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spk01: Good morning. My name is Ashley, and I'll be your conference operator today. At this time, I would like to welcome everyone to the first quarter 2022 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 telephone keypad. If you should require operator assistance, please press star 0. Thank you, and I will now turn the call over to Mr. Eric Wasserstrom, head of investor relations. Please go ahead.
spk09: Thank you, Ashley, and good morning, everyone. Welcome to today's call. I'll begin 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 our first-quarter earnings press release and presentation. Our call today will include remarks from our CEO, Roger Hochschild, and John Green, our Chief Financial Officer. After we conclude our formal comments, there will be time for a question-and-answer session. During the Q&A session, you'll be permitted to ask one question followed by one follow-up question. After your follow-up question, please return to the queue. And now it's my pleasure to turn the call over to Roger.
spk10: Thanks, Eric, and thanks to our listeners for joining today's call. In my comments this morning, I'm going to address three topics. Our strategic and financial highlights for the first quarter, the expected impact of the current environment on our 2022 results, and some of the exciting advancements we've made around our DE&I and ESG reporting. Starting on slide three, we had another quarter of outstanding results with earnings of $1.2 billion after tax, or $4.22 per share. Our earnings this quarter were the result of consistent execution on our business priorities against the backdrop of complex economic and geopolitical conditions. Consistent with our expectations, our loan growth accelerated to 8% from the prior year as we benefited from continued strong sales and investments in new account acquisition last year and into 2022. Year-over-year card sales were up 23%, with improvement in all categories. There's been a lot of discussion about the impact of energy price inflation on consumer spending. We believe that higher prices at the pump were a relatively small contributor to sales volume, adding approximately 200 basis points to our first quarter volume growth. We also continue to lean into account acquisition and new accounts grew 11% year over year with particular strength in the prime cashback segment, reflecting our attractive value proposition. Credit performance remains strong with credit losses normalizing in line with our expectations. This is an outgrowth of our consistent focus on prime lending and our strong credit management throughout the pandemic, along with robust labor market conditions. Importantly, we have not seen evidence of credit stress beyond the moderate pace of normalization that we anticipated coming into the year. In fact, as John will address later, we're narrowing our expectations for credit losses to the low end of our prior range. We continue to effectively manage expenses while making investments for profitable growth, analytic capabilities, and product enhancements. As our account growth demonstrates, we're making significant investments in card growth, but we're also focused on innovation in our non-card offerings to further enhance our full suite of digital banking and lending products. In early April, we launched our cashback debit product. This product is digitally native, including a mobile-first customer experience. It provides features like early access to paychecks, as well as items that others will struggle to match, including no fees, 1% cash back on debit transactions, and our industry-leading service. We plan on investing more for the growth of this product with broad market advertising later this year. Now let me talk about how we expect the current environment to impact Discover. We provide some views on macro conditions on slide four. The most pressing issue is Russia's invasion of Ukraine. Naturally, our primary concern is for the resulting humanitarian crisis and the well-being of the Ukrainian people, as well as for our employees and customers with close ties to this nation. From the more narrow perspective of our business, we currently have no activities in either country, and we do not anticipate any material impacts on our business from the war. We have indefinitely suspended our efforts to open an office in Russia, and while we have temporarily paused our certification of a Diners Club bank issuing partner in Ukraine, we plan on moving forward as soon as we can. The war in Ukraine and the resulting sanctions against Russia have also raised concerns about the risk of recession globally and domestically. We do not see any evidence of this across our consumer lending portfolio. Our credit metrics remain good, and there is nothing we're seeing in terms of consumer spending or borrowing behavior that suggests that a broader downturn is imminent. Another concern has been the significant elevation and flattening of the yield curve given the anticipation by the rates market around aggressive monetary policy from the Federal Reserve to stem high inflation. Because we are modestly asset sensitive, the potential for a greater number of Fed rate hikes has improved our outlook for spread income, which John will discuss momentarily. And while we're not immune from the effects of inflation, our business model has somewhat of a natural hedge as the pressure that inflation may create on elements of our expense structure are partially offset by the contribution inflation makes to our sales volume. In summary, while macro conditions are much more fluid than we had thought coming into this year, we're positioned to benefit from the combination of strong sales and receivables growth, expanding margin, and slowly normalizing credit. These trends give us confidence in our outlook over our forecast horizons. Finally, I want to point out our new ESG-related disclosures. In March, we produced our first Diversity, Equity, and Inclusion Transparency Report, which highlights our commitment to supporting a diverse workforce that reflects our communities and customers. We also recently published our first ESG summary that includes details on our greenhouse gas emissions, among other items. The data in our new reports is encouraging, but we intend to do more to reduce our impact on the environment and to advance diversity and equity in our organization and communities. With that, I'll turn the call over to John to review our financial results in more detail and provide an update to our expectations for the rest of 2022.
spk03: Thank you, Roger, and good morning, everyone. Once again, our results this quarter reflect strong execution on our business priorities with accelerating loan growth and solid credit performance. I'll begin with our financial summary results on slide five. There are a few things I'd like to call out here. The first is that our net income is lower year over year because of our reserving actions. In the first quarter of last year, we had an $879 million reserve relief. while this quarter included $175 million dollar release. Adjusting for reserve changes, our profit before tax and reserves would have been up 19% year over year. Second, our reported total revenue net of interest expense increased $107 million, or 4% from the prior year. However, this included $162 million net loss in equity investments. Excluding this loss, total revenue increased 10%. These points underscore the strength of our core earnings power, even in a fluid economic environment. Let's turn to the details of the quarter. Looking at slide six, net interest income was up $149 million, or 6%, driven by improved net interest margin and higher average receivables. NIM was 10.85% up 10 basis points from the prior year and four basis points from the prior quarter. The year over year increase in net interest margin reflects lower funding costs and a favorable shift in funding mix partially offset by a higher mix of promotional rate balances. We made further progress on our funding mix with consumer deposits now making up 71% of total funding. On a sequential basis, The modest increase in NIM was driven by a slightly improved revolve rate on credit card loans, partially offset by increased funding costs. The better revolve rate reflected a 70 basis point decline in the payment rate quarter over quarter. This helped boost sequential loan yields by five basis points. However, the payment rate remains nearly 500 basis points above pre-pandemic levels. We continue to expect that the normalization in the payment rate will continue through the back half of 2023. Receivables were higher driven by card, which increased 10% year over year from the continued strong sales and robust new account growth last year and into this year. Organic student loans increased 4%, reflecting solid originations through the 2021 peak season. Personal loans were down 1% due to a sustained high payment rate. Looking at other revenue on slide seven, excluding the $162 million loss in equity investments, non-interest income increased $120 million, or 26%. This was driven by net discount and interchange revenue, which was up $79 million, or 33%, reflecting strong sales. Sales were up 23% year-over-year with growth across all categories. Inflation drove a modest portion of the growth in the quarter, and we expect that inflation will remain a benefit to sales growth over the short term. Strong sales also drove higher rewards expense compared to the prior year. However, the rewards rate was down two basis points year-over-year. We still anticipate the full-year rewards rate to increase two to four basis points. loan fee income was up 33 million dollars or 31 percent primarily driven by an increase in late c instances moving to expenses on slide eight total operating expenses were up 49 million dollars or five percent year over year excluding marketing investments expenses increased just one percent compensation expense was slightly uh down year over year on lower bonus accruals and headcount which was partially offset by higher average salaries we expect some degree of salary and wage pressure in 2022 and possibly into 2023 as we take steps to remain competitive marketing expense increased 38 million dollars or 25 we continue to invest for growth in our card and consumer banking products including support of our relaunch cash back debit product. Information processing increased $16 million or 15% year over year versus a low level in the period a year ago. This expense was flat sequentially. Going forward, we will continue to prioritize investments in analytics to support growth, innovation, and generate operating efficiencies. Moving to slide nine. Net charge-offs remained low and were in line with our expectation for modest credit normalization. Total net charge-offs were 1.61%, 87 basis points lower than the prior year, and up 24 basis points from last quarter's record low. Total net charge-off dollars were down $169 million from the prior year and up $55 million sequentially. Moving to the allowance for credit losses on slide 10. This quarter, we released $175 million from reserves and our reserve rate continued to decline, dropping 17 basis points to 7.1%. The reserve release primarily reflects the sustained strong credit performance in our portfolio, partially offset by loan growth. Looking at the macroeconomic environment, The pandemic now has a lesser impact on our outlook. The primary sources of risk have shifted to the impacts of inflation and a potential slowdown from Fed actions. While the risk has shifted, the economic view of the U.S. consumer remains healthy. Looking at slide 11. Our common equity tier one for the period was 14.7%, slightly lower than the prior period, and still well above our 10.5% target. We repurchased $944 million of common stock during the quarter, executing on our remaining authorization. Our board of directors also approved a new $4.2 billion share repurchase program that expires on June 30th, 2023. and increased our common stock dividend by 20% to 60 cents per share. This repurchase authorization represents our largest ever over a five quarter horizon. It is evidence of our commitment to returning excess capital to shareholders while sustaining our investments in strong organic growth. Concluding on slide 12. Our outlook for 2022 remains favorable And we are improving some elements of our expectations, starting with loans. Spending trends through the first quarter and a modest decline in the payment rates improved our conviction for high single-digit growth. We are revising our view on NIM. We now see five to 15 basis points of upside for the full year relative to the first quarter. This view includes five Fed rate hikes at 25 basis points each. Our prior view reflected two rate hikes of the same magnitude. If the Fed increases rates beyond this, it would provide modest upside to net interest margin. Despite inflationary pressures, there's no change to our guidance for operating expense. Marketing is expected to be above 2019 levels with non-marketing expenses up low single digits. We are improving our credit outlook. We expect losses to be between 2.2 and 2.4% for the full year. While there's still some uncertainty about the back half of this year, our current credit performance and delinquency trends give us confidence in a tighter range. And as previously mentioned, Our board recently approved a new share repurchase program and increased our dividend. In summary, loan growth accelerated as we benefited from robust sales and strong account acquisitions last year and into 2022. Credit performance reflected our disciplined approach to underwriting and credit management with moderate normalization as expected. We managed operating expenses while investing in new product features and functionalities. And our highly capital generative model enable us to increase our dividend and share repurchase authorization while supporting strong organic asset growth. These results demonstrate the resiliency and flexibility of our integrated digital banking and payments model. And I'm confident that we're well positioned for continued profitable growth through a range of economic conditions. With that, I'll turn the call back to our operator to open the line for Q&A.
spk01: And at this time, if you would like to ask this question, please press star 1 on your telephone keypad. If you wish to remove yourself from the queue, you may do so by pressing the pound key. We remind you to please pick up your handset for optimal sound quality. We'll take our first question from Bill Karkatou with Wolf Research. Please go ahead.
spk20: Thank you. Good morning, Roger and John. Good morning, Bill. Competitive intensity and elevated expense pressures are leading your peers to report negative operating leverage, but you just reported over 500 basis points of positive operating leverage, and your results certainly stand out. That degree of positive operating leverage is much stronger than I think anyone was expecting. Can you frame for us whether an efficiency ratio here in the 37% range is sustainable?
spk03: Hey, Bill, thanks for the question. So, you know, certainly we were pleased with the execution in the quarter. In terms of the specifics around efficiency ratio, what we've guided to in the past and we're still holding there is that over the medium term, we would expect a efficiency ratio in the upper 30s now this quarter certainly demonstrated some progress on that front uh there is a bit of bit of timing there uh we did um we kept our marketing guidance uh uh as uh as we indicated before which uh would bring that above uh uh 2019 levels so uh there's a slight skewing towards the back half of the year we continue to invest for for growth uh there will be some uh upper funnel or broad market advertising as well so um you know we're watching every dollar and making sure we get an appropriate return uh for our shareholders as we invest it whether from an expense stamp or expense standpoint or from a loan um a lending standpoint so um I don't want to get over our skis here on that efficiency ratio, strong execution, and we're going to continue to kind of work towards the medium-term target.
spk20: Understood. That's helpful. If I may follow up on capital from the 14.7% CET1 level that you're at today, would you expect capital consumed through loan growth? and the $4.2 billion authorization that you announced to be enough to get you down to that 10.5% target over the next five quarters? Or would you still expect to be sort of running above 10.5% at that point? And how much flexibility do you see in that $4.25 billion? Is there some chance we could see you take that higher depending on how things play out?
spk03: Yeah. So in terms of the CET-1... ratio, you know, we're sticking to 10.5% target. There is about 175 basis points from CECL transition still yet to impact that CET1 ratio. So then, you know, that still puts us, you know, over 200 basis points above the target I just expressed. So, you know, our thinking is that over the next two, three, perhaps four years depending on, you know, investments and the broad economy to close down to the 10.5% target. But in terms of the repurchase authorization, you know, our board just approved it, so it would be way premature to talk about any changes to that.
spk00: Thank you for taking my questions. Of course. Thanks, Bill.
spk01: And we'll take our next question. from Sanjay Sakrani with KBW. Please go ahead. Your line is open.
spk19: Thanks. Good morning. So, Roger, you talked about the fluidity of the macro, and obviously you've been through a number of these cycles, as have you, John. I'm just curious. I know you're not seeing anything right now, but what's the playbook from here? I know you guys are leaning into growth, but, you know, if things suddenly change, how would you react? Yeah.
spk10: Thanks, Sanjay. So in terms of leaning into growth, I would say we're pleased with our growth, but it remains balanced. You know, in terms of the investments we're making, I expect our, you know, our prime cost per account to be down from last year. So we're not in any way overinvesting. By and large, our credit policies are back to where they were pre-pandemic. But, you know, as we said at that time, you know, it was late cycle, so we're not exactly letting credit go. So, you know, we're still executing on a model of disciplined growth, even as the economic environment, especially the U.S. consumer, remains strong.
spk19: And I guess maybe just following up on – interest rate sensitivity. John, could you just talk about what you're seeing? I know you raised the NIM expectations, but any changes in industry behavior around chasing rates from competitor banks and such? Maybe you could just talk about deposit data. Thanks.
spk03: Yeah. Sure, Sanjay. So in terms of competitor behavior, so we have seen that the competitors that we benchmark ourselves against recently through this quarter, this past quarter increased rates and into this quarter. As you observed our behavior in the pandemic, we moved fairly aggressively down. Matter of fact, we led our competitive set on the interest rate movements downward. Now that we're in a rising rate environment, my expectation is we're going to be disciplined around that. So the principles are that we want to ensure we have a fair customer proposition. We also seek to kind of manage our interest costs as effectively as we can. So a combination of funding needs and competitive dynamics will dictate how and when we take deposit pricing actions.
spk19: Okay. Great. Thank you.
spk01: And we'll take our next question from Moshe Ormbach. Please go ahead. Your line is open.
spk08: Great. Thanks. I was hoping for, Roger, if you could talk a little bit about the competitive environment. Obviously, there's been a lot going on from some of your competitors. You talked about an 11% growth in new accounts, and your marketing expense was pretty much under control. Can you just talk about what it is that allows you to do that and be comfortable in terms of your account growth going forward?
spk10: Sure. Thanks, Moishe. You know, I think it really comes down to having a balanced and distinctive value proposition. You know, the Discover brand is one of the most trusted brands in financial services. We provide a leading customer experience both through the phone and digitally, which helps with retention as well as booking new accounts. We spent a long time building our skills around managing cash rewards, not just paying the higher rate, but focused on every part of the process. And then continuing to innovate with new features and functionality. And you saw we just launched another one around helping protect your information from people reselling it on the web. And so that, I think, allows us to succeed in just about any environment. I view the card business as always competitive. Occasionally, there's a lull in the depths of a recession. But beyond that, it's our job to execute for our owners and grow, and you're seeing that this quarter, and I'm confident we'll be able to keep it going. Great.
spk08: Thanks. Maybe just a follow-up in a completely different direction, and that is you talked about the debit product. Could you just talk a little bit more about how much in resources you're putting behind that, how big it can be, and are there any other areas in which you can kind of leverage the network in the coming year? Thanks.
spk10: Sure. So, you know, the network does give us advantages for both our credit card issuing business, but also in terms of being able to support the 1% cash back on debit purchases, which is a real differentiator in the marketplace and builds on the Discover heritage with cash back in a new direction. So, you know, we'll work our way into it. As John mentioned, we'll start broad market advertising for that product later this year. But we intend to sort of scale it gradually and build for the long term. Over time we expect it to be a key part of our business. And then we see advantages on our core card issuing business. Good example is our ability as we roll out SRC to pre-enroll our customers in a way that would be much more challenging for issuers on a third party network. And finally, we remain focused on the payment services business, monetizing our network investments through attracting third-party value.
spk00: Great. Thanks very much.
spk01: We'll take our next question from Betsy Grastic with Morgan Stanley. Please go ahead. Your line is open. Hi. Good morning.
spk10: Morning, Ben. Morning.
spk15: Nice growth in the quarter and a really nice pickup, especially as we moved into, you know, end of period here. And I just wanted to get a sense as to how you're thinking about funding that continued strong growth as we move through the year, given that, you know, you've got Fed string in the balance sheet and probably some deposits growth slowdown. You know, I looked at the liquidity balances. It looks like they're down to pre-pandemic lows, which, well,
spk03: during the pandemic i should say so i'm just thinking through uh deposit growth versus liquidity utilization versus wholesale funding how should we think about how you're planning on funding the loan growth thanks yep great um thanks betsy so um you know in terms of loan growth we're going to take a a balanced approach so uh we we talked about the target of 70 to 80 percent of our funding needs um coming from OSA or deposits from our customer base. There's always the opportunity to go into the market and execute on broker CDs if liquidity needs dictate that. We also issued an ABS transaction this past quarter in a rising rate environment at pretty compelling rates overall. know we're going to take that balanced approach uh and uh you you will see or we did um if you haven't seen it um you'll you'll see a little bit more of it uh there um there'll be a little bit more um broad market um marketing on deposits and then also targeted targeted marketing uh on deposits and we're going to try to balance kind of the rate and the marketing in order to get the most effective um cost of funds as we can. So that's essentially the strategy in a nutshell. So we actually just went through a review from the Fed on our liquidity controls and it's come out very, very strong. So we're pleased with the position of the business and the processes around it.
spk15: Okay, great. And then just as a follow-up, you indicated, I think earlier, John, that the outlook that you have for NIM includes five rate hikes from the Fed. And maybe you can help us understand as, you know, we go to that six, seven, eight, nine rate hike that's expected. How does that, how does your asset sensitivity change if at all, or should we just take what's in the 10, you know, queue and apply that to, you know, whatever comes after Fed rate hike five?
spk03: Yeah. So, um, The math on it would be for a 25 basis point increase somewhere between 3 and 5 bps to NIM on an annual basis. Now, there's a bunch of other dynamics that obviously impact that, right? So you touched upon it earlier. So deposit pricing could impact that, as well as the revolve rate, payment rate, and then the credit impacts coming through net interest margin. There's a lot of dynamics there, and that was why we were conservative in terms of the number of hikes that we baked into this updated guidance. If there are more hikes and we're able to kind of effectively manage our liquidity, credit remains as we expect. We would certainly see some upside from that guidance we provided.
spk15: But in the same, like, three to five BIP range per 25? Yes. Okay. All right, thanks.
spk03: And that's an annual basis.
spk15: Yes, yeah, I got that. Thanks, John. You got it.
spk01: And we'll take our next question from John Pancari with Evercore. Please go ahead. Your line is open.
spk07: Good morning. As a follow-up to I think it was Sanjay's question earlier just around deposit beta, could you just tell us what is your deposit beta assumption that's baked into your NIM guidance that you just mentioned? Yeah, so thanks, John.
spk03: So, you know, I don't really try to think about this in terms of a deposit beta. What I do here is think about it in terms of broad principles. The principles are that we're going to have an attractive proposition for our customers and that we're going to manage interest costs as low as we can while still maintaining that proposition I just talked about. So I gave the point in terms of our actions during the pandemic when we had plenty of liquidity that we were a price leader down. And what I said in this rising rate environment, we expect that we're going to manage that interest cost very, very tightly in order to hopefully, you know, drive overall cost low, increase NIM and benefit shareholders. So, I don't want to kind of tag to a specific beta because they tend to be, you know, the numbers tend to be kind of off, you know, a month from now, so.
spk07: Okay. All right. That's helpful. And then separately, just regarding the broader economic backdrop, given the Fed's efforts here to tame inflation and slow the economy, and then looks like this morning we're getting probably a disappointing print here on GDP. I'm curious, does your 2022 outlook factor in a slowdown in card spend at all?
spk03: It does. So actually, it was... The 23% for the quarter was higher than we anticipated. We're frankly happy to see that. But there is a modest stepping down through this year. You know, effectively, it's hard to envision year-over-year sales growth to continue in the upper 20s.
spk00: Got it. Okay, great. Thank you.
spk01: And we'll take our next question from Ryan Nash with Goldman Sachs. Please go ahead. Your line is open.
spk06: Hey, good morning, guys. Good morning. John, maybe to follow up on a couple of the questions that have been asked, I think the focus has been on the liability side of the balance sheet as it pertains to rate sensitivity, but maybe we could talk a little bit about asset side. And I'm just curious, you know, obviously a lot has changed, you know, over the last few years. So maybe can you unpack a little bit for us? Have we seen significant changes in terms of floating rates relative to the last time rates rose? How much more improvement do you think we could see in revolve rates? And I guess lastly, are we now back to more sustainable BT levels such that, you know, we can see the asset, you know, the asset yields improving, you know, with benchmark rates? Thanks. I have a follow-up.
spk03: OK, thanks Ryan. So so there's a lot there. So revolve rate actually increased mildly in the quarter as as the payment rate decreased by by the 70 basis points I spoke about. And by the way, that that payment rate decline was essentially in line with how we built our original guidance. So as as we think about. inflation or um or other other impacts that could drive payment rate lower we've essentially de-risked our our guidance for loan growth so so we could see additional upside subject to payment rate and a bunch of other factors the um the other pieces there um in terms of uh kind of overall asset growth what i would do is I would break it down into kind of the three categories or our primary products of card. You saw the double digit growth there. Student loans at 4%, so we'll have another peak origination season coming in 2022. We hope to be able to execute there and continue to take market share and personal loans. The growth was down 1%, but originations were up strong double digits. So we had a high payment rate impacting personal loans that we'll expect to moderate over time, giving some level of loan growth in that product. So I guess, you know, your question had a number of elements. Hopefully I gave you enough detail to be able to piece together the information you're trying to glean.
spk06: And maybe as a follow-up on credit, it was good to see you lowering the high end of the range. And understanding you probably have about six months of visibility, so the fourth quarter is probably still hard to predict. But just looking at some of the credit metrics, delinquencies remain really, really low. but nine, you know, they only have 20 basis points on the bottom. So can you maybe just talk about what's included now in the credit expectations and, you know, do we have the potential to see credit come in, you know, towards the bottom end of the range over the course of the year? Thanks.
spk03: Yeah. So, you know, when we gave this initial guidance, we gave a pretty broad range and we batted around internally whether or not we should tighten it. And as the quarter unfolded, you know, our conviction around, you know, that tighter range and perhaps the lower end group. So, as you said, there's three months. The fourth quarter, we don't have perfect visibility in terms of kind of roll rate performance, but our modeling analytics have been actually surprisingly accurate, and we have a high expectation there. You know, we'll see how the rest of this quarter plays out, and, you know, hopefully we can give updated guidance in a subsequent call. Thanks, John.
spk01: And we'll take our next question from Mark DeRuys with Barclays. Please go ahead. Your line is open.
spk16: Thank you. So your reserve rate is still about 100 basis points above CECL Day 1. Can you just talk about what assumptions are embedded in that? You know, how we should think about that ratio if a recession happens in the near term as some are expecting? I mean, it would seem these levels, that's almost already in the reserve. And alternatively, where could it go if some of this macro uncertainty clears?
spk03: Right. Thanks, Mark. So, yeah, the reserve rate came in at 7.1 CECL day yesterday. uh day one was 6.1 so so some context around cecil day one so it was it was um an accounting adjustment reflecting um new guidance uh provided by the fasb right so we did our best to capture life of loan estimates of what uh what losses would be and and embed them in an overall reserve rate now you know the macro environment at the time versus today has certainly changed. Portfolio dynamics have changed. As a matter of fact, the upper end of our credit quality for the balance sheet is stronger than it was Cecil day one. But there's still a degree of uncertainty that we are managing through. You know, as we said in prior quarters, we're conservative on this. We want to make sure that we're appropriately capturing reserve rates under GAAP. If the broad macros are positive and the portfolio performance is positive, we could continue to step down through a combination of growth or reserve releases. And if the recession likelihood continues to increase. The broad macros could warrant either holding or perhaps even increasing. But overall, I think the takeaway here should be, Mark, that the portfolio performance is really, really strong. There's no view of any damage to the consumer. There's no view that job losses are going to increase definitely through this year and likely through the first half of next year. So all those factors are positive from a credit and reserving standpoint.
spk16: Okay, got it. And then just a clarifying question on the OPEX guidance. You indicated no change there despite what seemed like kind of growing wage inflation pressures that you've indicated you're not immune to. Should we assume that as that pressure kind of builds in the second half that, you know, that what happens is you flex down kind of other non-marketing, non-wage expense to maintain some kind of a targeted, you know, operating leverage?
spk03: Yes. So here's how we think about it. And I've tried to articulate this over the past two and a half years. we're going to be really disciplined in terms of how we spend our dollars. And Discover's got a long history of that. We've done some stuff to kind of drive both accountability and visibility of the expense base, which my sense is it has helped. It's important to note that as we see opportunities, we're going to continue to invest. We also are, as you paraphrased, we're seeing inflation coming in on salary and wages. We're also seeing it on third-party spend. So we will effectively manage that in order to be able to deliver to the guidance we provided. And if we see incremental opportunity, either for growth or otherwise, we'll invest to and we'll create transparency on that in order to drive long-term shareholder returns.
spk16: Okay, great. Thank you.
spk01: And we'll take our next question from Kevin Barker with Piper Sandler. Please go ahead. Your line is open.
spk18: Thank you. When you consider this rate environment versus the last rate cycle, do you feel that the deposit betas that are going to play out in this cycle are going to mirror what we saw in the last cycle? And is that your base case when you think about funding costs despite what might be a much more aggressive Fed this time around?
spk03: yeah um you know last last time i would take that as a proxy but there's a couple things that are different right so so the patient pace of inflation is a heck of a lot higher here right we're at record record levels of inflation the other thing that is different is the savings rate coming into this inflationary cycle much higher so you know those two dynamics could could create some offsetting impacts. But, you know, it will be subject to kind of liquidity and loan growth across the industry and who's got a competitive proposition. And, you know, we're very comfortable with our proposition in terms of the customer experience, the kind of the rate. And if you take a look at our rate versus a brick and mortar bank, You know, I find it ironic that anybody keeps any excess cash in those institutions whatsoever. So, you know, we're going to be diligent on it.
spk18: Okay. And then you mentioned that you're going to be very disciplined on how you spend your dollars. You were pretty consistent on that commentary. Are you seeing anywhere where some of your competition may be a little exuberant in how they're spending their dollars, just given... the opportunity set in the market today?
spk10: Yeah. I would say in general, in this business, you get diminishing returns on incremental investments in marketing. And so you have seen cycles in the past where people spend heavily. After a while, they look at the returns they got and may be less happy with that. So, you know, we feel good about both, you know, what we're investing on the reward side and the guidance we provide there of only, you know, two to four basis point increase, but also that we'll see, you know, cost per accounts at an attractive level, you know, You're certainly seeing very heavy levels of investment out there that I would wonder whether or not they're going to be sustainable.
spk18: Thank you for taking my questions.
spk01: And we'll go next to Don Finetti with Wells Fargo. Please go ahead. Your line is open.
spk02: Yes, good morning. I know home equity is a small part of your business, but I didn't know if there was maybe a growing opportunity as a lot of the sort of cash out refi activity could potentially slow And then secondly, I think you have a partnership on account-to-account payments. I was just curious if you think that will take off at the point of sale in the United States.
spk10: Yeah. So in terms of our home equity business, we do think a rising rate environment will be very constructive. You know, perversely, many households, their greatest asset could be their 3% mortgage. So while we're excited about it, it also isn't that huge. On the payment side, you know, we're excited about our partnership, but I don't see, you know, tremendous disruption coming to point of sale and existing means of payment point of sale. anytime soon. But, you know, we're excited to work with a broad range of partners and different fintechs who want to leverage our network capabilities.
spk00: Thank you.
spk01: And we'll take our next question from Rick Shane with JP Morgan. Please go ahead.
spk05: Thanks, everybody, for taking my question this morning. Can you talk a little bit behaviorally about the stratification you're seeing in terms of borrower behavior, both in terms of credit performance and also in terms of spending behavior, discretionary versus non-discretionary shifts across the portfolio?
spk10: Sure. Seeing strength across all categories. You know, revolver sales growth is probably a little higher than transactor sales growth, but, you know, that reflects, you know, our lend-focused model. But, you know, and that sales strength is continuing into April, where, you know, through, say, the 24th, sales are still up 23% year-over-year. So, consumer is good and breadth across all all categories um in terms of you know different segments from a credit standpoint you you do tend to see normalization occur faster at the the lower end segments but again you know we're very pleased and john mentioned that in his comments that the normalization is very much in line with our expectations got it and and roger are you seeing any in that um lower fico band any shift in terms
spk04: of spending behavior from category to category?
spk10: Not necessarily, Matt. You know, there's been a lot of volatility just, you know, as pandemic restrictions come and go. You know, certainly travel growth is up compared to what it was, but I'd really point towards breadth and growth and spend across all categories.
spk05: Great. Thank you very much, guys.
spk01: And we'll take our next question from Robert Napoli with William Blair. Please go ahead. Your line is open.
spk14: Thank you. Good morning and congratulations. A really good quarter. I mean, Discover's been a model of consistency over the last decade plus, so it's just good to see. Just on your cashback debit product, just thoughts on the growth of that business, the penetration rate, any comments on some of the other banking-like products and early early paycheck, what kind of demand you're seeing for that product, and then economically, how you're going to monetize these banking products over time?
spk10: Sure. You know, it's still early days, so I probably won't provide much in the way of forecast, but we're very excited about the demand we're seeing. We think the product is positioned well to compete both with some of the newer fintech neobanks, but also with any traditional branch player that's out there. And over time, you know, the balances build slowly, but a lot of opportunities to cross-sell both other deposit products, such as savings accounts and CDs, but also our broad range of card products and provide really a different entry point into the Discover franchise. So very much our focus is on building this for the long term. And as we said earlier, you'll start seeing more broad market advertising later this year for that product. Great.
spk14: And then just any thoughts, Roger, on the competitive positioning of Discover today versus, say, five years ago, pre-pandemic five years ago, your ability to maintain or gain share while maintaining returns, and you've done so very nicely, but just any thoughts on the competitive position today versus, say, five years ago?
spk10: Yeah, I mean, I'd go back to the very kind comments you made at the beginning around 10 years of consistency, right? Even five years ago, a brand value proposition that stood for trust, for a superior customer experience, and for innovation on the feature side. You know, back then it might have been the ability to freeze your card. Now it's some of the things we do for our customers in terms of protecting their infrastructure. online, but the focus remains the same, you know, a very strong cash rewards program that competes well with anything out there. You're probably seeing a little more intensity in the cash rewards space as some of the changes on miles programs through the pandemic, but, you know, we still compete very much the same way, but also still feel as good about our competitive position. Thank you. Appreciate it.
spk01: We'll take our next question from Mihir Bhatia with Bank of America. Please go ahead. Your line is open.
spk17: Good morning, and thank you for taking my questions. Obviously, really solid results here this quarter, so I guess congratulations on that. Maybe you can just talk a little bit about, you know, Washington. We're hearing more noises from there, both from the CFPB on, you know, the late fees and which I guess to a certain extent kind of plays into your brand about, you know, less fees and being consumer friendly, but still obviously will have an impact for you to the extent. I think yesterday he announced or this week he announced he's talking about reopening the Card Act and the fees there. But also just on the student loan forgiveness side too, we're hearing more rumblings on that. So just what's going on with Washington, your views on the situation. Thank you.
spk10: Yeah, sure. So on the fee side, first I'd say we have good relationships and enjoy working closely with all of our regulators and by and large are aligned in terms of wanting the consumers to be protected. As you've seen, it's a pretty small percent of our revenues. We waive the first late fee for our discovery customers anyway. Right now, we're set at the safe harbor to the extent that that changes. We can change accordingly, but don't expect it to have an overly material impact. Certainly, on the deposit side, the fact that we have no fees on any of our deposit products positions us very, very well compared to our competitors, and it's a key part of our value proposition. In terms of student loans, we probably have seen some pressure on the payment rate, just given the ongoing payment holidays that people have seen on their federal loan. It's important to realize, though, that there's a big difference between the federal loan program and ours, just in terms of who they give loans to, the types of educations they fund. As an example, we do nothing in the for-profit sector. So we'll wait and see what comes out of Washington, but we don't expect it to be overly disruptive for our own student loan business.
spk17: Thank you. And then just maybe turning back to credit for a second, obviously you're improving the outlook for this year, but how much of that is just a function of you gaining increased confidence based on the one key outperformance maybe versus any kind of change? I guess really what I'm trying to understand is, is the path to normalization changing or is the curve like from here like a little less steep? then what you would maybe expect it to be, like, when do we get back to a normalized state? Is it the front half of 2023, the back half of 2023, 2024?
spk03: Yeah, thanks for the question, Mihir. You know, what we said previously is we expected normalization through 2023. Now, it's really hard to kind of predict anything when you get out you know, out into the kind of 2024 timeframe. What I would say here is, in terms of narrowing the range, that was a function largely of increased confidence around our forecast with, you know, frankly, an internal expectation that we're going to come in at the lower end of the range. So we're still giving ourselves some wiggle room here. But if things proceed as we expect them to, we'll be around the lower end of the range. Thank you.
spk01: And we'll take our next question from John Hecht with Jefferies. Please go ahead. Your line is open.
spk13: Thanks, guys. Most of my questions have been asked. know turning to the student lending business i mean it's important i know it's small but important overall um but uh your results have been pretty consistent there but i'm wondering you know maybe if you just have any thoughts on you know the moratorium its impact on on your business and more importantly is you know when the moratorium expires is there any broader effect that you would expect to see on overall credit trends even outside that specific segment yeah
spk10: We've modeled it pretty carefully. We don't expect it to have a significant impact on card or personal loans. And as you think about student loans, it's important to look at how we underwrite those, right? For our undergrad loans, the vast majority are co-signed by the parent, very strong FICO scores. So, you know, we've seen probably a modest benefit on the credit side, but also a modest negative on the payment rate as students have more liquidity to put towards paying off their private student loans. And again, I'd go back to the federal student loan program in terms of who participates, the amount of debt they have, and the nature of the education they finance is dramatically different than our portfolios.
spk13: Okay. Makes sense. Thanks.
spk01: And we'll take our last question from Ming Zhao with Deutsche Bank. Please go ahead. Your line is open.
spk12: Great. Thanks, guys, for taking my question. Just a quick question on the personal loan portfolio. I guess, are you sort of tightening up standards there, just given the pristine early stage and loss rates that we've seen there? But, you know, I'm also looking at the sequential sort of seven-quarter decline in yield. So, Just wanted to get your thoughts there, or is it just sort of primarily the elevated payment rates that's driving that? Thank you.
spk03: Yeah, it's a couple of factors that are playing out here. So the first piece was when we came in, prior to coming into the pandemic, we were pretty tight. And then we hit the pandemic, and we tightened the personal loan product more stringently than any other product we had. And then we also, we doubled down on our underwriting, including 100% verification of all loans. So we were super careful. That had an impact on growth levels. We have since reduced our manual underwriting. So it's back to kind of pre-pandemic underwriting standards. And we also opened up the credit box because what we're seeing is the loans that were in there were pristine. And we're now in a situation where we've got a high returning asset. We're looking at the competitive dynamics. We've made some conscious choice to reduce yield for the benefit of very profitable growth. And, you know, as I said earlier in my comments, the expectation is that, you know, the payment rate will subside and we'll see growth in loan balances in that product. Originations have been, you know, positively strong, as I said earlier as well.
spk12: Got it. Great. Thank you.
spk11: Any other questions?
spk09: Great. Thank you, Ashley. And with that, I think we'll conclude. If you have any additional questions, please feel free to follow up here in Investor Relations and have a great day.
spk01: Thank you. And this does conclude today's program. Thank you for your participation. You may disconnect at any time.
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