Okay, thanks very much for joining us this morning. I have a quick disclosure to read. For important disclosures, please see the Morgan Stanley Research Disclosure website at morganstanley.com/researchdisclosures. The taking of photographs and use of recording devices is also not allowed. If you have any questions, please reach out to your Morgan Stanley sales representative. Well, with that out of the way, good morning. Thank you so much for joining me. Good morning. John Greene, CFO of Discover. Exciting to have you back. Yes, it's great to be here. Thanks so much for joining us. Appreciate it. Yeah. Let's just start with the big picture, and maybe you can give us your sense of your view of the consumer right now. How do you see their financial health? Interestingly enough, the consumer and the economy is actually continues to remain strong. I would say we are seeing signs that the consumer is becoming more cautious. We've seen kind of changes in spend levels from dramatic year-on-year growth, April of last year versus what we saw this April and into May and early weeks of June. Certainly, the spend levels is more cautious in coming down. Savings rate, we've seen come down overall. Credit in terms of payment rate has actually been strong. From April to May, our payment rate actually increased, which was a little bit ironic. Some of that could be seasonal from kind of, the tax season in April, people making payments to, in May, perhaps receiving refunds. Overall, those factors indicate, a general level of stability with credit being strong, employment levels being strong. Even those folks that are impacted by an employment issue, they're able to find jobs right now in the market pretty quickly. As long as the outlook for employment remains strong, we feel pretty good about the overall situation in terms of credit and the economy and the consumer. On your comment around spending becoming more cautious, is it possible to put some numbers around that? Yeah, for sure. I'll talk about April to April, and then I'll give some views on early June, a little bit on May. April last year over year, spending was up about 22%-23%. This April, overall spend levels were up 3%. When you adjust for inflation, actually real spend, actually negative. That trend continued into May and has continued into June. Now that's versus the first quarter, where we saw overall spend up year over year, about 9%. Interestingly enough, the area with the most significant decrease in spend has been fuel. Now, that was a price-led decrease, that was down, 20 about 20%. where everyday categories overall, down about 2%-3%, and then the rest of the spend categories, pretty consistent, 2%, 3%, 4%, 5%. The two categories that, interestingly enough, were up were restaurants, then activities. People are saving money, it looks like, in petrol, and they're spending it eating and drinking and going to events right now. You have a little bit of a skew towards gas relative to peers, right? We do, because we're the everyday categories are really important for Discover, and that actually creates some stability over time for the spend pattern. Okay. Then just trends in May. Yeah. -April. May is pretty consistent 3%. The category breakdowns, I don't have committed to memory at this point. Right. Right. Early indications, June, basically about the same level, 3%. Okay. As we think about competitive conditions currently, maybe you could give us a sense as to what you see. Has anything changed with regard to either on the loan side, do you see folks leaning in, pulling out? Especially given some of the failure of the banks earlier this year, wanted to see how that's impacting you and your business? Yeah. Co-competition actually remains strong, but what we did see most recently is it abating mildly. Some data that we see coming through the aggregator sites show less activity, which means that either the credit appetites aren't as strong or the level of investment dollars available that people want to put to work is less than we've seen over the past 6, 8 months. Now, that ebbs and flows overall, I would say there are general signs that the competitive environment, in terms of new account acquisition, is getting mildly less intense. Still intense for prime customers and especially the super prime area. Overall, rewards competition, you see less advertisements in terms of rewards, right? Folks are less likely to be fighting based on a rewards basis. You know, we've been really consistent no annual fee, cashback, rotating 5% categories that has served us well and allowed us to maintain our rewards cost, I'll say rewards cost efficiency, at a high level. Okay. Just to make sure I understand, were you saying that the competition, in particular for the high end, the prime and the super prime, was? We saw indications that that is still there, the lower end, so go mid quartile to lower quartile, less significant. Got it. There's indications that there's been some level of pullback. Pullback from the lower end. Yes. in particular? Yes. Let's switch to loan growth. Just wanted to get a sense as to how we should be thinking about loan growth here. You recently increased your loan growth guide from low double digits to low to mid-teens. Yes. I would call that an increase, right? Yes. The monthly data shows that loan growth is still very hot. I think the data from last night showed 21% year-on-year. Yeah. I wanted to understand how you're thinking about loan growth as we go through the rest of the year. you know, part of the reason for asking the question is, you seem to be tracking even higher... Yeah you know, the outlook that you've got for full year. Yeah. That updated guide remains our best estimate of where we think overall loan growth will be. Now, a couple factors coming into play here. certainly we had a real successful 21 and 22 vintage in terms of generating loan growth. We about 6 to 8 months ago, began to have a more cautious outlook on the economy, and we cut some of the lower segments. We're still experienced the benefit from the 21 and 22 vintages maturing. Mm. Also what we're seeing is the payment rate, while it's still 200 basis points higher than what we've seen pre-pandemic, we do expect that to moderate, and that moderation that has happened so far has actually been positive for loan growth. Right. We've also seen in the first quarter, that 9% sales growth, positive for loan growth overall. Finally, just normal seasoning of the rest of the portfolio, has benefited overall loan growth. As we get into the second part of the year, we have tougher comps, right? We had a lot of growth in the second half of 2022, which will make those comps come in more in line to the overall call it teens that we talked about. Got it. Okay. There's no indication there of needing to change your underwriting or anything like that? No. We on the card side, as I said, 6, 8 months ago, we pulled back on the riskier segments. You know, our through-the-cycle underwriting kind of process is we were leaning into the kind of late cycle as we thought about originations for 2023 and the end of 2022. You know, we're very comfortable with that. Now, on the personal loan side, the book is about $9 billion. We've had great growth there. We are looking at a couple segments, subsegments that we are considering pulling back on. Now, the size of that won't even be visible in the financials. Mm. The overall point is we're remaining appropriately conservative in terms of underwriting standards and continue to look at subsegments to identify areas where there's highest risk, and if there's opportunity, we try to find those and lend into those. Subsegments, we're talking about kind of a FICO score or? It's a combination of FICO and other customer attributes that we use to make a determination on who we're going to give credit to and who we're not. Okay. We have an internal credit score that we use that loosely kind of maps to FICO, but there's different attributes in there that we think have given the company an ability to lend through the cycle maybe differently than some other lenders. You want to spill your secrets here? We can't do it today. Some other time. Understand. Okay. While we're on the topic of loans and credit, why don't we flip to credit and then after that, move it to funding? On the credit side, you did during 1Q earnings narrow your 2023 net charge-off guide by about 10 basis points, I think, right? Yeah, we did. Yeah. Okay. It was at 3.5%-3.9%. Now it's 3.5%-3.8%. Yeah. Right. Okay. And you did indicate that we could see more tightening over the course of the year. When, again, we looked at the master trust and managed data that you put out last night your net charge-off running within that range at this stage, right? Exactly. I guess the question I have is, do you feel that this is at pace net charge-offs here through the end of the year, or is there an opportunity for us to even have tighter NCO performance? Yeah. We've been really pleased with our portfolio and the performance, and frankly, our models and the predictive power of our models. They track internally. Every month, we'll have a comparison to budget or forecast. The charge-off numbers tends to be the most volatile, and we have been, like, smack on. That's kudos to the modeling teams that do the work, and operationally, no surprises that have created any deviation, which is great. You know, what we're seeing right now is if we take that existing range and I'm comfortable saying we're going to be at the midpoint to the lower end of that. Mm-hmm. -that updated range. We'll give more more specificity, on our earnings call coming up. overall credit's performing exactly how we were hoping it would. Okay. Can we flip to the reserve then? Because in 1Q, there was a reserve build. It was about $385 million. Yeah. A slightly higher reserve rate. I'm sure you know, the whole debate on the street is, hey, under a CECL environment, you set the reserve, your expectation of the macro events come through, and therefore, shouldn't the reserve rate just stay flat like we. There's been some question as to how should we think about the reserve ratio from here, given the fact that I think your outlook for the reserve is a 4.5% to 5% unemployment rate, is that? It is, yeah. Right. Yeah, it is. It does contemplate scenarios north of 6 out into the future. That would be the exit rate to 2023, and then into 2024, scenarios into the 6. You know, unemployment has come in favorable. You know, I think the probability of exiting 2023 somewhere in the 4.5 range, impossible. You know, that lower end of the range, we could be closer to that. That gives us a level of confidence in terms of what we think life of loan losses could be. There are views, that we're working through internally in terms of what are the implications, not for 2023, but 2024. Are we talking about kind of the loss trajectory, essentially just moving out, a quarter or two, three or four? We'll continue to work through it. Overall, context to kind of our outlook on the economy in the first quarter, certainly, we had those bank failures. We expected the lending environment to tighten. We expected credit to be impacted by that. We do see signs that the lending environment is tightening. We haven't seen any signs, at least within our portfolio, that there's implications from that tightening to translating into delinquencies and losses. The macro seems to be generally improving, is my view today. Implications for reserves. We haven't gone through our process yet, so I can't say specifically what I think will happen. you know, at least where I sit here today, I'm not seeing more negative than positive. I'm actually seeing slightly more positive elements than negative. Maybe just to, I have one last question on this. We think about what happened in 1Q that drove you to raise that reserve, what would you say that, you know? Yeah -of factors were? In terms of dollars, certainly it's portfolio growth. We'll certainly see a reserve increase, reserve dollar increase because of loan growth. The view of the macro, actually, from year end to the first quarter got slightly more negative for us. Right. As a result, there was a mild increase in reserve rate. Right. I'm saying today, where I sit, I feel like it's slightly more positive. I don't know if it's going to offset. You know, what we tend to do is be conservative on these factors, to ensure that we're not in a situation where, well, first and primarily, that we can't support it under GAAP, and then secondly, we don't want to see any gyrations of the reserve that just don't make logical sense. Right. Last one on credit. Student loan moratorium is going away. Should be, right, this year? Maybe. In the next couple of months. Yeah, yeah. How do you think about that, factoring it into the out that you have on credit quality? Yeah reserves? When we kind of did our modeling and the resulting guidance that we provided, you folks we contemplated the risk of the student loan moratorium going away. You know, we've done some modeling on that, and the models haven't been tested because we've never been through this situation before, but it looked like, possibly, $200 million-$400 million of charge-offs. Now, that would be, you know. Mm-hmm. -late 2023 at the earliest and likely 2024. That is not so significant that it's impacting the loss trajectory of the portfolio overall. Kind of the main message here is the growing conviction in terms of how we're seeing the overall portfolio perform this year and guiding to the kind of middle to the lower end of the range. You know, the student loan impacts will be $200 million-$400 million it's a meaningful number, but not something that... the earnings capability the firm can absorb easily. You know, we expect to be able to continue to kind of watch that and see where it turns out. It's not a big concern factor, but it's something that we've spent some time looking at to make sure it shouldn't be a big concern factor. Got it. Okay, that's very clear. Thank you. Yeah. I did want to spend a little time here on funding. Your loan growth, as we discussed earlier, very strong. Funding also, right? Average deposits in 1Q is up 6% Q on Q. I guess the question here is: how are you thinking about funding the growth that you do have? In particular for deposits, how are you thinking about the competitive environment, betas, and how that factors into your 2023 net interest margin outlook? You know, the brand's held up really, really well. In March, when we had those bank failures, we had actually one of the best months in the company's history in terms of generating deposits. We haven't traditionally competed on price. What we competed on was a value proposition, kind of our digital technology, and then high level of customer service. The brick-and-mortar banks have traditionally competed on convenience and trust. The trust aspect has been impacted by those bank failures. Convenience, when you think about how we operate today digitally, the convenience factor doesn't come into play. Institutions such as us, I think are really well positioned competitively to be able to attract deposits, generate a high value proposition, manage the cost of deposits very well relative to the net interest margin that the firm is able to generate. Overall, while the failures have created, what I'll say, more competitive tension at the brick-and-mortar institutions, within the space we operate has been relatively consistent. You know, in our betas, I know folks pay a lot of attention to that. What we try to do is certainly not be a price leader, compete on other factors, and the beta, the way it's shaking out, somewhere between 60 and 70. It looks like it's going to hold. That 60-70 is spot today, is that right? Yeah. To year to date. Yeah. Year to date. Yeah. Yeah. Yeah. Okay. I did want to shift over to expenses and just highlight that you previously maintained your full year guide for OpEx growth of less than 10%. You did notice some upward pressure, some risk of upward pressure. Yes. you know, to that number. Can we just go through a little bit of the puts and takes there? What is it that you're seeing that you wanted to call that out? Yes. We've been able to invest in new customer acquisition and marketing at, frankly, at a high level, because we saw a high level of growth opportunity for the firm. We continue to be positive in terms of the ability to generate positive new account growth and at high returns for the company. We'll continue to do that. We also are launching the Cashback Debit program or product, which we're going to put marketing dollars behind. That will result in the level of expense to support those efforts greater than the 10%. The overall, the rest of the cost base, we've over the years, have tried to kind of manage that to make sure we get the highest level of return for every dollar investment. We have invested significantly in compliance and Compliance Management System. Since 2019, as you know, we had a consent order back in 2015, another one in 2019, and we're trying to manage through the details of that. From 2019 to what we expect this year, kind of the increase in risk and compliance, $250 million to the firm. Mm-hmm. That's a big number. We expect that we're going to continue to invest so that our Compliance Management System meets our high standards and the high standards of the regulators. We got more work to go in order to get there. You know, our hope is that we're going to kind of manage through this, invest in kind of compliance and other opportunities to grow and make our systems more, I'll say, resilient, sustainable, and reduce manual processes. Over time, that may drive efficiency, but in the short term, next couple of years, we're going to be investing heavily in those areas. The 10% factor or 10% overall guide for expense growth we are seeing pressure on it. We'll see how the balance of this year turns. The key point here is invest where we have opportunity to grow and then also invest in Compliance Management and our systems to be able to maintain a high level of customer engagement and a high level of compliance. The $250 million you mentioned, that is dollars that you're spending for the risk and controls today? Yeah. Risk. Yeah. Just to be crystal clear, so if I look at 2019 spend versus 2023 spend is an incremental $250 million in risk, compliance, and investment in technology resources in order to kind of make sure our systems can operate the way we want them to operate. Okay. That $250 increase is in your run rate? It's in the run rate. Right now? It is. Okay. i the follow-up here is just on any levers that you would pull to manage that expense increase at all. Yeah. -that you're pulling back on to keep within this 10%? Yeah. Not yet. No. We still see, as I said, opportunity to spend dollars in terms of marketing to generate new accounts and launch the Cashback Debit program. You know, we do try to remain very, very disciplined in how we're spending our money. At this point, we're not pulling any levers in order to kind of hit a number. Okay. Because a couple different things. The earnings power of the firm has substantially increased over the past two years. We're looking at this as an opportunity to invest, to drive, medium and long-term profitability of the firm. One of the other questions that I got recently, from investors was on how you approach collections. Yeah. you know, what kind of costs are embedded there and how you think about managing that? Yeah, that's a great question. You know, the proposition of Discover has always been a high level of customer service, and part of the customer service is your collections. We're 100% US-based collections team, so no offshoring of collections. We've been able to generate productivity year-over-year within our collections operations, somewhere between 1%-4% year-over-year. That's overall customer service and collections. That has been as a result of improved tools, improvement in terms of how we interact. When folks call in, they'll get routed to the best tool for them, whether it's text, it's a online question and answer, or it's a call agent. That's all been important. The outlook for credit and the seasoning of the credit, we staffed up at the end of 22 in case there was going to be an issue in terms of a tougher credit cycle. We looked at that as a good investment in terms of put some $ upfront, handle any potential transition of the economy. Also, there was a high level of turnover at that time. We said, "Okay, we're going to staff up to be able to make sure that our collections queues don't get backed up. Mm. We've been able to do that. What we're seeing now is the ability to let some of natural attrition happen and reduce the number of customer service and collections people through this year. That number somewhere between 300 and 700 resources. If we see a change in the outlook we'll adjust that up or down. Got it. Okay. You feel that you're outperforming the industry based on how you're handling collections? Well, it's hard for me to kind of benchmark across the entire industry. You know, given the differences in the service models and differences in the level of touch required for a super prime customer versus a subprime customer. In that prime revolver space, in terms of what we're trying to achieve, we're very pleased with our collections operation. Just on the marketing side, you indicated you're leaning in, obviously, given the environment, given the risk-adjusted returns that are attractive. Can you give us a sense as to where those marketing dollars are going? I'm thinking about new account growth in card. You talked a little bit about the personal lines. Yeah. as well as the Cashback Debit that Yeah You just launched in May, right? Just last month, was it? We turned it back on. We haven't done any kind of broad marketing on that yet. Okay. That'll all be in the second half of the year. Got it. you know, organically, we're seeing, just people coming into our website and kind of grabbing the product somewhere between 1,500 and 2,000 new accounts a day. That speaks to the features itself. Yeah. We're pleased with how that's worked out here on the relaunch. In terms of other marketing spends, new account acquisition in the prime area. We're not doing near prime or subprime right now. Personal loans, again, prime, and we see opportunities there. The year-over-year account growth will come down. You know, we were in the 20s last year. You know, this quarter, we're tracking somewhere between the 3%-5% range of new accounts, off tough comps, reflecting kind of our change in appetite as well. We'll see how the rest of the year works out on that. Okay. That's new account growth, 3% to 5% year-over-year? Yes. Okay. Just last topic I wanted to hit on is capital. Last quarter, you announced the board approved a new $2.7 billion share repurchase program through June 2024. Given that you still have excess capital on your balance sheet since your CET1 is 12.3%, and I think the target is 10.5%, how should we think about the pace of buybacks here over the next several quarters? Yeah. You know, our intention is to kind of continue with our capital allocation priorities, which 1, invest in the business, to return excess capital to shareholders, and then 3, and it's a distant 3, if there were anything on the payment side, like a bolt-on capability, we'd invest there. It's really 1 and 2. In terms of the kind of the pace of buybacks we're on a pretty regular cadence right now, so we're comfortable with the kind of the overall payout ratio, which has been somewhere between 60% and 70%, and we expect it to stay there unless something changes, you know. Okay. How are you thinking about addressing some of the potential new rules coming down the pike? Obviously, there's expectations for new capital rules. Yeah. I think the end of this month. Obviously, we're going to pay attention. You know, at least our early read on it is, we're well positioned. You know, the liquidity coverage ratio, we already kind of do that. The incremental capital that we're talking, we're already well above the kind of capital minimums. Our binding constraint tends to be kind of the rating agency view versus kind of minimum capital levels. I feel like we're in a good position, and it's not going to have a great impact on us. We'll continue to kind of monitor it, and if something were to kind of change dramatically, we'll look at our capital allocation priorities and adjust it. Right. accordingly. On the liquidity coverage ratio, your point there was that it's probably something. We're already in compliance with... Right. no, no issue. Okay. In our last minute here, one topic that we didn't address, is on technology investment and how you're expecting that is likely to traject here over the next couple of years, particularly with regard to AI, the new I shouldn't say new. Yeah. -the current buzzword. Right. Could you give us a sense as to how you're thinking about that? You know, we're a digital bank, right? Technology is embedded in every single thing we do and how we deliver value to our customers. You know, we continue to invest in advanced analytics in terms of modeling for kind of revenue trajectory, loss trajectory CCARs, analytics in terms of new customer acquisition, and then AI to help us make sure we do right-party contacts and maximize the collection efficiency of our people within the call centers. All that will certainly continue. We're going to continue to invest in functions and features that make sense for our customers, and then we're also going to continue to invest in compliance and Compliance Management. Overall, the takeaway is we're going to try to be very, very disciplined in our allocation of expense dollars to those areas that we see will drive the greatest medium-term and long-term benefit to the firm. The trajectory, certainly clear, it is going north. With the advanced analytics and some of the capabilities that just came out with chatgpt we continue to take a look at that. We're not going to change our underwriting using those sorts of tools, but we do think that there's, down the road, some opportunities to drive some efficiencies in how we handle things from a call center standpoint or documentation preparation and analytics overall. We're excited about it, know I feel really comfortable with how kind of Roger and the board have positioned the company overall from that standpoint. Great. Well, John, thanks so much for joining us this morning. All right. Thank you. I appreciate it.