Discover Financial Services (NYSE: NYSE:DFS) reported a 17% increase in revenue and strong asset growth in the third quarter of 2023, according to Interim CEO John Owen during the company's earnings call. Owen also unveiled the launch of a Cashback Debit product and a new national advertising campaign featuring Jennifer Coolidge.
Key takeaways from the call include:
- Discover reported a net income of $683 million, with CFO John Greene noting a provision expense increase of $929 million and strong loan and deposit growth.
- The company's reserve rate increased by 22 basis points to just over 7% due to a modest deteriorating macroeconomic outlook and increasing delinquencies.
- For the year, Discover expects mid-teens loan growth, an 11% net interest margin, low double-digit operating expenses, and net charge-offs between 3.4% and 3.6%.
- The company is considering several candidates for the CEO position.
In terms of vintage performance, the 2022 vintage was reported to perform slightly worse than the 2021 and 2023 vintages, although it remained highly profitable. The company plans to adjust reserves accordingly for the 2024 vintage and expects charge-offs to peak around the midpoint or second half of 2024.
Discover also discussed ongoing work on risk management compliance capabilities, stating that they have made significant investments in this area. The company is awaiting feedback from regulators on the card misclassification issue.
On the topic of expenses, Discover reiterated its guidance for 2023 and stated that they will continue to focus on efficiency and disciplined allocation of expense dollars. The company also noted that they are seeing differences in performance among customers who historically transact or revolve their balances.
In terms of competition, Discover noted that the lower FICO bands are less competitive, while the upper prime segment remains very competitive. The company expects peak losses to stabilize for a few quarters before coming down, and sales volumes were reported as relatively flat, with slower growth in new accounts but potentially faster network volumes.
Accounts from 2021, 2020, and 2022 are starting to revolve more, bringing the revolve rate back to historical levels. Early indications suggest that the 2023 vintage is performing very well, while 2022 is performing well but not as well as 2023.
Discover expects delinquencies to slow in the first half of 2024, and if they don't, it may indicate significant consumer stress. The company also stated that it is mindful of credit risk and underwrites carefully in these segments.
The company expects sales growth to be relatively modest in the lower single digits next year, with changes in spending patterns. Debit transactions have been growing well due to their PULSE business.
Discover has been updating their models and refining their underwriting process, focusing on risk identifiers such as savings rate, household net worth, and credit balances. They are also using machine learning models for contact strategies and channels.
Discover's capital priorities remain focused on generating positive earnings, investing in the business, and returning excess capital to shareholders. They expect to continue generating high returns on equity and manage capital levels effectively.
Discover anticipates maintaining historical growth rates and considers their Cashback Debit product to have significant potential for growth. The company is not seeing significant deterioration in credit and has low delinquency rates. They mentioned that the resumption of buybacks will depend on progress in remediation and negotiations with merchants, discussions with regulatory agencies, and a review of their capital position.
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