Earnings call transcript Q1 2023

Due to licensing restrictions, you must log in to view earnings call transcripts.

Operator

Good morning. My name is Chelsea, and I will be your conference operator today. At this time, I would like to welcome everyone to the First Quarter 2023 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 ahead. Relations. now Wasserstrom, Mr. Head of Sir, the will to call Eric I please go

Eric Wasserstrom

you, Investor slide morning, call. good find in presentation, Chelsea, to section can investorrelations.discover.com. Thank morning's of financial this our which everyone. you I'll website, of two Welcome on the our Relations earnings begin and

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

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

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

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

Roger Hochschild

for the take to quarter XXXX. Thanks, in our for the I'll of and some our will and review listeners Eric, the our of details on begin through thanks updated results on highlights quarter, joining then and recent banking perspectives today's industry, John commenting call. you our the first events by

two of portfolio losses system of catalyzed segments banks, of funding and embedded This and the models include the the raised stress multiple in past quarter failure an that banking widespread event large more some questions about banks.

with trusted of strong its range to In focus funding, through us how risk prime model, conditions. diversified and succeed contrast, our operating conservative consumer positions management results our underscore on brand, lending a

quarter and income $X.XX our performance guidance. leveraging service, our few improving results We of a $X elements of inflows, experience We our particular terms digital deposit in reported an we're per consumer to record had share. highlight and environment. or our call all-time quarter of that want out award-winning I customer billion this leading challenging net in key first in

our positioned our we're remainder liquidity our the also outlook enhancing may the focus regulatory more believe believe and rigorous of strong as conditions more XXXX, for to We management adjust standards, well there is for we to on systems. given evolve. continue internal We compliance and we potential look we requirements capital As regulation. stringent

included workplaces to is best among received the milestone we one This us with respect this honored and Work This time ranking last to in parents also builds human investment been Fortune's XXXX. first workplaces earned upon as past capital. an for in quarter XXX our important the we've distinction for have Companies Best year, to recognized of women. Fortune's best for it and We're recognition

our consumer leading In and strength, balance investments conclusion, digital strategy advancements capabilities we and our in of believe support bank. people sheet becoming earnings power, the

more I'll results now to over review our to turn in John detail. call the

John Greene

results morning, good start and Roger, you, summary financial Thank slide with everyone. four. our on I'll

increase Our a performance slight this outlook a credit and by our year-over-year quarter increase, in growth, resulting reserve characterized on a normalization, change macroeconomic was environment, strong the in continued revenue expenses. to

XX%. or on year-over-year the up details slide five. income interest $XXX starting was Let's Net review million

higher net continued and margin offset interest partially rates, promotional increased benefiting prime expand, by funding Our to higher from balances. costs

and driven NIM growth, modest from and sales sequentially. account stable at payment which points year seven the reflecting moderation. basis by XX.XX%, year-over-year, basis growth prior XX rate XX% ended the Receivable quarter points increased was new up growth, card,

very year. so Sales of high in we XX% slightly is is prior in experienced XX% of X% the higher in coming a than far modest growth from comp but experienced XXXX. off and quarter growth X% growth increased in last X.X% April April in period, the this the Sales we the down a

of points slowing from above XX rate rates. XXX the pre-pandemic growth the card points The past basis offset grew X% months, the on The several payment payment expansion growth basis over the by standards New underwriting decreased sales but over impact receivable card in account in tightening slightly of and level. the by quarter currently prior decelerated, was reflecting decreases year. is

non-card higher year originations by loans our Personal the were payment up products. lower XX%, to and Turning driven past rates. over

We to consumer reduction rate. by in while X%, demand, staying this of continue disciplined strong the product. by largely loan receivables driven payment our Organic student experience a underwriting grew in

year-over-year terms X% In deposit consumer XX% funding were up and of balances mix, sequentially.

now our funding we continue with over of we As total quarterly mix to Roger XX% make target medium term. up highlighted, deposit insured the and funding Deposits deposit record achieved over to growth. XX% XX% XX%

of remain at open our Outside and funding costs. attractive deposits, channels

example, April, an upsized notes. of in nine our This than and our rate tighter fixed points was ABS card early spread securitization. was billion As we basis $X.XX November issued offering

we to resiliency received in downturn. our by economic upgrade bank our banking and an and risk Additionally, including a recently this of reasons support Moody's ratings Moody's company. number conservative subsidiary our prudent holding underwriting, management, a cited for upgrade,

the fee net six. quarter XX%. $XXX on year million these, our for up Adjusting an and other equity quarter. was Looking X%, revenue. loss to interchange a by slide loss this This to investments million income revenue driven income compared our was due on in prior Non-interest partially $XXX and at or increased primarily the discount higher non-interest million loan income $XX

the products. increased up or slide XX% consumer XX% $XXX Marketing continue million, as on expenses $XX X% in card and operating or to Compensation growth we wage Total inflation. quarter. due seven. and prudently primarily headcount invest to to from for were and increased down costs banking Moving up million, prior expenses year-over-year expenses were our

or Professional period. in consumer we increases, was and compliance fees leverage and our our efficiency ratio driven XXX increases about in operating points support XX%, that XX%, initiatives. basis Even consulting the technology and activities $XX these with generated of by investments million, increased

card XX of the XXX quarter. points points the performance credit the than was from the years Slide two with and more sequentially. These expectations. higher the Consistent portfolio, and the prior older higher loss basis new in with to normalization charge-off X. and basis back remain basis XXX of than In were January, charge-offs past rate net XX a X.XX%, year expect from Moving basis points we up our on points the typical year our commentary vintages account net trends Total rate. to seasoning higher of prior prior X.X% consistent vintages

Turning to the on X. discussion Slide of our allowance

potential two typically in quarter, increase the by This of increased the was driven expectations points for X% our About $XXX rate to rate the allowance our fourth XX XXXX was our We in of our we balances a runoff basis X.X%. and economic in seasonal remaining quarter. increased we change points increased basis experienced our reserve reflects reflects by to impacting million, the XX X.X% that The year-end portion This macroeconomic in by environment. largely by This driven growth. factors. lending rate reduction the to reserve employment transactor deterioration of for the range. expectations midpoint

We will the macroeconomic make and our conditions to monitor adjustments continue to expectations.

Looking at Slide XX.

XX period not was of at we stock our quarter on Our points. $X.X Tier capital, net if opt-out our common quarter. were the allowed The impact the end AFS securities million. was billion XX.X%, and X common about portfolio during equity basis of the $XX unrealized our The regulatory have the repurchased been for would loss OCI on

remains of position well and capital robust ahead regulatory requirements. Our

of a share. was excess prioritize by to $X.X capital We approved the June our to five press continue our $X.XX common quarters release billion Board that to and shareholders. XX% in dividend program Included per growth repurchase and increased Directors share announcement investment returning our strong for in new ending the organic XXXX stock

outlook. our with XX Slide on Including

low Following mid-teens. first to to change loan the strong quarter to There for year we no is raising are forecast. our NIM be our performance, expectations growth this

We are than XX%. less for guidance be maintaining to operating our expenses

expense and to and from growth service pressure deposit in However, investment our and in on support service technology. and we of do related customer risk see accounts upward continued professional this collection lending

charge-offs our delinquencies XX We to range reduction and to This to by roll end our range top X.X% are expected points. of based X.X% targeting the a basis on current net represents rates. the of

authorization. Directors share Board Finally, as a our approved new mentioned, of repurchase

towards past well this of we're We have to positioned on capital first half us our financial this significant a our the share objectives. conclude, and returned given we To second year. over into cadence have substantial standard buybacks more of deliver anticipate quarter over two the and year, moving years, momentum excess results

that, back I'll operator to turn the to call our the Q&A. With open line for

Operator

Sanjay Instructions] our from first [Operator Sakhrani question KBW. with we'll And take

line Your is open.

Sanjay Sakhrani

you. on morning. quick Good the Thank question John, reserve you had. commentary

the know to X.XX%. take to you sounds went I you had we assumption, Just And clear, scenarios. all be unemployment rate out, average like that above because X.X% the scenarios. the from the expected range think of about the between low unemployment that waiting X% or of that? the it Does When guys panned the end a meaning terms necessarily in was And we hasn't charge-offs to, also better? that should just way this it's the more quarter, of of how coming rate you it out in narrowing

John Greene

Yes. start aspect. of Thanks, swing Sanjay. question the with Yes, the reserve charge-off I'll and the to over then portion

So as of ran mentioned, we number we different a scenarios.

the of at driver and And for centered typically around from in north X.X% essentially XXXX. ranges between was outside looked first that X%. improvement a X% to then range We of remarks prepared transactors rate do the my I off the as basis to reserve in of about of related they XX in the running points kind we and the X.X% So a unemployment increase XXXX quarter. slight talked in

have you reserves. clarifies So question on clarify questions any hopefully, your that or

Related so a there's charge-offs, to there. factors of couple

and and performing it roll what terms rates as the first most is say important of we the is I almost to The in that exactly portfolio would expected charge-off, delinquencies. is

So we're that. generally pleased with

line we the by, we each to As have total year of goes better what be. and quarter sight month to expect

a to look models models of then advanced Our basically beyond forward, rate good internal roll at that. we anything very, very six and move months take for can more kind

our the September. as of first passed models. sight quarter beyond line through great on relied And analytical September, through So we've then

on upper able reason the charge-off give the from update that end. we'll each essentially that's And So quarter, guidance an why the to we're certainly. tighten

Sanjay Sakhrani

Okay. Thank you.

Operator

Thank you.

Our Moshe next from with question Orenbuch Suisse. Credit come will

open. is Your line

Moshe Orenbuch

you of perhaps talked into or drivers, I kind credit seeing Great. that the kind in the new about of either more environment? growth. slowing competitive drill the a consumer Could down what of terms of in kind account in Thanks. guess, I little guess, environment you're you of, Roger, first,

Roger Hochschild

Yeah.

center competitive the of well the a the right? -- remains money in banks, deposits. start business capitalized key card lot competitors the are larger of environment I'll robust, our credit So Most

So card's competitive. to tends always be

seeing last the in some we've at some tightening very what talked of year. the the we I And growth also then We've margin. credit saw about the over think policy. results of changes made comps you're are tough

feel our appropriate we booking, believe current we're really new good credit the So but also for policy is environment. about accounts the

Moshe Orenbuch

growth revenue Got it. much higher. comment to more of made, about the if maybe talk would were bit And maybe little expenses how a John, you can you be that expense talk, that tied

John Greene

Yeah.

as So mentioned. remarks, I we're pressure of in lines than on said little bit a we've guidance, we less maintained a prepared XX% I although the seeing those

we marketing growth of accounts, So in to opportunities in seeing in that said was of be an are account up the appropriate be terms the that to double still January we to despite of rate expect growth with expected digits. what case still generate We risk good reduction the new we marketing, positive tolerance.

spend out that be The to third late back the -- in quarter. program, rolled anticipate in marketing be the roll early will second other the debit out cash quarter, the maybe which portion we to of

the some deposit substantial think and account franchise. product as build continue generation we some -- both strong to our well to to that help as new going build behind activity, put will generate that features awareness the we're of So product dollars

Operator

you. Thank

Our from Blair. William come next with question Napoli Bob will

is open. line Your

Bob Napoli

front? slowdown any give Yeah. wondering in Thank you, if out was called tough month you view The and could your comps growth -- in spend consumer? a just color in the then good year on on you're of change that health seeing the I But ago. morning. any it's the know April. of what of you I that versus And

Roger Hochschild

Yeah.

trend. slowdown is say So a broad-based. And I would pretty continuation that, the the of is really

at was a the March, quarter X%. If itself, growth over dropped But sales to had X%. you it little overall look

think I got But tough a categories, of also last So sales reduction in is the up XX% you've just broad-based all were April, inflation. pressures terms in from it some across year-over-year. of comps some

thing for strength important For job the and most us, that remains robust. the of consumers, market, pretty the the

continuing consumer overall, are tightening pretty and is while that, we well. still along up So the holding credit

Bob Napoli

and to guess, on been more any thoughts Debit product strategically? of do Cashback just on Then -- know do believe have lot you. the work what ready Just years, will, Thank really I it. I you're like doing and you it the you it seems a color on roll you for that over guys any with

Roger Hochschild

from virtually their a payments about. having one are lot on pandemic network. account No, the bank -- proprietary transactions X% debit big is primary we're back of match. more advantage bank. consumers a can a with the that or excited cash take checking Yeah. no It's product dealing outcomes We comfortable something that is And it's unique. really of debit even the for direct Offering

but leading this our part going initiative, digital of critical home way come. to credit to being year, for years equity, is for this So And being be but not a bank. transition student cards, first loans, just the true loans, many more than to

Bob Napoli

Thank you.

Operator

you. Thank

question next from Rick come with JPMorgan. will Shane Our

Your line is open.

Rick Shane

takes roll out the see what's it's look rates. guidance, credit Roger, the what's constructive questions I'm morning. Thanks your gives that everybody NCO is of factor and the rates, you puts some payment that and pause? most at my when whether most for numbers, you you about of terms taking in you this curious internals there of the updated do outlook utilization, you the -- see What and the the

Roger Hochschild

Yeah. varies in for portfolio. what accounts for It new our we look versus

factor the of indebtedness, comes when even of For it's payments, use. side, at pick the behavior payment, portfolio in the levels the in But given hard overall during we we their models certainly, terms month. complexity an look the payment a to individual yeah, amount of of

look we're of in continued on every across products. consumers general, all different something I doing have our day that still we given So every tighten. account, would but well, And focused it's are we the to say, growth, at

Rick Shane

it. is to because -- reports, one away scan when your you And that you? get a of for -- your you right concern you Got metric point might kind daily there to to it's

Roger Hochschild

Yeah.

an hard a believe, may at numbers there are have basis. to on amazing lucky few to I'm daily team. you it So I but find very look

can't But single can it you frequently. a so look to at point And I little a number. less

a We that are reporting. our have portfolio are some score complex composite literally a lot risk behavioral of variables in see models there countless that on again, most our learning internal I of But evaluating machine credit.

Rick Shane

it. Got

Okay. Thank you much. very

Operator

Thank you.

will question Stanley. Graseck Betsy from next Our Morgan come with

open. is line Your

Jeff Adelson

overlay the wanted a is fit John, going on growth. Yes. to was know lending potential for tightening follow that but more Adelson into just up Good Hi. comment on you wanted think impacting for a I comment, understand in the I This maybe Betsy. morning. reduction economic about to just regime? to that Jeff is potential macro of where Discover

year I side, meaningful you doing loan on growth seeing the to know would slowing you're that some tightening, you at revisit already what growth yourself cut, point account see your do more a today? this but you're just maybe some taking cause wondering,

John Greene

Yes, thanks Jeff. the question, for

growth for at bit. positive, loan moved very, very and as look So growth we why loan a the we XXXX, we that's up range feel

then So stress to within openings the lending and overall additional in changes consumers. what job in signs further and trigger the terms of number meaningful the be would it the environment outlook, meaningful changes would unemployment of cuts, of

payment would timing take another. itself, of bucket We So rates would within it to portfolio -- one rates, flow at be a the payments. look from that

broader So of those as be delinquency would charge-off vintage the of certainly well all a kind indications rate as signs of basis. and on the

and growth as look continue we we manufacturing be sector, gas, I believe, strong of defense, supply things But now, oil care onshoring at right So health to the continues. sector, strong, employment, chain right? in have will and

not to any seismic tightening the is sense we're have that So action. my despite going fed unemployment changes to

And and to around we're we'll accounts the make the are means putting profitable. that at ensure on good that -- things look that strong. and the So out look to that at service folks calls our continue collection that margins accounts customer are early warning ensure remain in to we flows the have triggers, reach collections and cash can portfolio so that that

Jeff Adelson

technology. Discover is to on And and technology anything you. just there focus Thank wondering, in that But been its investment. lot expenses advances and want just nimble I -- one own pretty follow-up in AI that of investing a and know some on space. been I out on has have There's there

John Greene

Hello. the Jeff operator? open? Is line or

Operator

open. still is line His Yes.

John Greene

Okay.

Eric Wasserstrom

the of use essentially a question, little I it of we the but Jeff, last I missed was AI. bit about think think your

So.

John Greene

Yes.

I'll can Jeff if we or So why -- you Betsy, in follow like. don't take the I up briefly. afternoon, And separately that

of So investing in terms in technology.

four I'll -- three there's strengths. it, there's, So call three different or

ensure leading-edge to learning, is have we first The include which capabilities, machine would AI.

a continues Second network, is are global systems minimum at market to edge And or ensure third, that core and our our that leading robust network resilient. the sure capabilities. making around have

as as system So, those invest in support remarks. compliance in talked to are our as about aspects continue technology we the management the we tiers and prepared to those overall well

overall, So, capabilities, ensure that invest keep We institution. area in need of technology We're a digital to to it's continue investment. an we to advancing.

Jeff Adelson

you. Thank Okay.

Operator

Thank you.

Our next from with question Gabriele will Dominick Oppenheimer. come

Your line open. is

Dominick Gabriele

good much so franchise thanks Discover, of KYC. has I actually given and fintech I prudence having way that the Hey, would players some some you morning. imagine your And the are of there. the think difficulty really strong run

to account. love when a just I for difference hear a Thanks about an KYC card much is credit your issue for talk guys. you you credit I'd follow-up. debit versus And extending a so opening And have with checklist card? the so there And

Roger Hochschild

Great Yes. question.

BSA, of others are AML that KYC There focus we is on. So, compliance. many element one

from to and what of we pretty we thing don't outside much worth task have we're focus, I'd between there's ourselves say handle might huge US. to what not having a it We big required a do But our is do easier fraud. little standpoint operations, a given net key First much tackle be actually just is the a that overlap private don't branches. area KYC cash,

theft. we new a when there very of someone product, checking a new nuanced the account. very, by in via attacks terms while of opening is account fraud And are a credit identity do card of sort differences versus opening what debit similar or amount huge A come do

Dominick Gabriele

a you closely the Okay. had much. that disconnect is But rate your and a -- And I aligned you there how Is very there to unemployment actually and Is guidance. mean, charge-off Thanks. much. company is mentioned question Thanks before you a Thank could guess, that, thus, outlooks? reserve that kind there don't so expect of with possibility outlook between here. much? CECL correlated be net a unemployment reserve chance I double rate very your NCO rise CECL

John Greene

Yes, thanks Dominick.

losses, a we make process So, charge-offs period have the kind call between or pains are loan which bunch use yes, is would And we disconnects a people include kind four-quarter outlook tools, a and systems on ensure to through of that our modeling life of charge-offs over, essentially there's life of Same organization. the the managing to the relationship. no the those great sure same. work we that which that take CECL it, and of the same of reserves, three-quarter

functions, and terms systems the in to risk the management accomplish what finance page are of So here. and on each same credit of and trying accounting we're

at there's in that outlook has will factors play So at the that difference tightening say and there. the reserve couple Discover. of disconnect of updated in to in charge-off our terms guidance no terms of the I of a here chance happened what are

gave we on a is, intend each wide of we're quarter talking period to a fairly range, The tighten as And first the which three-quarter forecasting we about charge-offs. passes.

ensure including have of level macro an judgment we take that then the appropriate standards. use under we different certainly number reserves, of accounting there's And the reserve factors, financial portfolio. management On environment a a to we that

of a So the use. that's quick that process we sketch essentially

Dominick Gabriele

good my so Have for much taking Thanks a Excellent. day. questions.

John Greene

Thank you.

Operator

you. Thank

Mihir from come will Bank America. with Bhatia of question next Our

open. is line Your

Unidentified Analyst

for you to now Quick Rich But quality versus Hi. credit are curious Are tightening applicants? to consumers year how for me. or you're [ph] two changes underwriting. just I Mihir credit that for seeing Nate understand for those any and see new This Bhatia. is ago? on a asking the question loans

Roger Hochschild

a tricky of varies did question Yes. because pre-approved marketing. lot it channel. we it's Obviously, I a mean by quite answer, to

criteria to tend channels, of the we kind applies targeted. our within who set and we So be even non-pre-approved

our we've So would applicant account tightened of huge profile credit. seen, has new to I guess, tended in a improve profile, as I but haven't difference terms

Unidentified Analyst

quick Like business just And from loans are can as you versus Okay. about performance? the follow-up, the then pre-pandemic? performing XXXX a card loan or how like talk XXXX

Roger Hochschild

Yes.

as all in mentioned, think general, of vintages I John are the expected. performing

line And so losses are what in we total normalizing with still forecast.

seen performance I the strong behavior say So continued differences And huge would vintage. in across haven't board. by we

Unidentified Analyst

Okay. Thank you.

Operator

you. Thank

will Barclays. come DeVries question with next Mark Our from

Your open. line is

Mark DeVries

[indiscernible]

Roger Hochschild

Hey, is Hey, Mark, open. back Mark I line your Chelsea, to think come offline. we'll

Operator

are sir. And Yes, in no questions Okay. as the there moment, at this queue. further

to for would I like or over remarks. management closing So to any back it turn additional

Eric Wasserstrom

Well, out if additional us a team. reach any And to much. questions, here day. are Have the at IR there thanks Great. please great very

Operator

gentlemen. conference, and This ladies participation. your we and you, today's appreciate does conclude Thank

any at may You disconnect time.

Discover Financial Services (DFS) 20 Apr 232023 Q1 Earnings call transcript