Q1 2020 Earnings Call
[music].
Good morning, My name is Maria and I'll be your conference operator today at this time I would like to welcome everyone to the first 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 that time. Please press star one on your Touchtone phone.
If he should need operator assistance. Please press star zero. Thank you I'll now turn the call over to Mr., Craig Streem head of Investor Relations. Please go ahead.
Sure. Thanks, a lot Maria good morning, everybody and welcome to our cool.
Well begin on slide two earnings presentation, which you can find is always in the financial section of our Investor Relations website Investor Relations Dot discovered dot 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.
Call. This morning will include remarks from our CEO, Roger Hux child, and from John Green, Our Chief Financial Officer, and after we conclude our formal comments there will be time as Maria said for question and answer session. During the Q and a session. We'd appreciate it if you limit yourself initially to one question. If you have a follow up maybe Q back in so we can be sure too.
Comedy as many participants as possible and now it's my pleasure to turn the call or would Roger.
Thanks, Greg and thanks to our listeners for joining todays call I hope all of you and your families are staying healthy unsafe. During these very challenging times I'd also like to take a moment to acknowledge and thank the healthcare workers first responders grocery store workers and many others, who have been working so hard and often great personal.
Sacrifice for the benefit of our communities and country.
The structure of this call will be a bit different than our traditional earnings calls after my opening remarks, John will discuss our first quarter results with a particular focus on the reserve builds I will then come back and provide additional information as to what we have been seen since the end of the first quarter.
Here are discover our top priority has been health and safety of our employees. Our headquarters functions moved to work from home on March 16th with minimal disruption in our technology team and field leadership did an incredible job getting nearly all of our 8000 discover call center team members working from the safety.
Their homes within two weeks.
Our robust business continuity plans digital business model and 100% US based customer service helped ensure our representatives were ready even as we faced an unprecedented increase in coal volumes from concern customers impacted by the Corona virus.
Yes.
Early on in the crisis, we answered 95% of calls in less than five minutes and for April as our team got more comfortable working from home average full times have been under one minutes.
We are providing significant support to our customers across every product to help them through this crisis, we've expanded payment plans across our credit card student and personal loan and home equity products and waived fees on CD early withdrawals for customers, who need emergency access to their.
Yes.
Our strong capital position and balanced funding model are also a source of strength John will provide additional detail, but I'm, especially pleased with the strong demand we are seeing for our deposit products.
Some of the early impacts of the pandemic can be seen in our first quarter results specifically in sales volume and card loan growth for.
For the company overall, we generated a net loss of $61 million or 25 cents per share as the benefits of solid growth in average loans were more than offset by higher provision expense.
As we adopted the seasonal reserve methodology on January Onest. The reserve build this quarter reflected the life of loan view as well as an outlook for a weaker economy and higher unemployment.
Actions, we've taken since the crisis began include significant tightening of underwriting for new card and personal loan accounts with additional employment verification.
And we've pulled back on balance transfer offers and line increases as I've mentioned on prior calls for the last 18 months, we have been tightening credit at the margin as we have felt for some time that we are in late credit cycle, but given the present environment. We are adopting a significantly more cautious view.
To give you a sense for how our card portfolio compares today with how it looked at the end of 2007 are contingent liability.
During the total open to buy for our card products has been reduced from roughly 5.7 times loans to around 2.7 times and the percentage of the portfolio below a FICO score of 660 has gone from 26% at that time down to 19 per se.
Sent at the end of 29 chain.
So while we're not immune from the impacts of deterioration in the economy or portfolio is significantly better positioned than it was ahead of the last financial crisis.
In addition to our credit actions, we're taking a hard look at operating expenses to ensure investments align with the economic environment.
We are implementing approximately $400 million of cost reductions over the remaining three quarters of 2020.
And we'll continue to review expense levels as the economic environment evolves.
I'll now ask John to discuss key aspects of our financial results in more detail than I'll come back to discuss the current environment.
Thank you Roger and good morning, everyone.
Before I begin I want to Echo Rogers, Thanks to all the people working on the front lines of the pandemic I also want to thank all of our discovery associates, Dave pivoted to work from home environment, while maintaining their high service levels and professionalism throughout.
Today.
I will summarize the results for the quarter, then provide details on our credit performance and loan provisions I'll conclude with an update on capital and funding trends before turning the call back over to Roger to summarize our cobot 19 response actions.
In light up the uncertainty in the economy, we are redrawing, our previously provided guidance, but as Roger mentioned, we are targeting $400 million of cost reductions through the balance of the year with the majority in the second half.
Our expense actions include reducing account acquisition expense cutting spending on brand awareness and consideration activities and reducing vendor and technology spend.
We will continue to review all discretionary spending as the payback on incremental spend has changed.
In the interest of focusing our comments this morning on the impacts of the pandemic in our responses. We are not going to review our customary slides on loan growth payment volumes and revenue.
Are you can.
Well disclosures on slide 11 to 16 in the appendix to this presentation and as always we're happy to take questions on knees or any other aspects of the quarterly results.
On slide four looking at key elements of the income statement revenue net of interest expense increased 5% this quarter, driven primarily by a 6% increase in average loans and a $35 million net gain in our payment services segment, principally from the sale of a portion of an equity investment.
Net interest margin was 10.21% for the first quarter. This was down 25 basis points year over year due largely to lower loan yields as a prime rate came down in response to fed rate cuts in September and October of last year.
This was partially offset by lower funding costs.
The additional fed rate cuts in March of this year will impact net interest margin beginning in the second quarter.
Provisions for credit losses include a net charge off of 760 mine $69 million up 8% from last year and an increase in reserves of approximately $1 billion, reflecting the deterioration in the economic outlook.
I'll have some additional comments and credit in a moment, but before we turn to the next slide I want to discuss operating expenses they were up 13% from the prior year first quarter.
The increase was principally due to higher compensation expense increased marketing cost and investments in technology.
Turning now to slide five showing our key credit credit metrics credit performance remained stable in the first quarter, we did not see any discernible impacts from the national Cobot 19 containment activities or from our own credit mitigation actions in response.
Card charge offs increased 15 basis points from last year's quarter, due principally to seasoning of loan growth.
The credit card 30, plus delinquency rate was up 17 basis points from last year, but flat versus the prior quarter with both metrics, reflecting consistent performance and typical seasonal patterns.
Our private student loan and personal loan portfolios also had stable credit performance in the quarter with both showing slight improvements in charge offs and delinquency rates.
On slide six you'll see our allowance for credit losses.
We added $2.5 billion to the allowance for credit losses in January of this year as we transition to a life of loan Cecil basis at the end of the quarter, we added approximately $1 billion to the allowance largely due to changes in the macroeconomic forecast.
The reserve build assumes unemployment rising to more than 9% recovering through twentytwenty, two and a decline in GDP of nearly 18%.
We also included our best estimate of the reserve implications of the government stimulus programs.
As the economic outlook evolves and the impacts of the various government related programs to become more clear we will adjust our allowance accordingly.
Turning to slide seven our common equity tier one ratio increased 10 basis points sequentially, mainly due to a decrease in loan balances, partially offset by capital returns.
For purposes of calculating regulatory capital, we have elected to defer recognition of the Cecil day, one adjustment for two years. So we will begin to phase in our day, one Cecil impacts in Twentytwenty too with 100% phased in by 2025.
The federal banking regulators have also provided that phase in for that day, two impacts of Cecil with 25% of the quarterly reserve build also being deferred until Twentytwenty too and then treated the same as the day one deferral.
Our payout ratio, which includes buybacks was 99% over the last 12 months as Roger noted we have suspended our share buyback program, but we will continue to fund our regular quarterly dividend.
Our liquidity position remains very strong.
As of the ended the quarter, we had $19 billion in liquid assets $6 billion and committed borrowing capacity through privately placed asset backed securitization and 35 billion in borrowing capacity at the federal reserve discount window.
As of April Twentyth, our liquid assets have grown to more than $23 billion.
In addition to those forms of actual and committed liquidity, we have access to funding through our direct to consumer deposit channel.
With average deposits, increasing 20% year over year, and now making up over 55% of total funding.
Based on the strength of consumer demand yesterday, we reduced rates on our savings accounts by 10 basis points and we'll continue to look for opportunities to do so.
In summary.
Good progress on the expense front.
Liquidity is robust capital remains strong and we continue to monitor and manage our credit exposure and now I'll turn the call back over to Roger.
Thanks, John.
While we will not be providing new guidance given the uncertain economic outlook I do want to provide you with an update on two key areas, where the cobot 19 pandemic is impacting our business in a way that was not captured in the Q1 results.
On slide eight we're giving you a detailed look at sales volume trends to illustrate how cobot 19 has affected cardholder spending in April.
As compared to the much smaller impact we saw on the first quarter sales. The first column shows the composition of sales by category for the full year 2019.
So you can see where our cardholders spend is normally distributed by industry.
We then give you the year over year growth percentages for the first quarter 2020 and month to date April.
On a day adjusted basis every day sales, which includes gas groceries and wholesale clubs and makes up about 22% of total sales so growth of 10% during the quarter.
So far in April however, everyday sales are down 14% year over year as increased spending on groceries is more than offset by a 60% reduction in spend in petroleum.
Discretionary spend is down 33% driven by the category the travel category, which although only 8% of cardholder spending is down 99% and by retail which is down 11%.
As long as stay at home orders remain in place and many businesses remain closed we expect the weak sales volume trend to continue.
And future trends will depend upon the pace of the recovery.
Turning to slide nine I want to take you through the skip a payment programs, we have implemented to help our customers during the period of economic difficulty.
We recognize that cobot 19 has placed financial stress on the discover customers who may be out of work or have suffered reduced wages.
One of the key differences in this downturn compared to the great recession of 2820 10 has been the staggering pace of job loss, but also the amount of government stimulus and the potential for many of those jobs to be restored after a hopefully brief period of unemployment.
Therefore, we are offering support to those impacted by cobot 19, with skip a payment programs available across all of our products. Many models on the relief, we traditionally provide for our natural disaster.
Through the first half of April we have enrolled over 450000 customers and roughly $3.8 billion in receivables in skip a payment programs to provide financial relief to our customers across our lending products.
The receivables enrolls now represent 4% of total loans, but we are encouraged that the number of daily enrollments has been declining since the level peaked in late March.
We will continue to work with these customers closely and potentially extend programs when required to meet the customer's needs.
Let me close by summarizing some of the actions we have taken to respond to the cobot 19 pandemic.
We have shifted virtually all of our employees to work from home in a sustainable model. It's still continues to provide an industry leading customer experience across all of our products.
We have taken swift and meaningful action to adjust our credit policies to reflect the new environment continuing to lens, but we tightened standards for new accounts and for growing existing accounts.
We are implementing expense reduction initiatives, while preserving key investments that will allow us to grow our business over the long term and we're prepared for additional actions as the environment evolves well our capital position is strong we have suspended our share repurchase program in order to enhance.
Our capital base.
Clearly, we will have some challenging quarters ahead, but I'm confident that we have taken the correct actions none of us can foresee when depicting pandemic impacts will subside and allow the us economy to begin to recover but discover is well positioned for the recovery that we know will eventually come we.
Have a loyal customer base committed employees and a strong financial foundation to build from as we look to deliver long term value to our customers and shareholders.
That concludes our formal mark remarks, so I will turn the call back to our operator Maria to open the line for QNX.
Thank you at this time, if he would like to ask a question. Please press star one on your Touchtone phone.
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And we'll take our first question from Bob Napoli of William Blair.
Thank you and.
Good morning, everybody hope everybody's well.
A question on the your outlook for unemployment to end GDP essential reserving for the life of the loans and I know you gave some numbers. But is now are are you can you just go over those numbers for 22000, 2021, and what what you're expecting.
As far as recovery and what effect is will that have on on loan growth.
Okay. Thanks, Bob This is John I'll I'll take a shot at that so.
There's a wide degree of economic forecasts that we took a lack looked at while we're building our.
Our models and ultimately our allowance so.
What what we built in was.
Unemployment, peaking at 9% and staying relatively high through through the balance of this year. So.
About 7%.
Through the end of the year and then it recovers.
Slowly through Twentytwenty too.
So not not expecting a.
Real quick.
Recovery, and rather slow and our allowances as reflected that dynamic as we as we model that out.
The loan and your second part of your question on loan growth the loan growth will be dependent on how we see the economy.
And the recovery.
Proceeding as Roger mentioned in his comments we have been.
Cautious coming into this cycle and when when the pandemic kit, we pulled back further so loan growth will be.
Subject to essentially the recovery of the economy.
While we would expect to see loans declining I guess from here at least for the next quarter routine Wyoming.
Fair.
Bob There are lot of factors that will go into where loans go certainly the retail spend numbers that I gave you will have a significant impact.
On that the credit action and expense actions, we've taken will have an impact on loan growth as well, but to John's point, there's a lot of uncertainty that will be determined by the pace of the recovery.
Thank you appreciate it.
Our next question comes from the line ascend Jackson County of KBW.
Thanks, Good morning, and I Hope you guys are doing well as well.
I guess, it's been pretty well documented that since the end of March.
Some of the economic forecasts have actually been revised worse. So can you just talk about how that might be contemplated in the future whether or not you guys think it should be.
And then also how you guys are incorporating.
Some of these skip a payment to cure rates in such inside.
Your loss assumptions.
Okay. Thank you.
So there is as I said in my on my response to the last question. There's a wide degree of variation on the estimate so when when we put this together we were looking at what we're unlikely scenario was now.
The the economic backdrop continues to evolve so.
We certainly did consider that there are.
Some overlays related to how we think about recoveries and certainly we did put a mild overlay in.
For the government stimulus programs, but it is uncertain and if.
If the economy deteriorates further and we don't see a recovery that we'll have reserve implications if if it.
Runs out as we've modeled.
Well.
Also play through into into the balance sheet and the piano. So I know I'm not being real specific on your answer but.
At this point given the uncertainty this was our best estimate in terms of your second your second part of your question on skip the pet.
So.
With that.
No. It's the nature of that program is for card is that an inbound call will happen.
The customer if there are impacted by cobot.
We'll get an automatic.
Basically payments deferral, they won't have to make the payment.
If they call back a second time.
They can get a second deferral on the payment.
And after that they would either pay and go go current or.
Continue to kind of roll into delinquency buckets, and ultimately charge offs. So as we provisioned we thought about.
Life alone provisions and feel like we did a reasonably good job of capturing the dynamics on the portfolio. The one the one impact on skipped failure is that.
If.
If a customer is in trouble in isn't able to pay.
It will it will result in up to a two month deferral into charge off just by the nature of how things roll but.
I do want to point out that.
Just over 80% of those customers who entered into the skip a beat appropriate students pay program.
Our current at that time.
Okay, and just to clarify.
I guess the same forecast you used for your assumptions in the first quarter have those actually been revised for the worse in early into the second quarter and if everything remain the same would that mean that there would have to be an additional provision or are you, saying that.
It's really subjective based on sort of how youre seeing things unfold based on your own forecasts.
Yes, so theres, a number of factor and I'm not trying to be elusive here Sanjay but.
Unemployment and GDP contraction are are obviously key.
Inputs that are the duration of the the slowdown will also.
Important geographic input impacts are important job classes are important so ultimately it will be a matter of the pace of the recovery, but just to go back to clarify my remarks.
So we assumed nine nine just over 9%.
Unemployment levels at a peak and then a very very slow recovery in two.
Twentytwenty and.
Coming in.
Through Twentytwenty too.
And Sanjay just to build on that the reserve is calculated a point in time and so we'll go through a similar process next quarter. My guess is there will be a lot of ups and downs in economic forecast between now and then then and I would contrast that with in terms of how we make our credit decisions that is done on a near continuous base.
Basis, and I'd much more granular level and so we're looking by industry sector. We're looking by geographic area, we're making decisions on who we both line assignment.
How much employment verification, we do so I contrast, the reserve calculation with how we're manning managing credit which is near continuous.
Okay, great. Thank you.
Our next question comes from the line of block degree of Barclays.
Good morning.
Thanks for taking the question.
The.
It sounds like your macro assumptions are not too dissimilar from the last recession as far as kind of where unemployment peaks in the pace of the recovery.
Yes, the card reserve reflects.
Cumulative losses that are probably less than half of what your experience in a way to online timeframe could you talk about how.
No.
Thanks.
Folios changing the manner that it makes you comfortable that.
Losses will warm approach, what we saw in the last recession.
Okay.
You know.
Theres a couple important pieces related to the the portfolio that change. So Roger mentioned this in his comments in terms of the open to buy so the open to buy has has reduced by about $54 billion from the last reception to this recession.
Average average FICO scores in the portfolio have increased between.
Five and 600.
Basis points.
Which is a material change are.
Underwriting.
Frankly is is.
Far more sophisticated than than it was.
10 years ago, and frankly the actions that.
This business undertook.
When a pandemic.
Started to actually.
Drive some real difficult employment numbers.
Was drastic and very very quick.
So.
I don't know if it's if there is a perfect for Larry between the last recession in this recession time will tell but.
Certainly.
I feel like the business the business is well positioned in took decisive action.
And.
Again, if the economic outlook changes will.
We will adjust.
The reserves and the allowance accordingly.
Okay fair enough. Thank you.
Our next question comes from line of Don Vendetti of Wells Fargo.
Selling your line is open to make sure you're not a meal.
Yes, John.
The sort of.
Tell you to a specific number on the stimulus.
Ballistic that you could have as you've looked at your scenarios, maybe a point or two lower net charge offs.
From stimulus and then secondarily most financial institutions have said there'd probably be another reserve build a sizable reserve build in Q2 just want to.
I know you've talked a lot about it but.
Is that the case as you sit here today in April.
So.
Real difficult to answer at this point, so we're going to monitor.
The economy in our portfolio and actually how our customers are performing and and make make appropriate calls on reserve builds in subsequent quarters.
In terms of.
The government stimulus programs the the impact that we modeled.
Was relatively modest so I don't know I would go to a full percentage point on charge offs, but.
But there was a mild impact and as we see that unfold.
It will become more clear the key thing on the stimulus programs at least initially was.
With the.
Unemployment checks going out in the 600 dollar.
I will say benefit.
That.
Thats, a front loaded impact and we'll have to see how things develop on the back half a year.
Thank you that's helpful.
Our next question comes from the lot of Bill catchy as new era.
Thank you good morning, Roger and John I was hoping to follow up on your thoughts about the potential benefit from government relief programs, specifically on the Paycheck protection program.
Can you comment on the idea that have employed consumers, who are receiving payments under PPP and therefore, not receiving unemployment insurance, maybe understating. The true level of initial claims which you guys have always side. It is an important leading leading indicator of credit performance and then if we extend that line of thinking how much of a concern is there that like.
Those receiving unemployment insurance employees participating in PPP face uncertainty about their employment outlook and still have to make decisions about which bills to pay first what that means for the unsecured credit card, but just I guess the overall consensus view seems to be that PPP as a positive in the near term, but it's not a longer term fixed.
I was just hoping to that you could maybe speak a little bit more to.
Just a broad potential that PPP program will benefit your loss experience and your confidence level. Thanks.
Yeah, I mean, I think all of the government stimulus provides a benefit but given the depths of the decrease in economic activity. What we all really need is for the economy to start back up again and that'll depend on the pace of Reopenings in different states and is in.
Possible for us to forecast as we sit here.
Yes, some of the traditional relationships may break down a bit.
A lot of the initial unemployment claims have been driven by I would say entry level employees in retail restaurant other industries.
That may have less of a correlation with what we see in our prime card base. So there is an essay even the same one to one interaction that we would have seen in previous downturns, where the job mix was different and that job mix maintain change over time.
During this recession as well so.
I would summarize where the government programs are helpful, but what we really need as the economy to get going again, and so while this will depend on the pace of the recovery.
Thanks, that's helpful. I guess, maybe if it could just follow up with the conceptual question on seasonal.
I guess, a different way of asking what's come up.
Idea that if macro conditions were to continue to deteriorate relative to your expectations at the end of Q1.
At a high level is it reasonable to expect that we will see additional reserve building and then therefore.
When conditions stopped deteriorating will stop seeing additional reserve building, maybe you kind of another way to asked that is if you can envision a scenario, where you would need to continue to build more reserves, even after economic conditions start to improve just trying to get and get just get the big picture idea of how Cecil it's going to work okay. So so big picture.
Sure if the economic conditions continue to deteriorate there will be two dynamics that are likely to happen one would be.
The Cecil life of loan provisions would would increase.
So so the allowance would increase we would also take appropriate actions to.
Ensure that our portfolio is stable and that.
The lending activity, we were doing made sense. So so you could expect that portfolio.
Frankly might.
Might not increase in would actually decrease in if that were the case.
You would see some level of offset as result of reserve.
Releases tied to the portfolio size or the overall loan loan size. So so theres a multiple dynamics there that come into play, but I hope that's conceptually helpful.
Thank you.
Our next question comes from one of Jason Kupferberg of Bank of America.
Hi, Thank you for taking my question I wanted to ask a little bit more about just into the fall balance program sorry quickly. This isn't the here on for Jason.
I wanted to ask about the forbearance programs.
Typically.
You also continuing somewhat typical modification programs, Joe and can you just help automobile with the mechanics in builds off just but how you deal with the fact with whether you do a credit limits available to borrow et cetera for those who.
Either of these programs.
And just how you expect that could lead to like it with the skip a beat or whether you will people will be transitioning from that if they continue to grow through the delinquency buckets do your other modification program or is that that once you do the skippy and now you don't you are eligible for some of those other programs just want to understand a little bit more on how you're dealing with some of the delinquencies.
Thank you.
Yes, it's Roger let me try it out a high level as John described per card. It's a two month program up to two months for skip a pay but they do one month less than 5% have renew for the second month.
So we'll see how that plays out over time.
We do still have our programs for customers that need.
A longer period of assistance regulators have been encouraging us and others to maximize the support we provide for customers, but again I think it really does depend on the pace of recovery.
So as John pointed out over 80% of those taking advantage of skip a pay our current and so our hope would be and again thats why weve modeled that after some of disaster relief programs be traditionally at that they will require a shorter bridge and then we'll be able.
So to get back to paying their bills, if not we have longer term programs to assist.
Yes.
And just sorry, just to clarify on that when do you do anything with the longer with those skipping a bit there's no change to their credit limits available to borrows except for correct.
No for those who have signed up for skip a pay it does not impact their credit limits on the so thank you.
Our next question comes from a lot of Rick Shane of JP Morgan.
Hi, guys. Thanks for taking my questions. This morning.
Thank you for all the information on the skip a pad.
Im curious what you're seeing in terms of payment behaviors or consumers, who are on skip a pay programs.
Are you seeing increasing.
Consumers, who are making minimum payments on a monthly basis.
So we're still.
Here pattern to emerge and part of it is driven by that drastic reduction in sales volume that you've seen what I would say is that reduction in sales is relatively equal across transactors and revolvers and so it's balanced in that way, but what happens with.
Payment rate I think will be determined on how quickly those sales ramp up.
Some people, making larger payments and you can see from the inflow into our deposit products. There are lot of households were still okay, but are looking to afford defy their positions. So I'd say, it's too early to really pick out a pattern in terms of impact of all these changes on payment rate.
Got it okay.
In and look we share your view on looking at this in the context of.
Natural disaster in terms of how.
The challenges emerge, but one thing that historically as being.
Subsequent to natural disaster are.
Significant insurance payments into those regions, which create things like.
Huge cash inflows, we've seen deposit spikes or associated with that.
I don't necessarily think that we're going to see that this time.
Is it your view that that will actually change the post then payment behavior and carrier credit characteristics.
You know, there's a lot of speculation out there in some ways. This is like a natural disaster in other ways. There is a big debate in terms of the resurgence of economic activity that you got from rebuilding after disaster you won't quite have that here and so is the economic people aren't going to go.
Good twice as many restaurants, and so is that economic activity just lost.
I'd say, probably why you don't have the degree of insurance payments you do have an unprecedented amount of governmental assistance and my guess is you'll continue to see additional programs. So that is probably a bit of an offset compare to what you would have seen coming out of insurance.
Got it hey, Thank you for taking my questions and we wish everybody their health and safety. Thank you. Thanks for an acute thanks Rick.
Our next question comes from lots of Kevin Barker of Pepper Sandler.
Thanks.
Just in regards to the liability side of the balance sheet.
Are you seeing changes in behavior on your deposit side.
And what are your expectations going into the second and third quarter on just overall deposit growth given the deferring stimulus checks combined with stress across unemployment I know, it's difficult to really pinpoint it but it seems like there could be a lot of.
Overlays, where you might actually see a little bit pick up in deposits and then maybe a decline can you just give us a little idea and your expectations there.
Yes, so I think supply and demand are.
Starting to come into balance.
But it's going to its going to take another quarter or so.
The.
The appetite for our deposit products has actually been very very good.
We.
We have traditionally been second or third on the bank.
Bankrate table.
We we have then recently been a little bit more aggressive on the downward side based on the overall demand of our for our products. So I think some concern people are coming out of equities and looking for safe place to put their cash I think other other folks.
Have.
Have looked at our offerings and our service levels and decided that we're good spot and they've chosen us so.
As we look forward in.
Future I'll say future quarters, it will be subject to a couple things.
Supply and the demand factors, what our competitors are doing and then obviously our own performance, but we.
We look to kind of move on the deposit pricing too.
Who actually.
Pulled back some of the NIM that was impacted by the fed actions.
Okay, and then in regards to some of the [laughter] programs that you laid out with a 400 million dollar expense savings should we assume that that's off of what your previous guidance was or or is that.
Lastly separate from.
Thank you yet, yes that was off the previous guidance and as we said when we we issued that it was.
It'd be best based on a strict payback analysis. So are we going to get a long term returns for the incremental investment with the economic backdrop changing we of course made the appropriate.
Decisions.
Thanks for taking my question.
Our next question comes from the line.
Of Jefferies.
Hi.
Good morning, guys and thanks very much for taking my question.
Your first question is where we are we on utilization rate should average balances.
And how does that compare to maybe appearing in the.
Entering the last recession.
I'm, sorry could you repeat the first part of the question utilization utilization rates.
So as you look at overall utilization rates for the portfolio I think we showed that the amount of contingent liability I.E. the ratio.
Of which is kind of about the opposite of utilization is significantly down from prior years. So one as part of the credit tightening that we've done over the last several years a key component has been tightening contingent liability and tightening that exposure.
Okay. Thank you and then.
You know kind of quantify the effects of the year the rate changes in March.
How much of the impact of benchmark rate you did you see in the quarter I know is later in the quarter.
And what do we think about NIM trends over the next quarter too.
Okay.
So so we didn't see any impact in the quarter from the fed reductions at the end of March So theres about 150 basis points that reduction so.
You know weve.
We're not giving guidance, but I'm going to give you a couple of points in terms of how to think about it.
So the 150 basis points hit.
There's an impact for three quarters of the year on that our deposit betas have traditionally been about 50%. We took some proactive steps early in the year reducing.
Overall deposit rates by 20 to 50 basis points, depending on the product and then.
We're.
Pulling back on the promo mix, which should also help rate. So you put those those factors together and I think it draws a picture of.
How NIM.
Good good look for the year now now the quarterly trends are going to be a little bit a little bit different based on.
What's happening in particular quarter on on revolver in Transactor mix.
Perfect. Thank you guys very much.
Our next question comes from the line of Moshe Orenbuch of Credit Suisse.
Great. Thanks.
Roger maybe.
As you kind of sit and think and obviously you're going to be doing less marketing, but you're going to be doing it kind of in.
Different Nixon products and as you think about discovers.
Product set and service.
Nish kind of how do you think about what what you are going to be doing and where there are opportunities to capitalize maybe if you could also just growing thoughts on rewards competition in this environment as well thanks.
Yes. Thanks, Thanks Moshe for the question one other things we're trying to do is keep an eye on the opportunity in this environment and so even as we may cause we continue to make investments as well that will strengthen discover build the brand and make sure we're in.
We're in great shape for the future. So we're excited about the partnership with quickly that just launched.
No products, such as our miles card, where you have the ability to redeem at Amazon and pay Pal. That's a lot more useful than programs that were structured just around to travel.
Our third quarter promotion is four restaurants for the 5% program, we think battle resonate very very well and offer so awards rate and products. This is really structured well for a wide variety of scenario. So for example issue or is that have big.
Signup bonuses, they're having to extend that period.
Sure earn those because of the reduced level of retail sales and complaints from their customers, where ours is just a flat match for the first year of spending. So we're very excited about where our products are positioned we've talked a lot about the traction we're getting in deposits.
So thanks, a lot of our message is really will resonate in this environment, who wants to waste money on a credit card with an annual fee and we're the only one with only no annual fee product. So we're really excited about some of the opportunities we're seeing in this environment.
Great.
I would assume that you would expect better.
Whether it's a response rate or conversion rates and things like that in this.
Well, while marketing as well as you might have some of that.
Yes, we're we're seeing and some of it plays out in the personal loan space. For example, some of the cup traditional competitors in the Fintechs, who do not have robust funding models are cutting very very aggressively so even with reduced marketing, we're still hoping to generate good results.
Great. Thanks very much.
Our next question comes from one of Betsy Graseck of Morgan Stanley.
Hi, good morning, and thanks for all the comments on a couple of questions. Just one earlier I think you mentioned something about how this recession is going to be very different from previous ones in part because of.
The quick job losses.
Then expected recoveries do you know the chop types spike customer that you have.
You know we get it at.
The time of underwriting so some of it can drift over time it varies a bit by product we have much better information for the personal loan customers. As an example, if we don't have far student loan customers given they they haven't been employed so it does vary but I would say, we we have very strong for personal loans and a good amount on the card portfolio.
Okay, and then separately on the reserving as you now it looks like US we're looking at the reserve levels relative to the 2018 bankrupt stress tests just to get a sense as to how you're comping. This.
Upcoming recession versus that stress loss scenario that you ran a couple of years ago and when we look at that.
You know the credit card reserve taken is running if my math is right around 45 ish percent of that stress loss period, but the other consumer is running much higher.
On the other consumer products I think it averages around high Eightys low ninetys.
I was just wondering is there a reason why.
You feel this apparent hasn't getting tougher on that other consumer and does it have to do with your answer just gave or is there anything else there.
You know I would I say it really has to do with more technical differences between the nature of those two different stress as a lot of it has to do with when a recovery comes in so just comparing scenarios based on peak loss can give you different numbers. So I wouldnt say, it's anything different we're seeing by asset class. It it's more tax.
Nickel.
Based on those scenarios.
Okay, and then just two other quick ones when people sign up for skip a pay.
And let's say you know they go for the one month is it is it automatic that they can go for the two month or they have to call and you know every time charter check it on the email.
Yes, Betsy they have to call in.
On the card side.
Okay.
All right and I guess with a call time is being extremely low that's that's not going to be a challenge for them.
And then lastly on the forbearance side or the Collins Ethan receiving from the slide deck. Obviously it showed that the beginning of April was the peak and I got a few questions and overnight why do you think thats the case that the requests for.
Skip a pay have already started to decelerate in a time when unemployment claims are still rising care, yes that that's a good question. Some some it could be related to the government stimulus programs.
And.
And then it could be just the cycle, we do expect.
The trend to decline and then a modest pick up as they approach into the second month for certain customers, but.
We'll have to see yeah, I mean, I guess I would probably 0.28 people may have a better feel of what stress is coming their way even before they are actually unemployed and so they may have called us knowing that their boss said, Hey, we've got one week left and then we're closing down so there isn't necessarily that.
Land site. The second thing my personal view as unemployment claims have actually been gated by capacity to process as opposed to each week 6 million people are losing their jobs and so thats why we would have seen the bubble earlier, but because we didn't have that same capacity constraint that I buy.
Have you seen around unemployment claims.
Okay, that'd be great of agree to update that as you get in front of people to over the quarter. Thanks.
Our next question comes from one of men Zhao of Deutsche Bank.
Hey, Good morning, guys. One quick question I guess I on the skin the payments.
You guys give further demographics I guess on on what you're seeing.
And these customers, meaning is it safe to assume that lower FICO score customers are the ones currently enrolling at least can pay payments or it's at the end too much of the generalization.
You know I would say, yes, we talked about over per card at least over 80% our current.
They are relatively highly utilized.
In terms of the amount of balance, but there is actually a mix of some that are transactors as well historically in that so thats, probably the information we're willing to provide at this time.
Hi, Thanks.
Our next three our live questions.
Our next question comes from one of Bob Napoli of William Blair.
[noise], Bob you're very hard to here.
[noise].
[noise] should reach.
[noise], yes.
Hi, Bob I'm sorry.
This is this is John.
Sure.
Sure.
Maria sounds like we may have aligned cross or some other call I'm not sure.
Thats the question or.
Summing sounded really strange there.
And I went ahead and removes Bob from the Q.
Okay. Then you can you can prompt if there's anything else and if not we'll will terminate the call.
Again, ladies and gentlemen to ask a question. Please press star one.
All right.
Im showing no further questions, Sir I would like to turn it back over from management for any additional for closing remarks. Thanks Maria everybody. Thank you for your attention. Your interest this morning, and we will talk to again.
As needed. Thanks, Stacy thank you.
Thank you ladies and gentlemen, this does conclude the first quarter 2020 discover financial services Conference call you may now disconnect.
Okay.
[music].