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 fourth 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 would now like to turn the call over to Mr. Craig Stream, head of investor relations. Please go ahead.

Thank you, Erica. Welcome, everybody, to our call this afternoon. We will begin, as usual, on slide two of the earnings presentation, which you can find in the financial 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 the presentation. Our call today will include formal remarks from our CEO, Roger Hochschild, covering 2019 full year and fourth quarter highlights. And then John Green, our chief financial officer, will take you through the rest of the earnings presentation. And when John completes his comments, there will be plenty of time for a Q&A session. And please limit yourself, if you don't mind, to one question and one follow-up so we can make sure that we 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. I'll begin by reviewing the highlights and key performance metrics for the full year, then turn the call over to John to review fourth quarter results as well as our guidance elements for 2020. 2019 was another very good year for Discover, with net income of $3 billion after tax, or $9.08 per share, and a healthy return on equity of 26%. These results reflect our business model that brings together the positive attributes of high-return consumer lending and direct banking with the benefits and long-term potential of owning our own global network. Our robust returns allowed us flexibility to return excess capital to our shareholders and while continuing to make important investments in the Discover brand, advanced technology, and expanding our acceptance globally. These investments have further strengthened our competitive position in 2019 and set us up for continued strong returns in 2020 and beyond. Looking at some of the specifics, total loans grew 6% in line with our expectations, and credit performance was also on target. as we've benefited from the continued strength of the U.S. consumer and ongoing advances in our risk management and servicing capabilities. We achieved a robust net interest margin of 10.41%, and operating expenses remain in our targeted range. Economists are forecasting continued growth in the economic environment in 2020. However, given the unprecedented duration of the economic expansion, we will manage credit with that in mind. We continue to invest in our global payments business in 2019, focusing on expanding acceptance by adding network partners and relationships with acquirers in key markets like the UK, New Zealand, France, and Spain. Our payment services segment generated a 24% increase in pre-tax income, primarily driven by strong volume gains from our Pulse business, The team at Pulse had a great year, adding volume from acquirers and both existing and new issuers. Turning to slide four, we had solid loan growth in all our products, with total loans and card loans both up 6%. In our card business, the majority of this growth was in higher-yielding merchandise balances as opposed to promotional activity, reflecting strong card member engagement. We continue to introduce features and service enhancements that are relevant to customers and prospects, including, for example, leveraging merchant partnerships to provide even greater value to our card members. We also had a good year in our student lending business, with organic receivables up 9%. Loan growth is benefiting from increased awareness of the Discover brand, enhancements to acquisition models, and improvements in the conversion process. we continue to benefit from our strong position as the second largest provider of private student loans. Our personal loan portfolio grew 3% in 2019, a touch above our expectation. Our investments in analytics and modeling have had a significant impact on our personal loan credit performance, enabling us to increase originations while maintaining an acceptable level of credit risk. Turning to slide five, Credit performed very well in 2019 and was in line with our expectations. The seasoning of loans from recent vintages was the primary driver as the impact of normalization in the consumer credit industry continues to abate. As I said earlier, we feel good about the underlying economic and credit trends as we enter 2020, and we'll have more to say about the overall credit environment when we discuss fourth quarter performance and 2020 guidance later in the call. Before I turn the call over to John, I want to wrap up by saying how excited I am about our prospects for continuing to create value for Discover's customers, team members, and shareholders. We finished 2019 on very solid footing, generating outstanding returns by combining solid loan growth and effective credit risk management. I'll now ask John to discuss our financial results in more detail.