Discover Financial Services

Good morning, and my name is Christelle, and I will be your conference operator today. At this time, I would like to welcome everyone to the second quarter 2020 Discover Finance 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 touchtone phone. If you should need assistance, please press star zero. Thank you. I will now turn the call over to Mr. Craig Stream, Head of Investor Relations. Please go ahead.

Christelle, thank you very much, and welcome everybody to our call this morning. We will begin on slide two of our earnings presentation, which you can find in the financial section of our Investor Relations website, InvestorRelations.Discover.com. Our discussion this morning 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 remarks from our CEO, Roger Hochschild, and, of course, John Green, our Chief Financial Officer. And after we conclude our formal comments, there will be time for Q&A session, and we ask you please to limit yourself to one question, and if you have a follow-up, we'd like you to queue back in towards the end, and we'll try to accommodate as many participants as we can. And now it's my pleasure to turn the call over to Roger.

Thanks, Craig, and thanks to our listeners for joining today's call. On last quarter's call, we discussed the impacts of the COVID-19 pandemic on our employees, customers, and business. While I am pleased with our execution in the second quarter, we remain in a very challenging environment with considerable uncertainty as our country continues to struggle to stop the spread of COVID-19 and the impact on our economy remains very significant. Of course, the safety of our employees continues to be a top priority. All areas of the firm, including our 100% U.S.-based customer service team, are operating effectively in a remote environment, and we have informed employees they will not be required to return to our physical locations until after January 1, 2021, at the earliest. Our operating model supports our commitment to providing flexible work arrangements as long as necessary to ensure the safety of our staff and their families. For our customers, we continue to provide an industry-leading service experience, leveraging our digital capabilities and with average answer times in our call centers remaining at pre-pandemic levels of under one minute. Our products are well-positioned. as consumers increasingly look for value in these challenging times. We are the only major bank with no annual fees on any of our credit cards and no fees on any of our deposit products. Our leadership position in cash rewards and flexible redemption options, including a point of sale with Amazon and PayPal, are serving us well as consumers are increasingly shopping online and concerns over the safety of travel are limiting the appeal of airline miles. We've continued to support impacted customers with our Skip a Pay programs. Since we launched this program in mid-March, we have helped over 662,000 customers across all of our products. And in fact, about 60% of total loans enrolled have already exited the program. The Skip a Pay program was intended to be a short-term option and we plan to end program enrollments in August. After that, we'll continue to offer assistance to those who qualify on a customer by customer basis. Now to our results for the quarter. We generated a net loss of $368 million or $1.20 per share. The most significant driver of this was a $1.3 billion reserve build in recognition of further deterioration in the macroeconomic outlook subsequent to March 31st. The credit performance in our portfolio has been stable, and we believe that the actions we've taken over the past few years, including reducing our contingent liability and the additional credit actions we implemented in March, position us well. Nevertheless, the reserve bill reflects our view that persistent long-term unemployment will increasingly impact prime consumer lending portfolios. The pandemic continued to have a significant impact on sales volume as well as loan growth through the quarter. We saw sales down 16% and 3% lower card loans. While down year over year, both compared favorably versus other issuers, principally due to our greater concentration in everyday and online spend categories as opposed to T&E. Operating expenses of $1.1 billion were flat to the prior year and included a $59 million one-time impairment charge to our diners business related to the impacts of the slowdown in global T&E spending. Excluding this, operating expenses were down 6% year over year. We remain on track to deliver the $400 million of expense reductions we previously announced, even as we continue to invest in core capabilities, including analytics and data science. We expect these investments to strengthen our ability to achieve profitable growth and shareholder value through improved targeting and personalization, better underwriting decisions, and enhanced collection strategies, just to name a few of the benefits. We're also responding to shifts in consumer preferences with our investments in contactless and secure remote commerce. Since the end of 2019, we have seen a 70% increase in contactless spending. I'm pleased to say we are on track to have most of our top 200 merchants enabled for contactless in 2020 and to have contactless cards issued to the majority of our card members by the end of the year. Consumers have also shifted to much more online spending, which makes our investments in secure remote commerce and our partnership with the other major networks to implement click-to-pay even more significant. Our disciplined approach to capital management and liquidity remains a top priority for us, particularly in the current environment. We've continued to see very strong demand for our consumer deposit products, even as we have been reducing rates. Consumer deposits are now nearly 60% of total funding, and we have reduced our online savings rate 59 basis points since early March. Discover has a very strong financial foundation, loyal customers, and a proven business model. I am confident that we have taken the correct actions to strengthen the Discover franchise, and we are well prepared to continue to drive long-term value to our shareholders and customers. I'll now ask John to discuss key aspects of our financial results in more detail.