Q3 2022 Discover Financial Services Earnings Call
Contain broad access to a variety of funding sources, enabling us to constantly fund our asset growth.
Looking at other revenue on slide six.
Noninterest income increased $264 million or 71%. This was partially due to a $167 million loss on our equity investments in the prior year quarter compared to a $4 million loss this quarter.
Adjusting for these our non interest income was up 19%.
This was driven by higher net discount and interchange revenue, which was up $47 million or 16%, reflecting strong sales and favorable sales mix.
Partially offset by higher rewards costs similar to last quarter, we estimate that inflation contributed between 202 hundred 50 basis points of sales growth in the period.
This strong sales also drove higher reward expense consistent with the prior quarter, our rewards rate increased three basis points year over year, driven by substantial growth in new accounts, increasing the cost of our cashback program year to date, our rewards rate is up two basis points consistent with.
Our expectation of 2% to four basis points of annual rewards rate inflation.
Moving to expenses on slide seven.
Total operating expenses were up $198 million or 17% year over year and up 13% from the prior quarter.
Compensation costs were up primarily due to increased head count our servicing organization is a key component of our value proposition. We expect expect to grow this as our accounts and assets expand.
This will contribute to an increase in salary and wages through the end of this year and into next year.
Marketing expenses increased $66 million or 31% as we continued to invest for growth in our card and consumer banking products.
We grew new card accounts by 22% from last year's third quarter.
Professional fees increased $43 million or 22% as a result of investments in technology and increased consulting costs.
We also had additional fraud cost in the consumer bank driven by increased volumes as well as some legal expense.
Elevating our other expense category in the quarter.
Moving to credit performance on slide eight.
Total net charge offs were 171% or 25 basis points higher than the prior year, but down nine basis points from the prior quarter.
Total net charge offs were up $114 million from the prior year and only up $10 million sequentially.
In the card portfolio, the net charge off rate of 192% was 27 basis points higher than the prior year and nine basis points lower sequentially.
Similar to our commentary from last quarter, we're not seeing evidence of emerging credit stress beyond normal expected nor.
Normalization.
Delinquencies among our lower prime segment have been normal normalized but in the upper prime.
But in upper prime delinquencies and charge offs remain below pre pandemic levels.
This is consistent with our baseline expectation that credit will continue to normalize over the next several quarters absent a change in macro conditions.
Turning to the discussion of our allowance on slide nine.
This past quarter, we increased our allowance by $304 million due to higher receivable balances.
Our reserve rate modestly declined to six 7%.
For us changes to on to employment conditions pose the most significant risks to loss levels as part of our reserving process. We have considered that prospects of higher unemployment among a range of macroeconomic scenarios and is reflected in our reserve balance.
Looking at slide 10.
Our common equity tier one for the period was 13, 9% the strong asset growth was the primary driver of the approximate 30 basis point decline from the prior period.
Our long long term target remains 10, 5%.
In terms of capital return, we declared a quarterly common dividend of 60 cents per share and repurchased $212 million of common stock in the period before we decided to temporarily suspend our buyback activity.
Concluding on slide 11.
As we look at the last quarter of the year, our prospects for 2022 remained favorable and we are once again.
Proving elements of our expectations.
We are revising our view on loan growth to high teens.
<unk> strong sales new account acquisitions through the third quarter and some recent improvements in the payment rates support our confidence in the outlook.
In terms of NIM, we expect the full year to be mildly above.
High end of our expected range with sequential margin improvement in the fourth quarter based on rate hikes that happened in late September .
We are revising our expense outlook to be up high single digits versus the prior year, driven by increased marketing and compensation costs.
In line with previous communications.
We still expect marketing costs to come in above 2019 levels as we've discussed.
We expect to add head count, which will elevate salary and wages as well as benefit expense. Excluding these two categories expenses are expected to increase by low single digits.
We now expect net charge offs to be between one eight and one 9% for the full year driven by lower than expected credit losses through this point in the year.
Our temporary pause on share repurchases remains in place, but we hope to resume.
Share repurchases before year end.
In summary.
Receivable growth accelerated as we continued to benefit from elevated sales strong new account acquisitions and improvements in the payment rate.
NIM continues to benefit from prime rate increases.
Funding costs are consistent with expectation.
And credit performance is slowly normalizing, reflecting our disciplined approach to underwriting and credit management.
These results demonstrate the resiliency of our integrated digital banking and payments model our earnings power, coupled with our strong balance sheet and capital position keeps us well positioned for continued profitable growth through a range of economic conditions with that I'll turn the call back to our operator.
Katy to open the line for Q&A.
Yes.
Thank you Sir at this time, if you would like to ask a question. Please press star one on your telephone keypad.
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We will take our first question from Ryan Nash with Goldman Sachs. Your line is now open.
Hey, good morning, guys.
Good morning, good morning.
So.
Maybe to start on the net interest margin John you commented that it implies another uptick.
Given the rate hikes that we saw at the end of the quarter can you maybe just talk about where we go from here on the margin I think last quarter, you talked about it potentially peaking out I'm. Just curious do you think you can continue to hold the align around these levels and maybe what is incorporated within that in terms of in terms of deposit betas and alike.
Great. Okay. Thanks, Thanks for the question Ryan there's a lot there so let.
Let me, let me start with.
The fundamentals that we're seeing so.
The.
The liability side of the balance sheet is certainly subject to increases in deposit funding costs as a result of competitive actions.
In general needs across the market too.
To attract attract some deposits.
With that said.
The.
The 11, 11% we delivered in the third quarter, we do expect some upside from that as a result of the fed hikes in September .
Certainly.
Sequentially into the fourth quarter, we'll see further improvement now beyond that.
Beyond excuse me into.
Into the fourth quarter, we will see improvement.
Beyond the fourth quarter at this point, we're going to reserve any commentary, but what I would say is we don't expect any any specific.
I'll say seismic changes to net interest margin.
In 2023 based on the stability of our funding base and.
Current access to.
Two.
Multiple multiple sources of.
Our funds.
Got it thanks for the color Roger maybe one for you you mentioned you guys are marginally tightening on account acquisition can you maybe just give additional color regarding some of the changes you're making to underwriting and what do you think this might mean for growth over the intermediate term.
Sure. So I would start by saying in general it remains a very good environment, we're seeing cost per account on the prime side below what we had last year.
The value proposition is resonating well.
For the new account space at the margin, we tightened some of those segments that will be most volatile in a downturn. So think the lower end of prime.
And are ready to take further action on new accounts or the portfolio side, but again I would say overall a very good environment.
And Thats part of why you're seeing such strong growth.
Got it appreciate the color.
Okay.
Thank you. Our next question will come from Moshe Orenbuch with Credit Suisse. Your line is now open.
Great. Thanks.
I was hoping maybe you could talk.
Rich.
A little bit of a different tack, maybe talk a little bit about the competitive environment and what youre seeing from a credit standpoint, and from a competitive marketing standpoint kind of in year two installment loan businesses.
The personal loan business and the student loan business and maybe talk about that.
Look there for a moment.
Yeah.
So it is hard to know what individual competitors are building I would say in general most of them are much broader spectrum lenders than we are and so my guess is we'll be seeing some stress at the lower ends of their books for us a rising rate environment creates a lot of focus on that.
<unk>, which is the primary use of our personal loans. So we're maintaining a very disciplined credit criteria, but seeing strong originations in that segment.
Got it thanks.
It is interesting I mean, I think we've seen that for others that are at the higher end of the credit spectrum, where its distressed youre talking about we do see at the lower end follow up question that I had is.
You talked about.
Hoping to restart the buyback by by year end or so.
A little bit growth kind of causing a 30 basis point downtick in your capital, but you're still well above just talk about I guess, the appetite for that given and does that kind of macro environment figure into that just talk about the appetite for the buyback what's that restarts. Thanks.
Yeah sure Moshe I'll take that so.
From a overall capital.
We are very well capitalized right, so where we're.
<unk> 13 approaching 14% on the CET one.
Our targets 10 five.
Percent.
<unk>.
The credit book has been very very stable.
It's normalizing, but overall very very stable so.
The capital allocation priorities through the firm remain in place. So first is to invest in organic strong organic.
Growth.
It would be a a return of capital and then third.
Perhaps a bolt on acquisition and we're going to do that will likely be in the in the payments segment. So overall those priorities didn't change so the suspension remains in place, but where we're hopeful that it will resume buybacks are resumed.
Here in the fourth quarter.
Okay. Thank you.
Thank you. Our next question will come from Sanjay <unk> with K B W. Your line is now open.
Thanks, Good morning, John I wanted to just walk through the expense guide increase you mentioned that the blend of marketing and Tom cost could you just parse apart what part is yes.
How much of each contributed to the increase and I'm just trying to put the marketing comments to slightly pulling back the credit box.
And then as far as like the head count increases was that related to the growth.
I'm just trying to figure out what changed in terms of the comp costs, yes, yes.
Yes.
Yes happy to help with that Sanjay. So let me provide some context upfront here so year to date total expenses are up 7%.
Comp expenses up 5%.
And excluding marketing.
Our expense base year to date is up 2% so actually.
Really really what I'll say first half of the year and into this quarter. Some strong fundamentals now we did have a significant growth in.
The asset base, which of course.
Means that.
There are accounts that we're going to have to service and you might have seen our press release that came out that indicated we were hiring about 2000 and servicing.
<unk>.
Through the balance of this year and into next year depending on on.
On the balance sheet and our.
Our customer value proposition and metrics so overall the.
Strong growth in the strong acquisition has necessitated investments in our people and we will continue to do that.
We've also.
Made specific investments in information technology, specifically around resources advanced analytics in order to further position us to be able to grow profitably and then also.
Enhanced underwriting and customer targeting so so so we believe all of those investments make perfect sense for.
The long term and what Youre seeing here in the third quarter is a culmination of the.
What I will say, it's a tough comp as a result of some turnover last year.
And then us comment coming on.
Back filling resources, what I'll say is salary resources as well as the investments I talked about in terms of customer service. So hopefully that provides some context and color to.
To your question.
Okay. That's very helpful. And then I know, we're trying to read between the lines in terms of the student loan servicing.
Inquiry or.
Investigation, that's going on but just to be clear. There is no change to how you guys are thinking about it relative to last quarter and as far as expenses are concerned. It seems like things are progressing as you expected it to and it's just a matter of timing is that is that a correct statement.
Yes that is a correct statement so.
No no change obviously.
When we have to have some news to share we're going to share it.
<unk>.
The expense guidance, we provided in the updates reflect reflect those items does.
<unk>.
On your previous question and no specific changes related to.
Expenses related to.
The buybacks as mentioned.
Okay, great. Thank you.
Thank you. Our next question will come from John Hecht with Jefferies. Your line is now open.
Good morning, guys actually most of my questions have been asked and that was going to ask one about marketing maybe maybe since you addressed the spend patterns. Maybe can you talk about just because its a topic that we haven't really talked about in detail recently.
Specter, Bonnie rewards and the competitive environment around rewards and what that means for the intermediate term.
Yeah sure. So a lot of the most intense competition on rewards is in the Super Prime segment, and we've talked over the last year or two how we think some of the propositions issuers are putting out arent necessarily sustainable in the long run as John mentioned our.
Rewards costs are moving up exactly as we forecast we haven't felt the need to make any structural changes to our program. So as you can see from the growth in the new accounts our value proposition competes very well in that prime revolver segment and so while the market is always competitive.
We bring a differentiated value proposition that resonates well with consumers.
Okay and then.
Question is maybe you're thinking about like a 'twenty, one cohort and I know, it's probably early for the 22 cohort, but what can you tell us in terms of how they're seasoning.
Utilization rates and kind of delinquency seasoning.
Is there is back to what it looked like in 19 or is there something different that's worth pointing out with respect to more recent vintages.
Yes, I would say more recent vintages are performing exactly in line with our expectations right. I mean every vintage Scott distorted during the pandemic, so you sort of cut across the.
The curves, but again, we feel very good about the performance.
Performance.
Okay. Thank you guys.
Thank you. Our next question will come from John <unk> with Evercore. Your line is now open.
Good morning.
Good morning, good morning on the <unk>.
<unk> ratio came in around 40% for the third quarter and just given the commentary that you gave around the investments that you're making in your expense expectations can you maybe help us think about how that could shape up for the fourth quarter and more importantly into 2023, how we.
Think about the trajectory there.
Yes.
John Thanks for the question so.
Well, we said in the past and what.
We've told our board and what we're targeting is a efficiency ratio.
In.
The high thirties and through this year, we've done we've done a pretty pretty good job in terms of.
Being able to deliver that certainly.
Really strong growth in <unk>.
The great performance through through the first half on expense on the expense base and then the third quarter reflects some investments and despite those investments still.
Still below 40.
We're going to continue to make investments where.
Where we see.
An opportunity to drive.
Great returns for our shareholders and.
As we approach 2023.
We are we are aware that the economic environment is a little tougher we do we do feel like we have.
Remaining tail winds in terms of asset growth.
And we.
We do have.
Investments, we're going to continue to make so so I would say for 'twenty three specifically.
We'll come out in January to give.
More specific details, but the overall commitments remain in place.
Commitment to positive operating leverage.
Inefficiency ratio south of 40.
<unk> expense discipline, while investing for growth.
Okay. Thank you that's helpful and then on the reserve front just wanted to.
Get your take on how you see that trajectory here I know you.
The reserve to bleed a bit in terms of the ratio this quarter, but now as you see some of the normalization that you indicated some of the pressure on delinquencies how should we think about.
The reserve as you look here, particularly as you factor in the economic conditions and how Youre looking at.
The economy.
The impact on the economy plays out thanks.
Yes.
Great.
Thanks for that question, so little bit of context, there. So we put on.
About.
Five and a half two.
Five $6 billion worth of assets in the quarter, our reserves increased by $304 million. So.
As we look at the portfolio and the macro environment, we're seeing the portfolio.
Continuing to be very very stable, but normalizing the macro environment.
Indications of a recession are certainly increasing Roger mentioned his comments about some mild in his comments about some mild tightening.
So.
In terms of expectation around reserves will continue to take a look at the macros will run multiple scenarios and then.
Sure.
The balance sheet.
The portfolio specifically continues to perform.
As anticipated and we will make make.
Appropriate calls for reserves under GAAP, it's really tough to give any specific guidance on that.
Other than we're going to be mindful of the macros continue to watch the portfolio in that prime revolver targeting we do tends to add.
A high level of stability.
A matter of fact, one other one other point that may be useful not specific to reserves, but.
Rather charge offs.
You have to go all the way back to the second quarter of 2011 to see charge offs.
Charge off rate that is that is north of <unk>.
4%, so we're seeing great stability.
This year and we would expect it to be stable next year as well.
Got it okay. Thanks for taking my question.
Thank you. Our next question will come from Betsy <unk> with Morgan Stanley . Your line is now open.
Hi, good morning.
Good morning.
I just wanted to see if I could get you to unpack your statement on new seismic changes in 2023.
Maybe you could speak a little bit about how you're thinking.
And I know you just detail a little bit, but how youre thinking about how the loan yield should traject I know in the slide deck, you called out that the loan yield was driven by prime obviously, but with partial offset from higher promotional mix and the timing of pricing changes could you help us understand how that works how much.
The promo mix and the timing impacted loan yields and how youre thinking about that trajectory as we continue to go through a fed rate hike period here.
Okay, Yes.
Theres a lot there and as you know.
Fairly complex Betsy, but.
Do my best to create some transparency here.
So.
Okay.
Let me start with the loan yield so.
80% of our book is floating floating rate.
Asset side.
So as the fed increases that creates the opportunity to.
Move.
Move to contract right up with the fed fed changes and correspondingly if the fed were to come down.
Yes.
The contract rate would come down.
So what we're seeing there is in a rising rate environment, we still expect three to five basis points of.
Yield improvement so net interest margin yield.
Improvement over a 12 month period.
So.
We saw significant increases in September .
It looks like based on the forward curve, there's another maybe as much as 125 basis points of further fed action. This year and then next year, depending on the economy, there could be a couple of more ore.
There'll be a pause I don't think there'll be much in the way of.
Fed fed rate reductions.
Until maybe maybe its latest 24. So so what that means is we're going to get the benefit from the fed rate increases into the portfolio. We're seeing deposit pricing continue to go up we havent been a price leader on that certainly we've been a file aware to make sure.
We have a.
Positive value proposition for our customer base.
And then the.
The next question would be around data and what do you think about betas, so I'm going to try to address that right now so as there is greater disparity between our rates from a deposit standpoint.
And the brick and mortar banks to create.
Plenty of opportunity for us to market.
Into those.
Customers and they'll find it an attractive value proposition, which should help dampen the impact.
A further rate increases so we do think the combination of the fed increases.
US being able to manage the deposit book, but in a rising rate environment.
Stable stability from a credit standpoint, but normalization, which will create a bit of incremental.
Interest interest reversals impacting net interest margin and then.
And then ultimately the.
Pricing decisions, we're going to make where we have that flexibility.
To make sure we're making good decisions for our customers and for our shareholders. So so ultimately.
It nets out that we expect.
Relative.
Relative stability over net interest margin.
True.
Through 'twenty three.
Okay got it and I appreciate that thanks, My follow up has to do with the buyback discussion that we had earlier and I know you mentioned that you're hopeful it can resume in <unk> would you expect to put out an 8-K that indicates that you can now resume buybacks or would we hear about buybacks only after you started there is no obligation to put.
And notification into the market that you can resume.
There isn't an obligation, but we would likely put an 8-K.
Okay, no obligation, but you would likely do it okay. Yes.
Yes.
Thank you. Our next question will come from Robert Napoli with William Blair. Your line is now open.
Yes, Thank you and good morning.
So just following up on that is good to hear the resuming the buyback I guess that would suggest that.
The review is behind you.
But would you expect then to get your.
To go towards your 10, 5% target capital ratio.
And over what timeframe would you would you like to do that or what kind of a buffer do you want to about that 10, 5%.
Yes.
Bob Thanks for the question I just wanted to.
Be very specific about something you said.
Our comments have consistently been here on this call that we hope to resume the buyback in the fourth quarter. So.
We say that.
We are hopeful.
But there is.
Ultimately it will be at <unk>.
A decision that the board helps what.
So.
In terms of the.
The 10, 5% target, we've been well north of that for.
Quite some time.
There is.
We have we have said that we want to step towards that.
We intend to step towards that so certainly the earnings power that the firm's generated and.
The buybacks as well as dividend.
Have impacted our ability to get there.
So.
We're going to we're going to step towards that.
<unk>.
Throughout 'twenty, three and 'twenty four what we said previously is we hope to be around the.
10, 5% target sometime in 'twenty four 'twenty five.
Thank you and the follow up just on normalization of credit losses, as we think about normalized credit losses here.
Looking back over history credit cards, no high threes, I guess, so mid threes to high threes personal loans in the 4% range is that the way. We should think is there anything thats changed.
So we continue to think about normalized credit losses, and that kind of an area.
Yeah. So.
I would I would put.
Two points out there.
First I would take a look at the historical trends.
And use that and make certain judgments.
The other the other item here I'm going to say as a matter of judgment, but certainly.
I have a belief that.
Credit cards.
Has increased.
And the payment priority because.
Folks can access to digital economy without a credit card some folks with a debit card but.
Most specifically around the credit card so.
That I believe helps prioritize the primary credit card.
<unk>.
Many other debt obligations that a consumer has so could that could that impact their relative charge off rates versus historical trends my belief is yes, but your judgment.
Our judgment is what I would say you should you should apply when youre working through your your forward looking outlooks.
Thank you.
Thank you. Our next question will come from Don Vendetti with Wells Fargo. Your line is now open.
John personal loan growth was pretty strong this quarter just wanted to get your thoughts on the outlook there in growth and also any updates on your.
Home equity lending initiatives.
Yes, yes.
Yes, thanks for the question, Dan So certainly nice growth there.
On the personal loan front.
Back in.
A few quarters.
And it was flat and we said it was flat to down actually if you go back three or four quarters as a result of some underwriting decisions.
We took we then we send strengthen the underwriting for that product and its given us greater confidence to be able to market market that product.
And there has been.
High level of appeal to it. So we will continue to be mindful of of the product in the face of a tougher economic condition.
But.
Certainly.
We feel like it's a good product and it's meeting customer needs and that's that's helped drive the growth.
In terms of kind of forward looking guidance.
Not going to start to do that at a product level. All it would do is ensure that I was wrong more often.
But.
But if I go to the kind of the.
The home equity loan.
That portfolio is relatively small so it's actually not not moving the dial at this point from an earnings standpoint, but what we've seen is.
Great level of interest in.
And the second lien product and we're also we're originating first lien product as well so.
Both products are performing well.
Nice appeal.
Thanks.
Thank you. Our next question will come from Mihir Bhatia with Bank of America. Your line is now open.
Good morning. Thank you for taking my question, maybe I just wanted to start with.
If we just take your guidance for NIM and loan growth and I think that works out to about four point.
We looked at our fourth quarter the name of the place 11, 2% and 3 billion plus NII.
Is that the right way to think about it and frame the exit rate for NIM and then Shouldnt NII just increase from there given loan growth and your comments about NIM stability am I thinking about that correctly.
Yes, so somebody here thanks.
Thanks for the question.
Certainly appreciate.
The specificity.
What.
What I've said about NIM is probably as far as I'm going to go here on this call.
We do.
Sequential improvement as I said.
Beyond that it'll be tough to get.
Specific details.
Okay, and then just wanted to ask.
About loss losses normalizing I think previously you had talked about it being in <unk> 'twenty three is when we get to a more normalized loss rate, but I think it was.
So that it could maybe pushing into even 2024 later any update on that thank.
Thank you.
Yes, so normalization through 'twenty three and then the.
The macro environment will make it a term will help us determine whether.
It pushes 23 and 24.
Where we're sitting today, we're very pleased with the portfolio performance and.
The only only surprises.
Frankly.
The pace of normalization on the upper end is little slower than we expected, which.
<unk> helped drive the improved guidance that we gave on the charge off rate.
Thank you.
Thank you. Our next question will come from Rick Shane with J P. Morgan. Your line is now open.
Thanks, everyone for taking my question.
Look your customer base really represents a great sample of the domestic.
Population.
I'm curious when you look at.
Spending on a category level basis, if theres anything that youre seeing that is a cause for concern not asking our people spending more of the pump that's obvious.
The inflationary pressures, but are there categories, where youre seeing people use their cards.
Better signals for something we should be thinking about.
Yeah, Great Great question, So our base, probably does skew a little upward so more more in the prime but we're seeing continued strength in sales in October so I would say year over year in the low teens.
Some of the trends you've heard about we're picking up so consumer durables softening.
In terms of year over year, but again, our households by and large they have the liquidity to absorb inflation. It causes some pain in the.
<unk> will switch categories will downgrade within the category, but I would say travel is coming off some of the very very strong growth. We saw over the summer. So yeah, a little less strength in traveling consumer durables are probably the key trend.
Got it thank you very much.
Okay.
Thank you. Our next question will come from Bill <unk> with.
Wolfe Research your line is now open.
Thank you good morning, Roger and John .
Hi, Good morning mentioned.
Mentioned that.
That operating conditions are consistent with late cycle expansion historically fed hiking cycles, if typically ended and slowing loan growth, but you're already exceptionally strong loan growth seems to be accelerating and certainly the whole industry is enjoying strong growth can.
Can you share any thoughts around how you would expect a late cycle expansion to and then I will just layer in my follow up now and if you can give any commentary around what level of unemployment is implicit in your reserve rate and what the change in unemployment would mean for the reserve rate that would be that'd be very helpful.
Yeah. So great question. So in terms of late cycle I think back pre pandemic, yes, we talked about it being late cycle for a couple of years and then it ended in a way that I think no unexpected.
And so that's part of why we tend to use a through the cycle.
Loss rate and look to be disciplined in our credit management. So while I would agree it's not a time probably to be widening credit we're seeing a lot of benefits from the investments in advanced analytics in particular around the personal loan product and on the card side, where the growth is.
We're achieving the growth.
Swapping and swapping out different populations and again with a policy that I think is appropriate for late cycle and it builds on some of the really strong new account production. We had in 2021 as those accounts mature. So again, we'll continue to look at it both in terms of our portfolio.
Actions as well as new account originations across all of our products, but we feel good about the credit approach and just the traction of our products are getting in the marketplace and I'll pass it to John for part two.
Hey, Bill and in terms of that.
Fundamental assumptions for kind of reserve setting so as I said earlier, we used a number of different scenarios, which included kind of non recession scenario as well as a recessionary scenario.
The recessionary scenarios.
We we modeled we certainly didn't wait as much as the non recession and also the view in terms of.
The.
Unemployment rates.
Pretty wide range right now right so.
Some some forecast that going north of 6% and a very what I will say a dark scenario. The more optimistic scenario is 4% and so we looked at the complete range of scenarios.
And weighted it.
More towards stability with.
With increasing.
Unemployment GDP not as big a driver, but certainly an indication for the economy today.
Today, we're at about 1% and in 2023 in a recessionary scenario there'd be mild contraction not deep contraction. So.
We think overall.
There'll be general stability, despite a tougher and.
The tougher.
Macro.
Thank you.
Thank you our next question.
Comes from Kevin Barker with Piper Sandler Your line is now open.
Thank you. Thank you. Thank you concerning the comments regarding unemployment rate and maybe some slight tightening on underwriting.
That being said are you seeing any.
Any minor shifts in consumer spending or payment patterns.
Indicate certain pockets of stress, whether it's the lower end of prime or other parts or maybe even certain vintages.
Customers that are that are on your books.
Yes, I mean, all the vintages are performing well as John said I think we're seeing the normalization occur faster and pretty close to fully normalized for the lower end.
Of prime.
While the payment rate has softened a bit.
Come down by about 70 basis points. It remains 400 basis points higher than 2019 levels and so I think that speaks to the fact that there is still very strong employment market out there people can find jobs can find extra hours and so good amount of liquidity that is supporting.
The debt burden for for our segment.
Okay and then.
I know, it's a fluid situation, but the student debt.
Payment is supposed to restart here, maybe early next year, who knows.
What's happening with the fighting in the courts, but do.
Do you expect any incremental impact to credit.
With a lot of student debt payments, obviously theres. The forgiveness is obviously a credit positive but is there something that you could see as a potential headwind as well.
Student debt repayments restart here potentially in January .
Not necessarily we've watched it closely I mean, I think we have experienced an elevated payment rate.
Which is a dampening impact on loan growth as students have put more of their payments towards their private student loans, but we don't see anything that would have.
Impact on credit.
Okay. Thank you for taking my questions.
Yeah.
Thank you. Our next question will come from Mark Devries with Barclays. Your line is now open.
Yes. Thanks.
How should we think about how you manage expense discipline, if we start to see some some revenue and credit weakness.
Tommy Softens here.
Yes.
I would just simply say that we will take a look at the opportunities we have in front of us.
And we will make.
What I hope will be great long term decisions for our shareholders and we're going to be very very mindful around discretionary spending and.
And around.
Employment.
Decision so.
Overall, we hope we're good stewards.
Of the company.
Okay got it and then.
Just given where the rewards cost is has trended so far this year and the guidance I think you said it was two basis points of guidance is two to four is is it right to assume that <unk> is a relatively big quarter for expenses, maybe if you've got more of the 5% categories. This quarter.
Yes.
I wouldn't necessarily assume that.
The point of the.
The guidance between two and four is that's what we had said.
Previously still within the range and we wanted to keep it within the range. So.
That that two to four is something that.
We have seen historically in.
To an extent managed to and we will continue we'll continue to do that so.
I won't.
I wouldn't lean on any particular.
Information do assume the fourth quarter is going to be extraordinarily high or low.
Okay got it thank you.
Thank you. Our next question will come from Bill Ryan with Seaport Research Partners. Your line is now open.
Thanks, Good morning.
Couple of quick questions just following up on the personal loans business historically, it's been heavily focused on.
Your credit card base and I was just wondering if that's still the case and you also had.
I'd say very very strong credit checks and that business paying off credit risk directly has anything changed there as well.
No. So I would say, it's pretty balanced in terms of cross sold to the card base versus broad market.
Probably the biggest change has been just the continued advancement in analytics and the underwriting approach there.
But very very conservative so a lot of.
Employment verification et cetera heavily manual processes, just to make sure we get it right because as opposed to the card business, where you can manage credit as you go you get one shot in personal loans, but again I would say that the performance.
<unk> remains very very strong there and it's a lot of it thanks that disciplined approach.
Okay, and just one follow up on the promotional balances thats kind of been brought up on the card book for the last several quarters is it.
Still increasing as a percentage of the overall card portfolio or is it kind of stabilized and maybe give us some historical perspective.
Where it stands.
Our recent history.
Yes.
Thanks.
It has stabilized in the end.
Third quarter.
Basically.
Approach stabilization into the second quarter.
And it's very close to where it has been historically.
Okay. Thanks for taking my questions.
Welcome.
Yes.
Thank you. Our next question will come from Dominick Gabriele with Oppenheimer. Your line is now open.
Hey, Thanks, so much for taking my questions throughout the call and throughout other calls you've kind of laid out your playbook in pieces in particular on the credit side for a slowing economy, but maybe.
Roger you can just provide us with a more holistic idea of what discover would change across various pieces of the businesses.
To protect profitability.
A tougher economic environment, and then I just have a follow up thank you.
Yeah.
I'd start by saying, we don't necessarily optimize on protecting profitability on a quarter by quarter basis.
We focus on delivering long term value to the shareholders.
I think as I've been in this business a while yes.
People, who just totally got marketing.
In a downturn miss out on what usually turn out to be some of the most profitable vintages.
And so yes.
Marketing, mainly because as you tightened the credit box there are fewer and fewer people in the market too, but I think we tried to operate our company almost like we're always in a recession always be conserved on credit always be tight on expenses.
There is there is more you can do especially on discretionary items.
But that ability to keep momentum through a downturn has really distinguished us in previous cycles, and we would try and do that again.
Okay, great. Thank you and.
I think.
It would be really helpful to understand what your both of your views are on the normalization of the personal loan portfolio net charge offs versus the credit card portfolio consensus has is such a huge ramp on the personal loan side versus credit cards for 'twenty, three and now look.
For specific guidance, but is there any reason why there would be such a difference in faster normalization on the personal loan side.
Versus credit card as far as basis point movements as a percentage of loans. Thanks, so much guys.
Yes, I mean, we.
Haven't put out product by product guidance, but I would say that given how we underwrite the personal loans I'm not sure why our portfolio would jump masked much faster than the card book.
In general we have a higher FICO for the personal loans business. They do tend to be a little more volatile than card in a recession, but I wouldnt.
That isn't necessarily behavior I would expect.
Great. Thanks, so much.
Okay.
Alright, well. Thank you everyone for joining us and thank you Katie and if theres any additional follow ups. Please reach out to the IR team will be here and looking forward to speaking with you. Thanks and have a great day.
Yes.
Thank you ladies and gentlemen. This concludes today's event you may now disconnect.
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