Q2 2021 Discover Financial Services Earnings Call
Lastly, we achieved a historic low in delinquencies, which resulted from consumers strong liquidity position, our conservative stance on underwriting and the proactive measures we took into the downturn to protect our credit quality.
This out quarter.
Turning to the quarter's results, we earned $1.7 billion after tax or $5.55 per share.
These results included.
We had a 720.
$729 million, 1 time gain but even excluding this gain our results were very strong at $3.73 per share.
The drivers of the quarter's strong results reflect the combination of our solid execution and supportive macro conditions total.
<unk> sales were up 48% from a year ago and 24% from the second quarter of 2019.
Retail sales remained very strong and there was significant improvement in teeny categories, which were hardest hit by the pandemic.
I did is an increase from <unk> 15.
15% in the first quarter.
2019.
We also see an attractive environment for account acquisition, even though.
We have removed nearly all of our pandemic credit tightening and have increased our marketing investment to align with these actions. These decisions supported new accounts.
Over 2019 levels with strong growth among prime consumers as our differentiated brand and integrated network support our strong value proposition, which centers on transparent and useful rewards outstanding customer service and new annual field fees.
While the current operating environment as broadly constructive there are also some challenges as we have highlighted before the counterpoint of sustained strong credit performance is high payment rates, which in the second quarter were over 500 basis points above 2019 levels.
We may be seeing.
Any evidence that payment rates are plateauing and while we expect some believe payment rates will remain.
Hi.
Even so we expect the strength in our sales figures and a contribution.
Through the back half of this year and accelerate in 2022.
As we have said.
So when we see attractive opportunities and the actions. We took this quarter with increased marketing expenses and investments in technology and analytics. We are an example of that approach.
These investments are consistent with our commitment to long term positive operating leverage and an improving efficiency ratio as they drive loan growth and enable a more efficient operating platform.
In our payments business, we benefited from a gain on our equity investment in <unk>.
This gain was the result of a relationship that began a decade ago and we continue to see opportunities.
And innovative partnerships I'm very excited about our investment in <unk> that was weak.
Weak as we look to expand our partnership with a leading buy now pay later provider.
We also continue to grow our global acceptance presence and announced new partnerships and by bringing in Portugal, adding to the 2 network alliances that we announced earlier this year.
Our debit business continued to build on its recent strength.
Pulse volume increased 19% year over year and was up 33% from 2019 levels. In addition to the influence of economic recovery. This performance reflects the greater relevance of debit to many consumers through the pandemic period volume of diners is also recover to some extent.
And was up 41% from the prior year's loans. However, volume is still below pre pandemic levels and may remain so for a period of time.
This strong fundamental performance of our digital banking model drove significant capital generation, which this quarter was also aided by our equity gain.
We accelerated our share repurchases to $553 million of common stock a level near the maximum permitted under the federal reserves 4 quarter Rolling net income test.
We remain committed to returning capital to our shareholders and going forward our approach will be governed by the stress capital buffer framework.
On our call last quarter, we indicated that we hope to revisit our capital return for the second half of this year.
I'm very pleased that our board of directors authorized a new $2.4 billion share repurchase program that expires next March we also increased our quarterly dividend from <unk> 44.
To <unk> 50 per.
Per share.
With the current strength of the U S economy.
I am increasingly optimistic about our growth opportunities this year and beyond our value proposition continues to resonate with consumers. Our payment segment is expanding its partnerships and acceptance and our capital generative model positions us for strong returns over the long term.
I'll now ask John to discuss key aspects of our financial results in more detail.
Thank you Roger and good morning, everyone.
I'll begin with our summary financial results on slide 4.
As Roger noted our results this quarter highlighted the strength of our digital model solid execution on our priorities and continued improvement in the macroeconomic environment revs.
Revenue net of interest expense increased 34% from the prior year.
Excluding 1 time items revenue was up 9%.
Net interest income was up 5% as we continued to benefit from lower funding costs and reduced interest charge offs, reflecting strong credit performance.
This was partially offset by a 4% decline in average receivables from the prior year levels.
Excluding 1 time items non interest income increased 29% driven by the higher by higher net debt discount and interchange revenue due to strong sales volume the per.
Provision for credit losses decreased $2 billion from the prior year, mainly due to a $321 million reserve release in the current quarter compared to a $1.3 billion reserve build in the prior year and.
An improvement in the economic.
And ongoing credit strength were the primary drivers of the release.
Net charge offs decreased 41% or $311 million from the prior year.
Operating expenses were up 13%, primarily reflecting additional investments in marketing, which was up 36% and flow.
Compensation, which was up 10%.
Software write off and a nonrecurring impairment at diners club also contributed to the increase I'll provide more details on expense drivers and outlook later in the presentation.
Moving to loan growth on slide 5.
Ending loans increased 2% sequentially and were down just 1% from the prior year. This was driven by card loans, which increased 2% from the prior quarter and were down 2% year over year.
Lower year over year card receivables reflects 2 primary factors first the payment rate remains high as households continue to have a strong cash flow position due to several rounds of government stimulus.
Promotional balances were approximately 250 basis points lower than the prior year quarter.
While card receivables declined year over year, we consider the sequential increase to be an important data point, reflecting continued momentum in account acquisition and very strong sales volume.
Payment rate remains a headwind to receivable growth, although we expect to see modest decreases in late 2021.
At our other lending products.
Organic student loans increased 4% from the prior year, we are well positioned as we enter the peak origination season.
Personal loans were down 6% driven by credit tightening last year in high payment rates were.
We are encouraged by continued strong credit performance in the portfolio and have expanded credit from new originations.
Moving to slide 6.
Net interest margin was 10, 6.8% up 87 basis points from the prior year and down 7 basis points sequentially compared.
Compared to the prior quarter. The net interest margin decrease was mainly driven by a nearly 200 basis points reduction in net card revolve rate.
Loan yields decreased 17 basis points from the prior quarter, mainly due to the lower revolve rate. This decline reflects the impact of increased payment as well as seasonal trends.
Yield on personal loans declined 7 basis points sequentially due to lower pricing student loan yield was up 4 basis points.
Margin benefited from lower funding costs, primarily driven by maturities of higher rate Cds, we cut our online savings range of 40 basis points in the first quarter from did not make any pricing adjustments during the second quarter.
Average consumer deposits were up 6% year over year and declined 1% from the prior quarter.
The entire sequential decline was from consumer Cds, which were down 9%, while savings and money market deposits increased 2% from the prior quarter.
Consumer deposits are now 66% of total funding up from 65% in the prior period.
Looking at slide 7.
Excluding the equity investment gains total noninterest income was up $123 million or 29% year over year.
Net discount and interchange revenue increased to $102 million or 43% as revenue from strong sales volume was partially offset by higher rewards cost.
Loan fee income increased $20 million or 24%, mainly driven by higher cash advance fees with demand increasing.
Economy reopens.
Looking at slide 8.
Total operating expenses were up $145 million or 13% from the prior year.
Employee compensation increased $46 million, primarily due to a higher bonus accrual in the current bill.
As 2020, when we reduced the accrual.
Excluding this item employee compensation was down from the prior year as we manage head count across the organization.
Marketing expense increased $46 million from the prior year as we accelerated our growth investments.
Still see significant opportunities for growth and we plan to accelerate our marketing spend.
Year to drive account acquisition and brand awareness.
Information processing was up due to a $32 million software write off.
The increase in other expense reflects a $92 million charge and the remainder of the diners intangible assets.
Partially offsetting this was lower fraud expense, reflecting some of the benefits from our investments in data analytics.
Moving to slide 9.
We had another quarter of improved credit performance.
Total net charge offs were 2.1% down 132 basis points year over year, and 36 basis points sequentially.
Net charge off rate was 245%.
145 basis points lower than the prior year quarter, and down 35 basis points sequentially.
Net charge offs were down $276 million versus last year's second quarter, and 62 million sequentially.
The card 30, plus delinquency rate was 143% down 74 basis points from the prior year and 42 basis points lower sequentially.
Credit in our private student loans and personal loans also remained very strong through the quarter.
Moving to the allowance for credit losses on slide 10.
This quarter, we released $321 million from the reserves due to 3 key factors continued improvement in the macroeconomic environment sustained strong credit performance with improving delinquency trends and lower losses.
These were partially offset by a 2% sequential increase in loans.
Our current economic assumptions include.
We include an unemployment rate of approximately 5.5% by year end and GDP growth of 7%.
Embedded within these assumptions are the expanded child care tax credits and the benefit from the infrastructure physical package beginning in late 2021.
Looking at Slide 11, our common equity tier 1 ratio increased 80 basis points sequentially.
15.
7% pay.
A level well above our internal target of 10, 5% as Roger noted we are committed to returning capital to recent Florida, provable, increasing our buyback and dividend payouts reflect debt.
On funding, we continue to make progress towards our goal of having deposits speed 70.
280% of our mix.
Moving to slide 12.
Our perspective on 2021 continue to evolve as we see additional opportunities to drive profitable growth.
We have increasing confidence in our outlook for modest loan growth in 2021 had strong sales in our new account growth should offset.
The higher payment rates.
We expect NIM will remain in a relatively narrow range compared to the first quarter levels.
75% with some quarterly variability similar to what we experienced this quarter.
We anticipate a slight benefit from higher coupon deposit maturities and an optimized funding mix with yields are affected by the variability in the revolve rate.
Our commitment to disciplined expense management has not changed and we remain focused on generating positive operating leverage and an improving efficiency ratio for this year. We now expect non marketing expenses to be up slightly over the prior year, reflecting the higher compensation accruals and recovery.
Yes.
The increase in these expense categories is closely tied to the economic recovery for example, the high level of consumer liquidity is supporting elevated deliveries. These recoveries have some costs associated with them, but are more than offset by lower credit losses.
Regarding marketing expenses.
We expect this will step up more significantly in the second half of 2021.
We further deploy resources into account acquisition and brand marketing.
With the continued improvement in credit performance. Our current expectation is that credit losses will be down this year compared to 2020.
Naturally a material change in the economic environment could shift the timing and magnitude of losses.
Lastly, as evidenced by our dividend increase and new share repurchase authorization, we remain committed to returning capital to shareholders.
In summary, we had another very strong quarter.
We are well positioned for a positive top line trajectory, given our sales trends and new account growth.
Credit remains extraordinarily strong in the economic outlook continues to improve.
We maintained our discipline on operating expenses, while investing returning organic growth opportunities.
And finally, we continue to deliver high returns, allowing for enhanced buybacks and dividends.
With that I'll turn the call back to our operator to open the line for Q&A.
At this time, if you would like to ask a question. Please press star 1 on your Touchtone phone.
You wish to remove yourself from the queue you may do so by pressing the pound team.
Mind, you to please be GAAP your handset to provide optimal sound quality.
We will take our first question from John <unk> with Evercore ISI.
Good morning.
Good morning, just wanted to see if you could good morning.
Just wondering if you can give a little more color on the payment rate expectation.
I guess, just what are you seeing that gives you confidence in the.
The moderate decline expected for the back half of this year and if you could talk about the.
How do you weigh the risk that the payment rate may not moderate from here and then secondly on that are you seeing any differences in your FICO bands in terms of the payment rate behavior. Thanks.
Okay great.
I'll take the call or I'll take the question John Thanks, Thanks for that.
<unk>.
Payment rates are are frankly at a record high total.
<unk> looked at our trust data you can see that in June.
They came in at about 29% net.
Frankly, that's an all time high at least as far as back as 2005.
So what we're seeing when we look at the portfolio the portfolio the trends are similar but the overall payment rates.
Debt lower.
What we're seeing is a couple of factors 1 is.
And a deceleration of the growth in payment or any.
And second.
We formed our expectation on the second half of the year based on all of the government programs that are out there and most the most significant ones are expiring or have expired.
By the end of the third quarter. So we expect that coupled with the strong economic activity and lower savings range that we're in.
<unk> 2.
Result in a moderate decrease in the payment rate certainly in the fourth quarter in the third quarter.
It could be it could be flat to maybe even up.
A mild debt.
But overall our sense is that we have approach the peak of this and it's going to begin to tail out tail off.
And in terms of the mix by FICO band.
It's pretty broad certainly the higher FICO SKU transact or so youll have a higher payment rate in some of the mid FICO as you've seen revolvers churn Trans actor Bill.
But again to John's point, we do expect to gradually normalize.
Okay, Great now Thats helpful and then separately from you.
I appreciate the.
The commentary around the loan growth expectation.
You also expect some variability in your margin.
What does that imply for your net interest income expectations. If you could elaborate a little bit on that in terms of the second half trajectory, there and possibly going into 2022.
Yes so.
I will touch upon it so the net interest income.
We'll follow the loan growth, but as you know in the fourth quarter.
Bill the loan balances is skewed towards the last last 2 months of the quarter.
Net interest margin.
Is.
What I'll say the trajectory is changing.
Positive direction, given the sequential loan growth we saw.
From first quarter to second quarter.
But again.
It's going to be in the single.
Single digits lower lower single digits.
General expectation.
Okay.
Your next question comes from the line of Sanjay SEC, Ronnie with K B W.
Thanks, Good morning.
I guess my first question is I know, everyone sort of waiting for the consumer to re lever in there is positive signs, but maybe Roger you could just speak to the competitive environment. I mean, obviously everyone's chasing growth are wanting to grow maybe you could just speak to how it's out there.
Yeah. Thanks Sanjay.
We've discussed in the past the card business is always competitive.
There was a nice little lull last year that we book to take advantage of and pick up even more market share, but I think this is returning to more normal maybe a little heightened but more normal level of competition, you're seeing new products out there increased marketing spend but as I look at.
Our value proposition.
Cost per accounts, we're achieving and the returns I feel very very good about the market seeing spend we're putting out there and what we're generating for it.
Okay, Great and my follow up is on that.
<unk> investment, obviously theyre not been coming buy now pay later company I'm, just curious sort of if you could speak to that specific investment and how you see that unfolding for yourselves. Both in terms of the investment itself, but also strategically inside a buy now pay later thanks.
Sure. So in terms of our buy now pay later strategy. There are really 2 parts. The <unk> investment is really being driven by the payment side and thats similar to the investment we made in Marquette a while back are set of network assets are very useful for many thing tax.
In terms of just an easier way to process payments and connect to merchants in a wide variety of form. So I'd say, that's the core of what we're doing with <unk>. We also believe that potentially over time, there may be opportunities on the banking side. So in terms of our providing lending not necessarily with <unk>.
But in the buy now pay later space more broadly and again, leveraging what we can do with unsecured lending and our direct merchant relationships, but I would say, we haven't announced anything on the on the lending side of buy now pay later at this time.
Your next question comes from Ryan Nash with Goldman Sachs.
Hey, good morning, guys.
Good morning, good morning.
Okay.
John and Roger can you, maybe just talk about the expectations for monetizing the Marquette again, how much do you expect to reinvest versus share repurchases is already factored into the buyback second can you maybe just remind us what the lockup is and your intention for for the stake and maybe just lastly.
It needs it needs increase in expenses that we have right now marketing and non marketing investments how much of these are being driven by the market again and should we expect this to be 1 time in nature or should we expect them to stay in the run rate. Thanks.
Okay.
Alright, Ryan Thanks.
The Marquette again.
Something that when we.
When we looked at the plan for the year.
Didn't frankly envision debt.
That opportunity.
Turned out quite the way it did so certainly a nice outcome.
The.
The spend that we're seeing isn't as indicated based on that size of the Marquette again, but more about the broad economic opportunity that we're seeing right now to be able to drive positive growth. So.
Frankly, we'd be spending at this level with or without.
The mark at a gain.
<unk>.
The.
Kind of the lockup those those points are disclosed in the S..1. So so you can you can reference that get real specificity on it.
And then finally in terms of the expenses.
And.
Are they onetime in nature so.
Within the presentation itself, we highlighted.
No.
3.3 items that were significant 1 was the bonus accrual.
Unrelated to Mark that again and.
More broadly on reflection of what's happening in the business and.
And the outcomes, we are seeing here in terms of generating.
Positive returns.
The other the other item there was.
Diners and tangible.
Rich.
We took we took the opportunity based on what we see.
The change in the cash flows and diners to to fully impair that.
And took a $92 million write off and then the third the third item was $30 million software write offs. So.
All of those are part of our normal I'll say hygiene factors.
So the last the last 2 items were.
I would consider relatively 1 off and on.
I wouldn't include those.
Operating cash flows going forward, but as you are trying to get a sense for overall spend in.
In 2021, we've talked about accelerating marketing expense.
So the way I would think about marketing specifically.
Is that.
We anticipate it to return to 2019 levels.
Which which would indicate.
A material acceleration in the second half of the year, which again is tied to the fact that we're seeing good origination opportunities to drive growth and long term profitability.
Got it thanks for the color on that and maybe as my follow up So you announced a new $2.4 billion buyback, but just given how high the levels of profitability.
Still going to be well above the 10.5 level. So can you maybe just help us understand the strategy of getting the capital down over what timeframe are you managing all into C. Peaceful day, 1 and then maybe.
Attach that Roger you talked about potential lending opportunities and buy now pay later, we've seen others take some go at it organically some go via acquisition.
Would you expect to be the strategy for discover on a go forward basis. Thanks.
So I'll hit the capital point real quick and then we'll flip it over to Roger to handle it back.
Second part of that question. The second part of the second question I should say.
So the.
The capital plan was based on a couple of different factors.
1 we want to be prudent in our distributions of capital and make sure that.
That organic.
We allocate our capital through organic growth opportunities.
And then buybacks and dividends and then acquisition debt.
Yes.
And as they appear.
So that hasnt change whatsoever.
<unk>.
The planning in terms of capital overall is that we.
We are committed to that tenant 10, 5%.
As we look at the impacts of the sea. So capital relief transition, that's about 200 basis points and then and.
Then.
In the first quarter of next year towards the end of this year as we review the outlook for 2022 with our board, we'll we'll make recommendations.
Recommendations with with a couple of points in mind, the overall economic opportunity. The FC band in terms of buy now pay later there are many different things, we could do clearly going direct with the merchant relationships. We have as 1 option, we could work with partners.
I think the market is still very image different combinations and it will evolve over time, but we don't have anything specific to share at this time.
Your next question is from Don Vendetti with Wells Fargo.
Hi, Good morning, Roger kind of a bigger picture question around technology spend.
Just want to get your thoughts on where you.
That is right now.
Whether youre kind of making.
Investments in AI and machine learning and staffing.
Different financial institutions.
Cool.
Yeah.
It is a major source of investment for us.
And I would say the scarcity of assets there is talent.
As opposed to technology dollars.
And then part of it is just making sure you're investing to monetize.
Yes.
Granularity you can pick up with enhanced data and analytics. So looking at the entire Martech stack. Your personalization abilities. What you can deliver through different channels. So it's a big focus I think we're probably the only major bank, where the ahead of data and analytics as a direct reports the CEO and so I think that reflects the importance.
We see on that and I feel very good about our level of investment.
Okay. Thank you.
Your next question is from Bob Napoli with William Blair.
Got it. Thank you appreciate it good morning.
Tim I just to follow up I guess on Roger your investments in.
Mark.
And schedule and just the thoughts.
How are you working with Macquarie.
How are these investments.
Improving.
Yes, the product set if you would for discover and hard there.
More of these types of investments or could they become acquisition.
In the future.
Sure so.
All of these investments start with a commercial relationship we are not venture capitalists, we have no desire to get into that business.
But where we have a commercial relationship with a company, where we think theres a lot of potential.
And there is a way to invest and perhaps extract additional terms may be an exclusive arrangement or other commitments.
Those are the types of opportunities, we pursue and theyre largely on the payment side and we may even given some of the opportunities we're seeing accelerate that although again, it's going to be relatively.
Modest.
In terms of acquisitions given the valuations.
I'm not sure I necessarily see doing acquisitions and this approach around partnership and investments seems to work well, but we will look at it John.
John and our payment steam out of a very strong business development effort and we will consider acquisitions, where it's a capability that will help us monetize our payments assets.
Okay. Thank you follow up on spend.
Your chart on page 16.
The acceleration through the quarter relative to 2019.
I mean are you surprised by the level of spend that we're seeing and how do you think about that relative to the long term trend I guess if you.
Take this quarter, you maybe had a 10% compound growth from 2019, but were you surprised by this and the acceleration through the quarter.
Your thoughts on spend growth.
As you lap as you look at 2022 and onward.
Yes.
Compound growth is a very <unk>.
<unk> measure because it's smooth and unbelievable cycle, but I don't think any of US would have expected in 2019. So the year over year spend growth numbers are unsustainably high for the economy as a whole.
<unk> is growing above I think what what our comments would say it's wheel level should be and so youre seeing that.
Demand from consumers, yes, we expect it should normalize at a strong level and we look to continue gaining market share given how we're positioned but I don't think anyone is expecting retail sales to stay up 30% forever.
Your next question comes from Mark Devries with Barclays.
Yes. Thanks.
Question about the reserve levels.
Could you give us some sense of what you're kind of contemplating both from a going concern and a charge off perspective.
Those reserves I mean I think.
Trends have obviously been very benign.
Yet youre still almost 200 basis points above kind of your seasonal day, 1 what do you what do you need to see to see those reserves come down more meaningfully.
Yes, Mark.
Alright, thanks for the question so.
When.
When we approached this quarter certainly the economic data was improving our portfolio is performing.
Performing extremely well.
And the charge offs trajectory.
We've revised our guidance and now now believe it will be.
Below the prior year. So so all of those are very very positive.
From a reserving standpoint.
Sure.
We did put a bit of caution and in our reserve numbers as a result of the various government programs that are out out there. So if you think about the.
Eviction moratoriums foreclosure moratoriums various payment deferral programs and then the massive amount of government transfer payment.
Economy.
We.
We felt like those those contributed to driving delinquencies and charge offs below historical norms for our customer base.
Under sea Salt, we reserved from life of loans and Accordingly, we were waiting for those programs to run their course.
And the cash flows to kind of achieve through the economy and.
Impact our customers and then be able to make make.
Call it a deeper the.
The deeper change to the reserve levels.
So.
As I said earlier most of those programs.
Ran their course from the third quarter, we obviously have the charge.
Child care tax there was a child tax credit.
We don't expect that to be.
So in the fourth quarter.
We should begin to see more data net would allow us to take a different look at reserves and then into into 2022 certainly.
Our expectation is that debt.
The credit environment is.
<unk> is very very positive from a from a growth standpoint and accordingly.
We will.
We'll make reserves debt.
Kind of in line with that.
Okay got it.
And then just 1 more question.
Do you have any other private investments.
Look like they could be in a large gain position just based on any kind of subsequent funding rounds and the valuations of those are done that.
So.
<unk>.
Yes.
We have some investments yes.
We tried to get in early and Bill.
Build out the commercial relationship as Roger alluded to and we're hopeful that the combination of <unk>.
Working with quality companies and developing deeper commercial relationships will help those flow to be profitable and help help.
Help us drive business in our payments payment area, while giving us an option value for that investment so.
1 would hope that there's more but at this point it would be way premature to speculate.
Your next question comes from menu <unk>.
From UBS.
Good morning, guys.
Good morning, good morning.
Thanks for taking my question.
I guess, you've talked a lot about.
About the benefits of having a differentiated product with flexible cash rewards.
Now as things get back to normal and travel rewards become more relevant where consumers are you seeing any impact to your utilization levels.
Is there any indication that consumers might have a shifting preference for bill.
Travel and my style rewards over cash rewards.
We have been successfully marketing cash awards against travel rewards and every other type of card out there for decades, So I wouldn't get too caught up in sort of the shift away from frequent flyer miles in 2020, I think it points to sort.
The stability and structure of our program that we didn't have to make a series of changes we focus on continuously enhancing it bill.
A lot of people don't focus as much as we do on redemption. So the ability to redeem at point of sale at Amazon through our partner Paypal.
So we are confident that we can compete with the travel rewards programs.
A lot of the miles cards really target the Super Prime transact.
Which isn't ours is much more lend focused model, we've got a very good miles card ourself, but we market, but again I feel really good that our rewards can compete against anyone out there.
Okay.
Thank you for that.
And just as a follow up.
How should we think about the rewards rate as you think about growing loan balances. For example is there anything to that.
Yes.
Covenant excellent so.
The rural interest rate over time has been relatively stable it has increased.
Somewhere between 1 and 3 <unk> annually.
We expect that.
That's 5% programs and the reward structure will continue that trend, while helping us to sustain.
Drawn level of customer loyalty, so we look at that increase.
As a natural evolution of a good good investment in our customer relationships.
Okay. Thank you very much thanks for the color I have a good day guys.
Thank you.
Your next question comes from Rick Shane with J P. Morgan.
Hey, guys. Thanks for taking my questions.
<unk> really covered.
What I wanted to talk about in terms of reserves, but I'd just like to follow up on that slightly.
The observation was made that your reserve rate is about 2 points higher than it would have been on day 1.
<unk> day.
Day, 1 was essentially an ideal economic environment low unemployment.
Steady growth et cetera should we look at day, 1 as a destination for where where the reserve rate will go or more is a channel marker in terms of sort of an ideal operating environment.
Yes good.
Good question so.
The short answer is that it depends on the economic outlook and in the portfolio performance I would say.
Okay.
The current view on the marker.
When we look at the reserve rate.
Jack.
Call It January 1.
We are at.
Just over 6% we're at just over 8% now that difference is about $1.7 billion.
Of reserves on the current loan book.
So if if we have a level of confidence in the economic environment portfolio continues to be positive.
And.
And the.
The work we've done on analytics.
Drive.
Positive credit performance.
There is an expectation in the benign environment that we should March back that way now.
Premature to think we'll get there.
A lot of factors that could change, but I look at that day 1.
<unk> as a marker for <unk>.
Solid credit environment.
<unk>.
A relatively strong performing credit book.
Great. Okay. That's very helpful. Thank you guys.
Your next question comes from Bill <unk> with Wolfe Research.
Thanks, Good morning, Roger and John.
Good morning. Thank you morning, Bill can you guys help square the continued strength in customer acquisition that you expect on 1 hand with payment rates remaining low for an extended period on the other you mentioned I think John at the end of the pandemic related federal forbearance programs with some risk of catalyst for payment rate normalization, but why do you.
Zinc payment rates will remain elevated after that support has ended.
Yes.
I'll start it and then maybe Roger I'll add a couple of points on the back end so.
So.
Certainly if you look at frankly, the projected GDP that that's above normal levels for us.
Strong U S economy, and that's as a result.
Frankly, all of the activity in the.
The transfer payment that I talked about earlier.
I think there is a natural I'll say transition from where we are today to something that approaches historical norms. This.
Savings the savings rate is still high but it's falling.
And so that's that's positive and in terms of overall sales activity versus payment rates.
We do we.
We do expect.
The sales levels at some point to moderate.
Partly because of year over year comps and partly because of whats happening on economic activity.
But with that said.
I would expect that payment rate there is a bit of an inverse relationship and what we're seeing from a growth standpoint.
Net sales activity.
The new account acquisition.
Payment ratio is a bit of a headwind and then that revolve transact or rate.
Aligning to payment rate, but despite all that we've been able to grow from first quarter to second quarter. So so is that payment rate moderates a bit sales activity I think will be.
Lag to that.
And we will.
We will be well positioned to grow in the fourth quarter and beyond.
Okay.
Well thank you.
If I may follow up on that as.
As we look out to next year would.
Would you expect that process so.
But you've described it as sort of this payment rate the revolve rate normalization should that provide an incremental tailwind to loan growth such that we could actually see your loan growth.
Start to outpace your spending growth.
2022, it's bill.
About 6 months away 5 to 6 months lag.
So.
We're working on it right now.
I will tell you this.
Positive in terms of how the business is positioned.
And what.
What we can expect from a topline standpoint, as well as credit and expense so.
Those factors that I feel very good about to get into the level of specificity at this point is probably a bit early.
Your next question is from Ming Zhao with Deutsche Bank.
Hi, guys. Good morning, Thanks for taking my questions I wanted to ask.
Student loans.
We head into the third quarter.
The first time, it'll be yet that probably many constant current campus.
Are you doing anything differently in terms of how you're approaching it.
This particular school year in Florida is it fair to say that marketing to students is going to be a large piece of that accelerating marketing spend that you guys have commented on.
Yes.
The third quarter is peak season for student loans, but all the marketing is done before they get to campus volume was suppressed last year because for many of our customers, we encourage them to take federal student loans.
And then use our private student loans.
The top off and if there were expenses were lower because they are paying tuition, but not paying housing and food et cetera.
That had an impact on our volume.
The other hand, we did benefit last year from a major competitor pulling out of the marketplace. So I would say we are optimistic with kids going back on campus that this will be a strong year for originations and that we will continue to gain market share in the student loan product.
Gotcha great.
And then secondly, I think you mentioned.
Growing content consumer.
Quarter to date have you seen I guess, a continued acceleration in net spending I know from roughly 22 day to third quarter, and then secondly, Roger I think.
Hence are unsustainably high Im just curious if you had any further color as to when you expect that debt to sort of normalize.
I'll start with that 1.
I think it will take a while to normalize there isn't a good amount of pent up demand, but also pent up liquidity in the form of the savings that have built up as well as just the open to buy that people have on their cards from sort of month after months of pretty high payment rate. So I think that will provide some.
Support on the other hand huge amount of uncertainty in terms of what will happen with the delta variance and other factors that can drive the economy. So we feel like we're well positioned but unclear what the back half of the year.
Boring.
In terms of what we're seeing so far this month I would say.
Travel continues to be constructive, but overall not necessarily accelerating but spend levels staying very strong.
Your next question is from Moshe Orenbuch with credit Suisse.
Great. Thanks.
Yes.
Getting back to the NPL.
Is your primary.
Kind of revenue or growth kind of opportunity in the circle on the lending side is that the way we should think about it.
You should think about it on the payment segment, so transaction processing revenue answer Tim.
With payment processing and sort of connectivity to the merchant side.
And so thats sort of our first entry into buy now pay later has been more on the payment services segment as opposed to our direct banking side.
Got you.
1 of the things that you've talked about in the past about buy now pay later.
Just a question of whether kind.
Kind of encourage us or discourage younger consumers from taking out a credit card and I think you had said we did on the last call or 1 of the presentations that because of student lending brand of discover that you haven't kind of seen that impact could you just talk a little bit.
<unk>.
How you think about the value I guess of the student lending.
In terms of kind of an <unk>.
Terms of debt marketing of the discover brand.
Sure.
We are very successful and the students card business I think the student loans help but it also has to do with the product the value proposition and some very good marketing.
And we see actually great.
Credit performance from students because contrary to popular belief a lot of them are very responsible in how they handle their card with student loans I would start by saying we think it's a great business. It's profitable I would say it is operationally complex.
But it also gets our brand out there with <unk>.
Parents as well as students went from making a series of financial decisions. So they are not that many banks that are in it is scale not that many too that have sort of the product set that we have to be able to leverage those relationships. So it's a key part of our banking strategy.
Got it and just a quick follow up on the reserving point I guess I was sort of wondering if.
If your reserves on day, 1 included an expectation of a potential of a recession somewhere in the life of those receivables.
As you think about it as we kind of enter 2022.
That would be a lower probability just given the experience that we've had or is that think about it.
Yes, so when.
Glenn We did day, 1 we look debt.
But through the cycle view, so essentially that means as we then look at the trough of delinquencies and charge offs, nor did we look at Truecar.
Extremely oversimplify it a bit of averaging.
With the help of a bunch of data scientists.
So.
That day 1 is.
Call It a normalized view of both the credit environment.
Your next.
Question comes from Harry <unk> with Bank of America.
Hi, Thank you for taking my questions and good for me.
Good morning, I wanted to ask I wanted to go back to.
Can you comment on competitive intensity and it certainly does feel like.
Cash back.
Has increased I think you alluded to intensity being a little higher than maybe the average.
Historically, so maybe just talk a little bit more about the dimension book. This competition is it spinning a little beyond just tayo direct global insight.
1, 5% or 2% per balls are you seeing any irrational signing bonuses and product <unk> spend 5000.
3 months ago $100.
Anything irrational or are you seeing anything on the balance funds flow side, how does discover responding to this increased competition and as the Cleveland marketing spending, but because of the elevated competition.
Yes, so I'll start with the back half the increasing in the increase in marketing spend is driven really by the opportunity we see so it is not.
By the competition I do expect that cost per account to be modestly higher than say 2019 levels 2020 was extraordinarily good.
But that part of that has to do with just booking more new accounts and the marginal ones tend to be more expensive.
I do think some of the rewards products out there will not be sustainable long term <unk> seen 2% cash back offers come and go for a very long time.
Especially when we eventually get to a higher rate environment.
So far our balanced transfer demand is still a bit suppressed. So we're not seeing the overly long 24 month zero percent offers you are starting to see some of those high <unk>.
<unk> 4400 type of offers from some of the issuers that I think are most aggressive around growth.
But again nothing that I would say, we haven't seen before it tends to be different people at different times, but this is part of the card business than what we're used to competing against.
Great.
Thank you and then just I just wanted to ask about your debit product any update on that as debt.
We have been a bad debt.
No nothing debt thoughts to expand the marketing push behind it.
Just any update on the debit product. Thank you.
Yeah, so given the excess deposits, we had we really pulled back on the vast majority of our deposit marketing, including that product, but we're very excited about the differentiation having cash back.
No.
We think we're well positioned against the challenger banks as well as traditional banks and so we will continue to ramp it up.
Probably more so towards the back half of the year and as we get into 2020 chip.
Thank you.
Stephanie I think we have time for 1 last question.
Your last question comes from Betsy <unk> with Morgan Stanley.
Hi, Thanks.
So I just have 2.1 is on marketing I just wanted to make sure I understood. What you meant by marking expense anticipated returned to 2019 levels are you, saying that.
The back half of 'twenty, 1 will be at a run rate similar to <unk>.
Full year 2019, or the back half of 'twenty, 1 is going to be similar to the quarterly run rate of 2019.
So so think total year 'twenty 1 to be similar to total year up 19, yes.
That would require.
Operations in the back half.
Got it Okay, and then just separately on credit I know that a huge debate and the group here is around payment rates and.
How.
We're anticipating them to traject over the course of the next year or so 1 other question is specifically for you is that if I recall correctly, you've got a homeowner skew to your book.
And home prices have clearly Scott.
Accelerated significantly.
<unk>, 20%, depending on the location.
So I know you look at your.
Customers routinely.
And Chuck how Theyre doing financially are you seeing any signs of your customer base, having refined and materially dropped there.
Monthly Maury.
Mortgage payment requirements, which would potentially keep your payment rates elevated for longer or how are you.
Think about this refi cycle and what it means for your customers and their financial health and how that translates to payment rates for you. Thanks.
We have and this cuts across past cycles, we haven't seen a link between sort of a refi boom.
Card payment rates and so I don't have any expectation that would happen this time.
Okay.
Thank you.
I would now like to turn it back over to Eric losses from.
Closing remarks.
Well. Thank you very much for joining us if you have any additional questions. The IR team is available all day and of course whenever so thanks again and have a great day.
Yes.
Thank you. This concludes today's conference call you may now disconnect.