Discover Financial Services(DFS) - 2020 Q2 - Earnings Call Transcript

Financial Data and Key Metrics Changes - The company reported a net loss of $368 million or $1.20 per share, primarily due to a $1.3 billion reserve build reflecting a deteriorating macroeconomic outlook [9] - Revenue, net of interest expense, decreased by 7% in Q2, driven by lower net interest income and decreased sales volume [14] - Net interest margin (NIM) was 9.81%, down 66 basis points year-over-year, influenced by lower loan yields and average loans remaining flat [14] - Operating expenses were flat year-over-year at $1.1 billion, but down 6% excluding a one-time impairment charge [10][16] Business Line Data and Key Metrics Changes - Sales volume decreased by 16%, with a 3% decline in car loans, although the company performed better than competitors due to a focus on everyday and online spending [9] - Gross discount and interchange revenue decreased by 18%, partially offset by a 16% decrease in rewards costs [15] - The provision for credit losses was $2 billion, including net charge-offs of $767 million, which were up 7% from last year [15] Market Data and Key Metrics Changes - Total card sales volume decreased by 16% in Q2, with a peak decline of 33% in mid-April, but showed improvement as the economy reopened [20] - Retail sales were up 7% in Q2 and 15% in the first half of July, driven by strong online spending and home improvement categories [21] - The company has seen a 70% increase in contactless spending since the end of 2019, indicating a shift in consumer preferences [11] Company Strategy and Development Direction - The company is focused on maintaining a strong financial foundation and is committed to expense reductions of $400 million while investing in core capabilities [10][25] - The strategic emphasis is on digital capabilities and contactless payments, aligning with consumer trends towards online shopping and remote commerce [11][33] - The company plans to continue supporting impacted customers through programs like Skip-a-Pay, which has helped over 662,000 customers [8] Management's Comments on Operating Environment and Future Outlook - Management expressed confidence in the company's ability to navigate the challenging environment caused by the COVID-19 pandemic, emphasizing the importance of employee safety and operational flexibility [6] - The company anticipates some deterioration in consumer credit in the coming quarters but remains optimistic about its credit performance and overall stability [18][25] - Management highlighted the importance of government stimulus in supporting the economy and mitigating potential losses [55] Other Important Information - The common equity Tier 1 ratio increased by 40 basis points, and the company has a strong liquidity portfolio with $27 billion in liquid assets [23][24] - The company suspended its share buyback program in response to the economic environment and continues to pay a quarterly dividend of $0.44 per share [23] Q&A Session Summary Question: Reserve build and future expectations - Management took a conservative approach to reserve building, indicating that further increases would depend on economic conditions and balance sheet growth [29] - The impact of the Skip-a-Pay program on delinquencies was modest, with a small benefit observed [31] Question: Permanent changes in the industry - Management noted an acceleration of trends towards digital channels and contactless payments due to the pandemic [33] Question: NIM outlook and market share - NIM is expected to stabilize, with the second quarter likely being the trough [36] - Management feels confident about gaining market share as conditions improve [37] Question: Borrowers exiting forbearance - Approximately 80% of customers exiting forbearance are making payments, indicating a positive trend [41] Question: Comparison to the Great Financial Crisis - Management highlighted that the current consumer financial position is stronger than during the Great Recession, with better quality originations and lower delinquency levels [47][48] Question: Charge-off expectations - Elevated charge-offs are expected to begin in late 2021, with a gradual increase rather than a sharp spike [53][62]