customers financials good is TDRs flow performance

Roger Hochschild

insight why of you us give it. to provide we this, the more decided just on way kind so help noise see that's disclosures that. And lot There maybe to more into information been has around the add of and to we and a part build of

been be, in know it to might who a not way You TDR. have a classify just TDRs better ever but customers

line account are returned be just the way getting And increases It them, to into and is some so cetera the of we well TDR. have the will et be for prime a always happens really TDR these once book. will a to growth,

will why these in you be think we helpful. K see very that's So the new that disclosures

Operator

We'll next from Barclays. Mark DeVries our take question with

Mark DeVries

My is what longer XXXX, you CECL indicated, end what kind we of the the I the XXXX look XX.X% of CETX in continued you loan sort with the continued think growth? on implications of along are you operate which the term factor payout target should have question and ratio is in to of for impacts believe guys as of the phase beyond

John Greene

So I'll take this and maybe Roger appropriate. will have a comment if that's

original So be the impact when and with up set that the through the would did idea team the CETX, indeed year for they that the plan half target first would capital of CECL XXXX. implemented the for XXXX overall

would our through coupled going are we're make June. the submission, in and to with our going feedback work some we we'll And likely programs and So get we'll that our plan use beginning review will CCAR overall this. like. and the that what look buyback with capital future to I allocation payout we'll around dividend the make determination of ratio board say a

look for models, the phase XXXX So and at likely CECL. over short we absorb long in the generative based business term as and term in the we CECL can impact our capital

I home especially products student equity lives, certain lesser and Now impact consumer with the that like FASX say Cecil profile its the loans. as under given we impact that will and finance personal of a look of there's a our will CECL the to In methodology. our and products credit. products availability this, nature under not the and certain and tough regarding pro-cyclical loans lenders even how regulators that the extent questions fact will environment, current industry longer such like economic might

the in the generated we will CECL And cash the flows. future. it's impacting not So flow, the based and we've profiles is return that cash like historically on

Roger Hochschild

to that interpret designed on as wouldn't to to build just pain. give has them regulators, indicated delaying with I to time The it's Fed And is from plus different discussions our us financial the the that the amounts institutions, and pre-CECL, is i. capital see like loss that in e. how provision, currently, system of is actually which appropriate. absorption CECL of the feel they impacting phase-in

it So how just But see and again, that going wouldn't as we'll view that's I comes out. phase-in to something that. that's necessarily

Mark DeVries

to XX.X% say could is the that does maybe that right Fed post-CECL kind level bit that now for got isn't imply that there go loss absorption lower? that greater a Roger, potentially of the So capacity the some room maybe you've you

Roger Hochschild

Fed they is say out I've heard want I is actually figure that is not out would the feel not can phase-in what gives what predict the overtime, going it them, right to directly like absorption which time is spread a them system to pre-CECL the the that do. I for whole to from lost what and just they just as do.

say, I'd So all to we have stay tuned.

John Greene

my And they're kind take the look the as view December, a the takeaway equity this will that with the spend at at take, going reserves we is help you of And that and be rating personal time form agencies will least party aggregate. know agencies. my some other rating in and in the there is

don't there. any So in I short-term see least at the major implications

Operator

We Eric from Wasserstorm will next take our UBS. from question

Eric Wasserstorm

about just credit. question a have I

charge-offs but interest the a know experience few in higher rate and heard cited, is also There as investment other I very your we're but high add know there You commentary broad-based also is TDRs interest TDR you fees. stability, higher collections, trends you is growth late to too, in plenty such seeing large. about seems that just to a

pieces kind the the about of to trying So near-term those I'm think over experience of understand horizon. to all to credit put together really how just

John Greene

together. worry a things wouldn't bunch of about I straining Yes,

disclosures adding TDRs so hopefully talked we will that about help more that them the we've and I are think you do. way see the

I about for In but certainly talked we've think terms of But investing any sense in there. late cycle. years collections, I about, think multiple of that's a something time that ton that's something pretty just consistently makes

trying sure would those with. spring to are I'm bigger not story, into that's I you if points something a data agree So

Eric Wasserstorm

forward highlighted. terms experience as the of moment a you've the recent different ratio the little overall think that And maybe are should you in Is just Discover what about maybe going about being or investment topics thinking an than has historical we this a just just expense that a been? for efficiency of transitioning expense over specific horizon, bit

John Greene

provided for around But for I efficiencies we'll in around invest leveraging guidance that, guess on automation, analytics. of is to advanced My those going growth. some especially to about investments think what technology our robotic to also find as expect optimistic I'm ability beyond process the XXXX. we've side continue well,

So looking the investment give see we're side find can But XXXX. assured can rest efficiencies to not help prepared guidance you on be to we growth. beyond we'll fund in what really to

Operator

with our Credit take will Suisse. Orenbuch Moshe from next We question

Moshe Orenbuch

in in Sort revenue But I of comments mean and obviously or a together to pay is not likely following those at that the back if to that giving ratio, take from the inference going X% and X% that. and see XXXX. growth guidance to beyond should I can the efficiency do that investments you appreciate some bit? you're little improving, interested you're put given you Roger between point we that be from should most it that in deteriorate there you at expect discuss

Roger Hochschild

number. efficiencies our rest in model do further industry, of the some to Actually, next it as I technology. gained sound deploying you're guidance rate we financial not guidance. asking that you we these as the long-term year. make services beyond said necessarily to again, John I believe, made, take efficient be did giving that it clear advances want there's like the No, we're earlier, But as a is And believe as for compared point run to to by shouldn't of

XXXX. saying the also to you not print just we're that can for number continue So

Moshe Orenbuch

be well, to And period a I’m just the of some of we want higher because that necessarily not fan it's huge idea, it take because others, should lower than ideas timing. that for to maybe

in we're the like not running it seeing was degradation high returns, down. it's but talked that, like not that You it's of about level

what talk made bit the to you that about right So time you that a saw maybe the are things take on know little this expenses? stand

Roger Hochschild

and growth, ratio. expense to think look just our drive appropriate. we points to I business good good investments too talked as and see an opportunities extent But you will efficiency efficient very as entire good accelerated ratio. I communicate a make Moshe. don’t ratio. some about, efficiency payback, those an John we is as and that of growth one, also We we the We your honestly really business that drive the do to to feel about it’s the of calculation then the invest and expenses manage think But But base the don't be possible. are drive to as to efficiency point, but to the manage manage

Moshe Orenbuch

to No, revenue a I forward future the and guess some on those side. look gains don’t having think I of about I coming in discussion seeing so

Operator

our take from next with will America. Bank Kupferberg of We question Jason

Unidentified Analyst

a on just about compare with can start Does day-two think a has for you Jason. those just your on mentioned of providing. Mihir particularly just way quarters into want you. the Are is think then we and next results could the the products, as just given will products going to you disclosures just provide sure change relatedly This that I understand disclosure so and a apples-to-apples on And quarters. we terms maybe CECL, of I for to we make also you more in basis? impact several be had some you we -- differential go CECL the

John Greene

and under about basis CECL, terms regime basis. new a in flow or our so standpoint products, think and from of this return about the cash we -- on on And to we how return an we products, continue like a thinking whether in change no there. our we So think risk are all and risk them incurred

provide transparency previously, quarters. will disclosures same that terms to in between we the disclosure, be will in spot we've next Now incurred of what we create said for four the continue CECL that

Unidentified Analyst

quick, if And to help if we could maybe of you on investments give get could little just more on guess, clearly making but the can the I real go us of color bit this OpEx. us then maybe, topic a I -- just understand. it's just just call, back and you're just kinds

but little guess, and to these next X.X sounds growth is of to also X in little, a similar that… that I year, guess those loan some to investments And year the make to if this that a Your achieve range supporting period, is on year. have to it I this growth payback X like growth, it X do that investments longer you bit need loan

John Greene

about how here's So think it. we

to in and drive awareness is there So considerations. investment the brands

unit but that and and that customer greater it product over as find one cost actually experience that our time we our baked acquisition think value acquisition will is offerings, but cost, is Discover, frankly, overtime lower per the a the exchange, of We haven't people fair determined. in aspect be so awareness to

our other help difference profile. trajectory around a to about that make make investments, we expense or either that functionality technology those piece to deploying The those sure and we're be going to growth judicious are very with

line would see we'll efficiency that the either So gains, overtime, expense I expect top through or base. indeed

term Roger make longer we're the thorough of but banks them, are shorter said, term, some a there's process the to as buck. And some getting sure

Operator

Rick from next We'll with take JPMorgan. our Shane question

Rick Shane

loss policy think in that unemployment or and Is shift about anything that's there sort of you're factors driving that is death, divorce. the we the job, idiosyncratic there hardship, this? normal changing that illness that's or cause When of portfolio, a seeing

John Greene

you're is managed customer only change customer has our here by that process and The to be helping no call there's from seeing rep. someone in solid when say is of of a we've talk collections analytics to of, team customer No, the frankly it in a behaviour. benefit terms What and frankly, I'll made difficulty through it. used in some is to change experiencing terms

balances, that case. the continues large For be to

the or talks and a someone it who the customers actually And certain those versus performing to populations as app certain are populations For their can well criterias, mobile they tested than better in call meet app. do online we've on rep. populations when mobile

exercise cash that sure difference of and analytical opened have to So what flows here some we a I factors; competitors; difference in is there's a reporting is one in growth done you're a versus where and make two paybacks understand really to to we will an is, make think up. the we've couple those seeing positively

a long factors. going keep So we're flow to And doing cash it as those combination of positive. as they're it's

Rick Shane

NPV it lifetime make for to penalty if reserve transition from CECL and extent of to the sort less an this? doing does accounting it the perspective, to you And construct easier, because is there

John Greene

of the you basically it the of your the value a P&L present impact. do compare net to In and the thing flows cash you take P&L when on you that's CECL, life same basically balance, and TDR, terms right impact the of loan take losses.

of are TDRs kind you yes, So that's CECL. detriment decisions growing is you relative the smaller P&L not know to under But the here. if how make we

Operator

question take Fargo. with will Don from next Fandetti our We Wells

Don Fandetti

change talking division of of growth? XX% your also on it mean is incremental the of accounting, if then no economic loan just follow day-two. Are you or rate day-one but once on on through mix And John, about what ups day-two can or will clarify sort talk remain year you the outlook? not there's can the by couple stable you in on sort allowance you conceptual relatively set, the

John Greene

of So day-two, it be basis. would to on they on would incurred in XX% terms relative what

incremental So an versus XX% incurred.

Now incurred versus loan taking incrementality just in standpoint. growth the a will upfront nature lifetime loss an create basis, provisioning a of

day-one performance and seeing team modeling. job a forward, overall a adjust. appropriately going the And And correspondingly, feel cycle we we're we the if challenged adjust are other portfolio know from we're will did we'll then or we're a And way. in good a somewhere really terms better from through if like recoveries better standpoint you standpoint, And of reserved.

Don Fandetti

think an throughout that and you allowance the sort GAAP rate despite all about incremental do relatively equal? we year the stable of talking about EPS remain what CECL else or of impact, all equal sort mix conceptually, being But else percent change couple reasons economic

John Greene

But totally So if I question. miss, clear we answer will and try can I'm I’m come sure to back. on the I not

So of the in all an or mix, in terms or impact change in change in of if change those economy have our a reserves. CECL a outlook we're on the seeing performance economy, or the of portfolio, a -- the will

Don Fandetti

to saying the allowance I those year. rate, but same throughout kind if the of with I’m were the not change equal, No that, else stay all get

John Greene

So difference would that loan incurred, build consistent. relative to in it But rate. at for of growth it'd fairly terms be

Operator

Betsy our will question We take Morgan Graseck from with Stanley. next

Betsy Graseck

wanted spend. just investment the to So Roger, to swing back

non-card able I mentioning or think especially in product. of wondering brand under-representing the in if in to on to you that. enhance payback any spend, loans, you you to expecting you're you're does student touch be about if Maybe investment what how fees think were that is for during associated should particular there that base be the to investment of the or your that come either the to if if you and with the looking it you comments, that the some that should implications like loans or are growth for could in messaging I'm use in the words personal loan well? with NII, more the And there into? get think just I as form understand products or is. awareness,

Roger Hochschild

brand increasing in investment side. the it parts, card on there the just So right. two Part of considering is

people at of do, we mind. You've we back, other terms offer top gap is of look we a behind there tunnel, some money But that in more ground building top out who just us both awareness consumers so miles there, we cash than of consider as as well. and products have put add Discover

going brand up funnel we about we're top heavy of bit mix, to marketing So advertising. a think type as that’s why our on

product consumers and strides private and the don't originator of alone is that great in example, checking our account some savings for the of products. holds even made are we've understand, true of We've the in let an loan offers largest we with themselves, are opportunity huge the the loans that the same business, second of account. across with student fees amounts products, understand also deposit There students of Discover no in out particular any for deposit terms But there non-core our products. went still

on building the of those. So it’s enhancing a and consideration Building both awareness products. card and mix non-card for our side of

Betsy Graseck

this this How in is year? should about that to XQ, throw of environment. and spend through should like four be throughout think then the investment going that divide just $XXX or spend by XQ a I back if and I in the end linearly, model off million And kick this pace the loaded take

Roger Hochschild

We tend on to the comment seasonality not spend. the of

Operator

our take from Bill with next Carcache Nomura. We'll question

Bill Carcache

on John, and you. a had I Roger for level the high guidance question of

generating of you're operating rich suggesting that, history growth in point that with we're your that everyone high and positive But you year's been agree earlier guys industry leverage returns expense guiding revenue this there's operating that to I commitment a seeing within efficiency. think guidance to have also a would explicitly and not your leading negative operating leverage. with guidance

like what's to And opportunities improvement seen past positive a operating to managing so it the commitment achieving what by as another, upfront in extent that to the get taking one now, in Discover more with improvements which make leverage from seems be think the you'll area, the changed, environment that the later. you the making investments along of in approach efficiency finding revenue investments and the cost we about is for lines opposed the guys expectation when need is we've seem to expenses you that to

share So about? an on high was is just and to hoping that's thoughts, question. only and way my thinking you I accurate any that of level comment that Thanks. could

Roger Hochschild

we sort efficiencies and budget and And lot I manage of and or an years, if been So here for consistent. we that we can first and a more you've but decades, money you've is new, the making It from that's side. be of growth, expense same trade team I'd then say a discipline necessarily John expense frees credit generate on up it's seen for side it's to the us isn't the more disciplined -- of the sort where try investment. whether off got the over think

to driven in and on be not opportunity feel making philosophy profiles that drive reflect team and at consideration acquisition costs some So longer to an expect money next investments into in work payback that do work Discover. But like see we there's side, of unit technology, good some a return here mentioned top the would with I we're brand advertising specific the the to particular opportunities sort discipline, put bit money that brand organic our to more And are I that. year. awareness the growth from we of down any to and with on funnel our in by really change put XXXX, investments read our or decisions of the coming on it growth, shareholders' strong for for we a dropping to

Operator

William with take from We'll question our Bob next Blair. Napoli

Bob Napoli

several revenue consumer pay loan the of kind potential of there guess the products, AREVA of the deposit banking and the revenue up just through some they are BXB growth you on, growth, I Is follow on growth that growth. products, And loan the revenue lot you've could BXB that Is last to over higher years? do made a in and time. that? and the seems over than payments get network growth a potential it investments goal is growth the a there of in

Roger Hochschild

Yes, see segments, can far and BXB very come from be more to a initiative. The that terms would payments of can be probably That are margins profitability. have thin, than benefited in multiyear love of volume earnings so on clear but we more we've the that. very payments our been driving focused

have something So payments we transformational assets. I a wouldn't collection expect in of but unique XXXX, necessarily

in sort and Club again, acceptance, team of the built fact take If and monetizing very Diners PULSE, about a some you're so look will so is at third that. time. the talking focused But on that terms sales network of cycle the global that largest you BXB we

Bob Napoli

investment Apple thoughts which segments, your Apple is those target as the valuations your on your some be have brand the there of of Maybe and probably the your environment, demographic, -- environment? deposit the Card, growth Card, In are maybe competitive to some going several going, of follow-up companies. the mean and after a to private response them of companies entrance super in the competitive [neobanks], with the on in What of getting space. high [neobanks] the on

Roger Hochschild

more in are and go. company those And our much private valuations our appear super-high driven as competitors. we're by traditional brand to seen investments come So

a high-return As competition, competition large about competitive. card intensively sophisticated be challenging always space It the think business. players, some intense. always you tends have but rational to but in I is it's It's

it's but as you space. the So new transforming environment the before think overall does. cards It's that is and underestimate Apple told I anything would Apple formidable, a competitor don't Card I view in one competitive can't I that

you a from, loan you decision a deposit give money. different in side, the it's On who terms from of your take who

key trust remain and And so brand of that. elements

direct-to-consumer really product ability we need growth set awareness. you have we to from compete, saw just strong and think the I the we feel very posted, we build as like deposit players head-to-head And to deposits emerging on branch some of the players. the opposed going really these based focus us online as of a lot some moving from with of to traditional is

Operator

question will from John take Jefferies. We next our from Hecht

John Hecht

mentioned of to that Actually Number ups one forward? most are of are been there. some able or couple my follow permanent funding and the a you I'm going unwind but in funding unfavorable you kind the triggers wondering aspects asked have those quarter questions is of

John Greene

deposits is year-and-a-half over the was P&L if actually came some back and So on the is you if was on on will go CDs there Fed favorability Fed expensive look more a then cheap the what books. that. books, see action, And about no into actions you at... there had ago, and And rate really come that time you we through if

John Hecht

and And the what where duration favorable should you'll deposit get outcome we expect that on costs? that

John Greene

So, year. year it's next throughout this and into

John Hecht

hundred would up taken as couple period. course follow basis think of then How funding percentage the XXXX be, about we over you've deposit of of a should question up XXXX? a points mix And in funding

John Hecht

both it's team So Discover, I the products to and the and we think growth general. great testament in enjoyed there,

say thereabouts, I five years deposits direct We that. three to XX% a consumer next to have longer-term target of and on would

plot and it line accordingly. do to it a way draw one to be So would

Operator

Scharf We with will take our next David from JMP. question

David Scharf

just pretty I up do repetitive that again my follow been topic. all I much when hope want Once have questions except not a to is answered

seemed the it was backward more was have cycle. highlighted think I On third-party fourth And written collections going couple late times, the professional and I quarter, had more then it a forward, looking broader investment down of spend, investment like in a you that of fees.

under us mean color with be factors? you internally? Is why little sort thinking I recovery Can defaulted cyclical a you we rates curious, about challenges capacity the that any finding with are should you to or more collectors. in-house of parties, Just besides third give just

Roger Hochschild

that Ss just collections in to which as be prior charge define terms house. off, XXX% clear, in of of we

about you scalable. very with employee, A analytics, And as marketing. been lot our our collections investments have in well as of own think area if it the is US-based that’s of so is

We have digital they of have great people online. talk impact seen but building may to want from who office not the about an are seeing There out therein, situation collections. a lot like

collections you where think is can advantage. I area so And achieve an competitive

something that change journey multiyear continue. expect it's our hasn't and a been been a it's in -- strategy So to there there, we been investment

On third we side, work the with do recovery parties.

And so we successful, in usually because structures more the recovery commission there are net benefit. but of extent to the will recoveries pay means is more that a fees

John Greene

And onto just adding that.

XX%. recoveries the up are about So year-over-year

is seeing more we the where you're the as of fact is also that's what wealth quite mildly. that reflective consumer frankly improving is factor that think and are the distribution in but strength cycle I of probably portfolio economic a increasing So and probably

on professional whatsoever. there story bad the a not So fees

Roger Hochschild

our any haven't for just the And side, will and paper, over not XX one thing out, recovery point on years. I we do sell of charge-off well

as opposed from stream would a who enjoy you the take NPV. those know people recoveries do just So to and you sell

David Scharf

your conservatism built there as And off XXXX far you follow-up, -- charge-off gross modification as quick of is in or a is charge percentage as range a I recovery any rate rate embedded assume just consistent for provided out? a net

John Greene

range we overall So that's think comfortable with pretty net that as charge-offs, I , mean we're guidance. I the gave a and

Operator

next our Deutsche take We'll Jiao with Bank. from question Meng

Meng Jiao

on pretty range, I broker off guess I is runway down consumer? brokered looks like the guess deposits here. I the the should in going that see It question, to -- guess, forward guess direct quick that as well the run I the one have deposits. expansion just as more, deposits we I were Is continued in the

Roger Hochschild

going an funding the that But decrease increases. our funding of percentage In that as of general, DTC terms overall plan. keep as should stack, We're continue that's as to the stack the in open to channel. the

Meng Jiao

guys same And you from question focused guess prior forward? deal. a then changed and going know interest partnerships or quarters, materially noting bank are the less second still M&A, message is is that in on that that BXB of terms the -- in I in I Has

Roger Hochschild

businesses in look feel banking our side, don't see our any we about gaps to we fill. And I that think you I think good that and if organically. ability grow we're I would the model in on need to the

Operator

take is Point. our with question Ryan Compass from We'll next Bill

Bill Ryan

dollars a versus you're and/or on pricing could some is XXXX? color share of and maybe was what profile. your give origination little lending, volume of idea in us XXXX student you your XXXX Question for market if and percent bit maybe seeing And what borrower of maybe in terms outlook what your

John Greene

said organically overall not on which So in had but inclusive we loans, on organic and guidance growth, provided we is terms of loan loan of student in growth originations balance growth, loans. we X% student

So to we're going that's not probably into just get think don't origination we most levels, the information. of helpful kind

Bill Ryan

any And color or do pricing your where share think on things that? like market is you and

Roger Hochschild

feel we had. good the season think of we've I about originations

disciplined. there kind share and we but of held a some credit, very environment target they're largest we position remain harder of terms where second originator, even to data, we we again, as get And in in new little So the market thought an were our who certainly entrants.

Operator

Oppenheimer. Gabriele We'll with take our from next question Dominick

Dominick Gabriele

of you invest to about global the investment what or are is other much When spend, on in of focus talked spend? talk And particular? to the significantly spend, given this in there investment much network plans Thanks. use the how investment time you've period about how the

Roger Hochschild

and One cost-effective. will spending. the We not look And two call the strategy. those think agreements the was the in highlight very advertising, acquirers, increase. our We highlighted around part change is we brand and again, significant the to building areas a it want on significant Yes, remain a working one of that acceptance, I out with did where some through built one technology. other network-to-network a are as global some at of core of we the we was

Operator

are no please. this closing Mr. questions. further time, remarks there And At your Streem,

Craig Streem

back Thanks, through and sure questions call. with your off. care come care that please have But anybody this and cut of wanted it. to take everybody's follow-ups, long to me make you Thank will Erika. if we for staying for Thank attention took any didn't But us we you we you. everybody of and

Operator

you does this for Ladies conference participating. and conclude gentlemen, Thank call. today's

now disconnect. many You

Discover Financial Services (DFS) 23 Jan 202019 Q4 Earnings call transcript