Discover Financial Services(DFS) - 2024 Q1 - Earnings Call Transcript

Financial Data and Key Metrics - Net income for Q1 2024 was $308 million, down 68% YoY, primarily due to a$ 799 million increase in the reserve for remediation related to the card misclassification issue [10] - Excluding the remediation reserve, net income would have been approximately $915 million, with EPS of$ 3.50 per share and an efficiency ratio under 36% [11] - Net interest margin (NIM) was 11.03%, down 31 basis points YoY but up 5 basis points sequentially [11] - Total net charge-offs were 4.92%, up 220 basis points YoY and 81 basis points sequentially [16] - Common equity Tier 1 ratio was 10.9%, down 40 basis points sequentially [18] Business Line Performance - Card receivables increased 11% YoY, driven by lower payment rates and prior year new account growth [12] - Discover card sales declined 1% YoY, with the largest decline in the everyday category (supermarkets, gas, wholesale clubs) [12] - Personal loans grew 21% YoY, with 50% of Q1 originations used for debt consolidation [13] - Student loans were flat YoY, with the company stopping new applications on February 1 and targeting a sale closing in late Q3 or Q4 [13] - Direct-to-consumer deposit balances grew $3 billion, with average deposits up 18% YoY and 4% sequentially [14] Market Performance - Noninterest income increased$ 113 million or 19%, driven by higher net discount and interchange revenue, loan fee income, and transaction processing revenue from PULSE [14] - PULSE debit volume increased by $13.8 billion or 21% YoY [14] - Rewards rate was 139 basis points, down 2 basis points YoY due to lower cash back match and active management of 5% categories [14] Strategic Direction and Industry Competition - The company is focused on maximizing shareholder value through risk management, compliance, and customer service, while positioning for long-term value creation [7] - The merger with Capital One is progressing, with merger applications submitted to the Federal Reserve and OCC [8] - The combined company aims to be a competitive payments network and well-positioned bank, supporting customer financial goals and community commitments [8] Management Commentary on Operating Environment and Future Outlook - Management expects loan growth in low single digits, driven by declining payment rates and modest new account contributions [19] - Net interest margin is expected to range between 10.7% and 11%, reflecting fewer rate cuts and proactive deposit rate management [19] - Core operating expenses are expected to increase mid-single digits, excluding remediation and merger-related costs [20] - Net charge-offs are expected to range between 4.9% and 5.2%, with the base case at the lower end of the range [20] - Share repurchases are suspended, and dividends will not be increased due to the merger agreement [20] Other Important Information - The company increased its liability for the card misclassification issue, which is expected to advance the resolution of the issue [6][10] - The CFPB late fee proposal, if implemented, could result in a pretax reduction of around$ 600 million annually [15] - Compliance and risk management expenses for the year are expected to remain around $500 million, excluding remediation-related costs [16] Q&A Session - No Q&A session was held during the call, with questions directed to the Investor Relations team [3][4]