Discover Financial Services

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 third quarter 2019 Discover Financial Services Earnings Conference Call. All lines have been placed on mute to prevent any background noise. After the speaker's remarks, there will be a question-and-answer session. If you would like to ask a question at that time, please press star 1 on your touch-tone phone. If you should need operator assistance, please press star 0. Thank you. I will now turn the call over to Mr. Craig Stream, Head of Investor Relations. Please go ahead.

Thank you very much, Erica, and welcome, everyone, to this afternoon's call. I'll begin on slide 2 of our earnings presentation, which you can find in the financials section of our investor relations website, investorrelations.discover.com. Our discussion today contains certain forward-looking statements that are subject to risks and uncertainties that may cause actual results to differ materially. Please refer to our notices regarding forward-looking statements that appear in today's earnings press release and presentation. Our call today will include formal remarks from our CEO, Roger Hochschild, covering third quarter highlights, And then it's my pleasure to welcome John Green, our new chief financial officer, who will take you through the rest of the earnings presentation. After John completes his comments, there will be time for a question and answer session. During the Q&A session, please limit yourself to one question and one follow-up so we can accommodate as many participants as possible. Now it's my pleasure to turn the call over to Roger.

Thanks, Greg, and thanks to our listeners for joining today's call. As you can readily see from our results, we continued to deliver very sound fundamental performance this quarter, leading to net income of $770 million after tax, or $2.36 per share, with a robust return on equity of 26%. We achieved our key objectives for loan growth, net interest margin, and credit performance, setting us up to finish the year on a very solid footing. At the same time, the strength and profitability of our business allow us to make ongoing investments that should further enhance our competitive position in each of our products and enable us to achieve continued strong results. Looking at the key drivers, total loans were up 6% and credit performance remained strong across all of our products, reflecting our discipline in underwriting new accounts and line management, as well as the clear benefits of our continued investments in servicing and collection capabilities. Card receivables grew 7% this quarter, reflecting a healthy mix of volume for both new and existing customers, and origination activity skewed more to higher yielding merchandise balances versus promotional balances. This demonstrates a positive degree of customer engagement while providing a favorable contribution to the overall net interest margin. Turning to our student loan business, growth remained strong this quarter and originations were in line with our expectations through the peak season. We're seeing an improvement in conversions driven by increasing awareness of the Discover brand in the student loan market and better customer experience at the front end. We're excited about our competitive position in private student lending and we remain confident in our ability to grow loans and gain market share despite competitive pressure. In personal loans, growth was in line with our expectations as we remain disciplined on originating loans that meet our return objectives. Credit performance continues to stabilize, reflecting the positive outcome from recent credit tightening and implementation of enhanced risk mitigation strategies. Overall, underlying credit trends continue to be favorable across our lending products with credit performance driven more by growth in receivables as compared to normalization of the back book. The U.S. consumer and the overall economy continue to look good with unemployment at a 50-year low and consumer sentiment at a high level as we enter the holiday season. This was also another quarter of strong growth in consumer deposits which passed the $50 billion mark and are now over half of our total funding. We've been able to maintain deposit pricing in the middle of the pack and have been pleased with our ability to continue to attract cost-effective funding in a falling rate environment. We recently introduced our no-fee commitment across our deposit products, and while still early, we believe this has resonated with customers and is contributing to our deposit growth. Pre-tax income for our payment services segment increased 16%, primarily driven by strong volume growth from our Pulse business. The Pulse team continues to expand business with existing issuers and win new relationships through creative debit solutions that deliver meaningful value for partners. Additionally, we continue to make progress against our strategy to enhance global acceptance by investing in partnerships with local acquirers and adding network-to-network partners. This quarter, we added two acquirer partners in France, Banque Postale and Arkea, as we continue to focus on acceptance in Western Europe. In addition, we're expanding acceptance in Africa with our partnership with Verve, a Nigeria-based payments network that will provide acceptance in a number of African countries for Discover and our net-to-net partners, such as RuPay and BC Card. To summarize the quarter, our performance once again demonstrates the strength of the Discover business model. Our commitment to providing an industry-leading experience to our customers and our disciplined approach to profitable growth and credit management continue to provide strong returns and long-term value to our shareholders. The economic environment remains favorable, and we do not see that changing in the near term. That said, it is likely that we are in the later stages of the economic cycle, and we are continuing to manage origination, servicing, and operational effectiveness with that very much in mind. Before I wrap up my section of our formal remarks, I want to acknowledge Mark Graff's retirement from Discover. Mark has been a valued colleague and leader since he joined the company in 2011 and will remain at Discover as an executive advisor until his retirement in early 2020. We wish Mark and his family the very best for the future. And now I want to take a moment to formally introduce our new CFO, John Green. John brings significant experience in financial services, including over eight years at HSBC, where he held the role of CFO of their largest business unit, Retail Banking and Wealth Management, And he also brings over 12 years of experience at GE. John held public company CFO roles at Willis Group Holdings, where he was instrumental in a turnaround of the company and subsequent merger with Towers Watson. And most recently, John was CFO at the Biogen spinoff, BioVeritiv. John is joining Discover at an important time and brings very relevant capabilities and experience. I'm very excited about the impact I expect John to have here at Discover, and I'm sure you'll enjoy working with him. I'll now ask John to discuss our financial results in more detail.