Q1 2025 Discover Financial Services Earnings Call
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Margo: Good morning. My name is Margo and I will be your operator today.
Margo: Good morning, My name is Margo and I will be your operator today at this time I would like to welcome everyone to the first quarter 2025 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.
Margo: At this time, I would like to welcome everyone to the first quarter 2025 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.
Unknown Executive: Thank you, operator.
Margo: Thank you operator, I'll begin by referencing slide two of our earnings presentation, which you can find in the financials section of our Investor Relations website Investor relations that describe our dotcom.
Unknown Executive: I'll begin by referencing slide two of our earnings presentation, which you can find in the financial section of our Investor Relations website, InvestorRelations.Discover.com.
Unknown Executive: 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 first quarter 2025 earnings press release and presentation, as well as the risk factors detailed in our annual report and other filings with the SEC.
Margo: Our discussion today contains certain forward looking statements that are subject to risks and uncertainties that may cause actual results to differ materially.
Margo: Please refer to our notices regarding forward looking statements that appear in our first quarter 2025 earnings press release and presentation as well as the risk factors detailed in our annual report and other filings with the SEC.
Margo: Our call today will include remarks from our Interim CEO and President, Michael Shepard, and John Greene, our Chief Financial Officer.
Michael Shepherd: Our call today will include remarks from our interim CEO and President Michael Shepherd, and John Greene, Our Chief Financial Officer.
Margo: There will be no question and answer session following today's remarks.
Speaker Change: There will be no question and answer session. Following todays remarks. It is now my pleasure to turn the call over to Michael.
Michael Shepard: It is now my pleasure to turn the call over to Michael. Thank you, Erin. Good morning and welcome to today's call.
Michael Shepherd: Thank you Aaron good morning, and welcome to today's call.
Michael Shepard: I'd like to begin by providing a few brief comments about the merger with Capital One. Of course, we're very pleased to report that the Federal Reserve Board and the Office of the Comptroller of the Currency approved our merger with Capital One. These decisions follow the approval of the transaction by the Delaware State Bank Commissioner in December of last year, and by our shareholders in February of this year, with over 99% of the ballots cast voting in favor of the merger.
Speaker Change: I'd like to begin by providing a few brief comments about the merger with capital one.
Speaker Change: Of course, we're very pleased to report that the Federal Reserve Board and the office of the Comptroller of the currency.
Speaker Change: Proved our merger with capital one.
Speaker Change: These decisions followed the approval of the transaction by the Delaware State Bank Commissioner in December of last year and by our shareholders in February of this year with over 99% of the ballots cast voting in favor of the merger.
Michael Shepard: The transaction is expected to close on May 18, 2025, subject to the satisfaction of the customary closing condition. We look forward to completing the merger and believe the combination of our two great companies will increase competition and payment networks, offer a wider range of products to our customers, increase the resources devoted to innovation and security, as well as bring meaningful benefits to our communities and shareholders.
Speaker Change: The transaction is expected to close on May 18, 2025 subject to the satisfaction of customary closing conditions.
Speaker Change: We look forward to completing the merger and believe the combination of our two great companies will increase competition and payment networks offer a wider range of products to our customers increase the resources devoted to innovation and security as well as bring meaningful benefits to our communities and shareholders.
Michael Shepard: Shifting focus to our recently reported quarterly results, Discover's financial performance remains strong in the first quarter. Earnings per share increased by 31% compared to last year, driven by a healthy net interest margin and good credit performance. Discover customer behavior was stable, evidenced by spend, payment, and credit trends. The CARD 30 plus day delinquency rate decreased by 18 basis points compared to last quarter and the CARD net charge off rate improved year over year. Consequently, our acquisition and underwriting strategies did not change materially during the quarter.
Speaker Change: Shifting focus to a recently reported quarterly results discoveries financial performance remained strong in the first quarter.
Speaker Change: Earnings per share increased by 31% compared to last year, driven by a healthy net interest margin and good credit performance.
Speaker Change: Discover customer behavior was stable evidenced by spend payment and credit trends the.
Speaker Change: The card 30, plus day delinquency rate decreased by 18 basis points compared to last quarter and the card net charge off rate improved year over year.
Speaker Change: Consequently, our acquisition and underwriting strategies did not change materially during the quarter.
Michael Shepard: In light of increasing macroeconomic uncertainty, we are closely monitoring economic developments and consumer health.
Speaker Change: In light of increasing macroeconomic uncertainty, we are closely monitoring economic developments and consumer health.
John Greene: With that, I'll now ask John Greene to review our first quarter financial results. Thank you, Michael. I'll start with our summary financial results on slide four. In the first quarter, we reported net income of $1.1 billion, which was up 30% from the prior year. Provision expense declined by $253 million, reflecting a reduction in our credit reserve balance and lower net charge-offs. Net interest income increased by $71 million from continued net interest margin expansion.
Speaker Change: With that I'll now ask John Greene to review, our first quarter financial results.
John Greene: Thank you Michael I'll start with our summary financial results on slide four in the first quarter. We reported net income of $1 1 billion, which was up 30% from the prior year.
John Greene: Provision expense declined by $253 million, reflecting a reduction in our credit reserve balance and lower net charge offs net interest income increased by $71 million from continued net interest margin expansion.
John Greene: Let's review the details beginning with Revenue on slide 5. Our net interest margin ended the quarter at 12.18%, up 115 basis points from the prior year, and up 22 basis points sequentially. Over the past year, margin expansion has been driven by the student loan sale, a lower card promotional balance mix, and a reduction in consumer deposit prices.
John Greene: Let's review the details beginning with revenue on slide five.
John Greene: Our net interest margin ended the quarter at 12.18% up 115 basis points from the prior year and up 22 basis points sequentially over the past year margin expansion has been driven by the student loan sale, a lower card promotional balance mix and a reduction.
John Greene: And in consumer deposit pricing.
John Greene: Quarter over quarter, the main driver was lower deposit costs. Card receivables were relatively stable, down half a percent year over year from modestly lower sales. The payment rate increased 10 basis points from last year and was sequentially flat.
John Greene: Quarter over quarter. The main driver was lower deposit cost.
John Greene: Card receivables were relatively stable down half a percent year over year from modestly lower sales the payment rate increased 10 basis points from last year and was sequentially flat.
John Greene: Discover card sales were down 2% compared to the prior year. The decline in card sales was from past credit tightening action. Personal own balances were flat.
John Greene: Discover card sales were down 2% compared to the prior year. The decline in card sales was from past credit tightening actions.
John Greene: Personal loan balances were flat, although demand remains robust our conservative underwriting posture and increased competition has slowed the pace of new originations.
John Greene: Although demand remains robust, our conservative underwriting posture and increased competition has slowed the pace of new origination. Total loans, after adjusting for the student loan sale, increased 1% from last year. Average consumer deposits were up 6% year over year and 1% sequential. We grew direct-to-consumer deposit balances by $2 billion in the quarter, while reducing average deposit rates by 22 basis points. Direct to Consumer Deposits now account for 74% of total.
John Greene: Total loans after adjusting for the student loan sale increased 1% from last year.
John Greene: Average consumer deposits were up 6% year over year and 1% sequentially.
John Greene: We grew direct to consumer deposit balances by $2 billion in the quarter.
John Greene: <unk>, reducing average deposit rates by 22 basis points.
John Greene: Direct to consumer deposits now account for 74% of total funding.
John Greene: Looking at other revenue on slide six. Non-interest income increased $20 million or 3% driven by an increase in net discount and interchange revenue.
John Greene: Looking at other revenue on slide six.
John Greene: Noninterest income increased $20 million or 3% driven by an increase in net discount and interchange revenue.
John Greene: The rewards rate was 140 basis points in the period, an increase of one basis point, driven by higher spend in the 5% category, which was largely offset by lower cash back max. Sequentially, the rewards rate was up five basis points from changes in the promotional category.
John Greene: The rewards rate was 140 basis points in the period, an increase of one basis points driven by higher spend in the 5% category, which was largely offset by lower cashback match.
John Greene: Sequentially the rewards rate was up five basis points from changes in the promotional category.
John Greene: Moving to expenses on slide seven. Total operating expenses were up $19 million or 1% year over year. looking at our major expense categories.
John Greene: Moving to expenses on slide seven.
John Greene: Total operating expenses were up $19 million or 1% year over year.
John Greene: Looking at our major expense categories.
John Greene: Compensation costs increased $64 million or 10% primarily due to higher wages and benefits and proactive employee retention activities. Information processing increased $17 million or 10% as a result of technology investments related to software and increased systems use. and other expenses decreased $59 million from a $45 million reduction in anticipated civil penalties and a $20 million decline in legal fees.
John Greene: Compensation costs increased $64 million or 10%, primarily due to higher wages and benefits and proactive employee retention actions.
John Greene: Information processing increased $17 million or 10% as a result of technology investments related to software and increased systems usage.
John Greene: And other expenses decreased $59 million from a $45 million reduction in anticipated civil penalties and a $20 million decline in legal fees.
John Greene: Moving to credit performance on slide eight. Total net charge offs were 4.99%, seven basis points higher than the prior year and up 35 basis points from the prior quarter.
Moving to credit performance on slide eight.
John Greene: Total net charge offs were 499% seven basis points higher than the prior year and up 35 basis points from the prior quarter.
John Greene: Excluding the impact of the student loan sale, the net charge off rate would have been down 24 basis points year over year. In CARD, net charge-offs increase 44 basis points from the prior quarter, primarily driven by normal seasonal trends.
John Greene: <unk> the impact of the student loan sale. The net charge off rate would have been down 24 basis points year over year.
John Greene: In card net charge offs increased 44 basis points from the prior quarter, primarily driven by normal seasonal trends.
John Greene: that 30 plus day delinquency rate continue to improve. declining in the quarter after plateauing in the second half of 2024. Personal loan net charge offs and delinquencies were stable compared to last Delinquency Formation, Vintage Performance, and Portfolio Trends remained positive.
John Greene: That 30, plus day delinquency rate continued to improve declining in the quarter. After plateauing in the second half of 2024.
John Greene: Personal loan net charge offs and delinquencies were stable compared to last quarter.
John Greene: Delinquency formation vintage performance and portfolio trends remained positive.
John Greene: Turning to the allowance for credit losses on slide nine. Our credit reserve balance decreased $215 million from the prior quarter. The reserve rate was relatively unchanged at 6.91% up for basis.
John Greene: Turning to the allowance for credit losses on slide nine.
John Greene: Our credit reserve balance decreased $215 million from the prior quarter.
John Greene: The reserve rate was relatively unchanged at $6, 91% up four basis points.
John Greene: Looking at slide 10. Our common equity tier one ratio for the period was 14.7% up 60 basis points compared to the prior quarter driven by core earnings generation, partially offset by the impact of the final Cecil phase in which reduced capital by approximately 43 basis points. We declared a quarterly cash dividend of $0.70 per share of common stock.
John Greene: Looking at slide 10.
John Greene: Our common equity tier one ratio for the period was 14, 7% up 60 basis points compared to the prior quarter driven by core earnings generation, partially offset by the impact of the final Cecil phase, which reduced capital by approximately 43 basis points.
John Greene: We declared a quarterly cash dividend of <unk> 70 cents per share of common stock because the planned closing of the merger with capital. One is may 18th we expect that holders of the discovers common stock will not receive any discover dividend, but will instead receive any dividend declare.
John Greene: Because the planned closing of the merger with Capital One is May 18, we expect that holders of the Discover common stock will not receive any Discover dividend, but will instead receive any dividend declared on shares of Capital One common stock, if they are holders of record of Capital One stock as of the applicable record.
John Greene: <unk> on shares of capital one common stock if they are holders of record of capital one stock as of the applicable record date.
John Greene: As it relates to 2025 trends, we have elected not to provide an update due to our upcoming merger. In summary, Our fundamental performance in the first quarter was strong, underscored by our robust net interest margin, strong credit performance, and healthy capital and liquidity levels.
John Greene: As it relates to 2025 trends, we have elected not to provide an update due to our upcoming merger.
John Greene: In summary.
John Greene: Our fundamental performance in the first quarter with strong underscored by a robust net interest margin strong credit performance and healthy capital and liquidity levels.
John Greene: Given the recent merger approval and anticipated closing date, this is likely Discover Financial Services final earnings call. I want to take this opportunity to thank the covering analyst and our shareholders for your support over the years and for your support of our merger with Capital One.
John Greene: Given the recent merger approval an anticipated closing date. This is likely discover financial services final earnings call.
John Greene: I want to take this opportunity to thank that covering analysts and our shareholders for your support over the years and for your support of our merger with capital one.
John Greene: We wish you all the best.
Wish you all the best with that I'll turn the call back over to the operator.
Margo: With that, I'll turn the call back over to the operator. Today's call has ended. Thank you for joining. You may now disconnect.
John Greene: Todays call has ended thank you for joining you may now disconnect.
John Greene: Okay.
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