Q4 2024 Discover Financial Services Earnings Call
Yeah.
Operator: Good morning.
Madison: Good morning, My name is Madison and I will be your conference operator today at.
Madison: My name is Madison and I will be your conference operator today.
Operator: At this time, I would like to welcome everyone to the fourth quarter 2024 Discover Financial Services earnings conference call. All lines have been placed on mute to prevent any background noise. If you should need operator assistance, please press star zero. Thank you.
Madison: At this time I would like to welcome everyone to the fourth quarter 'twenty 'twenty four discover financial services earnings Conference call.
Madison: All lines have been placed on mute to prevent any background noise. If you should need operator assistance. Please press star zero.
Madison: Thank you.
Operator: I would now like to turn the call over to Mrs. Erin Steber. Please go ahead.
Speaker Change: I would now like to turn the call over to Mr. Aaron Steeper. Please go ahead.
Erin Steber: Thank you, Operator.
Erin Steber: I'll begin by referencing slides 2 and 3 of our earnings presentation, which you can find in the financials section of our Investor Relations website, InvestorRelations.Discover.com. Our discussion today contains certain forward looking statements that are subject to risks and uncertainties that may cause actual results to differ materially. Please refer to our notices regarding forward looking statements that appear in our fourth quarter 2024 earnings press release and presentation as well as the risk factors detailed in our annual report and other filings with the SEC.
Speaker Change: Operator, I'll begin by referencing slides two and three of our earnings presentation, which you can find in the financials section of our Investor Relations website Investor relations that discover dotcom.
Speaker Change: Our discussion today contains certain forward looking statements that are subject to risks and uncertainties that may cause actual results to differ materially. Please refer to our notices regarding forward looking statements that appear in our fourth corner 'twenty 'twenty four earnings press release and presentation as well.
Speaker Change: As the risk factors detailed in our annual report and other filings with the FCC.
Erin Steber: Our call today will include remarks from our Interim CEO and President, Michael Shepard, and John Greene, our Chief Financial Officer. There will be no question and answer session following today's remarks. However, the investor relations team will be available for any inquiries.
Michael Shepherd: Our call today will include remarks from our interim CEO and President Michael Shepherd, and John Greene, Our Chief Financial Officer.
Michael Shepherd: There will be no question and answer session. Following todays remarks, however, the investor relations team will be available for any inquiries.
Erin Steber: It is now my pleasure to turn the call over to Michael. Thank you, Aaron.
Michael Shepherd: It is now my pleasure to turn the call over to Michael.
Speaker Change: Thank you Aaron good morning, and welcome to today's call.
Michael Shepard: Good morning and welcome to today's call. 2024 was a good and transformative year for Discover. When assuming the role of interim CEO last April, I shared that our top goals were operating the company profitably and safely, continuing to strengthen our risk management and compliance, sustaining our commitment to outstanding customer service, and preparing for the successful completion of our merger with Capital One. I'm happy to report today that we've made considerable progress on each of these goals. We reported net income of $4.5 billion for the full year 2024, and the earnings per share of $17.72, reflecting several factors.
Speaker Change: 2024 was a good and transformative year for discover when assuming the role of interim CEO last April.
Sure that our top goals, we're operating the company profitably and safely continuing to strengthen our risk management and compliance sustaining our commitment to outstanding customer service and preparing for the successful completion of our merger with capital one.
Speaker Change: I'm happy to report today that we've made considerable progress on each of these goals.
Speaker Change: We reported net income of $4 $5 billion for the full year 2024, and the earnings per share of $17.72, reflecting several factors.
Michael Shepard: On a full year basis, we grew average loans, expanded our deposit base, and benefited from a higher net interest margin. We also successfully completed the sale of our private student loan portfolio, which provided financial benefits and streamlined our business model. As we anticipated in our commentary, delinquency formation and net charge-offs began to improve. And despite a modest slowdown in U.S. card sales, overall network volume increased driven by growth in our Pulse business and demonstrating the strength of our payments network. We continue to invest heavily in risk management and compliance in 2024. And we are seeing meaningful improvements in our program.
Speaker Change: On a full year basis, we grew average loans expanded our deposit base and benefited from a higher net interest margin.
Speaker Change: We also successfully completed the sale of our private student loan portfolio, which provided financial benefits and streamlined our business model.
Speaker Change: As we anticipated in our commentary delinquency formation in net charge offs began to improve.
Speaker Change: And despite a modest slowdown in U S card sales.
Speaker Change: Overall network volume increase driven by growth in our pulse business and demonstrating the strength of our payments network.
Speaker Change: We continue to invest heavily in risk management and compliance in 2024, and we are seeing meaningful improvements in our programs.
Michael Shepard: Additionally, we have made progress on meeting regulatory requirements and toward fully resolving the CARD misclassification matter. Throughout the pursuit of these goals, we remain steadfast in our commitment to customers and employees, evidenced by the customer satisfaction and workplace award recognitions we have received.
Speaker Change: Additionally, we've made progress on meeting regulatory requirements and toward fully resolving the card misclassification matter.
Speaker Change: Throughout the pursuit of these goals, we remain steadfast in our commitment to customers and employees evidenced by the customer satisfaction and workplace Award recognitions. We have received each of these successes positions us well for our pending merger.
Michael Shepard: Each of these successes positions us well for our pending merger. Capital One received approval of the merger from the Delaware State Bank Commissioner and our definitive merger proxy has been transmitted to shareholders in connection with the upcoming shareholder vote. Integration planning efforts are progressing well in preparation for a smooth transition. We continue to firmly believe the merger will advance our company's shared mission to help our customers meet their financial goals, support the communities in which we operate, and create value for our shareholders.
Speaker Change: Coordinator, and our Definitive Merger Proxy has been transmitted to shareholders in connection with the upcoming shareholder votes.
Speaker Change: Integration planning efforts are progressing well in preparation for a smooth transition. We continue to firmly believe the merger will advance our company's shared mission to help our customers meet their financial goals, support the communities in which we operate, and create value for our shareholders.
John Greene: With that, I'll now ask John Greene to provide an update on our fourth quarter financial results.
Coordinator: With that, I'll now ask John Greene to provide an update on our fourth quarter financial results.
John Greene: Thank you, Michael. I'll start with our summary financial results on slide five. In the fourth quarter, we reported net income of $1.3 billion versus $366 million in the same period last year. These results were driven by three main factors. First, provision expense declined by $707 million. This was largely from a reduction in our credit reserve balance compared to a reserve bill one year ago. Second, as Michael mentioned, we successfully completed the sale of our student loan portfolio, which resulted in a gain of $381 million. The transaction in total provided an earnings benefit of $1.3 billion, including the reserve reduction of $869 million recognized in the second quarter.
John Greene: Thank you, Michael. I'll start with our summary financial results on slide 5.
John Greene: In the fourth quarter, we reported net income of $1.3 billion versus $366 million in the same period last year. These results were driven by three main factors.
John Greene: First, provision expense declined by $707 million. This was largely from a reduction in our credit reserve balance compared to a reserve bill one year ago.
John Greene: Second, as Michael mentioned, we successfully completed the sale of our student loan portfolio.
John Greene: which resulted in a gain of $381 million. The transaction, in total, provided an earnings benefit of $1.3 billion, including the reserve reduction of $869 million recognized in the second quarter.
John Greene: And third, net interest income grew $162 million from continued net interest margin expansion.
John Greene: And third, net interest income grew $162 million from continued net interest margin expansion.
John Greene: In connection with finalizing the merger proxy, we restated financial results for the periods dated back to 2021, reflecting a reclassification of amounts related to the card tiering accrual. Furthermore, an independent review identified approximately $60 million of incremental charges related to the card product misclassification, and we increased our accrual for potential regulatory penalties by $90 million in the third quarter. both are incorporated in our revised Accounting for these updates, the cumulative impact on equity was a decrease of $151 million. Earnings for 2024 increased by $441 million.
John Greene: In connection with finalizing the merger proxy, we restated financial results for the periods dated back to 2021, reflecting a reclassification of amounts related to the card-tiering approval.
John Greene: Furthermore, an independent review identified approximately $60 million of incremental charges related to the card product misclassification and we increased our accrual for potential regulatory penalties by $90 million in the third quarter. Both are incorporated in our revised results.
John Greene: Accounting for these updates, the cumulative impact on equity was a decrease of $151 million. Earnings for 2024 increased by $441 million.
John Greene: Back to the detailed results beginning with revenue on slide six. Our net interest margin ended the quarter at 11.96%, up 98 basis points from the prior year, and up 58 basis points sequentially. Margin expansion was driven by product mix, investment of sales proceeds, and a lower card promotional balance mix. Card receivables increased 1% year over year due to a slightly lower payment rate, partially offset by a decrease in sales volume. The payment rate declined around 10 basis points from last year, was down 20 basis points sequentially, and is approximately 90 basis points above pre-pandemic levels.
John Greene: Back to the detailed results beginning with revenue on slide six.
John Greene: Our net interest margin ended the quarter at 11.96%, up 98 basis points from the prior year, and up 58 basis points sequentially. Margin expansion was driven by product mix, investment of sales proceeds, and a lower card promotional balance mix.
John Greene: Card receivables increased 1% year-over-year due to a slightly lower payment rate, partially offset by a decrease in sales volume.
John Greene: The payment rate declined around 10 basis points from last year, was down 20 basis points sequentially, and is approximately 90 basis points above pre-pandemic levels.
John Greene: Over the past several quarters, payment rates have stabilized. Discover card sales were down 3% compared to the prior year. The decline in card sales is primarily due to credit tightening actions, which began in 2022. Holiday sales were strong, and we currently see an opportunity to increase new account acquisition in the coming year. This is expected to provide a modest boost to 2025 sales, with more substantial benefits expected in 2026. Personal loans were up 5% from the prior year. Demand remains strong and we continue to take a conservative approach to underwriting. Total loans, after adjusting for the student loan sale, increased 3%.
John Greene: Over the past several quarters, payment rates have stabilized. Discover card sales were down 3% compared to the prior year. The decline in card sales is primarily due to credit tightening actions, which began in 2022.
John Greene: Holiday sales were strong and we currently see an opportunity to increase new account acquisition in the coming year. This is expected to provide a modest boost to 2025 sales with more substantial benefits expected in 2026.
John Greene: Personal loans were up 5% from the prior year. Demand remains strong and we continue to take a conservative approach to underwriting.
John Greene: Total loans, after adjusting for the student loan sale, increased 3%.
John Greene: Average consumer deposits were up 10% year-over-year and 2% sequentially. Deposit growth, driven by industry-leading products, customer experience, and our value proposition, has enabled us to improve our funding mix. Direct-to-consumer deposits now account for 72 percent of total funding, bringing us within our targeted range of 70 to 80 percent. We continue to manage deposit balances to meet our liquidity needs and anticipate a through the cycle beta of around 70%.
John Greene: Average consumer deposits were up 10% year over year and 2% sequentially. Deposit growth, driven by industry-leading products, customer experience, and our value proposition has enabled us to improve our funding mix.
John Greene: Direct-to-consumer deposits now account for 72% of total funding, bringing us within our targeted range of 70 to 80 percent.
John Greene: We continue to manage deposit balances to meet our liquidity needs and anticipate a through-the-cycle beta of around 70%.
John Greene: Looking at other revenue on slide 7. Non-interest income increased $417 million or 59%. Other income increased as a result of the Successful Student Loan Act. Net discount and interchange revenue was up $45 million due to increased cash back debit volume and lower reward. The rewards rate was 135 basis points in the period, a decrease of two basis points driven by lower cash back match, which was largely offset by an increase in 5% reward. Sequentially, the reward rate is down 9 basis points from changes in the promotional category.
John Greene: Looking at other revenue on slide 7. Non-interest income increased four hundred and seventeen million dollars or fifty nine percent. Other income increased as a result of the successful student loan exit.
John Greene: The rewards rate was 135 basis points in the period, a decrease of two basis points driven by lower cash back match, which was largely offset by an increase in 5% rewards.
John Greene: Sequentially, the reward rate is down nine basis points from changes in the promotional category.
John Greene: Moving to expenses on slide eight. Total operating expenses were up $67 million, or 4% year over year. Looking at our major expense categories, compensation costs increased $146 million, or 23%, primarily due to higher wages and benefits, and Proactive Employee Retention Act. Marketing costs declined $73 million in the quarter due to timing of broad market advertising. Information processing increased as a result of technology investment and a $22 million write off pertaining to our student loan professional fees were up $51 million or 16%. This increase was driven by approximately $44 million of merger and integration costs and loan sale expenses.
Moving to expenses on slide eight.
John Greene: Total operating expenses were up $67 million or 4% year over year. Looking at our major expense categories, compensation costs increased $146 million or 23% primarily due to higher wages and benefits and proactive employee retention actions.
John Greene: Marketing costs declined $73 million in the quarter due to timing of broad market advertising.
John Greene: Information processing increased as a result of technology investment and a 22 million dollar write-off pertaining to our student loan infrastructure. Professional fees were up 51 million dollars or 16 percent.
John Greene: This increase was driven by approximately $44 million of merger and integration costs and loan sale expenses.
John Greene: We recognized $588 million of risk management and compliance expense in addition to card misclassification. and $118 million of merger and integration expense in 2020.
John Greene: We recognized $588 million of risk management and compliance expense in addition to card misclassification costs and $118 million of merger and integration expense in 2024.
John Greene: Moving to credit performance on slide nine. Total net charge-offs were 4.64%, 53 basis points higher than the prior year, and down 22 basis points from the prior quarter. On a full-year basis, net charge-offs ended at 4.8%, slightly better than our guided range. In CARD, net charge-offs declined 25 basis points from the prior quarter, and the 30-plus day delinquency rate was flat. This marks the third consecutive quarter the CARD net charge-off rate has declined. The 2023 card vintage is maturing and is now expected to modestly outperform the 2022 vintage. We are seeing improvements across the portfolio.
Moving to credit performance on slide nine.
John Greene: Total net charge offs were 4.64 percent, 53 basis points higher than the prior year and down 22 basis points from the prior quarter. On a full year basis net charge offs ended at 4.8 percent.
John Greene: slightly better than our guided range. In CARD, net charge-off declined 25 basis points from the prior quarter, and the 30-plus-day delinquency rate was flat. This marks the third consecutive quarter the CARD net charge-off rate has declined.
John Greene: The 2023 card vintage is maturing and is now expected to modestly outperform the 2022 vintage. We are seeing improvements across the portfolio.
John Greene: Personal loan net charge offs and delinquencies continue to be within historical norm. increases reflect the seasoning of recent growth. Our view on the consumer has not changed. We continue to observe a stable consumer supported by wage growth and a resilient labor market providing a foundation for sales and credit headed into 2020.
John Greene: Personal loan net charge-offs and delinquencies continue to be within historical norms. Increases reflect the seasoning of recent growth.
John Greene: Our view on the consumer has not changed. We continue to observe a stable consumer supported by wage growth and a resilient labor market providing a foundation for sales and credit headed into 2025.
John Greene: Turning to the allowance for credit losses on slide 10, our credit reserve balance decreased $189 million from the prior quarter. The reserve rate was 6.87%, down 31 basis points driven by our credit performance, improvement in household net worth, and an increase in seasonal transactor balance. absent seasonal balances, the reserve rate would have declined by about 20 basis points. In terms of the macroeconomic outlook, our expectations for unemployment and GDP are relatively unchanged from last quarter. We now assume peak unemployment of 4.7% of 10 basis Our GDP forecast remains in the 1 to 3% range.
John Greene: Turning to the allowance for credit losses on slide 10. Our credit reserve balance decreased 189 million dollars from the prior quarter. The reserve rate was 6.87 percent down 31 basis points driven by our credit performance, improvement in household net worth, and an increase in seasonal transactor balances.
John Greene: Absent seasonal balances, the reserve rate would have declined by about 20 basis points.
John Greene: In terms of the macroeconomic outlook, our expectations for unemployment and GDP are relatively unchanged from last quarter.
John Greene: We now assume peak unemployment of 4.7% up 10 basis points. Our GDP forecast remains in the 1 to 3 percent range.
John Greene: Looking at slide 11. Our common equity tier one ratio for the period was 14.1% up 160 basis points compared to the prior quarter, supported by the student loan sale and core earnings generation.
Looking at slide eleven.
John Greene: Our common equity tier one ratio for the period was 14.1 percent, up 160 basis points compared to the prior quarter, supported by the student loan sale and core earnings generation.
John Greene: We declared a quarterly cash dividend of 70 cents per share of common concluding on slide 12. Given the pending merger, we will not provide numerical guidance. However, I'd like to provide some insights on trends for 2025. We anticipate loan growth to align more closely with pre-pandemic norms. Tailwinds from declining payment rates appear to have largely subsided. Sales and new account generation should play a larger role in driving growth than in the recent past. We expect net interest margin to remain relatively consistent with the fourth quarter level, although an increase in new account generation may create some margin pressure in the back half of the year.
John Greene: We declared a quarterly cash dividend of $0.70 per share of common stock.
John Greene: Including on slide 12, given the pending merger, we will not provide numerical guidance. However, I'd like to provide some insights on trends for 2025.
John Greene: We anticipate loan growth to align more closely with pre-pandemic norms. Tailwinds from declining payment rates appear to have largely subsided. Sales and new account generation should play a larger role in driving growth than in the recent past.
John Greene: We expect net interest margin to remain relatively consistent with the fourth quarter level, although an increase in new account generation may create some margin pressure in the back half of the year. Mitigating factors include declining deposit rates and our improved funding mix.
John Greene: Mitigating factors include declining deposit rates and our improved funding. We have not contemplated any significant changes to our expense base prior to merger approval. Previously, we had shared the expectation for net charges to peak and plateau. we are beginning to see a downward trend.
John Greene: We have not contemplated any significant changes to our expense base prior to merger approval.
John Greene: Previously, we had shared the expectation for net charges to peak and plateau. We are beginning to see a downward trend.
John Greene: To summarize, our strong fourth quarter results brought an excellent close to 2024. In 2025, we will continue to invest in actions that drive sustainable, long-term value and prepare for the consummation of our pending merger with Capital One.
John Greene: To summarize, our strong fourth quarter results brought an excellent close to 2024. In 2025, we will continue to invest in actions that drive sustainable long-term value and prepare for the consummation of our pending merger with Capital One.
John Greene: This concludes our remarks.
Operator: I'll turn the call back over to the operator.
John Greene: This concludes our remarks. I'll turn the call back over to the operator.
Operator: Today's call has ended. The Discover Investor Relations team will be available for questions. Thank you for joining.
John Greene: Today's call has ended. The Discover Investor Relations team will be available for questions. Thank you for joining. You may now disconnect.
Operator: You may now disconnect.
John Greene: Those who have magic in them are rare those who do not are cruel
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