Release Date: July 18, 2024
For the complete transcript of the earnings call, please refer to the full earnings call transcript.
Positive Points
- Discover Financial Services (DFS, Financial) reported net income of $1.5 billion, up 70% from the prior year quarter.
- The company entered into an agreement to sell its private student loan portfolio, simplifying operations and business mix.
- Net interest margin increased to 11.17%, driven by lower card promotional balance mix and normalized receivables growth.
- Personal loans were up 13% from the prior year period, reflecting prudent underwriting adjustments.
- Average consumer deposits increased by 15% year over year, indicating strong liquidity management.
Negative Points
- Discover Card sales were down 3% compared to the prior year, with lower spending at restaurants impacting sales volume.
- Total operating expenses increased by 23% year over year, driven by charges for expected regulatory penalties related to card misclassification.
- Credit losses are expected to peak and plateau during the second half of 2024, indicating ongoing credit risk challenges.
- The company experienced a decline in student loans by 1% year over year, reflecting a challenging market environment.
- Professional fees increased by 37%, driven by higher recovery fees and investment in compliance and risk management.
Q & A Highlights
Q: Can you provide more details on the agreement to sell the private student loan portfolio?
A: (J. Michael Shepherd, Interim CEO) On July 17, we entered into an agreement to sell our private student loan portfolio to affiliates and limited partners of Carlyle and KKR. First, Mark, a division of Nelnet, will assume responsibility for servicing the portfolio upon sale. This agreement is a significant milestone in simplifying our operations and business mix.
Q: What are the financial implications of the student loan portfolio sale?
A: (John Greene, CFO) The sale will be completed in four tranches by the end of 2024. The purchase price is at a premium to the principal balance and varies depending on closing timing, interest rates, and other factors. We will no longer maintain a credit reserve for student loans, and future student loan net charge-offs will be recognized through operating expense rather than credit losses.
Q: How did Discover's net income perform in the second quarter of 2024?
A: (John Greene, CFO) We reported net income of $1.5 billion, up 70% from the prior year quarter. This was driven by revenue expansion from loan growth, higher net interest margin, and non-interest revenue growth. Excluding unusual items, net income would have been approximately $915 million, with an EPS of about $3.63 per share.
Q: What were the unusual items impacting the quarter?
A: (John Greene, CFO) The unusual items included an $869 million student loan reserve release, a $26 million gain from the sale of our Lake Park facility, a favorable litigation settlement, and a charge for expected regulatory penalties related to the card misclassification matter.
Q: Can you elaborate on the card misclassification litigation settlement?
A: (J. Michael Shepherd, Interim CEO) We have entered into a settlement agreement to resolve the merchant class actions associated with the card misclassification litigation, subject to court approval. The settlement will resolve claims by parties affected by the card misclassification, including merchants, acquirers, and intermediaries. Our current remediation reserve is sufficient to cover the expenses under the terms of the settlement agreement.
Q: How is the pending merger with Capital One progressing?
A: (J. Michael Shepherd, Interim CEO) Capital One continues to lead the integration planning process, and the teams are working well together on integration planning and regulatory applications. Upcoming milestones include a virtual public hearing hosted by the Federal Reserve and the OCC, the completion of the written comment period, an in-person public hearing with the Delaware State Bank commissioner, and the filing of the definitive merger proxy. We expect shareholder votes to occur this fall.
Q: What is the outlook for credit performance in the second half of 2024?
A: (John Greene, CFO) Credit continues to perform in line with expectations, supporting our view that losses are near peak and will plateau during the second half of 2024. We expect some variability in monthly card losses due to seasonality and various credit management actions, but our broader outlook for losses to generally peak and plateau this year remains unchanged.
Q: How did Discover's net interest margin perform in the second quarter?
A: (John Greene, CFO) Our net interest margin ended the quarter at 11.17%, up 11 basis points from the prior year and up 14 basis points sequentially. Margin expansion was primarily driven by a lower card promotional balance mix as anticipated receivables growth continues to normalize from its early 2023 peak.
Q: What were the key drivers of non-interest income growth?
A: (John Greene, CFO) Non-interest income increased by $313 million or 45%. Discount and interchange revenue was up $67 million due to lower rewards costs. Other income increased due to unusual items, including the litigation settlement and the facility sale. On an adjusted basis, non-interest revenue grew by 14%.
Q: What are the expectations for compliance and risk management expenses for the full year?
A: (John Greene, CFO) Our expectation for compliance and risk management expenses for the full year remains in the $500 million range, with an upside bias. This figure excludes card misclassification-related costs.
For the complete transcript of the earnings call, please refer to the full earnings call transcript.
