Q1 2021 Discover Financial Services Earnings Call
Thank you.
[music].
Okay.
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 2021 discover financial services earnings Conference call.
All lines have been placed on mute to prevent any background noise.
After the Speakers' remarks, there will be a question and answer session.
If you'd like to ask a question at that time. Please press star one on your Touchtone phone.
If you should need operator assistance, Please press star zero.
I'll now turn the call over to Mr. Eric whilst the strong head of Investor Relations. Please go ahead.
Thank you Maria and good morning, everyone and welcome to this morning's call I'll begin on slide two of our earnings presentation, which you can find in the financial section of our Investor Relations website Investor Relations Dr discover dot com.
Our discussion today contains certain forward looking statements that are subject to risks and uncertainties that may cause actual results to differ materially. Please refer to our notices regarding forward looking statements that appear in today's earnings press release and presentation.
Our call will include remarks from our CEO, Roger Hochschild and John Greene, Our Chief Financial Officer. After we conclude our formal comments there'll be time for a question and answer session.
During the Q&A session. Please limit yourself to one question and if you have a follow up questions. Please get back into queue. So we can accommodate as many participants as possible now it's my pleasure to turn the call over to Roger.
Thanks, Eric and thanks to our listeners for joining today's call.
Last April if you'd told me that a year into the pandemic, we'd be reporting excellent credit performance positive sales trends and solid earnings growth I wouldn't have believed it.
While the pandemic is far from over and there may be twists and turns ahead as a nation. We have made tremendous progress toward addressing the health crisis and reopening the economy.
This quarter, we earned $1 $6 billion after tax or $5 <unk> per share I am very pleased with these results, which reflect a robust business model strong execution, including a disciplined approach to managing credit improving economic trends and the impact of federal support for U S consumers.
<unk>.
Since the end of 2020, our view on economic conditions has improved.
Rapid pace of the recovery has lessened our concern of job losses spreading to the white collar workforce and there has also been substantial support for the U S consumer through stimulus in January and in March our current expectation is that credit losses in 2021 will be flat to down year over year.
Year.
This improved economic view combined with lower loan balances and continued strong credit performance were the primary drivers of the $879 million reserve release in the quarter.
As discussed in previous quarters. The strong credit performance was accompanied by elevated payment rates that continue to put pressure on loan balances, which were down 7% year over year.
Payment rates were over 350 basis points higher than last year and at their highest level since the year 2000.
While the impact from stimulus payments should abate over the next few months, we expect payment rates will remain elevated for the rest of the year as households use savings to meet debt obligations and continue to benefit from payment relief programs, such as federal student loans and mortgage payment forbearance.
Despite this pressure we still expect modest loan growth this year supported by several factors.
First there has been a significant increase in sales volume up 11% from a year ago and up 15% from the first quarter of 2019.
Improving trends in categories like retail and restaurants are positive signs for future growth. Additionally.
Additionally, based on our credit performance on our current outlook for macro conditions, we have begun to migrate our credit standards back to pre pandemic levels. This is particularly true in card, where our value proposition centered on best in class customer service valuable rewards and no fees continues to resonate strongly.
Finally, among consumers, we're also expanding credit standards in personal loans, but not quite back to 2019 norms to on.
Offsetting the higher payment rate as well as leverage these credit actions, we intend to increase our marketing spending through the rest of this year.
Outside of marketing, we expect that expenses will be relatively flat year over year as we remain committed to expense management. We are reinvesting some of the benefits from our strong credit performance and efficiency gains into technology and analytics to further improve our account acquisition targeting fraud.
<unk> and collections capabilities, the rapid pace of the economic recovery and strong credit performance may provide additional opportunities to lean further into growth. We intend to take advantage of these opportunities and may make additional marketing and non marketing investments that will create long term value.
On the payment side, we continued strong performance in our pulse business with volumes up 23% driven by stimulus payments in the first quarter and higher average spend per transaction. We also continue to expand our global acceptance through network partnerships and this quarter, we signed new partners in Jordan.
In Malaysia.
Our digital banking model generates high returns and we remain committed to returning capital to our shareholders. This quarter, we restarted our share repurchase program with $119 million on buybacks in line with the regulatory restrictions still in place looking at our strong credit performance and robust earned.
<unk>, we see an opportunity to revisit our capital return to shareholders in the second half of the year.
As I look towards the future I am excited about discovery's prospects our products continue to bring value to our customers. We remain flexible as we support our employees and their families through the pandemic and we are well positioned to continue driving long term value for our shareholders.
Before I turn it over to John One last thing you may not know it but our CLO logic Walcott sits in on these calls is a great part of the team today is her birthday. So I want to wish one day, a very happy birthday with that I'll now ask John to discuss key aspects of our financial results in more detail.
Thank you Roger Happy birthday, <unk> and good morning, everyone I'll begin by addressing our summary financial results on slide four as Roger indicated the results. This period reflects many of the same dynamics, we've seen over the past few quarters.
The influence of stimulus resulted in elevated payment rates, which pressured loan growth also contributed to the strong asset quality and our significant reserve release in the quarter.
Revenue net of interest expense decreased 3% from the prior year, mainly from lower net interest income.
This was driven by a 7% decline in average receivables and lower market rates, partially offset by a reduction in funding costs as we continued to manage deposit pricing and optimize our funding mix.
Noninterest income was 5% lower primarily due to a $35 million net gain from the sale of an equity investment in the prior year.
Consistent with our excellent credit quality.
<unk> loan fee income reflects the decline in late fees, while net discount and interchange revenue was up 12% from the prior year, reflecting the increased sales volume.
The provision for credit losses was $2 billion lower than the prior year, mainly due to an $879 million reserve release in the current quarter compared to a $1 1 billion reserve build in the prior year.
Our improved economic outlook lower loan balances and strong credit sales that release.
Additionally, net charge offs decreased 30% or $232 million from the <unk>.
Prior year.
Operating expenses decreased 7% year over year as we remain disciplined on expense management.
Other than compensation all other expenses were down from the prior year led by marketing, which decreased 33% year over year.
Looking ahead, we intend to accelerate marketing investments over the remainder of the year.
We will go into details on our spending outlook in a few moments.
Moving to loan growth on slide five.
Total loans were down 7% from the prior year driven by a 9% decrease in card receivables.
The reduction in card receivables was driven by two primary factors.
The payment rate remains elevated driven by the latest round of stimulus and improved household cash flows.
Second promotional balances have continued to decline, reflecting the actions we took at the onset of the pandemic tightened credit as a result.
These balances were approximately 300 basis points lower than the prior year, Although we expect new account growth, we'll call it promotional balances to begin to stabilize.
As the economy reopens further we believe consumer spending and prudent expansion of our credit box should drive profitable loan growth going forward.
Looking at our other lending products organic student loans increased 5% from the prior year and originations returned to pre pandemic levels.
We continued to gain market share through the mini peak season.
Personal loans were down 9%, primarily due to actions we took early in the pandemic to minimize credit loss.
As we've previously mentioned, we see opportunity to expand credit a bit given the strong performance of this.
Portfolio.
Moving to slide six.
The net interest margin was 10, 75% up 54 basis points from the prior year and 12 basis points sequentially.
Compared to the prior quarter.
Prudent and net interest margin was driven by lower deposit pricing as we cut our online savings rates from 50 to 40 basis points during the quarter.
We also continued to benefit from the maturity of higher rate Cds and a favorable shift in funding mix.
Our funding from consumer deposits is now at 65%.
Future deposit pricing actions will be dependent upon our funding needs and competitive pricing.
Average consumer deposits were up 14% year over year and flat to the prior quarter.
Consumer Cds were down 7% from the prior quarter, while savings and money markets increased 4%.
Loan yield was flat to the prior year.
Seasonal revolve rate favorability and a lower mix of promotional rate balances were offset by the impact.
Reduced pricing on personal loans.
Looking at slide seven.
Yeah.
Total noninterest income was $465 million down $25 million or 5% year over year, driven by the onetime gain in the prior year that I previously mentioned.
Excluding this non interest income was up 2%.
Net discount and interchange revenue increased 12% as revenue from higher sales volume was partially offset by higher rewards cost.
The decrease in loan fee income was driven by lower late fees, which moved in line with delinquency trends.
Looking at slide eight.
Total operating expenses are down $78 million or 7% from the prior year.
Marketing and business development decreased $77 million or 33% year over year.
The reduction reflects actions we implemented in March of last year to align marketing spend with tightened credit criteria.
However, we accelerated our marketing spend late in the first quarter and plan to continue this through the year. These investments will drive new account acquisition and loan growth.
The year over year decrease in other expenses was mainly driven by lower fraud volume.
Due to enhanced analytics around disputed transactions and decreased straws in deposits.
This improvement demonstrates a small part of the benefit we expect from the investments we've made on analytics over the past few years.
Partially.
Offsetting the favorability was at $39 million increase in employment compensation that bill.
It's driven by two factors $22 million from a higher bonus accrual in the current year.
The remaining increase was driven by higher average salaries, reflecting the talent build in our technology and analytics team.
Moving to slide nine.
We had another strong quarter of very.
Very strong credit performance.
The total charge offs were two 5% down 79 basis points year over year, and up 10 basis points sequentially.
The card net charge off rate was two 8% 85 basis points lower than the prior year with a net charge offs down $209 million or <unk>, 31% sequentially.
Sequentially the card net charge off rate increased 17 basis points and net charge offs were up $11 million.
The increase in card net charge offs from the prior quarter was driven by accounts that had been in skip a pay and did not care.
The program ended six months ago and at this time most of the accounts that were in skip a pay have returned to making payments looking forward, we expect minimal impacts to charge offs from this population.
The card 30, plus delinquency rate was 185% down 77 basis points from the prior year and $2 22 basis points lower sequentially with.
With the influence of the skip a pay group now largely complete we think that delinquencies are the most clear indicator of our loss trajectory over the short term.
Credit remains strong and private student loans net charge offs were down 15 basis points year over year, and 18 basis points compared to the prior quarter.
On the 30, plus delinquency rate improved 55 basis points from the prior year and 19 basis points sequentially and.
In personal loans net charge offs were down 79 basis points year over year with a 30, plus delinquency rate down 47 basis points from the prior year and 24 basis points from the prior quarter.
The positive impact of additional stimulus combined with an improved economic outlook have shifted our expectation on the timing of losses we.
We had previously expected losses will increase in the second half of this year and remain elevated into 2022.
That is no longer the case.
Based on our current delinquency trends, we believe losses are likely to be flat to down this year with the possibility of some increase in 2022.
That said a material shift in the economic environment could alter the timing and magnitude of losses.
Moving to the allowance for credit losses on slide 10.
This quarter, we released $879 million from the allowance this reflected several factors including.
Favorable changes to our macro assumptions.
A moderate decrease in our loan balance.
The continued decline in delinquencies and lower losses.
Relative to our view in January the economic outlook has continued to improve.
As we've done in prior quarters, we've modeled several different scenarios and took a conservative but more optimistic view.
Our assumptions on unemployment, where a year end 2021 rate of 6% with a return to full employment in late 2023.
We assume GDP growth of about four 6%.
Our reserve assumptions did not contemplate any additional stimulus direct to consumers, but did anticipate broader economic benefits from infrastructure spending beginning in the second half of this year.
The modest increase to reserves in our student loan portfolio was driven by loan growth coming out of the mini peak season.
Yeah.
Looking at slide 11.
Our common equity tier one ratio increased to 180 basis points sequentially to 14, 9% well above our internal target of 10, 5%.
We have continued to fund our quarterly dividend at <unk> 44 per share and repurchased $119 million of common stock during the quarter.
Our board of directors previously authorized up to $1 1 billion of repurchases.
We will likely accelerate our share repurchases in the second quarter and we see the potential for capital returns to increase in the second half of the year.
As I mentioned earlier.
We continued to optimize our funding mix and consumer deposits now make up 65% of total funding our goal remains to have 70%, 80% of our funding from deposits.
Which we feel is achievable, though we expect some quarter to quarter variability in this figure.
Yes.
Moving to slide 12.
Our perspectives on 2021 have evolved from last quarter.
We continue to anticipate modest positive loan growth for the year.
We're investing in new account acquisition and have already seen strong sales growth through the first quarter high payment rates will continue to pressure loan growth near term, but should become less of a headwind over the course of the year.
Versus the first quarter level, we expect our NIM to remain in a relatively narrow range over the rest of the year.
While we will continue to benefit from improved funding cost and mix.
We may experience modest yield pressure over the next few quarters from variability in the revolve rate.
Our commitment to expense management has not changed but as Roger mentioned, we believe there is an opportunity to drive long term growth through increased marketing and further investments in data and analytics.
Excluding marketing expenses should be near flat from the prior year.
Credit performance has remained stronger than originally anticipated and we now expect credit losses to be flat to down compared to 2020.
Lastly.
We remain committed to returning capital to shareholders through dividend and buybacks.
Given the level of reserve release, and the strength of our fundamental performance, we plan to revisit our capital plan capital return levels for the second half of this year.
In summary, we're pleased with our first quarter results, our sales trend credit expansion and marketing investments to position us well for growth going forward.
We released $879 million of reserves.
NIM continued to improve driven by lower funding costs and expenses were down, but we will invest in marketing and analytics that will drive revenue as well as operating and credit cost improvements over the longer term.
As the economy reopens on positive regarding the opportunities for growth.
We have a strong value proposition that resonates with our consumers and our digital banking model positions us well for strong returns going forward.
With that I'll turn the call back to our operator Maria to open the lines for Q&A.
Thank you at this time I would like to ask a question. Please press star one on your Touchtone phone.
If you wish to remove yourself from the queue you may do so by pressing the pound key.
Please remind you to please pickup your handset for optimal sound quality.
Yeah.
We'll take our first question from Sanjay Zach Rami.
VW.
Thanks, Good morning.
I had a question on loan growth and marketing Roger you talked about.
<unk> standards to pre pandemic levels, maybe you could just talk about the opportunities for growth relative to 2019 on how we should think about the marketing budget in relation to that and then maybe you could just also tie in.
Your confidence level on the loan growth given the stimulus I mean, it seems like you guys kept it flat in terms of loan growth expectation. So.
Can you just elaborate on that thanks.
Sure. Thanks for the question Sanjay.
Maybe starting with bandwidth stimulus clearly one of the biggest differences versus 2019 is the payment rate and thats part driven by the cash payments to consumers the savings rate, but also the relief they get be it on their federal student loans or other payments they have to make and so thats a real.
The headwind against loan growth.
And as I mentioned on the call, it's actually at the highest level since the year 2000.
In terms of marketing, we feel very good about the cost per accounts about back to pre pandemic on.
As you recall, we had been.
Tightening for a couple of years and I would say continue to remain conservative. So I really think it's that headwind from payment rate.
It has kept us.
From being even more enthusiastic.
About loan growth.
And when we think about the margin okay.
And relative to 2019 is there any context, you could provide for that sorry on the follow up.
Yeah.
I think part of it and John indicated this I think we're probably more comfortable giving you some view around where we expect total expenses to beach, but also it will depend on what we see in the back half of the year.
And so to the extent, we see opportunities to deploy more capital against organic growth, we've been clear thats, our top priority and so thats why.
We're continuously revisiting where and how much we should allocate to marketing.
Thank you.
Our next question comes from the line of Ryan Nash with Goldman Sachs.
Hey, good morning, guys.
Good morning.
So Roger John on capital post this quarter's performance here at 15% CET. One you talked about reevaluating in the second half of the year I guess, given the outlook for credit potential for further reserve releases I think it's fair to say you guys are going to be building and capital on the near term so.
How should we think about.
The timeframe of getting back to that 10, 5% CET one level.
How does that have a seasonal day, one factor into that and I guess, Roger as a follow up to that just given all the capital sitting around does that at all change the way you think about acquisitions and if so what would be the priorities. Thanks.
Okay.
Hey, Ryan. Thanks, Thanks for the question I'll start it and then I'll turn it over to Roger for a second second piece of the question. So.
Really really strong performance and the the economy.
Somewhat optimistic but.
Also.
Cautious given given the amount of uncertainty what we're seeing is kind of a.
Broad based improvement.
As a result, we may have made a decision.
The release about $900 million of reserve, taking taking the.
Obviously.
The CET, one ratio well above our internal target of 10, 5% we're looking.
We're looking to come back to that $10 five.
Point, we're not going to do it overnight, we know the seasonal transition is somewhere between 202 hundred 50 basis points.
On CE tier one, but that still leaves ample room for.
Actions in terms of.
Dividends buybacks and targeted targeted M&A, when and if appropriate so.
On specifics around timing getting back that $10 five.
I would I would broadly say medium term, but we are.
We're certainly.
Committed to that target.
And.
And.
We'll do a number of efforts, including revisiting our buyback levels in the second half of this year too.
Net there and the follow up might be what do we expect the buyback levels to be incremental lives too.
We're not going to give specifics, but I will I will give a little bit of history.
Go back to 2017 and 18.
R R a.
The level of buybacks was.
It was about $2 billion.
Im not im not saying history is going to repeat that it will be subject to.
A bunch of conversations with.
Our team internally and obviously court approval, but.
<unk> continued to evaluate.
Roger you on yes, and on the M&A front, we try and be disciplined and so I would say it would not lack extra money burn a hole in our pocket.
For those of US for those of you who've been with us for a longer Youll recall, we had significant.
Time and stay disciplined.
Chinese on on the banking side.
Okay.
Not much out there that fits with our digital channel model Youre seeing acquisitions that our branch mergers cost takeout, which doesn't fit.
On the payment side, while valuations have come in.
There is still really high.
And so we lean a bit more towards partnerships potentially smaller minority investments. So again I think you can expect no change to our disciplined approach around returning capital to our shareholders.
Got it.
Could squeeze in one other so on the slightly higher.
Higher expenses, John can you, maybe just help us what is the base for that is that GAAP or adjusted and then second Roger Theres numerous mentions of.
Accelerating investments in data analytics on account growth can you, maybe just give us a sense for what you would need to see for those.
For you to bring those investments on in terms of whether it's in the macro account acquisition or what would you expect to drive that thanks.
Great.
Quick first part of your question.
The expense growth relative to GAAP last year.
And then on the investment side a lot of those are on capabilities.
Especially on the data and analytic area that just enhance all parts of our operations, whether it's the credit underwriting the marketing targeting personalization collections et cetera, and so they are given the return profile.
Part of it is just bandwidth in talent I would say are more gating factors, but we're really excited about the benefits and then in terms of putting more dollars to work on the marketing side. It will very competitive activity has a bit of an impact on that but we will just look at on the new account side what we're.
Moving across different opportunities and the returns they generate.
Thanks for all the color.
Our next question comes from the line of something.
Evercore ISI.
Selectively there on on the margin.
Maybe help us think about the.
I know you came in around 38 points.
Quarter.
Could you think about <unk>.
That patient as we look out thanks, yes.
Yes.
So as we went through that.
We really scrutinized the.
With expense discipline and net.
And Amir we found certain opportunities.
So.
As.
As we think about.
The balance of this year next year.
Controlling corporate.
Cost so that.
We can invest savings back into overall growth the growth levers.
<unk>.
We've done that and we're going to continue to do that.
As we think about the efficiency ratio.
Well.
Last year I think assuming.
Revenue comes in with the.
With the modest growth we talked about.
But <unk> would be a reasonable spot.
That will indicate that we're driving.
While investing in the business.
Any follow up capital.
Next question comes from the line of Bill Quirk.
Sure John.
Tim.
Taking place around.
For Steepening on the long end and one will get lift off what the shorthand is discover us ability to get to a mid 20% of our OTC.
With rates, maybe another way to ask it is can you.
You talk about your card.
Since level and being able to get to say mid 25% type on OTC, even if the strip remains in place.
Yeah. Thanks, Thanks, Bill so.
Oh.
If rates.
There is indications that.
A number of different things are happening in the economy. So you would expect.
Inflation to be increasing.
Very very low level of a full employment economy.
And a a robustness that.
Might rival.
The pre pandemic level on a sustained basis and so yeah.
You have to believe that a lot of different things that are going to happen in that that said also will.
We'll take some actions to control inflation now we have.
We've seen this over a number of years now.
The fed and overall interest rate environment has been on a sustained basis very very low.
As we look forward to 2021 and 2022.
My expectation is Rachel.
Remained low and.
We'll enjoy the benefits of <unk>.
Economy, continuing to grow beyond that it gets different more difficult to call in terms of.
Total return levels.
It will depend on a number of factors right is just one of those credit obviously it will be an important an important item.
Certainly.
Longer term, we think that.
So we're in a position to drive high returns for our shareholders consistent with what we've done historically and our hope is when we when we come back to that $10 five target net that will that will further enhance overall returns.
Got it thank you as a follow up.
Just the opportunity in the student lending space.
Customers, who may not have been thinking about refinancing their student debt to Lori when their loans went through variance, but as loans start to exit forbearance is there going to be an opportunity for you guys to see an acceleration there.
Yes, so we don't really participate in the student loan refi market the pricing.
It doesn't really meet our return hurdles.
To the extent there is more activity can marginally impact the payment rate for student loans, but we feel really good about where we're positioned and I think last year was very challenging as a lot of kids either deferred for a year or had reduced expenses because they didn't have.
Meals are housing et cetera. So again, we feel good about what this peak season should bring in our ability to continue gaining share.
Thank you for taking my questions.
Thanks Bill.
Our next question comes from the line of Betsy Craig tick of Morgan Stanley.
Hi, good morning.
Good morning.
Couple of questions. One you were talking earlier about widening standards in particular on card.
And I just wanted to get a sense as to what you're expecting.
An increase in accounts as well as.
A higher line.
Lines extended to your existing accounts and then could you give us some color on.
How you expect to pull in new clients given the fact that the consumer is in a fantastic spot on.
From other folks.
Or do you feel like this is generating new demand from from maybe a younger cohort that's not been borrowing at some color on that could be helpful.
Sure so in terms of.
And it's probably more heavily impacting new accounts, but also encompasses sort of our line increase and other criteria on the portfolio side as well.
In terms of where we expect I would say in.
All times, we gift cards to consumers who are in good shape.
But we do have particularly strong appeal to us.
Our secured card is performing.
So the traditional prime revolvers segment that discover is always targeted.
Competitive business. It always has been so it's about differentiation.
Our experience a great rewards program focus on value those traditional things are what allow us to continue gaining share and booking new accounts.
Sandy.
Your value prop very clear, especially versus other card lenders with no fee et cetera.
How do you think you're positioned against fin techs, who also have a light or low or no fee proposition.
So.
There arent that many of the Fintech that are active yet in the card space by and large they do.
Loans of different types, and so we've yet to see a significant I would say fintech player in the card space.
And most of our competition tends to be the traditional leaders in the marketplace.
Okay, and then if I could squeeze one in for John.
Mentioned in answer to the prior question on the to go around the total expense outlook day Youre thinking about for the full year 2021, and I think you mentioned that Youre expecting 2021 to come in similar to the end of 'twenty and then from there as we look to 'twenty two and beyond.
<unk> migrate back towards like the high thirties could you just give us some color as to the end of 'twenty expense ratio that youre thinking about because.
There's a couple of different ways you could slice it based on on one timers is that is that a run rate north of 40% on the efficiency side, maybe you can help us understand your sizing there.
So we used a GAAP basis on that and so the one timers that were.
Included in.
The underlying.
Number that actually we didn't publish but we called out the underlying numbers.
Was about $200 million.
So.
The the operating efficiency is going to be dependent upon what we see in terms of loan growth payment rate and new account generation, which.
As Roger said and I'll Echo the comments were very positive about how we're positioned.
To drive growth.
And especially in the second half of the year as the payment rate abate a bit.
So.
What you can expect here and trying to provide as much details I can is that.
Outside of the marketing investments, we talked about some investments in data and analytics, we're looking to keep all other costs flat.
We're going on.
We're going to manage that envelope as we see opportunities but.
We'll be able to use that as a.
With the jumping off point to drive further improvements.
<unk> fees.
Channel and beyond.
So the $200 million is what we should act out to get to operating assets.
On the stock price.
Subject to subject.
Kit growth in what we see as opportunities.
So theres no theres, no absolutes, but and as time goes on we'll have more clarity on.
On the opportunity and then if I look pre pandemic Ryan Betsy, we do want to do.
Do you have some other questions to get to.
Right.
So we'll follow up later thanks.
Right.
Our next question comes from the line of Mark Devries of Barclays.
Thanks Bill.
Hoping you could give us some color on where we should expect the reserve ratio to migrate to it as it.
Is it appropriate to think about it going back to kind of the seasonal day one level.
And if so at what pace could we get there.
Yes.
So.
Yes, we took a meaningful chunk out of other reserve levels this quarter.
Honestly the credit outlook and are on our models indicated that net.
There was a range of different outcomes, we could have kind of made on that and what we tried to do.
<unk>.
Take a chunk out of the reserves that.
Makes sense, given net level of absolute uncertainty in the economy as we as we look forward.
On the absolute reserve level, our reserve rate will depend on.
What what we see in the macros, how the portfolio is performing.
And.
And what we do in terms of account growth loan balance, but overall.
As we think about where where the provision levels could be I would I would use the day one T cell <unk>.
Right.
As a decent proxy and subject to how the portfolio is performing.
It could migrate up or down from there what we did last year in the first quarter in the second quarter was.
Was react to an incredibly dynamic and changing macro environment.
We.
We prudently put up on it.
Incremental $2 billion.
So.
The portfolio performs.
Over time, we can.
Could get back to that that seasonal day, one and perhaps a little bit lower with.
Excellent portfolio management, now timing I'm not going to be specific yet.
Okay. That's helpful. Thank you.
Okay.
Our next question comes from the line of Johnson <unk>.
Yes.
Hi, good morning.
Roger as we went through the pandemic, obviously theres more e-commerce.
Is there anything that you've learned in terms of like how you would position the company differently. It seems like the tack on technology are continuing to gain more touch points with customers is there anything strategically that you want to lean into where you've learned.
Great question, I think it really accelerated a lot of trends that were existing prior to pandemic right. So.
Consumers are already migrating more and more of their shopping online, but that move even.
Quicker their customer interactions, we're moving more towards digital that accelerated even further so I think it had has recommitted to the path. We were on in looking to accelerate some of the functionality certainly there were some specific things around the tap and go cards.
Small dollar transactions migrating from cash and debit that benefited our pulse volumes, but I would say in general not so much new trends, but 345 year acceleration of trends that were already there and that we had been positioning the company to take advantage of.
Got it.
The potential investments or partnerships with them accretive.
Or could they potentially be more technology.
Thanks.
No.
Where we traditionally Tim made them on the payment side is with partners that either add capabilities or to cement our relationship that will drive volume over our network.
On the technology side, we found.
We have great partners slash vendors out there that you don't need people don't need money in the current environment and so that's why we've kind of not to do investments in pure technology companies that arent payments relief.
Thank you.
Yes.
Our next question comes from the line of Rick Shane of Jpmorgan.
As you look forward to loan growth how much opportunity is there to category specific rebound that's more in depth to borrow like travel for example.
Great question.
I think that it will be constructive some of the categories that were strongest through the downturn, though had a pretty good revolve rate. So you think about home improvement that was really doing well. So a lot of it I think we'll be in the restaurant and travel segments, but I wouldn't necessarily.
Early expected a huge boost to revolve rates just given again some of the categories that were strong in the downturn.
Got it okay. Thank you very much.
Our next question comes from the line on the handful tier of Bank of America.
Good morning, and thank you for taking my question.
Yes.
Really quickly I wanted to ask about competitive intensity.
Are you seeing any impact on cost of acquisition of customers have come back I know that had trended very well last year and that's an area you would be making investments in and then maybe I'll just ask my up.
The related question I had on that last year discover with no annual fee no cash back card.
It's really well suited for the backdrop as we reopen and maybe probably rewards become more relevant for consumers are you seeing any impact on your usage any early indicators from consumers, who would maybe move your card the top of wallet not steel and what Youre seeing so just I guess competitive intensity more broadly thank you.
Yes, so I'll start with the second one we are not seeing an impact and we think the lesson learned in the pandemic of the utility of cash rewards hopefully will last.
And we feel very good about even the newer redemption offers.
We've added so the ability to redeem at point of sale on Paypal with Amazon, We just announced the ability to redeem for carbon offsets, which we think will be popular with millennials. So no real change to that.
In terms of competitive intensity, we talked about I would say just extraordinary really attractive cost per account last year. As there was a significant pullback I think we're now moving towards more normalized levels of competition and my guess is we'll see that increase but our.
Our job is to grow the business in face of the competition, that's there and so while I missed the <unk> base from last year, we feel good about the returns will generate from our marketing even in a more intense environment.
Understood. Thank you.
Our next question comes from the line of John Hecht of Jefferies.
Good morning, guys. Thanks, very much for taking my questions.
Our next question Roger you addressed some of this with.
With respect to the loan growth maybe.
You talked about it being a mix of Ryan utilization and new customers. I'm wondering is is there one bigger contribution to that relative to the others.
And what's the cadence and is this more of a second half factor or is this going to be balanced over the course of the year.
Yes, so on the <unk>.
So I do expect marketing expenses to ramp up over the course of the year.
Yes, they werent overly large Q1, but again with a wider credit box will get more leverage for the marketing spend.
So.
Expect a ramp but we'll look at that continuously and make adjustments as we see fit in terms of the impact of the credit changes, it's probably more heavily weighted towards the new account side.
Versus portfolio, but we always look for a blend of those two as we think about growth.
Okay, and then Joe.
Sorry go ahead John.
Please go ahead I was going to say channel.
More of a kind of concept question is we're a year into flow now and obviously, it's had a pretty big impact.
How things turned out from a GAAP perspective.
How do you stack the major decision, making factors with respect to your <unk> now is it is it the Moody's model is it unemployment is it just your internal opinion of your of your performance trends.
How have things changed with respect to you the way you look at that day that ALLL.
Level.
Yes.
Good question certainly evolving so.
We used Moody's and so on to other providers. So the broad macros are very important.
<unk> net.
Portfolio performance itself is also obviously a key input we have.
We have a team of technical Modelers that.
At that run various scenarios regression sort of scenarios to Tim.
To help make a determination on what overall LIFO type of loan losses could be which is a key input.
Probably 12, 12% to 15 different variables that go into that model that.
Through the projection and then the.
The other pieces youre loan balance right and what.
What what you have on the balance sheet as of as of the measurement data in order to set reserves. So.
I would say all of those factors are important.
And then finally, one other one is the recovery rate, which actually also does go into the model. So so four important factors.
<unk>.
We've taken a measured approach to ensure that our balance sheet is appropriately stated and.
We're on the conservative end of the judgment calls.
I appreciate the context. Thank you.
Our next question comes from the line of Macau of Deutsche Bank.
Hi, good morning, Thanks for taking my call.
So also on lumpy sales for travel on restaurants can be sometimes pretty much materially accelerating from February and March and takeaway for restaurants have you guys seen that carrying over into April as well.
Yes, yes.
Yes.
We have actually.
Incredibly the sales performance the first three weeks of April.
Versus.
Versus 19 overall were up about 17%.
And.
Three weeks into the month, so things can change and then versus last year.
Certainly dented significantly by the pandemic.
We're up 68% on on sales so.
Readers are up higher.
Then revolvers, but revolvers are up.
Prior year so.
Well good.
Great. Thank you.
Yeah.
Next question comes from the line of Moshe Orenbuch of Credit Suisse.
Great. Thanks, most of my questions actually has been on really asked and answered, but maybe if you could just follow up on two quick points one is.
Klein.
Is there.
I guess, maybe the question is how much of that is a function of.
Versus some of the ongoing.
Thank you you highlighted whether it's enhanced unemployment benefits.
Loans interest forbearance and terms.
Thinking about the pace of that decline.
And just very quickly you talked about.
But the seasonal day one.
Just conceptually do you think that that the life of loan has a higher or lower likelihood we're on.
January one 2022.
With a near term recession on January one 2020.
So I'll cover the first part and I'll, let John forecast for sales.
Sessions.
In terms of the elevated payment rate and it is a mix, but you are seeing a lot of it come from.
Governmental support and so we do expect it to come down over the course of the year, but remained elevated compared to historic levels and this is because households have a lot of savings that drawn and there's just a lot of other forms of support so.
It is a headwind against loan growth is really being driven by external factors.
So I would say, we're not overly alarmed about it.
And again, what it really extraordinary levels of governance of government stimulus and all assets.
Yes that is what will be our net.
Macro assumption.
This year.
Forecasting out to 2022.
On.
Today, obviously, there's no perfect answer on perfect insight.
Say this.
Net pent up demand.
Four.
For consumers I believe.
Is is fairly pronounced and we will continue to drive spending.
David through this year and well into next year.
So that.
That to me indicates that the macros should be positive through 'twenty, it's really difficult to call at this point.
Okay. Thank you.
Youre welcome. Thanks.
Thanks for the questions.
Our next question comes from the line of Kevin Barker of Piper Sandler.
Yeah.
Good morning could you give us a little bit more detail on some of the investment spend youre, making on data analytics and driving account growth and then also is there any way to quantify how much incremental spending you're putting into that.
And returns that are being generated from that whether it's additional growth.
Other trends that we can identify.
To quantify either the growth or the.
On the investment returns that Youre getting.
Yes, great.
So.
I'll hit the second part of that question first so.
In terms of returns.
We have a rigorous process, where we take a look at incremental investments.
And in terms of our.
Our return thresholds.
Both are on won't be specific but.
Very very strong double digits on that.
In line with.
What you can expect from the company.
On a normalized basis in terms of return on return on capital in terms of.
What we're investing in data analytics.
On specifically on <unk>.
On looking at attrition from the portfolio, we feel like there is an opportunity to.
Reduce attrition level through through some early identification of customers. So.
Who may not be maximizing net usage of the card we have.
Data analytics projects going on in collections.
Mentioned in our prepared remarks, and fraud and fraud analytics.
So.
Frankly.
Theres almost.
Hey, insatiable.
Demand for these sorts of programs.
Programs and what we are we're being very very selective in terms of making sure that we prioritize the highest returning loans.
And the current welcome.
Why don't we make this our last question. Please.
Our final question comes from non of Dominick Gabriele of Oppenheimer.
Okay.
I'm sorry on the beat a dead horse.
Operating expenses in the fourth.
Quarter of 2020, they were almost about one 3 billion.
Seem to be a little oh on kind of a little confused on one other comments there so is that reasonable to take that one.
Tier that one 3 billion.
Fair level.
So I'm.
Im certainly not in the business.
The marketing expense.
For the balance of the year.
Continue continue to grow and bill.
That kind of that envelope.
<unk> talked about earlier.
The quarter over quarter comparisons.
R R.
Frankly relatively challenging given what happened in 2020 in terms of our our focused approach to loans.
Look at every single dollar that potentially is coming out of the drill out the door on an expense items. So.
I would just focus on the broad numbers.
<unk>.
Quarterly breakouts.
<unk> to you to figure out what makes the most sense. We here we're looking at.
2021, and 'twenty, two and don't specifically try to manage to any particularly particular quarter.
Quarterly number.
Makes sense and then I guess, if you if you kind of look at what happened this quarter with the.
But the kind of benefits that you guys have.
<unk>.
With having not only a lending business, but one that also gains.
Interchange that really helped offset some of the slowdown in loans I guess do you expect that.
<unk>.
Could see that discover to proprietary network being much higher.
As far as the growth basis going forward.
Year over year versus your loan growth in 'twenty. One do you expect that divergence to be there for at least a few quarters. Thanks, so much guys.
Really appreciate it.
Sure. So our total network spend embedded fitting from from growth in some of our third party payments areas.
If you include the debit side pulse is growing very strongly and so thats helpful. But we also believe that having a proprietary network is an important differentiator and gives us a whole series of capabilities that helps us grow our banking business. So again total volume will depend somewhat on some of the partners.
And we are a little skewed towards debit.
For the third parties, but.
We're going to work for continued robust volume growth.
Alright, thanks, so much.
Alright, well.
Alright, sorry margin, but thank you very much.
Have any follow up questions feel free to reach out to Julian Emily and Hi, and thank you for joining us. Thank you folks.
Thank you ladies and gentlemen, this does conclude today's call you may now disconnect.
Good day.
Sure.
[music].
Okay.
Yes.