Q1 2022 Discover Financial Services Earnings Call
Our efforts to open an office in Russia, and while we have temporarily paused our certification of the diners club bank issuing partner in Ukraine, We plan on moving forward as soon as we can.
The war in Ukraine, and the resulting sanctions against Russia have also raised concerns about the risk of recession globally and domestically we.
We do not see any evidence of this across our consumer lending portfolio, our credit metrics remain good and there is nothing we're seeing in terms of consumer spending or borrowing behavior that suggests that a broader downturn is imminent.
Another concern has been the significant elevation in flattening of the yield curve given the anticipation by the rates market around aggressive monetary policy from the federal reserve to stem high inflation, because we are modestly asset sensitive the potential for greater number of fed rate hikes has improved.
Our outlook for spread income, which John will discuss momentarily.
While we're not immune from the effects of inflation our business model has somewhat of a natural hedge as the pressure that inflation may create on elements of our expense structure are partially offset by the contribution inflation makes to our sales volume.
In summary, while macro conditions are much more fluid than we had thought coming into this year, we're positioned to benefit from the combination of strong sales and receivables growth expanding margin and slowly normalizing credit.
These trends give us confidence in our outlook over our forecast horizon.
Finally, I want to point out our new ESG related disclosures in March we produced our first diversity equity and inclusion transparency report, which highlights our commitment to supporting a diverse workforce that reflects our communities and customers. We also recently published our first ESG summer.
That includes details on our greenhouse gas emissions among other items.
The data in our new reports is encouraging, but we intend to do more to reduce our impact on the environment and to advance diversity and equity in our organization and communities with that I will turn the call over to John to review, our financial results in more detail and provide an update to our expectations for the rest.
Of 2022.
Thank you Roger and good morning, everyone.
Once again our results this quarter reflect strong execution on our business priorities with accelerating loan growth and solid credit performance.
I'll begin with our financial summary results on slide five.
There are a few things I'd like to call out here. The first is that our net income is lower year over year because of our reserving actions.
In the first quarter of last year, we had $879 million reserve release, while this quarter included $175 million release.
Adjusting for reserve changes our profit before tax in reserves would have been up 19% year over year.
Second.
We reported total revenue net of interest expense increased to $107 million.
Or 4% from the prior year. However, this included a $162 million net.
Net loss in equity investments, excluding this loss total revenue increased 10%.
These points to underscore the strength of our core earnings power, even in a fluid economic environment.
Let's turn to the details of the quarter.
Looking at slide six.
Net interest income was up $149 million or 6% driven by improved net interest margin and higher average receivables.
NIM was 10, 85% up 10 basis points from the prior year and four basis points from the prior quarter.
The year over year increase in net interest margin reflects lower funding costs and a favorable shift in funding mix, partially offset by a <unk>.
Higher mix of promotional rate balances.
We made further progress on our funding mix with consumer deposits now, making up 71% of total funding.
On a sequential basis, a modest increase in NIM was driven by a light fleet improved revolve rates on credit card loans, partially offset by increased funding costs.
The better revolve rate reflected a 70 basis point decline in the payment rate quarter over quarter.
This helped boost sequential loan yields by five basis points.
The payment rate remains nearly 500 basis points above pre pandemic levels.
We continue to expect that the normalization in the payment rate will continue through the back half of 2023.
Receivables were higher driven by card, which increased 10% year over year from the continued strong sales and robust new account growth last year and into this year.
Organic student loans increased 4%, reflecting solid originations through 2021 peak season.
Arsenal loans were down 1% due to a sustained high payment rates.
Looking at other revenue on slide seven.
Excluding the $162 million loss on equity investments noninterest income increased $120 million.
Or 26%.
This was driven by net discount and interchange revenue, which was up 79 million or 33%, reflecting strong sales sales were up 23% year over year with growth across all categories infill.
Inflation drove a modest portion of the growth in the quarter and we expect that inflation will remain a benefit to sales growth over the short term.
Strong sales also drove higher rewards expense compared to the prior year. However, the rewards rate was down two basis points year over year, we still anticipate the full year rewards rate to increase 2% to four basis points.
Loan fee income was up $33 million or 31%, primarily driven by an increase in late fee instances.
Moving to expenses on slide eight.
Total operating expenses were up $49 million or 5% year over year.
Excluding marketing investments expenses increased just 1%.
Compensation expense was slightly.
<unk> year over year on lower bonus accruals and head count, which was partially offset by higher average salaries.
We expect some degree of salary and wage pressure in 2022, and possibly into 2023 as we take steps to remain competitive.
Marketing expense increased $38 million or 25%, we continue to invest for growth in our card and consumer banking products, including support of our relaunch cash back debit product.
Information processing increased $16 million or 15% year over year versus a low level in the period a year ago.
This expense was flat sequentially.
Going forward, we will continue to prioritize investments in analytics to support growth innovation and generate operating efficiencies.
Moving to slide nine.
Net charge offs remained low and were in line with our expectation for modest credit normalization.
Total net charge offs were $1 six 1% 87 basis points lower than the prior year and up 24 basis points from last quarter's record love.
Total net charge off dollars were down $160 million.
$169 million from the prior year and up $55 million sequentially.
Moving to the allowance for credit losses on slide 10.
This quarter, we released $175 million from reserves in our reserve rate continued to decline dropping 17 basis points to seven 1%.
The reserve release, primarily reflect the sustained strong credit performance in our portfolio, partially offset by loan growth.
Looking at the macroeconomic environment.
Pandemic now has a lesser impact on our outlook. The primary sources of risk have shifted to the impacts of inflation and a potential slowdown from fed actions, while the risk has shifted.
The economic view of the U S consumer remains healthy.
Looking at slide 11.
Our common equity tier one for the period was 14, 7% slightly lower than the prior period and still well above our 10, 5% target.
We repurchased $944 million of common stock during the quarter executing on our remaining authorization.
Our board of Directors also approved a new $4 $2 billion share repurchase program that expires on June 32023, and increased our common stock dividend by 20% to <unk> 60 per share.
This repurchase authorization represents our largest ever over a five quarter horizon.
It is evidence of our commitment to returning excess capital to shareholders, while sustaining our investments in strong organic growth.
Concluding on slide 12.
Our outlook for 2022 remains favorable and we are improving some elements of our expectations, starting with loans spending trends through the first quarter and a modest decline in the payment rates improved our conviction for high single digit growth.
We are revising our view on NIM.
We now see five to 15 basis points of upside for the full year relative to the first quarter.
This view includes five fed rate hikes at 25 basis points each.
Our prior view, reflecting two rate hikes of the same magnitude.
If the fed increases rates beyond this it would provide modest upside to net interest margin.
Despite inflationary pressures there is no change to our guidance for operating expense.
Marketing is expected to be above 2019 levels with non marketing expenses.
Up low single digits.
We are improving our credit outlook.
At losses to be between two two and two 4% for the full year. While there is still some uncertainty about the back half of this year, our current credit performance and delinquency trends give us confidence in a tighter range.
And as previously mentioned our board recently approved a new share repurchase program and increased our dividend.
In summary.
Loan growth accelerated as we benefited from robust sales and strong account acquisitions last year and into 2022.
Credit performance reflected our disciplined approach to underwriting and credit management with moderate normalization as expected.
We managed operating expenses, while investing in new product.
Features and functionalities.
And our highly capital generative model enable us to increase our dividend and share repurchase authorization, while supporting strong organic asset growth.
These results demonstrate the resiliency and flexibility of our integrated digital banking and payments model and I'm confident that we're well positioned for continued profitable growth through a range of economic conditions.
With that I'll turn the call back to our operator to open the line for Q&A.
And at this time, if you would like to ask a question. Please press star one on your telephone keypad, if you wish to remove yourself from the queue. You may do so by pressing the pouchy.
Remind you to please pickup your handset for alcohol sound quality.
We will take our first question from Bill <unk> with Wolfe Research. Please go ahead. Thank.
Thank you good morning, Roger and John .
Good morning, Good morning Bill.
Good evening, <unk> and elevated expense pressures are leading your peers to report negative operating leverage but you just reported over 500 basis points of positive operating leverage in your results certainly standout.
That degree.
Positive operating Leverages is much stronger than I think anyone was expecting can you frame for us whether an efficiency ratio here.
37% range is sustainable.
Hey, Bill.
Thanks for the question so.
Certainly we were pleased with the execution in the quarter.
In terms of the specifics around efficiency ratio, what we've guided to.
In the past and we'll still holding there is that.
Over the medium term.
We would expect a.
Efficiency ratio in the upper thirties now this quarter certainly demonstrated some progress on that front.
As a bit of a bit of timing there we did.
We kept our marketing guidance.
As as we indicated before which.
We'll bring that above.
2019 levels. So there is a slight skewing towards the back half of the year.
We continue to invest for growth.
There will be some upper funnel or broad market advertising as well so.
We're watching every dollar and making sure we get an appropriate return.
For our shareholders as we invest whether.
From an expense standpoint expense standpoint or from a.
Loan.
On lending stands.
Standpoint so.
I don't want to get over our skis here on that efficiency ratio.
Strong execution, and we're going to continue to kind of work towards the medium term target.
Understood. That's helpful. If I may follow up on capital from the 14, 7% CET one level that youre at today would you expect capital consumed through loan growth.
And the $4 $2 billion authorization that you announced to be enough to get you down to that 10% target over the next five quarters or would you still expect to be sort of running above 10, 5% at that point and how much flexibility do you see in that.
Two 5 billion.
Chance, we could take that higher depending on.
How things play out.
Yes.
So in terms of the CET one.
Ratio.
We're sticking to 10, 5% target there is about a 175 basis points.
From seasonal transition still still yet to two impact at CET one ratio.
So then that still puts us.
Over 200 basis points above the target just expressed so our thinking is that over the next two three perhaps four years depending on.
Investments in the.
The broad economy.
Two.
To close down to the 10, 5% target, but in terms of the repurchase authorization. Our board just approved it so it would be way premature to talk about any changes to that.
Okay. Thank you for taking my questions.
Thanks Bill.
And we will take our next question from Sanjay <unk> with <unk>. Please go ahead. Your line is open.
Thanks, Good morning.
So Roger you talked about the fluidity of.
The macro and obviously you've been through a number of these cycles as with you John .
Just curious I know youre not seeing anything right now, but what's the playbook from here I know you guys are leaning into growth but.
If things suddenly changed how are you how would you react.
Yes.
Thanks, Sanjay so so in terms of leaning into growth I would say, we're pleased with our growth, but it remains balanced in terms of the investments, we're making I expect our prime cost per account to be down from last year. So we're not in any way over investing by and large are.
Credit policies are back to where they were pre pandemic.
As we said at that time as late cycle. So we're not exactly letting credit go so.
We're still executing on a model of disciplined growth.
Even as the economic environment, especially in the U S consumer remains strong.
Okay.
And I guess, maybe just following up on.
Interest rate sensitivity John could you just talk about what Youre seeing any I know you raised the NIM expectations, but any changes in.
Sort of industry behavior around.
Chasing rates.
From competitor banks and such maybe you can just talk about deposit beta thanks, yes.
Sure Sanjay so in terms of.
Competitor behaviors, so we have seen that.
The competitors that we benchmark ourselves against.
Recently.
Through this quarter.
This past quarter increased rates and into this quarter.
As you observed our behavior in the pandemic.
We moved fairly aggressively down to a matter of fact, we led our competitive set.
Interest rate movements downward now that we're in a rate rising rate environment.
My expectation is we're going to be disciplined around that so the principles are that we want to ensure we have a fair customer proposition. We also seek to kind of manage our interest cost as effectively as we can.
So a combination of funding needs and competitive dynamics will dictate.
How how we how and when we take deposit pricing actions.
Okay, great. Thank you.
And we will take our next question from Moshe Orenbuch. Please go ahead. Your line is open.
Great. Thanks.
I guess I was hoping for.
Roger if you could talk a little bit about the competitive environment.
Obviously, there's been a lot going on from some of your competitors you talked about an 11%.
Growth in new accounts and your marketing expense was.
It was pretty much under control. So can you just talk about what it is that allows you to kind of do that and be comfortable in terms of your account growth going forward.
Sure. Thanks Felicia.
I think it really comes down to having a balanced and distinctive value proposition.
The discover brand is one of the most trusted brands in financial services.
Provide a leading customer experience both through the phone and digitally which helps with retention as well as booking new accounts.
Spent a long time building our skills around managing cash rewards not just paying the higher rate, but focused on every part of the process.
And then continuing to innovate with new features and functionality and you saw we just launched another one.
Round, helping protect your information from people reselling it right on the west and so that I think allows us to succeed in just about any environment I view the card business is always competitive.
There is a lull in that in the depths of a recession.
But beyond that it's our job to execute for our owners and grow and you're seeing that this quarter and I'm confident we'll be able to keep it going.
Great. Thanks, maybe just a follow up in a completely different direction and that is you talked about the debit product could you just talk a little bit more about how much in resources, you're putting behind that how big it can be and are there any other areas in which you can kind of leverage the network in the coming year. Thanks.
Sure. So the network does give us advantages for both our credit card issuing business, but also in terms of being able to support the 1% cashback on debit purchases, which is a real differentiator in the marketplace and builds on the discover heritage with cash back in.
Our new direction.
So.
We'll work our way into it as John mentioned, we'll start broad market advertising.
For that product later, this year, but we intend to sort of scale and gradually and build for the long term.
Over time, we expect it to be a key part of our business and then we see advantages.
Our core card issuing business. Good example is our ability as we roll out.
Sarcee to pre pre enroll our customers in a way that would be much more challenging for issuers on third party network and finally, we remain focused on the payment services business.
Monetizing our network investments through attracting third party volume.
Great. Thanks very much.
Thank you we'll take our next question from Betsy <unk> with Morgan Stanley . Please go ahead. Your line is open.
Hi, good morning.
Barney <unk> Barney.
Nice growth in the quarter and a really nice pick up, especially as we moved into end of period here.
And I just wanted to get a sense as to how youre thinking about funding that continued strong growth as we move through the year given that that's been shrinking the balance sheet and probably some deposits growth slowdown.
I looked at the liquidity balances it looks like there.
Down to pre pandemic loads, which well during the pandemic I should say, so I'm just thinking through.
Deposit growth versus liquidity utilization versus wholesale funding how should we think about how you are planning on funding the loan growth. Thanks.
Great. Thanks.
Thanks, Betsy so.
In terms of loan growth, we're going to take a balanced approach so.
We talked about the target of 70% to 80% of our funding needs.
Coming from.
OSA or.
Deposits from our customer base.
There is always the opportunity to go into the market.
Execute on broker Cds.
Liquidity needs dictate that we also issued an ABS transaction.
Last quarter.
In a rising rate environment at pretty pretty compelling rates overall, so we're going to take that balanced approach and.
You will see or we did.
Haven't seen it.
Youll see a little bit more of it there.
There'll be a little bit more.
Broad market.
Marketing on deposits and then also targeted.
<unk> marketing on deposits and we're going to try to balance kind of the rate and the marketing in order to get the most effective.
Cost of funds as we can so that's <unk>.
Essentially the strategy in a nutshell so.
We actually just went through.
A review from the fed on our.
Liquidity.
Controls and.
It's come out very very strong so we are.
We're pleased with the position of the business and the processes around it.
Okay, Great and then just as a follow up you indicated I think earlier John that.
Outlook that you have for net includes five rate hikes from the fed and maybe you can help us understand as we get to that 6789 rate hikes thats expected.
Does that how does your asset sensitivity change if at all or should we just take what's in the 10-Q and apply that to whatever comes after fed rate hike five.
Yes so.
The math on it would be or a 25 basis point increase.
Somewhere between three three and five bps to NIM on an annual basis now Theres a bunch of other dynamics that obviously impact that right. So you touched upon it earlier so deposit pricing.
Could could impact that as well as the revolve rate payment rate.
And then the <unk>.
Credit impacts coming coming through net interest margin. So there's a lot of dynamics there and that was that was why we were conservative in terms of the number of.
Hikes that we baked into this updated guidance. If there are more hikes that we're able to effectively manage our liquidity.
Credit remains.
We expect.
We would certainly see some upside from that guidance we provided.
But in the same like three to five branch per 25, yes.
Yes, Okay, alright, thanks, and that's it.
As an annual basis, but yes, yes, I got that.
Thanks, John .
Got it.
And we will take our next question from John <unk> with Evercore. Please go ahead. Your line is open.
Good morning.
As a.
Follow up to I think it was <unk> question earlier, just around deposit beta could you just tell us.
Do you what is your deposit beta assumption, that's baked into your NIM guidance.
You just mentioned.
So thanks, John so.
I don't really care.
Think about this in terms of the deposit data.
What I do hear is think about it in terms of broad principles. So the principles are that we're going to have an attractive proposition for our customers and then we're going to manage interest cost as low as we can.
While still maintaining that that proposition I just talked about.
So I gave the the point in terms of our actions during the pandemic only at plenty of liquidity that we are a price leader down.
And.
What I said in this rising rate environment, we expect that.
We're going to manage that interest cost very very tightly in order to.
Hopefully.
Drive drive overall costs low increase then.
<unk>.
And benefit shareholders. So I don't want to kind of tag to a specific beta because.
They tend to be.
The numbers tend to be kind of off.
A month from now.
Okay, Alright, that's helpful. And then separately just regarding the broader economic backdrop, given the fed's efforts here to tame inflation and slowly economy, and then looks like this morning, we're getting are probably disappointing print here on GDP I'm curious does your 2022 outlook factor in a slow.
Down in card spend at all.
It does so.
Actually it was.
The 23%.
For the quarter was higher than we anticipated we are frankly happy to see that.
But there is a.
Modest stepping down through.
Through this year.
Effectively it's hard to envision year over year.
Sales growth to continue in the upper Twenty's.
Got it okay, great. Thank you.
Yeah.
And we will take our next question from Ryan Nash with Goldman Sachs. Please go ahead. Your line is open.
Hey, good morning, guys.
Good morning.
John maybe a follow up on a couple of other questions that have been asked I think folks to spend on the liability side of the balance sheet as it pertains to rate sensitivity, but maybe we could talk a little bit about the asset side and I'm. Just curious obviously a lot has changed over the last few years. So maybe can you unpack a little bit for us have we seen significant changes in terms of.
Floating rates relative to the last time rates rose how much more improvement do you think we could see in revolve rates and I guess lastly are we now back to more sustainable BT level such that.
We can see the assets.
Asset yields improving with benchmark rates. Thanks, I have a follow up.
Thanks Ryan.
There's a lot there so.
Revolve rate actually.
Increased mildly in the quarter as the payment rate decreased by 70 basis points I spoke about and by the way that that payment rate decline.
<unk>.
Essentially in line with.
How we built our original guidance so.
As we think about inflation or.
Or are there other impacts that could drive payment rate lower we've essentially de risked.
Our guidance for loan growth. So we could see additional upside subject to payment rate and a bunch of other factors.
<unk>.
The other pieces there.
In terms of.
Kind of overall asset growth, what I would do is.
I would break it down into kind of the three.
Three categories, our primary products to card you saw the double digit growth there.
<unk> loans at 4%. So we will have another peak origination season coming into 2022, we hope to be able to execute there and continue to take market share and personal loans.
The growth was down 1%, but originations were up strong double digits. So we had a high payment rate impacting personal loans that we'll expect to moderate over time, giving.
Some level of loan growth in that product so.
I guess.
Your question had a number of elements hopefully I gave you an up detail that be able to piece together.
The information that you are trying to clean up.
And.
Maybe as a follow up on credit. It was it was good see lowering the high end of the range and I understand you probably have about six months visibility. So the fourth quarter is probably so hard to predict but.
Just looking at some of the credit metrics delinquencies remain really really benign, they're only up 20 basis points on the bottom. So can you maybe just talk about what's included now in the credit expectations and do we have the potential to see credit come in towards the bottom end of the range over the course of the year.
Yes so.
When we gave this initial guidance, we gave gave a pretty broad range when we batted around internally, whether or not we should tighten it and as the quarter unfolded our conviction around.
The.
Tighter range and perhaps the lower end group. So as you said there is.
Three there is three months of the fourth quarter, we don't have perfect visibility in terms of kind of roll rate performance, but our modeling analytics have been.
Actually surprisingly accurate.
We have a high expectation there so.
We'll see how the rest of this quarter plays out and.
Hopefully.
Hopefully, we can give updated guidance in a subsequent call.
Thanks, Sean.
And we will take our next question from Mark Devries with Barclays. Please go ahead. Your line is open.
Thank you.
So your reserve rate is still about 100 basis points above seasonal day. One can you just talk about what assumptions are embedded in that.
How we should think about that ratio a recession happens in the near term as some are expecting I mean, it would seem these levels that's almost already in the reserve and Alternatively, where could it go if some of this macro uncertainty clears.
Alright, Thanks, Mark so yes.
Yes, the reserve rate came in at seven one <unk>.
Day, one was $6 one so some context around seasonal day one so it was it was.
An accounting adjustment reflecting.
New guidance provided by the FASB right. So we did our best to capture life of loan estimates.
What what losses would be in and embed them and no broad reserve right now the macro environment at the time.
Versus today has certainly changed portfolio dynamics.
We've changed it a matter of fact our.
The upper end of our.
Sure.
Or kind of credit quality for the balance sheet is stronger than then it was seasonal day, one but they are still.
<unk>.
Degree of uncertainty that we are.
We're managing through so.
As we've said in prior quarters. We're we're conservative on this we wanted to make sure that.
We're appropriately capturing reserve rates under under GAAP.
If the broad macros are positive in the portfolio performance is positive we could we could continue to step down through a combination of growth or reserve releases.
And if if the recession likelihood continues to increase the broad macro is good.
Could warrant either holding or perhaps even increasing but overall I think the takeaway here should be mark that the portfolio performance is really really strong there is no view of.
Any any damage to the consumer there is no view that job losses are going to increase in the.
Definitely through this year and likely through the first half of next year. So all of those factors are positive from a credit and reserving standpoint.
Okay got it.
And then just a clarifying question on the Opex guidance you indicated no change there despite what seemed like kind of growing wage inflation pressures that you've indicated you're not immune to should we assume that as the pressure builds in the second half.
That.
What happens is you flex down kind of other non marketing non wage expense to maintain some kind of a targeted.
Operating leverage.
Yes so.
Here's how we think about it so so.
Sure.
I've tried to articulate this over the past two and a half year, we're going to be really disciplined in terms of how we spend our dollars and discover has got a long history of that.
We've done some stuff to kind of drive both accountability and visibility.
Of the expense base, which.
Census, it has helped.
It's important to note that as we see opportunities we're going to continue to invest.
We also are as you as you paraphrased, we're seeing inflation coming in on salary and wages. We're also seeing it on third party spend so we will effectively manage that in order to be able to deliver to the to the guidance, we provided and if we see incremental opportune.
City.
Either for growth or otherwise, we'll invest too.
Create transparency on that.
In order to drive long term shareholder.
Returns.
Okay, great. Thank you.
Yeah.
And then we will take our next question from Kevin Barker with Piper Sandler. Please go ahead. Your line is open.
And when you consider this.
This rate environment versus the last rate cycle.
Do you feel that the deposit betas that are going to play out in this cycle are going to mirror, what we saw in the last cycle.
And is that your base case, when you think about funding cost.
Despite what might be a much more aggressive fed this time around.
Yes.
Oh.
Last time, I would take that as a proxy, but theres a couple of things that are different right. So so the patient pace of inflation is a heck of a lot higher here right. We're at record record levels of inflation the other.
Sure thing that is different is the savings rates coming into this inflationary cycle much higher.
So those two dynamics could could create some offsetting.
Impacts.
But.
It will be subject to kind of.
Liquidity and loan growth across the industry and.
Who's got a competitive proposition.
We're very comfortable with our proposition in terms of the customer experience.
The kind of the rate and if you take a look at it.
At our rate versus the brick and mortar bank.
I find it ironic that everybody keeps any excess cash in those institutions whatsoever. So.
We're going to be diligent on it.
Okay, and then you mentioned that.
Very disappointed on how you spend your dollars.
Pretty consistent on that commentary.
Are you are you seeing anywhere where some of your competition may be.
Little exuberant and how they're spending their dollars just given.
The opportunity set in the market today.
Yes.
I would say in general in this business you get diminishing returns on incremental investments in marketing.
And so you have seen cycles in the past where people spend heavily after a while they look at the returns they got.
And.
Made maybe less happy with that so we feel good about both what we're investing on the rewards side and the guidance. We provide there have only two to four basis point increase but also that we'll see cost per accounts at an attractive level.
Yeah.
Youre, certainly seeing very heavy levels of investment out there that I would wonder whether or not theyre going to be sustainable.
Okay. Thank you for taking my questions.
And we'll go next to Don <unk> with Wells Fargo. Please go ahead. Your line is open.
Yes, good morning.
Home equity is a small part of your business, but I didn't know if there was maybe a growing opportunity as well.
Cash out refi activity could potentially slow.
And then secondly, I think you have a partnership on account to account payments I was just curious if you think that will take off at point of sale in the United States.
Yes.
So in terms of our home equity business, we do think.
From a rising rate environment will be very constructive.
<unk> many households, their greatest asset could be there, 3% mortgage so while we're excited about it it also isn't that huge.
On the payment side, we're excited about our partnership but I don't see.
Tremendous disruption coming to point of sale and existing means of payment and point of sale anytime soon but.
We're excited to work with a broad range of partners and different Fintech, we want to leverage our network capabilities.
Thank you.
And we'll take our next question from Rick Shane with Jpmorgan. Please go ahead.
Thanks, everybody for taking my question this morning.
You talk a little bit.
Hey, purely about stratification youre seeing in terms of borrower behavior.
Both in terms of credit performance and also in terms of spending behavior discretionary versus non discretionary ships.
Across the portfolio.
Sure.
Seeing strength across all categories.
Revolver sales growth is probably a little higher than transact sales growth, but.
That reflects our lend focused model.
But.
Say the 24th sales are still up 23% year over year, So consumer is good and breadth across.
In terms of different segments from a credit standpoint, you do tend to see normalization occur faster at the lower end segments, but again, we're very pleased and John mentioned that in his comments that the normalization is very much in line with our expectations.
Yes.
Got it.
Raj are you seeing any in that.
Lower FICO bands any shift in terms of spending behavior from category to category.
Not necessarily.
Been a lot of volatility.
As pandemic restrictions common go certainly travel growth is up compared to what it was but I'd really point towards breadth and growth and spanned across all categories.
Great. Thank you very much guys.
Yeah.
And we'll take our next question from Robert Napoli with William Blair. Please go ahead. Your line is open.
Thank you good morning, and congratulations on a really good quarter discovery has been a model of consistency over the last decade plus.
Good to see.
Just on your cashback debit products product just topline.
The growth of that business to penetration rates any comments on some of the other banking like products and early early paycheck.
What kind of demand youre seeing for that product and then economically how youre going to monetize these banking products overtime.
Sure.
Still early days, so I, probably won't provide much in the way of forecast, but we're very excited about the demand. We're seeing we think the product is positioned well to compete.
Both with some of the newer Fintech neo banks, but also with any traditional branch player that's out there.
And over time, the balances build slowly, but a lot of opportunities to cross sell both other deposit products such as savings accounts and Cds, but also.
Our broad range of card products and provide really a different entry point into the discover franchise. So are very very much. Our focus is on building. This for the long term and as we said earlier youll start seeing more broad market advertising later this year for that product.
Great and then just any thoughts Roger on the competitive positioning positioning of discover today versus say five years ago pre pandemic five years ago your ability to.
Maintain or gain share while maintaining returns that we've done so very nicely, but just any thoughts on competitive position today versus say five years ago.
Yes, I mean I'd go back to the very kind comments you made at the beginning around 10 years of consistency right. Even five years ago, a brand value proposition that stood for trust for a superior customer experience and for innovation on the feature side back then it might have been the ability to freeze your card now.
Is some of the things we do for our customers in terms of protecting their information online.
The focus remains the same very strong cash rewards program.
That competes well with anything out there youre pricing a little more intensity in the cash rewards space as some of the changes on miles programs through the pandemic, but we still compete very much the same way.
But also still feel as good about our competitive position.
Thank you I appreciate it.
And we'll take our next question from Mihir Bhatia with Bank of America. Please go ahead. Your line is open.
Good morning, and thank you for taking my questions.
Obviously really solid results here this quarter so.
Following obligations on that but maybe too.
<unk>.
Maybe you can just talk a little bit about Washington, we're hearing more noise as part of from both from the CFPB. The late season, which I guess to a certain extent kind of plays into your brand about.
Less fees and being consumer friendly but.
Still obviously will have an impact for you to the extent I think yesterday so to speak he announced he is talking about reopening the conduct and the fees.
But also just on the student loan forgiveness site to hearing more wrong rumblings on that so just what's going on with Washington Your views on the situation. Thank you.
Yeah sure so.
On the fee side first I would say, we have good relationships and enjoy working closely with all of our regulators and by and large are aligned in terms of wanting.
Consumers to be protected.
As you know.
You've seen it's a pretty small percent of our revenues we waived the first late fee for our discovery customers anyway.
Right now were set at the safe Harbor to the extent that that changes we can change accordingly, but.
Don't expect it to have an overly material impact.
Certainly on the deposit side. The fact that we have no fees on any of our deposit products.
Positions us very very well compared to our competitors and it's a key part of our our value proposition.
In terms of student loans, we probably have seen some pressure on the payment rate just given the ongoing payment holidays that people have seen on their federal loan.
It's important to realize though that theres, a big difference between the federal loan program and ours just in terms of who they give loans to the types of education State Fund as an example, we do nothing in the for profit sector.
So, we'll wait and see what comes out of Washington, but we don't expect it to be overly disruptive.
For our own student loan business.
Thank you and then just maybe turning back to credit for a second.
Obviously, you're improving the outlook for this year, but how much of that is just a function of you gaining increased confidence based on and the <unk> outperformance maybe.
Versus any kind of change I guess really what I'm trying to understand is is the path to normalization changing.
<unk> like from like a little less steep.
Then what you would maybe expected it to be like when do we get back to a normalized state is that the front half of 2023 the back half of 2023 2024.
Yes, thanks for the question Matt here.
What we said.
Previously as we expected normalization.
Through 2023 now.
Really hard to kind of predict anything when you get out.
The kind of 2024 timeframe.
What I would say here is in terms of narrowing the range.
That was a function.
Largely.
Increased confidence around our forecast.
With.
With it frankly, an internal expectation that we're going to come in at the lower end of that range.
So we're still giving ourselves some wiggle room here.
If things proceed as we expect them to.
We'll be around the lower end of the range.
Thank you.
Yeah.
Okay.
Take our next question from John Hecht with Jefferies. Please go ahead. Your line is open.
Thanks, guys. Most of my questions have been asked but I guess.
Turning to the student lending business I mean, it's important I know, it's small but important overall.
But.
Results have been pretty consistent there, but I am wondering maybe if you just have any thoughts on the moratorium it's impact on on your business and more importantly is when the moratorium expires is there any broader effect that you would expect to see an overall credit trends even outside that specific segment.
Yes.
We've modeled it pretty carefully we don't expect it to have a significant impact on card or personal loans and as you think about student loans. It's important to look at how we underwrite those rights for our undergrad loans. The vast majority are cosigned by the parent very strong FICO scores.
So we've seen probably a modest benefit on the credit side, but also a modest negative on the payment rate as students have more liquidity to put towards paying off their private student loans.
And again I'd go back to the federal student loan program in terms of who participates the amount of debt they have in that nature of education. They financed.
Is dramatically different than our portfolio.
Okay makes sense. Thanks.
Then we will take our last question from Ming Yao with Deutsche Bank. Please go ahead. Your line is open.
Great. Thanks, Thanks, guys for taking my question.
Quick question on the personal loan portfolio I guess are you sort of tightening standards here, just given the pristine or usage and loss rates that we've seen there but.
Also looking at the sequential sort of seven quarter declining yield. So just wanted to get your thoughts there or is it just primarily the elevated payment rates that's driving that thank you.
Yes, it's a couple of factors that.
Are playing out here. So the first the first piece was when we came in prior to coming into the pandemic, we were pretty tight.
And then we hit the pandemic.
We tightened that personal loan product.
More stringently than any other product we had.
What and then we also.
<unk> doubled down on our underwriting including.
100% verification of all loans, so we were super careful.
That had an impact on growth levels.
<unk>.
We have since.
Reduced.
Our.
Our manual underwriting so it's back to kind of pre pandemic underwriting standards and we also own.
<unk> up the credit box because what we're seeing is the loans that were in there where christine.
And.
We're now in a situation, where we've got high returning asset we're looking at the competitive dynamics, we've made some conscious choice to reduce yield.
For the benefit of.
Very profitable growth and as I said earlier in my comments the expectation is that.
The payment rate will.
Subside and we'll see we'll see growth in loan balances and net product originations have been.
Positively struck as I said earlier as well.
Got it great. Thank you.
Okay.
Great. Thank you actually with that I think we'll conclude if you have any additional questions. Please feel free to follow up here in Investor Relations and have a great day.
Thank you and this does conclude today's program. Thank you for your participation you may disconnect at any time.
Yeah.
Okay.
Okay.
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Yes.
Okay.