Q4 2021 Discover Financial Services Earnings Call
I'll begin by reviewing the highlights and key metrics for the year, then John will take you through the details of our fourth quarter results and our perspective on 2022.
2021 was another year of unique challenges related to the pandemic and I am very pleased that once again, the Discover team was able to successfully execute against our business priorities in a fluid operating environment.
This was evident in our fourth quarter results, which were the capstone to an outstanding year. For the fourth quarter, we earned $1.1 billion after tax or $3.64 per share and for the full year $5.4 billion after tax or $17.83 per share.
Sure.
These results underscore the strength of our differentiated model and were achieved as we continue to make meaningful enhancements to our capabilities and invest for future growth. Let me share a few examples from this past year.
Throughout 2021, we continue to make advancements to our data and analytics platform enhancing our capabilities in areas, including targeting, collections and fraud detection. We also made investments in machine learning to provide faster and better insights to improve customer personalization.
And we continue to modernize our infrastructure.
And build out our hybrid cloud platform.
We also opened a new customer care center in Chatham, a vibrant to African American community on Chicago's South side. Once fully operational the center will provide nearly 1000 full time jobs. Our Chatham center challenges the traditional notions of corporate site selection.
Has helped us connect with a talented pool of diverse candidates and suppliers.
It's transforming how we approach diversity equity and inclusion and it is already performing at an industry leading level. We hope our commitment to Chatham will serve as a springboard for further economic development in other areas that have long been denied opportunity.
Slide four of our presentation captures another important element of our results, which was our pivot into new account acquisition as the economic recovery took hold in late 2020 and early 2021. In the face of intensifying competition, our value proposition of cashback rewards
No annual fee and industry leading service remained very attractive to consumers. The strong level of card acquisition contributed to a return to loan growth over the second half of last year.
In payments, we continue to expand our business increased network volume and establish new strategic partnerships. We expanded global acceptance and announced new network alliances in Portugal, [inaudible], Jordan and Malaysia that will benefit us as cross border travel recovers. We remain committed to
Building out our international acceptance and we will continue to make investments to expand our reach.
Our record earnings through the year generated significant capital, which we continue to put to good use. In addition to our investments in acquisition brand technology and people. We also returned significant capital to shareholders through dividends and buybacks by repurchasing $2.3 billion of common stock.
And increasing our quarterly dividend by 14%.
As we look forward into 2022, I'm very optimistic about the trajectory of our business. While macroeconomic conditions created strong tailwind this past year, we acted on opportunities to strengthen our business actions that will drive long term value this year and beyond.
We start the new year in an excellent position and I am confident that our integrated digital banking and payments model will continue to create long term value for our shareholders and customers.
I'll now ask John to discuss key aspects of our quarterly financial results in more detail.
Thank you, Roger, and good morning, everyone.
As we review our fourth quarter results.
I echo Roger's points that the actions, we took last year position us for strong performance in 2022 and beyond.
I'll begin with our financial summary on slide five.
Our strong fourth quarter results were characterized by accelerating receivable growth, provision leverage and increased investments in marketing and brand.
Revenue net of interest expense increased 4% from the prior year.
Excluding a $139 million unrealized loss on our equity investments total revenue was up 9%.
Net interest income increased 4% driven by growth in average receivables and an 18 basis point improvement in our net interest margin, which was sequentially flat at 10.81%.
Our NIM trend reflects the continued benefit from decreased funding cost and lower interest charge offs.
Though these were partially offset in the fourth quarter by a higher mix of promotional rate balances.
The growth in receivables was largely driven by Card, which was up 4% year over year and 6% sequentially.
The primary drivers of year over year growth were continued strong sales volume and significant new account growth throughout 2021, which was up 23% year over year and 13% versus 2019.
As has been the case for most of last year, a significant portion of the benefits from strong sales and new accounts was offset by the sustained high payment rates.
The payment rate leveled off during the quarter, but remains approximately 500 basis points above pre-pandemic levels.
We currently expect that the payment rate will decline slightly over the course of 2022.
However, our expectations for card receivable growth is robust.
As I'll detail in a few moments.
Our student loan portfolio also contributed to our growth. Organic student loans were up 4%.
Over the prior year benefiting from the return to in-person learning in 2021.
We continued to gain share in this product and are well positioned for continued organic expansion.
Personal loans decreased 3% year over year, mainly driven by higher payment rates, but were sequentially flat as we returned our underwriting criteria to pre pandemic levels.
The second significant driver of our revenue growth was higher net discount interchange revenue, which increased $103 million or 43% driven by a 25% increase in sales volume year over year.
The strong volume has continued into this year sales are up 24% through the first half of January.
One significant item that relates to our net discount and interchange revenue is our rewards costs and haven't covered most of our key revenue drivers I'll point your attention to the reward rate reflected on slide eight.
We continue to benefit from strong card member engagement with our cash back rewards program.
Our rewards cost increase versus last year on higher sales volume. However, the reward rate declined three basis points year over year and nine basis points sequentially.
This reflects the benefit of our integrated model and our discipline in managing the program, while delivering substantial value to card members and merchant partners.
For the full year 2021, our rewards rate was 1.37% up two basis points from the prior year.
Consistent with our historical trends, we expect about two to four basis points of annual rewards cost inflation, driven mostly by shifts in mix.
Now I'd like to spend a moment speaking about expense trends on slide nine.
Total operating expenses increased $34 million or 3% year over year.
Focusing on the most significant items here. Marketing expense was up $112 million as we continue to invest in new account growth and brand marketing with the launch of our new media campaign, which went live across all channels in the quarter.
This pushed our marketing expense towards the top end of our previously guided range.
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Employee compensation was down $5 million year over year, driven mainly by a $26 million charge last year. Excluding this our comp expense was up 4% year over year, driven largely by a higher bonus accrual.
Information processing was down $73 million year over year and professional fees increased as a result of higher recoveries.
Moving to credit on slide 10.
The net charge off rate improved to 137% in the quarter, a decrease of 101 basis points year over year, and a nine basis point improvement from the prior quarter.
Net charge off dollars were down $218 million from the prior year and decreased $12 million sequentially.
Strong credit performance continued across all products. Card net charge offs were down 113 basis points from the prior year and personal loans were 158 basis points lower.
Student loan charge offs increased slightly but remained very low at 0.8%.
Moving to the allowance for credit losses on slide 11.
Our reserve rate continued to decline dropping 38 basis points to 7.3%. Two factors contributed to the decrease in reserve rate.
Two factors contributed to the decrease in reserve rate.
First, we released $50 million in reserves during the quarter driven by the continued strong credit performance of our portfolio and the relative stability of the macroeconomic outlook.
These factors were partially offset by the 5% increase in total loans from the prior quarter.
Our future reserves will be dictated by our portfolio credit trends, our receivable growth and any changes to our macroeconomic assumptions.
Looking at slide 12.
We remain extremely well capitalized and above our 10.5% target with a common equity tier one ratio of 14.8%.
We continue to demonstrate our commitment of returning capital to shareholders as we executed on our share repurchase plan and bought back $773 million of common stock in the quarter and paid a dividend of 50 cents per share.
Looking at funding, average consumer deposits decreased 3%.
Year over year and declined 1% sequentially.
This sequential decline was driven by a 5% decrease in consumer [CDs], while savings and money market deposits increased slightly.
We managed our excess liquidity down throughout 2021 and finished the year with consumer deposits, representing 68% of total funding.
We will continue to target 70% to 80% of funding from the [starts.]
Moving to slide 13, where we will provide some perspective on 2022.
We entered the year in a very strong position and our outlook reflects this.
We expect loan growth in the high single digits. This view is based on current expectations of sales trends and the contribution from recently acquired accounts combined with a very modest decline in the payment rate.
We believe this view of payment rates substantially de-risk our loan growth forecast.
We expect our NIM rate to be relatively in line with the full year of 2021 with quarter to quarter variability.
We expect to benefit from higher loan yields with rising interest rates.
This may be offset by other factors, including a higher mix of promotional rate balances.
Some degree of credit normalization.
And higher deposit rates, which will be subject to funding needs and competitive dynamics.
Turning to expenses, we expect our total GAAP expenses will increase at a mid single digit rate this year.
We will continue to invest for growth as we see profitable opportunities and currently expect that our marketing investments will be above 2019 levels.
Outside of marketing, we expect operating costs to increase at a low single digit percent level, reflecting disciplined expense control.
Our commitment to positive operating leverage over the medium term remains a priority.
We expect net credit losses will average in the range of 2.2% to 2.6% for the full year.
As credit normalizes from historically low levels in 2021, we expect net charge offs to increase sequentially over the course of the year.
Lastly, we remain committed to returning substantial capital to shareholders through dividends and share buybacks. As of this week, we had approximately $780 million remaining on our share repurchase authorization that expires at the end of March and expect to announce a new share repurchase authorization next quarter.
Lastly, we remain committed to returning substantial capital to shareholders through dividends and share buybacks. As of this week, we had approximately $780 million remaining on our share repurchase authorization that expires at the end of March and expect to announce a new share repurchase authorization next quarter.
authorization next quarter.
In summary, we had an excellent fourth quarter and full year with accelerating loan growth driven by robust account acquisition and strong sales volumes.
Excellent credit performance and a reduction in the reserve rate.
Disciplined management of operating costs and sustained return of excess capital to shareholders.
I am exceptionally pleased with Discover's execution against our business priorities in 2021.
Our value proposition continues to resonate with consumers, we prudently invested for growth, resulting in significant new accounts, growth and strong sales.
We continued to optimize our funding mix and actively manage core deposit cost.
These actions and the improved macroeconomic outlook have positioned us well.
And the improved macroeconomic outlook have positioned us well with.
With that, I'll turn the call back to our operator Britney to open the line for Q&A.
At this time, if you would like to ask a question, please press the star one on your telephone keypad. If you wish to remove yourself from the queue, you may do so by pressing the pound key.
We remind you to please pickup your handset for optimal sound quality.
We'll take our first question from Moshe Orenbuch with credit Suisse. Your line is open.
Great. Thanks, and congratulations.
On pretty strong numbers here and maybe focus on the account growth was up 11%. Could you talk about like how that compares in terms of just raw numbers of accounts to where you would have been pre-pandemic and the cost and anything you've done kind of from different
[ship] channel that credit box to get there?
Yes, we are.
We don't disclose the number of new accounts, but what I would say in terms of credit.
Our card credit policies are pretty much on top of where they were pre pandemic.
Costs have gone up since the low levels that we saw during the pandemic as we sort of kept marketing and a lot of others pulled back, but I would say as we look forward into 2022.
Our expectation is the cost per account will be roughly where it was pre pandemic.
Great.
And just as a follow up. Very very pleased to hear that the commitment to operating leverage in the numbers you put out there would suggest kind of an upper single digit revenue growth rate in the mid single digit expense growth rate. Could you talk about.
Even if it's unlikely, what would happen to your expense expectations if revenue growth just didn't materialize like how would you how would you make adjustments there?
Even if it's unlikely, what would happen to your expense expectations if revenue growth just didn't materialize like how would you how would you make adjustments there?
Make adjustments there.
Yes.
Hey, Moshe. I'll take that one so we'll.
We'll react based on company performance and opportunities that we see in the marketplace.
Over the past couple of years I feel like the team has done a really really good job in terms of making calls in terms of expense allocations.
We'll continue to do that to make sure that.
We're positioned for growth.
And marching towards the positive operating leverage that we talked about.
Thanks very much.
We will take our next question from Mark [DeVries] with Barclays. Your line is now open.
Yes. Thanks.
Could you give us a little more color about what you're seeing in credit right now?
I think the guidance around charge offs calls for some some pretty meaningful.
Normalization in 2022.
What kind of gets you to the low end of that guidance range and what gets you to the high end?
Alright, great.
Mark, thanks for the question.
What we're seeing in the portfolio is really really strong performance I think the numbers in the quarter.
Demonstrate that. We are seeing some difference between higher FICO, Unlike lower FICO account performance overall, all within expectation. So what what we're projecting here is a slow normalization of credit.
We are seeing some difference between higher FICO, Unlike lower FICO account performance overall, all within expectation. So what what we're projecting here is a slow normalization of credit.
And in terms of the guidance that we reflected here.
In terms of the guidance that we reflected here.
We've got pretty good line of sight to the first six months just as as
Accounts will go through their normal roll rates and gives us an ability to predict quite accurately. Once we get out beyond six months.
US an ability to predict quite accurately once we get out beyond six months.
We rely more heavily on our models. And the models themselves are built with a number of assumptions. '21 was frankly was a tough year to call based on how we had designed our models and what actually happened in the portfolio. So while we decided to do is give.
Are built with a number of assumptions 21 was frankly was a tough year to call based on how we had designed our models and what actually happened in the portfolio. So while we decided to do is give give.
From my standpoint, a relatively broad range that we think over time, we will be able to tighten.
And.
And in terms of lower end versus higher end strong portfolio performance.
Strong portfolio performance.
The slight difference that we saw between the higher FICO and the lower FICO.
Slight difference that we saw between the higher FICO and the lower FICO.
That continues to kind of rollout as we expect.
Kind of rollout as we expect.
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A positive macro environment should bring us towards the lower end.
Okay. That's that's helpful. Just a follow up on that.
On the model that you use.
Is there some element of just mean reversion when when charge offs were this low relative to kind of normal?
That will push push your estimates higher even even if kind of all the macro drivers seemed like they're more of a tailwind than a headwind.
Yes. There is there is a level of mean revision in there.
The second part of the year and just.
One other piece of, I'll say information. So you can you can think about the breakout at least how we thought about it of charge offs.
I'll say information. So you can you can think about the breakout at least how we thought about it.
Charge offs.
The predominant piece in the second half of the year.
You can think 45-55 split between first half and second half.
We'll continue to update that over over the year.
Okay. That's very helpful. Thank you.
We will take our next question from John Hecht with Jefferies. Your line is now open.
Good morning, guys. Thanks very much for taking my questions. Just thinking about NIM understanding you guys are guiding for relatively flattened in this year, but even thinking this year and beyond given that we're in a rate hike cycle.
You are in. I guess the last cycle was 2015 to 2019.
Your card yields went up about 50% of the fed funds changes and prime changes.
And your cost of capital went up or your deposits went up.
A little less than that. I'm just wondering.
As we go into this rate cycle.
Should we expect any differences in that in that, call It NIM input range?
Call It NIM input range.
Is there any mix shift in deposits that will cause that the betas to be different there? Or is there any different policies with respect to zero balance transfers that we should think about? Just in terms of that quarter to quarter fluctuations as the government or the fed raises rates.
Yes, yes.
It's actually.
A pretty complex question there so.
Rather than try to hit each of the elements, I'll give you a view in terms of how we thought about NIM for 2021.
2021.
So we do expect some impact to NIM from credit normalization.
We do expect some impact to NIM from credit normalization.
We also.
We also are expecting a higher mix of
BT in promotional balances.
Which will also impact net interest margin. We do get nice fees from that but certainly.
Net interest margin will be impacted.
The revolve rate.
As as the payment rate starts to normalize, we will see some benefits there. Fed funds rate changes. We plan for two.
Two.
Two in the year. If there's more of that that will create some upside. And in terms of impacts there.
You could expect per fed change somewhere between 3 and 5 steps.
$3 five steps.
On a total year basis on NIM, depending on timing. And then funding, we're still going to see some funding benefits from the actions we did to optimize our debt stack in 2020 and 2021.
Optimize our debt stack.
<unk> 2020 one.
So from that standpoint, it gets us to about flat, but there's a lot of moving pieces.
In terms of deposit pricing.
Yeah.
There is still a wide gap between where we're priced in the brick and mortar banks are pricing. So somewhere.
Somewhere close to 45 basis points.
Now the digital banks most have increased deposit pricing about 10 basis points over the past three to four weeks.
Most have.
Increased deposit pricing about 10 basis points over the past three to four weeks.
We're a lagger on that. At some point, our funding needs and competitive dynamics will be such that.
We'll take a look and make appropriate changes and we will do that throughout the year, so that deposit betas.
Specifics around that, I would rather think about competitive dynamics and funding needs.
In order to get a view on how we're going to price deposits on the up cycle.
Get a get a view on how we're going to price deposits on the up cycle.
Okay. That's very good color. I appreciate that.
A follow-up question, I guess unrelated.
You're in the zone of where you were on your allowance levels.
As we enter post CECL implementation.
Post <unk> implementation.
And the pandemic era. Are we at a point now where you kind of say this is the this is the new base for ALLL ex changes in our economic forecast?
Or is there any kind of further room for allowance bleed tied to increases during the last couple of years?
Yes. We go through a pretty robust process every single quarter to make sure that our reserves are fairly stated under GAAP.
Yes. We go through a pretty robust process every single quarter to make sure that our reserves are fairly stated under GAAP.
We go through a pretty robust process every single quarter to make sure that our reserves are fairly stated under GAAP.
Now when we did CECL day one. We were seeing charge offs in the low threes.
We had.
We're seeing charge offs in the low threes.
And we ended up posting reserved rate of I think it was 6.09%.
So as as we look at where we are today, where it's at around 72. Assuming strong credit performance and a positive macroeconomic outlook, my sense is that.
Assuming.
Strong credit performance and a positive macroeconomic outlook my sense is that.
There is some opportunity to take that reserve rate closer to day one.
Alright, perfect. I really appreciate that.
The answer, thanks very much.
You're welcome.
We will take our next question from Rick Shane with JPMorgan. Your line is now open.
Hey, guys. Thanks for taking my questions.
I'm actually curious if there is some sort of 80-20 rule that impacts payment rate.
What I am curious if you guys have done any analysis on revolve versus transaction behavior.
Revolve versus transaction behavior.
Differing by spending category, specifically like everyday spend versus large episodic spend and I'm wondering if what we're seeing in terms of payment rates with all the other factors is being impacted by the NPL.
Yes. I wouldn't say there is an 80-20 rule on payment rates so.
I wouldn't say there is an 80 20 rule.
On payment rates so.
Quite honestly as we looked at it in 2021, we didn't call the curve right and so what we did.
In the '22 guidance assumed a very modest decrease in payment rates, we felt like that derisked our loan growth.
In terms of kind of behaviors between revolvers and [transactors].
Kind of behaviors between revolvers and transacted.
That payment rates been relatively consistent. The one difference in our portfolio is the new accounts that we originated in 2020 tended to be higher FICOs. So more of those tend to.
Is is the new accounts that we originated in 2020 tended to be higher FICO. So more of those tend to.
Tend to transact versus revolve.
But we will see as the liquidity ends up getting used in the overall economy.
Ends up getting.
Used in the overall economy and.
And what that does to payment rates so.
We've.
We've modeled it multiple different ways.
There's really no standard rule of thumb.
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It's frankly somewhat somewhat dynamic in terms of what.
But what we're seeing month to month and quarter to quarter.
Okay, and just to build on that we look pretty carefully by merchant by customer segment. There is nothing to support a view that buy now pay later as having any impact on payment rate.
Great, really appreciate the answers, guys. Thank you very much.
You're welcome.
And we will take our next question from Sanjay Sakhrani with KBW. Your line is open.
Thanks, Good morning.
First question I guess for Roger.
Just on the competitive backdrop, obviously, we've gotten bank earnings and a lot of the large banks are talking about investing more in marketing. And you guys have some pretty aggressive growth targets. How should we think about sort of the risks to that target given the competitive backdrop?
Good question, Sanjay.
As I mentioned earlier.
Our forecast for next year is cost per account relatively flat to where it was before the pandemic and so I think this sort of focus on competition is a little bit overblown. The card business is just always competitive you have big players with good capabilities.
Each issue out there has their set of product set of channels.
I think some natural limits on how much money they can be put to work effectively. So I don't see it as a particularly high risk to our 2020 to growth forecasts and we have a very differentiated product we're seeing good benefits.
On the acquisition side from our investments in analytics. So we feel good.
Even in the current environment.
Okay, great.
And I guess I have one for John.
The non-interest income revenue line has done quite well over the course of this year.
Even excluding obviously, excluding the investment gains. Could you just talk about what kind of growth we should expect in that line going forward?
Yes, so the big driver there was obviously discount and interchange revenue which was up.
The big the Big driver there was obviously discount and interchange revenue which was up.
28% year over year, and then after rewards costs 43% in the quarter.
So super strong growth there, which that will that will generally run consistent with sales.
We're expecting sales not to not to stay in the mid 20, but.
Kind of come down to kind of strong double digits.
And then intoweaker double digits by the fourth quarter I don't know, if thats right or not it seems like there's been a lot of benefit from the new account acquisition and also where our card has been positioned in people's wallets. So that's been positive. There is also the factor that people are using less cash and charging more so.
Then into.
Weaker double digits by the fourth quarter I don't know, if thats right or not it seems like theres been a lot of benefit from the new New account acquisition and also where our card has been positioned in People's wallets. So that's been positive. There is also the factor that people are using less cash and charging more so.
That will continue to benefit sales interchange and net discount and interchange. In terms of the other items.
The amount of cash in the economy actually helped the cash advance fees.
Which was positive.
Our expectation is that we will have outside of discount and interchange growth, growth fairly similar to net interest income.
We will have.
Outside of discount and interchange growth growth fairly similar too.
Net interest income.
Okay, great. Thank you.
And we will take our next question from Betsy [inaudible] with Morgan Stanley. Your line is open.
Hi, good morning.
Good morning, Betsy.
Hi, can you hear me? Okay.
One, maybe it's a little bit of a theoretical question, but I'm just trying to understand how you are thinking about borrower capacity.
The borrowing capacity of your customer set relative to pre-COVID-19 and I'm asking the question because jobs more available wages rising so that seems like they might have more capacity to borrow. But then we've got inflation increasing so.
Yes, how do you think through those things?
Yes.
It will, of course, vary by segment, but certainly households, there are seeing rising incomes will have a greater ability for debt service and for many households, that's how they determine how much debt they take on. It's complicated a bit by.
Somehow so it's still having pent up savings from strong earnings and not many opportunities to spend and of course other cost going up whether it's childcare or day to day expenses.
Strong earnings and not many opportunities to spend and of course other cost going up whether it's childcare or day to day expenses.
On one hand, we will drive increases in sales, but on the other hand decreases disposable income for debt service so mix of factors.
Net net we would expect strong consumer demand for credit next year.
Okay, and then as I'm thinking about the other legs of the loan growth platform here.
Student loan and personal. Could you talk through how you see those drivers impacting the 2022 growth guide that you've got?
Sure, so student loans, we feel really good about where we're positioned in the market our products our brand our ability to take share what's a bit the wildcard is just enrollment.
Student loans, we feel really good about where we're positioned in the market our products our brand our ability to take share what's a bit the wildcard is just enrollment.
And I think enrollments were down year over year, which was a surprise to I think the entire higher education industry. There is a bit of a correlation of the stronger the job market.
Fewer people decide to pursue an education, because they're making too much outside. So I think it'll be more that factor. We will see peak season, but I am confident in our ability to continue gaining share for personal loans, we took a little longer to return to pre pandemic credit criteria.
For that product just given the higher volatility, but as John said, quarter over quarter, we're now flat and so we would expect that to return to growth in 2022.
And the balance transfer activity there is a bit of a link between personal and card balance transfer cards before personal loan growth, but how is that lagging in at this stage is that has there been a take up beginning there?
Link between personal and card balance transfer cards before personal loan growth, but how is that lagging in at this stage is that has there been a take up beginning there.
Or is that, you know more of a back half '22 outlook. So John talked about promotional balances as having an impact on NIM. I would say a lot of that is driven by new accounts. So as you ramp up new accounts youll see that but also portfolio activity as well.
You know more of a back half 'twenty two outlook. So so John talked about promotional balances is having an impact on NIM I would say a lot of that is driven by new accounts. So as you ramp up new accounts youll see that but also portfolio activity as well.
Thank you.
Thanks.
And so we will take our next question from Kevin Barker with Piper Sandler Your line is now open.
Thank you.
Given your growth rates that you are projecting out there. When do you feel like you can achieve a sub 40% efficiency ratio.
Sometime in the foreseeable future whether it be.
Run rate close to late '22 maybe early 2023.
Yes, thanks, Kevin.
We.
We specifically commented on positive operating leverage so.
As we deliver that. Obviously, the efficiency ratio will improve. My expectation is that.
We can get into the high 30s within the medium term so we built the plan.
Hi, <unk> within the medium term so we built the plan.
Essentially contemplating significant investment in marketing.
And then working through the other elements of the cost structure in order to create as much efficiency and capacity to drive new growth.
As as that model continues to build upon itself my expectation is that.
Built upon itself my expectation is that.
Those high 30 numbers are certainly very very achievable.
Our are certainly very very achievable.
Okay, and then a follow up on some of your comments around credit.
I believe you said you expect it to increase sequentially throughout the year.
Did I hear that correctly? And then I mean could you just give us a little bit more detail on your expectations for the cadence of net charge offs, given we're exceptionally low level?
And typically you have quite a bit of seasonality. Can you just give us a little bit more color around your expected cadence on charge offs throughout the year?
Yes. So it will be difficult to expand more deeply upon the comments that I've already made so.
It will be difficult to expand.
More deeply upon the comments that I've already made so.
We do expect it to increase sequentially. There is some degree of seasonality.
I don't view that as like a material driver to what we're going to be seeing and I also mentioned that.
Sure.
The charge offs are more weighted to the second half of the year than the first half of the year.
And that we've got pretty decent line of sight to the first half.
That split out somewhere around 45 first half 55 second half is probably as deep as I can go on on the charge off numbers right now.
Okay. Thank you for the color.
Yes, of course.
Yeah.
And we will take our next question from Don Fandetti with Wells Fargo. Your line is now open.
Hi. Good morning, Roger you can come out of the pandemic I was just curious if there's any areas of strategic interest new products et cetera.
That you are looking at. It's been pretty consistent.
For the last several years.
Yes. Certainly, we are always looking for new opportunities on the payment side of our business and there the versatility of our capabilities you saw some of that with our partnership with CECL in terms of our ability to to provide easier connectivity to merchants. So on the payment side, both in the US and globally.
Certainly we are always looking for new opportunities on the payment side of our business and there the versatility of our capabilities you saw some of that with our partnership with <unk> in terms of our ability to to provide easier connectivity to merchants. So on the payment side, both in the U S and globally.
We're looking for opportunities.
On the card side.
We feel really good about the product set we have. We are virtually 100% focused on consumer.
I think there is a huge opportunity to continue to grow our non card products and so we had talked about investing more on marketing our deposit products.
Before the pandemic. Clearly, when we were in a significant excess liquidity position. It didn't make sense to put a lot of marketing behind deposits, but that's something I would expect to see in 2022.
Okay. And any changes on your international acceptance push or is it sort of just kind of into your way?
And to grow.
Okay.
We continue to push out I think what you heard in the call.
<unk> heard in the call.
Our favorite way of expanding internationally Soo network to network partnerships. It's just much more cost effective than working with individual acquirers, although we do that as well.
There is also a big focus on acceptance in the US around the migration to digital. So working with other networks on secure remote commerce everything from transit implementations, but again, we're now up to 26 net to net partnerships and I feel that there's room to continue growing recently announced a partnership in Serbia actually this week.
Digital so working with other networks on secure remote commerce everything from transit implementations, but again, we're now up to 26 net to net partnerships and I feel that there's room to continue growing recently announced a partnership in Serbia actually this week.
Thank you.
And we will take our next question from Dominic Gabriel with Oppenheimer. Your line is now open.
Great. Thanks so much for the time.
With time.
I just want to follow up on one of the answers you had before.
Do you think that the ability to reach more customers and spur spend through marketing has an overall direct relationship between which FICO band or income level of these customers have?
The ability to reach more customers and spur spend through marketing as an overall direct relationship between which FICO band or income level of these customers have.
And is this why do you think perhaps there could be those diminishing returns on marketing investment?
That perhaps slightly different overall rates between what customer base, one issuer may have versus another.
Thanks. And then I have a follow up.
Yes, I don't think we said we expected diminishing returns on marketing.
Credit is pretty similar to what it was pre pandemic. And I mentioned our projected cost per account and then a lot of our marketing does go to new accounts. Cost per account were projecting that to be pretty much on top of where it was pre pandemic.
Different issuers certainly have different business models. There's one is particularly focused on subprime others are much more aggressive at the Super Prime. We have been very clear for many many years that ours is a lend focused business going after that prime revolver segment.
We've tailored our products for that our underwriting capabilities.
And again, we feel very good about the return we're getting on the dollars we spend in marketing.
On the dollars we spend in marketing.
Great. Thank you. And can you maybe talk about how the competitive landscape is evolving and what products are likely to either meaningfully compete not ultimately competing somewhat compete with your everyday spend credit card products and perhaps may be?
Which spend categories maybe most of that competition could reside versus lease likely. Thanks so much.
Of that competition could reside versus lease likely thanks, so much.
Yes. I think clearly what everyone's watching is find out pay later.
I think clearly what everyone's watching is find out pay later.
As I mentioned earlier, we haven't seen that have a noticeable impact on our base.
In my mind, it's closer to traditional sales finance, so they've always been competing products out there whether it's on the private label side, whether it's personal loans for debt consolidation et cetera.
We focus on getting a broad mix of spend even through this year. We're seeing strong performance across every category travel is holding up actually in January surprisingly well given the state of that pandemic. So we think we will continue to grow across categories and in fact is one of them.
In fact, one of our 5% program it sort of reinforces different categories of spend on a rotating basis as opposed to products that are really particularly tailored to an individual category of spend.
Perfect. Thanks so much.
And we will take our next question from Robert Napoli with William Blair. Your line is now open.
Robert Napoli with William Blair. Your line is now open.
Thank you and good morning, everybody. Walter, John.
Nice quarter. I really like the guide on loan growth versus expense growth.
On the expense growth side I mean.
There's a lot of investment going on at certainly at some of the major banks on technology.
And I know that Discover has invested in technology over the years that was just maybe just your thought process on where the our tech stack stands.
Where the our tech stack stands.
Alright.
Your thoughts on private cloud versus public cloud and the need to invest to compete over the next several years.
The need to invest to compete over the next several years.
Yes, yes. Good question. I think our perspective may be a little different than some of the big banks and of course.
We have a narrower range of businesses. So I can't really comment on some of their investment.
Certainly, we are focused on competing with the fin tax, but it's not just about spending money.
It reminds me of like someone saying I'm just going to keep eating more and more until I lose weight.
The competition, those fintech are not spending more on technology. Our focus is around capabilities. It's an agility, it's on speed to market and so if you look at last year. Once you sort of sort through for one time items, technology spend was relatively flat, but that doesn't mean there wasn't a huge focus around our capabilities.
We've talked about our investments in data and analytics. So it's really more about speed and you don't get there just through sheer dollars of spending.
Okay, and I guess, I mean private cloud versus public cloud.
The importance of your cloud strategy.
Your cloud strategy.
Yes, so innovation. Great question.
We're focused on our hybrid cloud strategy, so a mix of both.
I think there is sometimes companies seem to take a purist element that theres something great about having 100% of your applications on the cloud. Whether or not you're GL, resides on the cloud is not going to really make a difference for your business, but we are heavy users of the public cloud in particular for our data and analytics areas.
Where the speed and massive amounts of storage are critically important.
Thank you and if I could just sneak in your spend growth is really strong is how much of that is.
Is inflation, but what are your thoughts on inpatient and how it affects your business?
And the impact it may be it is having on the spend growth numbers, you reported which were pretty strong.
Pretty strong.
Hey, Bob I'll take that. Yes, we've been really pleased with the sales running running through through the card.
The sales running running through through the card.
Inflation has had a small impact.
Has had a small impact so.
You would think kind of on average maybe 1% to 2% in '21 and '22.
Kind of on average maybe 1% to 2%.
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In 'twenty, one and 'twenty two.
We didn't model that out specifically. My sense is it would be 2%. Okay.
Two 2%.
Okay.
Great. Thank you I appreciate it.
And so we will take our next question from [inaudible] with Bank of America. Your line is now open.
<unk>.
Hi. Good morning, and thank you for taking my question. Maybe first I just wanted to go back and just clarify a little bit about guidance and just wanted to make sure I understand some of the key.
Assumptions embedded in there.
So it looks like on payment rates I think you said you expected to slightly decline a little bit in 2022, and I was wondering if we were to see normalization happen a little bit faster, let's say that normalized back to normalized levels in 2022 would that push your loan growth up to like low double digits.
Or is that like too ambitious in terms of like the impact? What I'm trying to understand is the impact of the payment rate on loan growth.
And then just also related to adjust this guidance question is just on rate hikes and I apologize if I missed this annuity comment did you say how many rate.
So how many basis points you are assuming in your guidance? Yes.
Yes.
So we assumed, thanks for the questions. We assumed two rate hikes.
In our in our guidance and in terms of payment rate.
Yeah.
As I said very modest improvement or reduction.
Our reduction so if.
If payment rates were to normalize at the pace you just describe, which I don't think it will.
Were to normalize at the pace you just.
Scribe, which I don't think it will.
Friday.
But if it were to do that it would certainly be very accretive to loan growth.
Very accretive to loan growth.
I'm not going to get into specifics, whether it takes us to double digits or not.
Okay. Yes. That's helpful.
Yes.
That's helpful.
And then just wanted to the other question was asking just about understanding your credit underwriting or risk appetite, you didn't mention normalization happening maybe a little bit more on the low cycles. Have you tweaked your underwriting on marketing in the last.
A few weeks ago in response to that or is it still very much as expected. So it's all systems go.
Yes, no we haven't and I think it's important to note that the life of loan losses assumptions we use for new account underwriting is not driven by where losses are currently.
[inaudible] portfolio performance, and what we're seeing. But we use sort of by segment and actually by individuals account forecasts of life of loan as we determine our marketing and credit criteria.
Thank you.
Thanks.
And so we will take our next question from Bill [inaudible] with Wolfe Research. Your line is now open.
Thank you, good morning, Roger and John.
Is there. Good morning.
Is there any reason to be concerned about the pace of credit normalizing faster than receivables growth?
From my perspective. No.
No.
I'll tell you why.
First, the macros are the macroeconomic conditions are super positive right. So there's there's more job openings than there are people looking for jobs.
The macros are the macroeconomic conditions are super positive right. So there's there's more job openings than there are people looking for jobs.
The consumers will have more dollars into their paycheck as a result of this inflation.
Consumers will have more dollars.
Into their paycheck as a result of this inflation.
And there is a substantial amount of savings still left in the economy from largely from kind of a change in behaviors and government stimulus.
Largely from kind of a change in behaviors and government stimulus.
No.
I'm not frankly seeing that as a risk in 2023.
Excuse me 2022, so we get out into 2023.
There's less certainty around that.
Understood. Maybe a related follow up. There's a lot of consternation around normalizing higher but do you think that the environment that we're in today, where you're seeing the revenue benefits from the accelerating loan growth that you're putting up.
Maybe a related follow up Theres, a lot of consternation around Ncos normally normalizing higher but do you think that the environment that we're in today, where youre seeing the revenue benefits from the accelerating loan growth that youre putting up.
On one hand, and then also on top of that you've also got the reserve rate remaining well above day 1 levels. And so when you think about the risk of growth math headwinds and the need to build reserves on that strong loan growth that youre seeing the risk that that overwhelms the revenue benefits from the loan growth.
And the fact that the reserve rate is higher. Can you talk to that interplay and how you're thinking about that?
Yes, so when we, let me start with the reserves because it plays into the rest of your question. So when we look at reserves for the quarter.
What we wanted to see was the impact of the ending, the end of most of the government support programs. Most ended in September. So we had one quarter worth of data we looked at it we saw no real change to the portfolio dynamics, we are hoping to see another quarter and then reevaluate overall reserve rate but.
The impact of the.
Ending the end of most of the government support programs. Most ended in September. So we had one quarter worth of data we looked at it we saw no real change to the portfolio dynamics, we are hoping to see another quarter and then reevaluate overall reserve rate but.
That day 1 number and the, I'll say the normalized charge offs in the threes would support a view that down the road, we'll have some opportunity on reserves.
The I'll say the normalized charge offs in the threes.
Would support.
Q that down the road, we'll have some opportunity on reserves.
In terms of new vintages and kind of charge off impacts from those.
And.
Kind of charge off impacts from those.
This company has been through years and years of cycles with new vintages.
We are very thoughtful in terms of how we do the underwriting.
We've got some improvements from the underwriting.
Within underwriting from the advanced analytic tools that we've put in place.
My sense is portfolio seasons, we're going to see some increase charge offs, but well within the expectations of how we underwrite.
Charge offs, but.
Well within.
The expectations of how we underwrite.
And well within the expectations of this guidance and the macroeconomic outlook.
Very helpful. Thank you for taking my questions.
You got it.
And we will take our next question from Lynn Zhao with Deutsche Bank. Your line is now open.
Hi, great. Good morning, guys.
I wanted to follow up with a question on the competitive environment, we've seen a few competitors coming in with new offerings.
And I was sort of hoping for some more color as to whether you've seen any read throughs could possibly yields, possibly tightening or anything else outside of elevated marketing spend with this increase in competition?
Yes. Great question in general the competition takes the form of higher rewards increased marketing spend you'll see some players start putting up big onetime signing bonuses as they look to grow.
Great question in general the competition takes the form of <unk>.
Higher rewards increased marketing spend youll see some players start putting up big onetime signing bonuses as they look to grow some.
Some players may start extending their promotional periods, but given sort of the inability to re price cards Post card Act you tend not to see it drive yield compression. And as I mentioned earlier, a lot of those products and the competition seems to be targeting sort of super Prime transact or segment that is not one that we aggressively go after.
Not one that we aggressively go after so.
So our projection for flat cost per account next year reflects our view on our ability to compete in this environment.
Got you. Great. And then secondly, John, I wanted to sort of circle back on your comments regarding the difference that you're seeing between higher and lower FICO scores.
Are you sort of seeing that in early stage delinquency sort of diverging just any other further details you might be able to provide?
In that specific difference.
Yes. In the roll to one so one delinquent delinquent bucket out there. And the fact that we're talking about it is. I will say.
In the.
Roll to one so one delinquent delinquent bucket out there.
And.
The fact that we're talking about it is.
I will say.
It is intended to indicate that we're paying attention to the entire portfolio.
And that we have a growing comfort in terms of how the credit outlook.
Yes.
A growing comfort in terms of how the credit outlook.
As in the performance of the company into '22.
Got it. Thank you for taking my questions.
Yeah.
And we will take our next question from Bill Ryan with Seaport Research Partners. Your line is now open. Good morning. Thanks for taking my questions.
Just a couple of things first on promotional balances.
Looking at your portfolio today as a percent of the total. Where are you versus kind of like the history of the company or the historic norm at norm If you will?
And what is the typical duration of the promotional balances? And then I'll go ahead and ask the second question.
It looked like there is a little bit of a drop in protection product revenue this quarter as percent of the portfolio. I'm just curious if there's any specific callouts there. Thanks.
Okay great. The kind of the promotional balance content of the portfolio.
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The kind of the promotional balance content of the portfolio.
<unk>.
We tend not to kind of go into expensive detail about that so.
Tend not to kind of go into expensive detail about that so.
My comments on net interest margin should give an indication that we intend to use that as a tool that helps some origination activity.
My comments on net interest margin should give an indication that we intend to use that as a tool that helps some origination activity.
Use that as a tool that helps some.
Some origination. Origination activity.
Origination activity.
In terms of.
In terms of the protection revenue.
We have an existing product that we stopped marketing some time ago that essentially providing value to the customer set but if you don't marketed tool obviously revenue line gets impacted.
We have a new product that we launched. Very very soft launch that we actually haven't done any broad marketing yet.
New new new product that we launched very very soft launch that we actually haven't done any broad marketing yet.
Yet so.
My expectation is that line will be flat to down in 2022.
That line will be flat to down in <unk>.
In 2002.
Okay. Thank you.
Alright, well Britney. I think we're going to conclude our call here, but thank you all for joining us and if there is any additional follow ups. Please reach out to us here in Investor Relations. Thank you and have a great morning.
This does conclude today's program.
Thank you for your participation. You may disconnect at any time and have a wonderful day.
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