DFS - Earnings call transcript Q1 2022 | Discover Financial Services

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Operator

Good morning. My name is Ashley, and I'll be your conference operator today. At this time, I would like to welcome everyone to the First Quarter 2022 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 now will call to over And turn Mr. I the of Eric Investor Head Relations. Wasserstrom, ahead. Please go

Eric Wasserstrom

Thank good our Ashley. section begin you you, And find of on call. to can website, Slide I'll our today’s Investor X investorrelations.discover.com. the of in earnings Relations which morning, presentation, Financials everyone. Welcome

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

remarks Our will After our today comments, and for call Hochschild; our session. John conclude our include there Officer. from Financial question-and-answer CEO, time be a Chief Roger will formal Green, we

followed return follow-up question, by your follow-up During the to After one permitted the Q&A session, question, will question. please you be queue. one to ask

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

Roger Hochschild

listeners and the of three comments environment going morning, thanks the $X.X I'm to our Eric, on or the per and Thanks, X, advancements quarter highlights results, joining share. outstanding strategic another our my In expected today's impact this quarter, the our financial address call. to current for topics, we of earnings on first DE&I exciting reporting. tax, some and our had we've made Slide with results of billion and ESG after XXXX of around Starting $X.XX for

and growth. and Consistent our new and to year, execution the a continued discussion to conditions. higher acquisition small prices of XXX accelerated with sales price investments earnings sales up all economic the our contributor relatively prior improvement business our on were loan points consumer adding Our XXXX. year, geopolitical against account benefited volume result as categories. priorities backdrop to quarter at spending. about There's sales that lot consistent was been of in from in pump first basis from last the complex this a believe the of quarter expectations, on strong inflation into card were volume, X% the we growth with energy We XX% of impact approximately Year-over-year our

into performance continue with We in prime Credit reflecting lean value particular attractive strong, proposition. the credit new normalizing with our outgrowth with focus conditions. our on our to line cashback accounts also XX% remains market acquisition, segment, with pandemic, is This losses account robust the strong strength of labor along an year-over-year lending grew our management expectations. in and prime throughout consistent credit and

anticipated stress evidence not into the have credit year. we pace coming seen the Importantly, that moderate normalization beyond we of of

address to will expectations later, end narrowing we're credit our John as range. for fact, losses of our In prior the low

growth, We while making capabilities continue for profitable to enhancements. manage expenses product analytic investments effectively and

further X% cashback card As banking non-card market broad as struggle that fees, this growth in digital our we our to our a cashback launched debit demonstrates, we're first lending and in But we're enhance investments growth. making offerings of This innovation our digitally including on native, focused mobile account product In is suite full debit products. also significant April, advertising product. and later leading growth the match It to on features experience. service. like of We as this access product customer items including investing early industry others more plan paychecks, transactions year. with our will to on well for no provides early

war. in humanitarian From on X. is currently issue views the of more environment do me any expect anticipate the Slide We country. to The Ukrainian close talk pressing most impacts primary in from resulting our And Russia's of our impact as Naturally current the wellbeing this for well some how activities the crisis as on on with we no macro perspective we our concern the business, we is for of material Ukraine. ties invasion to conditions the employees either people let not and Now, have customers Discover. narrow about our nation. business provide

open our and an we can. portfolio. Russia. issuing suspended the forward as also we the a resulting plan soon against efforts consumer across while of not partner The And about indefinitely globally sanctions war domestically. of have have risk evidence Club concerns office in We on of paused We this we in Ukraine, do Diners in moving our Bank raised to our as have certification Ukraine Russia recession any and lending see temporarily

terms nothing a is there that consumer that and good imminent. borrowing remain downturn metrics in or spending of we're credit suggests Our seeing broader behavior is

In the potential number outlook the spread These this to hikes, into in while our has benefit our growth, has our trends Fed momentarily. over give Federal the and Reserve as forecast we're given we partially on from anticipation the the our flattening will yield by high coming income, from inflation pressure for receivables to conditions and of we're that combination concern business monetary structure improved than the market John been policy margin, slowly expanding which sensitive, are for strong greater elevation of the create sales are natural rates our macro aggressive assets inflation. stem modestly by Another while the a and much curve, had immune sales to we rate are around year, hedge, outlook effects us of inflation, significant makes summary, has model the from normalizing positioned thought of volume. horizon. Because fluid elements of credit. expense discuss confidence offset inflation And contribution our of may more somewhat not

a Equity communities and our In March, our I that out produced related commitment first to to reflects our point Finally, diverse customers. which want ESG Transparency our workforce supporting highlights new Diversity Report, and Inclusion disclosures. we

summary detail, that update to our to environment, the details We intend impact turn other in to John over encouraging, and With includes do among review advance is published so greenhouse our I'll and for our The first organization, our the reports more to more to an diversity expectations XXXX. ESG call that, to equity in provide in our recently emissions rest results new of our our and also gas communities. and financial on on reduce data items. we the

John Greene

Roger. And you, loan execution I'd begin summary accelerating our results reflect on financial on to and Once X. with performance. There like everyone. again, with our this our strong Slide solid Thank a I'll call things results morning, growth business credit here. quarter out priorities few are good

have we reserve our that the profit reserve $XXX our first In is included of is release, an before last because for release. million would up while tax year-over-year. XX% and had our $XXX actions. this The changes, net quarter lower year-over-year income first year, Adjusting of quarter reserving been million reserves

net million, $XXX from X% total prior revenue our interest of the Second, increased expense reported or year.

However, loss million investments. net equity this included and $XXX

earnings our of environment. loss, this increased Excluding These total fluid economic points power underscore a the in even XX%. revenue strength core

Let's turn of quarter. details to the the

driven average driven and prior Looking or points promotional year-over-year X and interest interest points higher at in interest net made Slide improved funding sequential reflected revolve of up margin XX-basis quarter-over-quarter. $XXX On from up increased modest funding further of light four funding. in by lower deposits now rate progress X, XX% decline partially payment the higher X funding and balances. helped X% costs by total by margin offset with by costs. The This NIM XX.XX%, net a The net increase prior mix basis a the up NIM a basis making million income offset partially revolve loan rate a loans link better the card reflects increase quarter. shift We point funding mix credit boost mix yields in points. XX on was sequential improved rate receivable. by rate on was basis, consumer was year our in the from favorable

rate However, levels. nearly payment of remains pre-pandemic basis the points XXX

that in and this student reflecting the will Receivables XX% new a growth XXXX the payment strong back down loans We continue loans higher last half from year. X% into robust continue through year XXXX. by due were rate high through X% the card, continued Personal increased to year-over-year sales peak sustained rate. to the payment were which Organic and of originations season. solid normalization expect account driven increased the

X. on revenue other at Looking Slide

Excluding which modest sales. a year-over-year million, or benefit of remain were categories. growth million inflation the Sales up drove higher over to in rewards the portion strong growth a all non-interest the with or expect increased short in sales was will net that Inflation term. expense driven to million, income growth by equity the was prior XX% the loss also This across quarter, discount reflecting we drove XX%, and year. $XX revenue, compared sales XX%. interchange up $XXX investments, $XXX and Strong

an increase increase up Loan or down We rate However, late points basis instances. fee million, fee the to rewards full rewards two was the driven two still year XX%, primarily by anticipate was $XX to basis points. four rate income in year-over-year.

or were Moving million, X. year-over-year. X% Total to up operating expenses Slide on expenses $XX

bonus marketing which Excluding just lower expense X%. Compensation offset expenses accruals on increased investments, and average year-over-year slightly salaries. higher headcount, was by was partially down

expect possibly We and competitive. to expense Marketing increased wage XX%. we pressure XXXX in of million, and degree $XX remain into XXXX, salary some take steps as or

versus our growth million, processing sequentially. a XX% continue cashback ago. increased expense debit a Information support flat We products, the in card $XX products. and year-over-year to period level year for banking including of or This invest relaunch consumer low in was our

to efficiencies. forward, prioritize support analytics will growth, to and operating investments generate continue Going in we innovation,

net with for $XXX basis Moving were up prior million were offs from charge down modest quarter’s X.XX%, year basis and to XX our normalization. million low. Total charge-off $XXX the in-line lower points last the net Slide points X. low Net from than -- credit charge-offs $XX up and Total sequentially. remain year million record and prior we’re dollars expectation XX

to allowance Slide the credit on losses for Moving XX.

points released reserve dropping and in reflects to partially portfolio, the The rate strong credit performance $XXX million reserves XX offset basis reserve growth. by continued loan sustained to quarter, we our decline our primarily X.X%. from release This

inflation has environment, impact from now The macroeconomic the the risk shifted and at pandemic of have on the to primary of outlook. potential slowdown Looking her Fed sources lesser impacts actions. a a

of shifted, While the the remains view risk has the consumer healthy. U.S. economic

XX. slide at Looking

the was still well $XXX than on quarter We above period tier executing target. repurchased remaining Our authorization. our for common equity prior during X of slightly the lower period common million XX.X%, and XX.X% stock the our

is repurchase Our on authorization board XX, per common share. ever quarter XXXX June It organic while repurchase represents investments expires XX. new a $X.X horizon. strong $X.XX program also sustaining commitment to capital our returning largest to This of to XX% increased Slide Concluding and share of our growth. stock excess on in by over shareholders our dividend that a directors billion evidence our approved five

favorable, and rates improved payment we XXXX our and trends spending expectations. some for a digit loans, first of the for in are improving conviction through outlook the growth. with quarter Our our Starting decline remains elements modest high-single

points basis This XX revising view full five upside our the of We now points are see to Fed first We XX NIM. basis view to at hikes quarter. relative for on includes the X each. year rate

rate magnitude. is Despite view above it operating hikes to modest net this, same expense. increases prior our interest up Fed XXXX there's pressures, Marketing two no to beyond levels If with for the rates Our low-single digits. upside change the reflected margin. non-marketing to would of guidance provide be inflationary expected expenses

our are credit outlook. improving We

We expect losses year. full the be to for between X.X% X.X% and

open the previously a While still And and recently program mentioned, about tighter uncertainty back current digital XXXX. acquisitions banking features approved positioned that and growth us our our as approach range turn authorization of underwriting confidence repurchase economic I'm to with we credit These summary, for year, conditions. trends product, functionalities. back operating And half last to generative account benefited capital the highly model. our loan manage as there's performance In management the accelerated delinquency a our we and are integrated growth share confident resiliency for share and demonstrate new while reflected our in Credit from supporting organic investing board while of results asset as increased line us in moderate the credit this a operator payments to increase With give repurchase well model our call of performance strong And and our new profitable dividend. into enable Q&A. expenses through dividend some disciplined expected. growth. We to strong I'll sales robust year continued and and normalization and range. our that, and flexibility

Operator

Carcache Research. question take from We'll Please with Instructions] [Operator go Wolfe first Bill ahead. our

Bill Carcache

John. Thank you. and morning, Roger Good

Roger Hochschild

Bill. Good morning,

Bill Carcache

reported over and intensity leading XX% But the operating stand whether points your of operating here for and out. us stronger are expense your peers Competitive degree report leverage. was than an results negative just basis That to is expecting. certainly in you frame anyone operating leverage Can positive of elevated I leverage you range pressures much XXX ratio efficiency think was sustainable? positive

John Greene

question. for Thanks Bill. the Hey,

we certainly, the quarter. with execution the in were So pleased

is efficiency ratio, the ratio the terms over and of the still we've past, medium we're we the specifics guided an to In efficiency would around upper what XXs. there expect that in holding in term,

of this guidance quarter a some on bit demonstrated would We before, as we XXXX above timing certainly indicated marketing Now that there. front. There's kept progress our levels. which that bring

skewing the a year. towards slight there's half the So of back

for continue from growth. for standpoint. will or standpoint some a as get watching to There invested invest as be shareholders an funnel market loan every sure our from we an upper dollar We're advertising making We well. or appropriate return and broad whether we expense lending

term continue medium to skis target. efficiency here of So on strong that And towards to we're execution. work I get don't over the going kind ratio, want to our

Bill Carcache

quarters? If on $X.X today, $X.XX to expect see you're billion, things would loan depending growth you point? XX.X% that you at And capital still to through be expect how how there from over Understood. consumed see that some could enough XX.X% next I up announced authorization above that sort capital of Or that CETX do out? running higher to level flexibility is the and the that to follow target you chance XX.X% would in on that get you play be much the helpful. we That's you may at billion you take down five

John Greene

Yeah.

still points to There impact of terms CECL a transition CETX CETX target. basis in XXX ratio, to about So yet ratio. from we're that the sticking XX.X% is

still then XXX I the just over expressed. us above target So that points puts basis

close So our approved investments two, But XX.X% four of authorization, to the next over just to down depending the target. thinking board and our years the that in is three, repurchase perhaps broad terms on the it. economy

to premature to would any way be that. it about So changes talk

Bill Carcache

you taking for Thank my questions.

John Greene

Bill. Of Thanks, course.

Operator

next from Sanjay our take Please ahead. Sakhrani KBW. question we'll And go with

line open. Your is

Sanjay Sakhrani

Thanks, good morning.

seeing of through now, So Roger, these how John. if are And playbook macro. cycles know not from you here? but the talked curious, been would the right know change, you obviously, anything you've leaning you, how things react? you as -- I of guys fluidity into what's number growth, of about are I just suddenly the I'm you're a but you

Roger Hochschild

Yeah. Thanks, Sanjay.

remains So of terms but would pleased lean say growth, in to growth balanced. I it we're with our

account from down I prime terms cost expect the investments of making, In we're our per be to last year.

overinvesting. where way that they enlarge, any to policies But as in said pre-pandemic. back cycle. our not we're credit So time, were we By are at it was late

we're credit exactly go. letting So not

So environment, disciplined we're still a of a the strong. executing on U.S. growth even the as especially remains model economic consumer

Sanjay Sakhrani

about industry maybe just about talk up John, competitor on you're NIM Maybe rate chasing seeing? know changes interest could sort rates deposit the could any expectations, I you but sensitivity. I Thanks. following such? talk just And guess and in around what you of behavior just banks raised you beta. from

John Greene

Yeah. Sure, Sanjay.

So in behavior. of competitor terms

recently through benchmark competitor rates this into seen against quarter. ourselves and we this past we quarter increased So quarter, the that have set this

pandemic, in aggressively fairly observed we our As moved behavior down. the you

matter on of fact, competitive the we rate As movements our downward. set a interest led

be in going is Now we're that. expectation environment. around rising that we're disciplined a rate My to

So the that a ensure to customer principles want we proposition. fair we are have

We to as also can. costs as of seek our kind manage we interest effectively

actions. So deposit how competitive when a and dictate and dynamics needs will we pricing how -- we combination take of funding

Sanjay Sakhrani

you. Thank great. Okay,

Operator

our take go we'll Orenbuch. And Moshe next ahead. question Please from

Your line open. is

Moshe Orenbuch

your was competitive some hoping -- bit competitors. Obviously, for a from a been could Great. little going Thanks. on I there's I guess lot you about if environment. Roger, talk the of

control. your kind much You was and of expense under in marketing new XX% pretty talked growth about an accounts

do So allows you of what your that that you be terms kind and to going of in it is growth account talk comfortable forward? about just can

Roger Hochschild

Moshe. Thanks, Sure.

focused it balanced new with a brands comes We well retention features innovate rewards, to around think having skills We continuing another reselling phone the paying our part is just and higher protect the launched through trusted saw web. services. down long And new I really Discover provide managing financial then a we The helping with accounts. as experience, distinctive people from one building of around one leading you process. cash a booking which helps information on spent brand to rate on just time functionality, of digitally, and not customer it and the value most the as proposition. every your both and in but the

depths competitive. And quarter, view so to confident recession. keep to us of the a our you're Occasionally, job lull this it about and in be able that any I allows in we'll execute seeing owners think, is business a succeed always it's and just that I card our But to for the grow. beyond that, I'm And going. environment. there's

Moshe Orenbuch

Great. you And talk Can a how a putting the little and in follow-up Thanks. you talked year? you in more is about any which can different in there be? about just big bit how are you're kind leverage direction, areas Maybe product. other that a much coming in that, debit could network it just the of the completely resources Thanks. behind

Roger Hochschild

Sure.

So advantages heritage direction. issuing in is purchases, card a but with support marketplace debit Discover real also in credit on the us and differentiator builds being of cashback the give able on new a X% terms in the for the network our which cashback both does business, to

work into we'll it. So way our

it for challenging investments for advantages payment services third-party focused of our to customers attracting sort And third-party on business. and of as John way is As then our that intend mentioned, our remain Monetizing in to Overtime, scale issuers we a And be network through business. part on a start advertising volume. rollout long-term. we more we'll core for our card the much pre-enroll product expect see year. gradually will later finally, on example our SRC Good it But build business. network. be the key broad we market issuing this that to we ability a we

Moshe Orenbuch

Great. Thanks very much.

Operator

question we'll go Please Stanley. Graseck our from ahead. Morgan with And next Betsy take

Your open. line is

Betsy Graseck

Hi, morning. good

Roger Hochschild

Good morning, Bet.

John Greene

Good morning.

Betsy Graseck

fed the looked deposits Nice nice how period a I pickup growth And we like growth balance as wanted move down. we to the funding liquidity sense through growth lows, in probably the strong the well, continued really a year balances, looks it about pandemic, as to at sheet the to I they're down -- just end and should got moved pre-pandemic you're you've say. slow of I given here. string during and quarter as that into which thinking some get that

So just how should wholesale I'm liquidity growth the planning you're on loan think deposit utilization thinking funding, ending how through versus about versus growth? Thanks. we

John Greene

Yeah. Great. Thanks, Betsy.

So growth, we're balanced approach. in loan a terms to going of take

talked of market XX% coming of OSA opportunity we the deposits always needs to to execute about and our So customer There's XX% funding the target dictate or if on CDs that. into from needs our liquidity go broker to from the base.

past this rates transaction ABS compelling an quarter issued rising in at overall. -- rate also environment We pretty at a

going So see marketing you be more of can. on order broad deposits seen we're and and then cost take in try a see the -- market we're There'll haven't the kind balanced will bit the funds you you'll to to bit that most to as a also it, little if of targeted we it. or more effective rate marketing approach. to we on get little deposits. And of going And did balance marketing

a in essentially strategy nutshell. So that's the

liquidity review we on Fed So and very, very from strong. a controls, the through went come it's just our out actually

processes and business the of position the around with it. pleased we're the So

Betsy Graseck

at the that Okay. understand John, could And Fed. then just as and that six, we us I rate -- eight, rate hikes for you Or XX-Q sensitivity that have follow-up, asset hike change, maybe from you hike to does the five what's a help whatever that nine how expected. should includes just go NIM think Great. if all? indicated, as to we that's apply that after take the rate five? comes And your you does in outlook seven, Fed earlier, How

John Greene

Yeah.

be annual X an between would increase a on XX for it to point somewhere NIM on math basis and the basis. bps X So

earlier. there's So Now obviously impact dynamics that, that touched other upon of it a you bunch right?

rate and interest through coming could net then that well the pricing deposit impacts revolve impact the as credit as rate, So payment margin.

to baked and lot hikes there, some our we a If from in are would we conservative this hikes why certainly of and updated that more we was So remains dynamics number see guidance. expect we we're that of that manage provided. of were kind upside as of into able terms we liquidity, effectively the credit guidance there

Betsy Graseck

But in X the same like to bp range per X XX?

John Greene

Yes.

Betsy Graseck

Thanks. right. All Okay.

John Greene

And that's an annual basis.

Betsy Graseck

John. Yeah. I got that. Thanks,

John Greene

it. got You

Operator

take our from go we'll John Pancari Evercore. And question ahead. Please next with

line is Your open.

John Pancari

morning. Good

question a into that your what is tell us, I follow-up beta. just mentioned? deposit your just beta that's to, Sanjay's you assumption think do guidance around just was As earlier Could you NIM you baked it -- deposit

John Greene

Yeah.

So thanks, John.

really in don't do So think in broad here I this about is principles. the kind I of of terms think beta. terms about of deposit What it

the proposition maintaining to are going interest we as about. manage going we're principles that have customers, just we're then that while to proposition for our can, attractive I So low and an as still costs talked

cost when to benefit So a in gave And very and the overall during that pandemic had order costs leader to NIM in shareholders. of rate very, rising that increase drive I down. expect interest liquidity low, hopefully our we in were actions we we said going manage environment, terms point tightly the we're price that of this plenty what I

So specific the month be now. numbers tend off tend I because from to a of to beta a tag kind don't want kind to they to -- be of

John Pancari

in the GDP. print this spend Okay. tame All Fed's we're getting card given probably here slow it here all? efforts broader morning, and right. That's the outlook economic then a helpful. factor on disappointing the I'm does a in regarding separately, backdrop, and And at economy your like just curious, XXXX slowdown inflation then a to looks

John Greene

It does.

the Effectively, through But in year-over-year a there higher to to modest envision quarter to year. was the this anticipated. happy the frankly continue it's XXs. than hard that. for We're down of growth stepping we is actually, kind XX% it's So sales upper see

John Pancari

it. Got

Okay. Thank you.

Operator

ahead. Ryan from go Please our Nash Goldman with Sachs. take next We'll question

open. is line Your

Ryan Nash

guys. Hey, good morning,

John Greene

Good morning.

Ryan Nash

questions been couple asked. on John, have maybe the a up of follow that to

balance we the the focus little curious, sheet a the side been on just few over lot as of the has liability I'm talk to rate has sensitivity, side. changed the maybe years. think a pertains could asset it but obviously, I bit last about

changes the rose? little last us improvement we rates seen So much think maybe a for rates in bit of can How time terms have you floating do more to unpack we relative significant you could to see in lastly, now level that asset rates? revolve BT And we are benchmark I have we a see back sustainable rates? with yields more guess, improving I can such the follow-up.

John Greene

Okay. Thanks, Ryan.

So there. there's lot a

revolve guidance. payment about. we So by actually decreased the our increased basis in XX with was original rate I how mildly that the rate as in-line by the payment quarter essentially the rate that points built And spoke way, decline

So about our derisked loan growth. other that essentially as payment or guidance we rate impacts for lower, think could drive inflation we've

see and a So upside rate of we payment other additional bunch could factors. to subject

kind pieces three other of break terms I would products. down the of there overall primary in or The is kind into I it categories would asset do of growth, what

to loans So you to double-digit originations Student have loans, strong at origination We XXXX. another there growth was to digits. so share. X%, we'll coming and growth down X%, were able the card, And be in saw season market continue hope up take there. but execute personal double the peak

given to product. over had we in growth moderate we'll level impacting loan that that some a time, expect So of rate high loans payment personal

to detail your together glean. I you're to you Hopefully, had the guess give be question to of lease a able So trying number information enough elements. I'll

Ryan Nash

good the credit. to range. was visibility, see you maybe lowering I XX the remained of bottom. follow-up really the fourth months the the on looking still just probably quarter have understand on at a And they're hard as so of probably you delinquencies of only It points benign, about up metrics, six predict. is really, some high-end to And Yep. credit basis But

about maybe the So potential the come range credit have included can towards over do Thanks. we the of in just of bottom And end the the the you course credit see now expectations? to year? in what's talk

John Greene

Yeah.

and that broad we gave gave tightened and So tighter we not around added whether the range, conviction guidance, our it. group. lower when the initial quarter range this as internally a or around perhaps end And pretty unfolded, we

visibility actually three expectation accurate months. analytics don't have said, and terms as we But perfect of rate roll surprisingly performance. you So there. have modeling have there's in quarter, we kind our been fourth of a The high

a So this And how out. can rest call. we in updated hopefully, the subsequent we'll see give guidance of plays quarter

Ryan Nash

John. Thanks,

Operator

Mark And our question Barclays. from we ahead. will with Please DeVries go next take

Your open. is line

Mark DeVries

you. Thank

reserve are So still you in that are I macro embedded levels talk if seem almost go expecting? mean Can basis what clears? the that? about recession it rate the think should assumptions CECL is where would some XXX your ratio above about happens about points we of just as How one. day And term these alternatively, some this near it could that's in uncertainty already reserve. of in

John Greene

Right. Thanks, Mark.

one was So yeah, the CECL, X.X%. reserve rate came X.X% day in at

day around So CECL one. some context

guidance the be we loan reserve best to new So So FASB, over of what estimates an adjustment in capture embed life by was right? and reflecting them did provided accounting rate. of would it our losses

dynamics time at today environment the macro Portfolio the Now have changed. has changed. certainly

there's sheet quality kind was the stronger As upper we balance fact, the our credit is end managing a day one. But of are than it a CECL through. still that uncertainty matter of of for of degree

of the prior we're we reserve that if could positive a or that reserve the are So capturing likelihood sure should view likely as and on portfolio And quarters, is through positive, the continue want the And we've either going half said consumer. We to job step macros next releases. GAAP. continues warrant really holding growth that appropriately losses the through view to increase macros be, overall, to rates broad and down Mark we're could of think in strong. portfolio There's definitely -- or no year. the year the the if broad the takeaway performance perhaps even increasing. this of combination is under increase, to here damage recession But in no performance to conservative through I this. really, There's make are any first

a are So all and credit from standpoint. factors those positive reserving

Mark DeVries

a just question then guidance. on And Got clarifying Okay. the it. OpEx

You kind to. happens second builds that indicated you not leverage? non-marketing seemed kind of that despite targeted maintain Should half, what inflation you've pressure a there as the wage change no pressures non-wage that in expense immune growing indicated we operating you're kind of kind to assume like some down other of as of what that flex

John Greene

Yeah.

here's it. So think we how about

and history So base, has years. We've is has got terms both opportunities, articulate done going visibility of Discover to we really disciplined helped. spend which to that to of some over tried long our two continue this half to It's expense dollars. stuff going -- how the the past of in and to my be and important it invest. to a we kind as see I've accountability of that. we're We're sense note drive And

also -- in our seeing third-party you coming and We're it seeing we're spend. are wages. salary inflation on as also We paraphrased, in

incremental So that to able we'll or order we be the transparency in guidance if to will deliver create shareholder for and to effectively manage that we -- on in to returns. either drive see opportunity to provided. long-term we order And we'll growth invest otherwise,

Mark DeVries

Okay. Great. Thank you.

Operator

go next And from ahead. Barker question Piper we'll with Kevin our take Sandler. Please

line open. Your is

Kevin Barker

out cycle? last that cycle, the rate aggressive this think you mirror this to might around? what are despite you consider be a your time when funding that base you And what the the Fed going saw this much feel going in more that do play rate we is costs in case, deposit cycle about last environment to are When you. betas Thank versus

John Greene

levels the time, We're of as proxy, of but a are different, heck would pace lot take a inflation. at of that inflation things there's here. record Last a higher out a couple of is Yeah. right? So I

inflationary higher. is this cycle, much The different rate savings into other the coming thing that is

two versus create will we're look the terms across be find in who's cash kind you comfortable our anybody excess of institutions proposition. competitive and the of whatsoever. offsetting take that liquidity loan kind in I rate industry dynamics proposition And any ironic subject those So it And the of But the with brick-and-mortar impacts. it growth to if customer experience, a rate. could those at our and a bank, keeps got could some very a

be to going it. we're So diligent on

Kevin Barker

spend your you how on dollars. disciplined very you're that mentioned you then And Okay.

on be how market dollars You're seeing consistent you spending in the a given little today? of where Are competition set commentary. pretty opportunity some they're just your may the exuberant in that in anywhere

Roger Hochschild

would business, say, in investments general, marketing. this on I diminishing get returns Yeah. you in in incremental

after the people cycles they with they in at that. a look and got spend maybe have past you the so returns heavily where while And seen less happy

and we'll X accounts So guidance an we feel on per we rewards also increase. good But only to investing about the basis side what both at X there we're see that point provide attractive level. of cost the

there wonder would out seeing certainly levels to be not or I that they're investment sustainable. whether of You're going heavy very

Kevin Barker

questions. you Thank my for taking

Operator

go Fandetti next we'll go to Fargo. And Don with Wells Please ahead.

Your line open. is

Don Fandetti

your but in Yes. a could And the have a on slow? know of partnership lot of growing payments. didn't a think out I take I just United I maybe know will if the point is sort Good sale activity a account-to-account as opportunity was small I a of of part refi home potentially business, then that there morning. off equity if you States? curious was you secondly, cash think

Roger Hochschild

Yeah.

will business, environment asset of their mortgage. think a in rate we households, Perversely, constructive. rising So their do equity very be X% greatest home be many terms could our

that it also we're isn't excited about while it, So huge.

our payment point the excited broad see anytime sale different payment disruption soon. network our of partnership, sale we're of with we're point of partners coming about to leverage existing On means who but I work range and don't fintechs want excited tremendous a of But capabilities. side, to a to and

Don Fandetti

you. Thank

Operator

our And go question Please next take ahead. we will with JPMorgan. Rick Shane from

Rick Shane

Thanks ships behaviorally you're about and terms of in seeing also terms credit in behavior, Can my discretionary of bit both in borrower spending versus the question everybody talk morning. of stratification terms a little performance across this you taking non-discretionary portfolio? behavior, for the

Roger Hochschild

Sure. year-over-year. strength growth, Seeing reflects Revolver that continuing through, up is sales sales sales across XX lend-focused our that -- categories. April, XX% than transactors model. But probably little and all strength a into are higher is where the say, still but growth

and across all is consumer categories. good breadth So

the In that much different very lower standpoint, normalization credit faster normalization his do expectations. that terms is at the of tend again, occur we're and But from in-line end to pleased, John with our segments. segments, comments in you a see very mentioned

Rick Shane

category lower band, from in you it. FICO spending to Roger, in any behavior Got seeing terms are of shift And any that category?

Roger Hochschild

travel up and lot been and what growth certainly, growth towards as across Not to necessarily. restrictions was. breadth There's all come really point a spend is compared of pandemic it volatility and But go, just I'd categories.

Rick Shane

Great. Thank you very much, guys.

Operator

And we'll go from our next question take ahead. Robert William Napoli with Please Blair.

is Your line open.

Robert Napoli

been plus, model to it's the consistency Thank And of a good last just I A good decade Discover see. over quarter. you. so really congratulations. morning. Good has mean,

what just the banking these how And Just that of economically, to early products then rate? of going of product, like overtime? comments product? seeing you're you're business, some monetize banking other the on paycheck, on cashback on the penetration thoughts products Any in your that demand for debit growth kind

Roger Hochschild

early It's Sure. still days.

but I well fintech, in the traditional overtime, accounts we're slowly, franchise. different the to excited And of the some really branch into seeing. also broad a deposit is lot both but way with provide other and neobanks So but demand We opportunities Discover but as there. the balances think products very range of a provide savings CDs, player products both also compete we're the to the such and point won't much forecast, of entry card newer build product any probably positioned of about that's out our cross-sell with

later market term. on said our that advertising So start focus broad building year seeing for we much our you'll very product. for more as the And is this earlier, long this

Robert Napoli

while or years position today say, very thoughts competitive maintaining done on Roger, five say, then any years thoughts, ago, to nicely. five you've so versus, five just of And versus, gain Great. share today the ago, positioning on competitive returns. I mean But any the just pre-pandemic ago? ability maintain your Discover years

Roger Hochschild

Yeah. I the and beginning freeze anything but at with the card, it for years Back our feature back online, out brand customers that innovation A now remains you information superior the very strong your well have around cash of terms a for the of in there. made some it's the protecting for comments of Even side. five to proposition kind for trust, customer focus value ability very been mean, rewards the consistency. might the same. go competes their program I'd then, years experience things on that's ago, a to we do XX

intensity some the more competitive as as pricing same good feel You’re way, But programs in much but of position. changes our still the little cash on rewards we pandemic. the miles through a also the about space still very compete

Robert Napoli

Thank it. you. Appreciate

Operator

question our we'll from go of Mihir Bank ahead. Please with Bhatia take America. And next

is Your line open.

Mihir Bhatia

my taking solid quarter. Obviously here really And results thank for morning. Good you questions. this

too, will more to that. he fees from you and from guess I -- on less some for certain little brand, noise congratulations student the about a think have being card which impact on of of also this your bit consumer-friendly. on plays hearing into CFPB just you side But talk fees season, late you you extent, rumblings loan the But act still, maybe about an extent Were the obviously, about just So could the to the I that. more the to out on yesterday, talking announced But there. there, announced both he's forgiveness or and week Washington. reopening maybe I a guess, hearing kind

on you. Washington going So just situation? Thank the on with your views what's

Roger Hochschild

Sure. Yeah.

working protected. side, enjoyed So are of consumers have the on and and the all in regulators to aligned our first, we enlarge, by wanting closely say I'd with good relationships terms of fee be

it's first that Discover of key it any revenues. pretty no material to we of fees the the our compared safe the part our products, percent impact. anyway. deposit now, fee to change Right a proposition. have We us to late side, value that, of As our small you've well a that very the customers overly extent on have changes on But set harbor our it's the accordingly. Certainly, fact an don't we we're deposit positions can very, expect And for seen, competitors. our at waived

student terms the In they difference loan have that have fund. terms seen their ours payment we given ongoing loans program payment between who It's of to the of they big important educations on of there's just seen give pressure loans, loan. federal people and types the a in to, federal on the just realize some holidays probably rate that

the in nothing do we example, four-profit sector. an As

it wait and see own So our to be out yeah, disruptive comes of Washington, we'll overly for we what loan business. don't but student expect

Mihir Bhatia

steep XQ curve guess you. understand really when what function Got maybe kind here like changing? you're I'm get a versus based I -- the And to back year. outperformance second. to outlook than increased half much we to turning half back maybe a less the back you any the like is path it. be the credit gaining XXXX, just had for of for to Or is, like is you little to this then state? how of of the it Obviously, a is of trying a -- Is from But it of improving what normalization normalized the just front expected XXXX-XXXX? do Thank confidence that change? on

John Greene

the for Thanks question, Yeah. Mihir.

previously said XXXX. through normalization we we as While expected

the in our function confidence was narrowing in Now range at expectation out, come say with, really kind you kind a anything of XXXX I out the is in end around of that that internal here largely when of frankly, get of forecast it's going lower terms range. predict would the to increased we're to hard of What timeframe. the an

So around room the things some as giving we're proceed them here. of wiggle lower But the expect be end range. to, ourselves still if we we'll

Mihir Bhatia

you. Thank

Operator

we'll our next And John take Jefferies. ahead. question go Hecht with from Please

Your is line open.

John Hecht

more that -- my wondering your the segment? maybe asked. its you your expect Thanks, And questions effect importantly, expires, impact on is if pretty even of business. you but any moratorium just guess broader it's I I'm when been lending on there, have specific consistent to I guys. But it's results see Most important mean student been I have overall any have there but outside business. moratorium, turning trends would small that the thoughts credit the know But to on important. overall.

Roger Hochschild

you a We loans. pretty have underwrite on expect student think we Yeah. And personal to carefully. or to it modeled it We've look significant card about don't at important as loans, how it's those. impact

scores. the majority For by are parent, our very undergrad loans, the strong vast cosigned FICO

And modest as back the a negative of liquidity student the they private again, terms in but dramatically debt modest student of our program education also who probably the than I'd to is they have side, go on benefit loan paying So the off amount the to finance of credit on more nature towards their the payment students federal loans. have portfolio. a put and we've participates, seen different rate

John Hecht

Thanks. sense. Make Okay.

Operator

And will go with we question Jiao Please take ahead. from Bank. Meng our Deutsche last

Your is line open.

Meng Jiao

Great. Thanks question. taking for my

the of pristine loan you But there. portfolio. sort on Just yield. guess given stage standards also sequential a personal early we've the the are tightening at in that decline just and seven-quarter looking I'm question I of there rates seen quick sort loss

to the just it that? Thank thoughts primarily So of that's you. sort just elevated get payment Or rates driving wanted is there? your

John Greene

are Yeah, it's a couple out of factors playing that here.

on then into So we we other the was pandemic any verification -- all pandemic, the loan first then the we piece coming had. than of came XXX% our hit and to also pretty product the And underwriting, personal were when we we including tightened product doubled we prior And down in loans. more we tight. stringently

an So we were super careful. impact on had growth levels. That

manual since have reduced We underwriting. our

benefit as the to growth product. payment said my earlier very said the looking the the underwriting and at we to is pristine. standards. dynamics. balances expectation profitable We've credit is in we that loan were there pre-pandemic back now we'll kind as of box asset. I rate made been positively where are conscious got earlier up strong, And competitive have seeing choice that subside, comments, in And We're we're for what because a And in high were in see also of I loans reduce situation that it's some as a So the yield the we've growth. well. Originations in opened returning will

Roger Hochschild

Thank you. Great.

Operator

no have further We questions.

Roger Hochschild

with And Ashley. you, I Thank that, we'll conclude. Great. think

please additional Relations. any feel in Investor follow to great free day. here you a questions, have have up If And

Operator

your you for Thank you. program. participation. conclude And this does today's Thank

time. disconnect at any may You

Discover Financial Services (DFS) 28 Apr 222022 Q1 Earnings call transcript