Good morning, everyone. Thank you for being here. Fireside chat with Roger Hochschild from Discover Financial, President and CEO. Also have the investor relations team here as well. Thank you very much for being here. The room's pretty full, but it's a little back-end-weighted. I just wanna start out by saying be courageous. We're open for questions. We're here for all of you. We have some topics that we'll go through to kind of assess the current health of Discover. To the extent that any of you have questions, just raise your hand and fire away. Roger, thank you for being here. Oh, sure. Thanks, thanks for having us. Again, it's really exciting to see people in person, not to check my vaccine card on the way in, so it's good to be back. Again, great conference you guys have put together. Good. Thank you. I guess we'll start it out and we'll get into some of the numbers, but I wanna have more of a strategic discussion as well. Let's just talk about the health of the consumer, what you're seeing, and maybe start it there, and we can go from there in terms of questions. Yeah, great question. As I think about the health of the consumer, it shows up in two ways for us. One is sales growth, and then the other is most importantly credit. For the prime consumer, they're very strong, right? Not where they were in the pandemic, where people had, you know, all-time record levels of liquidity. The biggest driver for us is unemployment. The robust employment numbers that keep coming out and we think the employment market's gonna remain robust for a while. That's very constructive for the prime consumer, and obviously we're benefiting in our business. Okay. Have you been surprised at all, the strength of the consumer? Little bit, right? I think you just read so much about inflation and the pressures, and there's so much noise about the economy. Again, it does come back to that employment market. You still see a lot of, you know, help wanted signs out there. For our consumers too, inflation is painful, but they can manage, right? They trade down. They'll shift their shopping basket. They won't be buying steak as much. They won't buy eggs as much. They won't go out to dinner as much. They can make their household liquidity work. Mm-hmm. Again, I'd probably say not too surprising, but just there is an awful amount of noise out there about the economy. Yeah. Okay. We were just talking earlier, and you talked about a Wall Street Journal article. The one I was gonna reference is yesterday, where the recession is six months away, and it's been six months away for about two years. You're obviously thinking about a recession, maybe planning for a recession. Do you see a recession, and does it really matter to the way you're thinking about running your business? It doesn't matter much. I mean, it is the old joke, right? The market has correctly predicted 20 of the last 4 recessions. Yeah. You know, we are a conservative lender, and we operate, you know, as if a recession is always coming because at some point, one will come. In terms of our credit criteria, for example, we use a through-the-cycle loss rate in all of our modeling. Where losses may be at a given point of time is less relevant. I think that lets us have more continuity in whether it's our marketing spend, our credit actions than some of our competitors where I see more dramatic changes. Mm-hmm. What we found is the ability to market through a downturn, the accounts you book during a downturn, right? Even in a horrific, you know, 10% unemployment, well, 90% of people are employed. So I think that everyday conservative approach to running the business has served us well. Okay. You said through the cycle, I wanted to ask the question, does the credit outlook really impact the way that you run the company when you think about some of the investments that you're making and some of the other, you know, thoughts around expenses and other investments? So in terms of the immediate forecast, not as much as one would think. You know, certainly in a higher loss environment, you'll cut back on marketing because if you narrow the end of the funnel, then some marketing channels or segments, if the approval rate starts coming down, won't make as much sense. We, we do aggressively manage credit all the time, so continuously looking at our portfolio, readjusting our new account criteria. We have been tightening credit at the margin, you know, starting last year and going into this year. Mm-hmm. Again, you know, as you saw, new account originations last year up over 20%, still strong marketing, the value proposition makes sense. I think, you know, in my mind, if an investment has a good return on, return, you should be making that kind of at all points in the cycle. Mm-hmm. Okay. We didn't talk about this, Eric, but I just have a curiosity. You had a couple of meetings this morning. What% of the time did you spend on credit? look, 20%. Not, not overwhelming. I would have expected more. Okay. Usually it's the first question, but we managed, you know, we talk about it a bit and then move on. Okay. I was gonna ask if you feel like people are too bearish. Maybe that answers the question. I don't know. I think, you know, a lot of times we're meeting with investors who know us well. Mm-hmm ... have seen the company operate through cycles. I mean, I'm in my 25th year at Discover. Mm-hmm. I've seen quite a few cycles come and go. Yeah, I think there's always a curiosity, and then especially around, well, what are you seeing with the consumers? Because they, you know, we'll, you know, see trends sometimes well before they're reported publicly. Mm-hmm. You know, in any lending business, I think it's hard to be too focused on credit. Yeah. I wanna talk about receivables and transaction volumes. Let's talk about receivables first. What do you think drove the strong growth in 2022? You've talked a little bit about it slowing. It feels like it's just more, use the term normalization. Talk a little bit about '22, and then what kind of expectations you have from there. Yeah. 22 was really an extraordinary level of loan growth, and I don't think is going to be sustainable. Our model was not built around 20% plus loan growth. you know, certainly the 23% increase in new accounts was very helpful. The strength of the consumer, you know, sales were up 16%. Mm-hmm. We also started seeing a normalization of the payment rate. One of the challenges during the pandemic was both the cutback in spending volume, but also how high the payment rate got. As that normalizes, that's very constructive for loan growth. Those are some of the trends that really drove our great performance across all products. You know, personal loans and home equity loans, there it was really an increase in demand. Mm-hmm. You hadn't seen much demand for either balance transfers or personal loans because people were paying down their debt so quickly that they didn't really think about restructuring it. Mm-hmm. That started changing over the course of 2022. Again, we feel good about what we saw across all of our different lending products. Mm-hmm. Okay. Sustainable growth rate for the company longer term? Um- Do you have a target in your mind? I do have a target in my mind. We haven't given a long-term target on growth rate. You know, I think below 20%, but obviously without loosening our underwriting standards. You know, we do have a very differentiated value proposition. It will vary. You know, personal loans, for example, is a product that you don't wanna grow too aggressively. At certain times in the cycle, you see faster loss emergence there. Mm-hmm. I think we'll start with credit discipline, and then after that grow as much as we can. Yeah. Okay. I wanna talk about personal loans in a bit. Let's talk about spending activity as well, kind of differences between the receivables growth and spending activity and what you're seeing there in transaction volumes. You're certainly seeing sales growth start to come down across the consumer. For February, year-over-year sales growth was down to about 12%. Still very healthy by historic standards, but obviously starting to come back. And I would expect that to come down a bit more in March as well. Obviously, you know, consumers are rethinking how much they spend. We're starting to see a bit of a shift across categories. Obviously less around consumer durables, more around day-to-day spending. Mm-hmm. Those are some of the impacts we've seen. On the other side, though, payment rates continue to normalize. As I look back at February, they're down to about 100 basis points above pre-pandemic levels. That's obviously constructive for loan growth. On the transaction volumes, it's tough comps, a little bit of a change in the mix, but nothing that you would say signifies a serious slowdown. Yeah. No, you know, certainly by historic levels that 12% is very robust, again, coming off some very tough comps to your point. Yeah. Okay. Good. Nobody's hands are up. Roger, we'll just keep rolling. Like it's like a boat. We're trying to get it to plan out to get people up to the front with their hands up. We've had a few people boldly come to the front of the room. Yeah. It's appreciated. It's really good. Vintages. Obviously, very large 2022 vintage. Talk a little bit about what you're seeing in the seasoning of the various pandemic vintages and some of your expectations there and kind of the timing on it. Yeah. Great question. Yeah, we had talked about losses normalizing. Yeah. Part of that is just, you know, the 21 and 22 vintages are now about 20% of our total loans. Mm-hmm. you know, traditional vintage, you know, they hit peak losses somewhere between 18 and 24 months. Yeah. That's part of the pressure we're seeing on delinquencies and charge-offs. You know, it's comparing to much smaller vintages we booked, especially in 2020, that were hitting their peak loss last year. Mm-hmm. you know, overall delinquencies through the first 2 months of the year are virtually dead on with our expectations. Okay. It is that seasoning normalization of the portfolio, but again, very, very much in line with what we had forecast. Mm-hmm. That aligns with your comment that potentially peaking later in 2023 from this 2022 vintage that's coming through. Yes. Yeah. Then normalizing. Well, I think, you know, the different 2022 vintage again, 18-24 months. Yeah. I think those comments were around sort of where overall losses may go. Mm-hmm. You also have the broader portfolio starting to get back to more normalized loss levels. Yeah. from the extraordinary low levels that the whole industry saw during the pandemic. Yeah. Okay. I feel like the industry's more prepared for a slowdown, better prepared from a credit point of view. Anything unique or different? you know, it is a consolidated industry with, you know, largely big, sophisticated companies. I think in general, I've seen good underwriting as I look across our competitors. Mm-hmm. You know, the more subprime-oriented players, I think will see challenges. Those segments of consumers are really feeling the stress from inflation. You know, they may also have more pressure on the top line, depending on what happens with late fees, because that'll impact the subprime players more. I would say beyond sort of one or two issuers that are big there, it feels like the industry is pretty well prepared. Mm-hmm. Okay. You brought it up, late fees. Let's give us the Roger assessment of late fees and the impact on your company. Yeah. It doesn't seem like it's a major concern of yours compared to others, but just, give us your latest thoughts on them. Yeah. So for us, late fees are around 3%-4% of revenues. Part of that is because, you know, I'd say the broad no-fee positioning we have, both across card but also our deposit products. We waive the first late fee for customers anyway. Mm-hmm ... have pretty generous policies if people call in to our customer service. I think it's very manageable for us. We'll see what happens and how it plays out. My guess is there will be litigation from either some of the smaller players or potentially some of the trade associations. Mm-hmm. Obviously, you know, for subprime and private label issuers, it'll be much more challenging. Right. Right. You, as you said, you have a more lenient policy. Yeah. I think that's part of why late fees are such a small% of revenue is not just our focus on prime customers, but also that leniency around when we assess them. Okay. Okay. I'm looking at here too, because of the stock price performance with the fourth quarter numbers and your new guide. I think about it. Tell me if I'm wrong here. I think about it, the big picture is we had GDP projections of flat going into the year. Real GDP is now 2.3. We had an unemployment rate of 3.7. We're now 3.4. It seems like it's maybe less worse from a credit and a growth, economic growth point of view. What's the likelihood that you guys come out and say, like you did last year, credit is a little bit better? We're in March, right? Everybody's waiting for this rolling recession. What's the likelihood for you guys that credit could come in at the lower end of the range? What would have to happen? Yeah. you know, we have pretty good insight into credit for the year, right? Because you have from the delinquency buckets the first six months. I don't think we've seen that much change in terms of economic forecast for the back half of the year. To the extent it's being driven by normalization of some of those vintages, that's a, that's a pattern we're pretty good at picking up. Mm-hmm. You know, as I look back at last year, you know, certainly, we outperformed compared to the guidance we gave at the beginning of the year. I think the consumer outperformed by a huge margin. I mean, I would guide you more towards, look, for the first 2 months of the year, everything is virtually dead on with what we, what we forecast. Mm-hmm. Good. I'm looking at Eric over the stock price too, so I don't blame you. I talked to him at the very end of the day. We had a 15-minute window. I was trying to get him to hang on to get it back to par for the day. It was close. Maybe a quarter. That was a fun day. Wasn't it a fun day? Every day is fun. Yeah. Okay. Got it. We were talking earlier about TransUnion being here before, they were talking about the high end and the low end and then the middle. They were talking about the resiliency of the middle. I want to ask you, just the prime revolver focus, top of wallet card for Discover, how do you think you benchmark from a credit point of view if you look at the masses in the middle? Not the high end, not the low end, but you feel like you'd be more resilient than peers in terms of the credit performance? You know, I think we have a great team in credit. I'm always suspicious of people who wand around talking about how their modelers and data is better than everyone else's modelers and data. I think, you know, I'm not gonna sit here and say we're so much smarter than a Chase or an Amex. They're very good companies. I think one of the things that helps us that doesn't get discussed much is our collections capabilities, right? We believe that you can actually manage sort of the Loss Given Default, especially if you've done a good job establishing a relationship with that customer. A big differentiator, from us versus even some of our largest competitors is not just the credit side, but our approach to customer management, the loyalty, and sort of superior customer experience that we provide, that serves us well when those customers are struggling too, and I think, you know, helps us outperform. Mm-hmm. You've made some serious investments there. Yeah. We continue. I mean, it's always been part of it. I I think we're the only big U.S. bank with a 100% U.S.-based customer service. All of our collections is in-house. Mm-hmm. That's a capability that truly takes decades to build in terms of the talented field management we have, as well as the sort of day-to-day line collectors and all the strategies that goes into it. Okay. A comment you made earlier, which I thought was interesting, you talked about your customer acquisition, and I think the receivables growth was a great number, but maybe there's some COVID-related rebound in there and some of the goods and spending differences. The 23% growth in accounts is a big number. How did you do that, and what is the competitive environment like today? Yeah. I'll start. The competitive environment. You know, the card business is always competitive, right? There's occasionally a couple months lag at the very, you know, depth of a downturn. Mm-hmm. Other than that, if you look at the returns, right? If you look at how banks are trying to grow high return assets, it is always very competitive. That's just the environment we deal with. I would say we've talked a lot about our investments around advanced analytics. Mm-hmm. The acquisition side is where those are really building, coming to fruition, both in terms of new modeling techniques, investments around the MarTech stack, so we have better attribution across the full funnel of marketing spend. It's just how well the brand and value proposition continue to resonate, especially with, I would say, the next generation of consumers. Mm-hmm. That all goes into, you know, how we think about acquisition, and that's probably one of the metrics I look at as most critical to the strength of the franchise long term, right? Is your brand well-positioned? Are you bringing in that next generation of consumers? Mm-hmm. Anything unique about 22 in that growth? Not really. Yeah, it was a strong year. What about the number? It was a good number on new accounts. We set some strong goals for new accounts this year. Maybe one thing that differentiates us a bit, we've been very successful with our secured card product. Great way for people to build credit. You know, a lot of competitors have a watered down product or, you know, charge fees. For us, same rewards program, same customer service that our prime customers get, and we added that if you pay on time for 6 months, we guarantee you will get back your security deposit. Proving very, resonates well with consumers because they like that predictability, and it's a great funnel in terms of helping people who are new to credit, you know, get to that unsecured product. Mm-hmm. Okay, good. I wanna talk a little bit about funding and deposits. Maybe the top of this would be your kind of debit checking refresh. Talk a little bit about that and what kind of expectations you have for that. Yeah. I couldn't be more excited about that product. I think rewards on debit is unique. We're really leveraging the exemption from Durbin that we have by having our own proprietary debit network. We're the only bank over 10 billion that gets the higher interchange levels. There are strong segments, especially younger consumers, who prefer using debit, getting rewards will be a big differentiator. We'll combine that with the great customer service, the, you know, really easy-to-use mobile app, all the other things that we're known for. I think over time, that'll be another very large entry point into the Discover franchise. Not saying as big as card, but certainly a lot of opportunity to grow there. We're really excited about that relaunch. you know, as we gave our marketing guidance, that includes sort of significant support with mass media as well. Mm-hmm. I think it's a huge product potential for you. Yeah. No, again, I think it'll be key and then over time become a platform for cross-selling, savings accounts as well as card. This is a low-cost core deposit account. Yep. One of the big advantages, I think traditionally people were very comfortable, you know, getting a credit card from anyone, savings account, but they wanted the physical presence of a branch bank for their core checking. I think that really changed during the pandemic, and people are much more comfortable, even with their core checking account, having that be a remote relationship. Mm-hmm. I think we're hitting the market at just the right time. Yeah. Okay. Unscripted. I'm so old, Roger. There was pre-Durbin, like covered banks where you could swipe your debit card and get one free phone minute for every transaction, and people used them. Yeah. I watched this debit rewards product really work pre-Durbin, and I think it could. Yeah. It's huge. No, I think there's a lot of potential. Yeah. You mentioned another thing, the differentiation between you and the typical brick-and-mortar banks. We've seen some of these other banks come out, and they've kind of done a hub and spoke type setup. It feels like there's a maybe a funding or a deposit cost gap between you and a traditional bank. Is any kind of pricing advantage on deposit pricing that you might have? Yeah. I mean, I think you're seeing that play out in the deposit marketplace, to your earlier question as well. You know, because we don't have the high costs of a branch network, we can invest in providing a better rate for consumers. Mm-hmm. There really are two deposit markets. There's the direct market with higher rates on savings accounts and other products, there's the branch market. I think those have gapped out. While it wouldn't make sense for a consumer to shift from a branch bank to Discover when our rate was 40 basis points, now that it's 3.5%, you're seeing very strong flows. Mm-hmm. As an example, January was an all-time record month for us for inflows into deposits, a little over $2 billion. saw very strong flows in February as well. I think that that points to a real challenge that the banks are facing because it's not easy to reprice their portfolios. Mm-hmm. Hopefully it'll be constructive for betas, for the direct players as well, in the coming rate increases. Okay. Few minutes left. Any questions? It's interesting you brought up the term beta. It's all we talk about with the commercial banks today because they're obviously, you know, you're forced to be on your front foot in terms of gathering deposits, and they're very behind. It's topic number one for the commercial banks. Yeah. Well, I think compared to a lot of their banks, our NIM is a little different too. Absolutely. more of a ability to absorb higher rates. Mm-hmm. Are you seeing any easing in deposit pricing? You know, it's hard to say, but as I look at the other direct players, it does seem to like we've stalled out a bit around the 3.5% rate for the savings account. Mm-hmm. I think it's a combination of, again, the vast amount of flows that are coming from traditional banks to those direct players. Also, some of the direct players aren't seeing the same asset growth-. Mm-hmm. Their demand for deposit may be declining. Feels like the price competition has softened a bit. Okay. Good. Capital philosophy priorities, we can talk about the buyback as well, just, you know, bigger picture, how are you thinking about capital? Yeah. Yeah, we set the 10.5% target capital ratio. You know, that's kind of through the cycle, so it isn't as if in a period of stress we'll feel like we need more capital. There are a lot of buffers already built into that. You know, in general, we're not a big M&A shop. We, we try and be pretty disciplined, and focused on price. I think you can expect to see a continued, you know, hopefully measured cadence of increases on the dividend. Also a lot of focus on that buyback as a way to return excess capital to our, to our owners. Mm-hmm. Now obviously, you know, to the extent we're seeing significant organic growth, that'll impact. You know, that's our top priority for use of capital, and that'll impact what's available for buyback and how quickly we get to that 10.5% CE1 ratio. Mm-hmm. you know, clearly, that's a model we've used around how we think about capital for many years. Mm-hmm. The buyback is a large buyback. This is my editorializing. It's a large buyback. You won't likely exhaust the authorization. What is your thinking for beyond June thirtieth? How should we think about that? Yeah, I would just say we are focused on getting to that target capital ratio. Mm-hmm. To the extent the board needs to, you know, my expectation would be authorizing, you know, subsequent buybacks as we move towards hitting that target capital ratio. Mm-hmm. Okay. Any other new initiatives that you wanna talk about that we haven't covered here, Roger? No, we covered a lot of them. Talked about the deposit products. I guess, you know, one of the things you've heard a lot from us, and I don't seem to hear as much about it from our competitors, just that ongoing focus on data and analytics, right? If you think about our business model, everything is built around a decision, whether it's fraud, whether it's who you approve, who you decline, whether it's marketing, targeting, personalization. So the ability to leverage vast amounts of data and new analytic techniques is something that, you know, I remain really excited about in terms of how much potential there is to improve our model. Mm-hmm. I think it'll be viewed much the same way as technology spend. The banks that don't keep up on the data and analytics side will fundamentally become uncompetitive in lending businesses. Mm-hmm. Okay. Last call for questions. We gotta have at least one question. Do you want me to call on people? We could. In relation to CBW Bank. When we built our own card switch, which is unlike other banks, we actually integrated the Pulse with the hope that Pulse would give us both the financial and non-financial switching, which I don't know you talked about today, but the non-financial switching capability in Pulse actually has turned out to be very useful in some use cases for us. What's your roadmap on the debit network? Because debit network, to me, is like the IV injection into a patient where you can put both vitamins and medicine into a bank in a legacy core banking. What's your roadmap on that? How are you thinking about it? Yeah. Great question. The payment services part of our business doesn't get discussed as much, right? Part of it is, it is a much smaller percent of our overall earnings. We think it's a huge strategic advantage, not just what it does for our own proprietary card issuing and as we talked about the debit side, but just, you know, great source of income for us. You know, competition is tough in debit, right? Visa and Mastercard are formidable, but there are many players that are looking for an alternative ability to customize superior economics, as well as just having an alternative to Visa and Mastercard. I think, you know, given the change in ownership that happened, you know, quite a ways back now, you know, banks no longer view them as the partners they once did, and that opens up opportunity for us. You know, through Pulse, we have relationships with thousands of banks. Leveraging Diners Club, we have relationships now with both our own franchisees, but probably know more about connecting payments networks than anyone in the world. A lot of very exciting opportunities on the payment side of the business as well. It's a great point. Good. A quick question. If we were sitting here, 12, 18 months ago, Buy Now, Pay Later, I think was a much bigger topic and potential threat. I'm just curious what you're seeing in the industry today. Yeah. I think our answer, though, was the same 12-18 months ago. you know, I think we had said that we did not see evidence there was a viable economic model. That has, I think, proved itself out, that the merchant take rate would not sustain itself. you know, in a more normalized interest rate scenario and with more normalized losses, that the business model will not hold up. I do think that there will be segments that are more like traditional sales finance. in general, there's very little overlap between Buy Now, Pay Later portfolios and prime cardholders. The vast majority of their customers are people who don't have access to traditional credit. I think it still remains to be seen whether or not there is a viable business model there and how big it is. Certainly, we're watching the potential wallet integrations carefully, and that may change somewhat. Again, we are no more excited about Buy Now, Pay Later now than we were 18 months ago. To summarize, moderating growth and transaction volumes back to a more normalized positive level. No real change on credit. Feeling comfortable with where you're sitting today. Optimistic about new business initiatives and active buyback. Yeah. Comfortable enough to be active on the buyback. Oh, definitely. The one thing I'd say on the growth side, you know, moderating sales growth, but the normalization of the payment rate is very constructive for loan growth. Mm-hmm. Probably better performance on loan growth than sales growth. Okay. Fair enough. Thank you, Roger. Appreciate it. Thank you. Thanks, everyone.