Discover Financial Services

Good morning, good afternoon. My name is Maria, and I will be your conference operator today. At this time, I would like to welcome everyone to the third quarter 2020 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 touchtone phone. If you should need operator assistance, please press star 0. Thank you. I will now turn the call over to Mr. Craig String, head of investor relations. Please go ahead.

Thank you, Maria, and good morning, everybody. Welcome to today's call. We will begin this morning 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 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 remarks from our CEO, Roger Hochschild, and John Green, our Chief Financial Officer. And after we conclude our formal comments, there will be time for a question-and-answer session. During the Q&A session, please limit yourself to one question, and if you have a follow-up, please cue back in so we can accommodate as many participants as possible. Now, as always, it's my pleasure to turn the call over to Roger.

Thanks, Craig, and thanks to our listeners for joining today's call. In these uniquely challenging times, I'm pleased with Discover's results and how well our business model has performed. In the third quarter, we earned $771 million after tax, or $2.45 per share. We clearly benefited from the actions we took in the first half of this year to protect employees, manage credit risk, and control costs while preserving momentum on long-term investments. While significant uncertainty remains as to the extent and timing of a recovery, we were pleased to see the return to year-over-year sales growth in September. Managing credit remains a top priority. We entered this recession from a strong credit position due to our traditionally conservative approach to underwriting, as well as actions taken over the past few years to reduce our contingent liability and tighten credit at the margin. We quickly implemented changes to credit policy at the onset of the pandemic, including tightening criteria for new accounts and line increases and additional income verification. While we saw very strong credit performance this quarter, we expect to see deterioration in the coming quarters as the prime consumer may be impacted by increasing permanent white-collar unemployment. That said, we believe we have taken the appropriate credit actions and don't see the need to make significant changes at this time. The improvements in sales volume continue during the quarter, with a return to growth in the month of September. Sales have improved across all categories, with particular strength in online retail, home improvement, and everyday spend categories, partially offset by continued weakness in travel and entertainment spending. Loan growth continues to be affected by the pandemic, with total loans down 4% year-over-year, including card loans down 6% and personal loans down 5%. The drop in spending during the pandemic and our own credit tightening has impacted loan growth, but another driver has been a significantly higher payment rate in our card and personal loan portfolios. Consumers have had improved household cash flows due to reduced spending and government stimulus and have taken this opportunity to boost savings and make larger payments against their loans. In our student loan business, Originations in the peak season were down year over year, reflecting the large number of students who chose not to enroll this fall. Even in this challenging environment, our organic student loans were up 7%, reflecting innovative features like our multi-year loan and our strong competitive position. In terms of operating expenses, we remain on track to deliver $400 million of cost reductions this year, while continuing to invest in core capabilities such as advanced analytics to increase efficiency and drive long-term value. In conclusion, this quarter our business generated high returns as we remained focused on disciplined credit management, profitable growth, and an industry-leading customer experience supported by our 100% U.S.-based customer service. The economic environment remains uncertain, but our strong capital and liquidity and actions we have taken to strengthen the business position allows us to continue to drive long-term value for our shareholders. I'll now ask John to discuss key aspects of our financial results in more detail.