We're gonna get started now. Up next, we're excited to have Discover Financial joining us at the conference. You know, in what has been a challenging year, Discover has continued to deliver best-in-class growth as well as industry-leading efficiency and returns, while continuing to build out its direct bank. Joining us for the first time, I believe, here is- It is. CFO John Greene. Today's presentation is going to be a fireside chat. So with that, welcome, John. Ryan, thank you very much. Thanks for having me. So, you know, this year there have been several changes at Discover. You know, can you address whether these changes, you know, have changed anything around the company's broader strategic vision? And why do you think the company is well-positioned over the next 12-18 months? Great. Yeah, thanks for the question. So yeah, there have been significant changes. So we have obviously gone through a leadership transition. We're still in the process of finalizing that. We disclosed a significant amount of compliance issues, and we're working hard to kind of manage through that and get to a good spot with that. And then we recently announced the intention to exit our student loan business. So, you know, the quantum of change for Discover is huge, quite honestly. In terms of how that positions the institution going forward, so it allows us to kind of focus on transactional banking. So with the launch of Cashback Debit, we feel like that's a powerful new entryway for new customers. It allows us to kind of reallocate resources to kind of strategic priorities around our credit card, personal loan, and other transactional lending products that make sense, while generating, you know, a high level of capital returns. So my sense is, with the exit from student loans, it positions the institution very, very well for 2024 and beyond. Maybe to build on those comments, you know, we all saw that you announced the announcement regarding the student lending business. Maybe can you provide some color on how you and the board came to that conclusion? You know, what are the strategic implications of this? Yeah. So, you know, it, it's never an easy decision to make a call that's gonna impact associates, especially associates that have been as hardworking and as loyal as our Discover Student Loan team has been. But when we looked at it, we had perennial issues in our ability to service that portfolio. So we had a consent order in 2015, then another one in 2020, and then the 2023 consent order also contained some elements related to that. We benchmarked systems capability, and we found that, you know, our internal systems capabilities weren't on par with what a professional servicing organization could do for this portfolio. And then ultimately, it came down to choices: Do we try to retain and fix? We ruled that out. We looked at an option to outsource servicing and retain the portfolio, and what we found is the economics of that decision, relative to a full exit, weren't equal. And so the full exit actually, when you peel it back, fairly positive for our shareholders. So it releases about $10 billion of risk-weighted assets. There's $900 million of reserves up against it. There's an opportunity to execute a gain on sale on that portfolio and actually create about $2 billion worth of—or $1.5 billion-$2 billion worth of capital that we can invest in the business, or, if the board sees to it, consistent with what they've done historically, is return that excess capital to shareholders. Also, from a strategic standpoint, assuming a successful exit, what happens is we're in an overfunding situation, and in a situation where you have competitive deposit pricing, it allows us to maybe take a different lens in terms of how aggressive or not aggressive we'll be in terms of deposit pricing, which should actually help benefit NIM in 2024 and beyond. Just, you know, you talked about the capital relief, the $10 billion RWA, $900 million from re-releasing the reserves. Any other preliminary financial impacts that you can talk about, and any thoughts on sort of the timing of when we may see these sales consummate? Yeah. So there's a lot of execution that has to happen between now and what we think. We're targeting the midpoint of 2024 to execute the exit. And important with that is when we thought about it, what we wanted to do is choose a bona fide servicer that has dealt with loans of this nature and also had dealt with loans that are subject to consent order, and we believe we're pretty close to finding one. So, we'll execute through that piece and make sure we get an excellent transition. And then the aspects are certainly our resources and our ability to kind of resize the organization. You know, our first priority will be to take resources and redeploy those into open positions. Then, of course, we're going to size it and work to be, what I'll say, fiscally astute in terms of kind of managing the cost profile of the business. So you talked earlier about Cashback Debit. You're in the process of rolling this out on a mass-market basis. Can you maybe just talk about the strategic rationale and the... of this? And as we look down the road, how big could this be, and how will you define success in this product? Yeah. So, you know, from the standpoint as we evaluate it, we first took a look at what our offerings are. And, you know, what we did see was an appetite for a product like this from a brand like Discover. Second, you know, there's favorable economics on, in terms of debit interchange- Mm-hmm that, you know, we feel like we're uniquely positioned to enjoy. And then, being able to kind of market to our credit card customers as well as broad market, to bring in new customers into the Discover family. And if they're lower quartile in terms of what we would- Mm-hmm not originate against, then it gives us an opportunity to work with these customers over time, understand how they're performing, move into cash flow underwriting, and then have a whole new cohort of customers that can be part of Discover. And, also, importantly, have the primary banking relationship, which we think it will be important for Discover and any institution going forward. Switching gears a bit to the competitive landscape. Can you talk about what you're seeing in the current environment for lending and deposit gathering, and how has it evolved over the course of the last few months? Yeah. So, the lending environment remains competitive. Mm-hmm. Certainly, the super prime area remains the most competitive. Mm-hmm. The least amount of credit risk there. What I'll say, the kind of prime revolver space that we operate in always remains competitive. Formidable competitors in that place, and, you know, we, you know, work very hard to ensure we can differentiate ourselves from a customer service standpoint, as well as a reward standpoint. I think we've been able to demonstrate- Mm-hmm that we've done that historically, and we'll be able to do that in the future. So, you know, what I would say overall is the competitive environment on the asset side of the business remains intact, mildly less competitive than it was, say, 2-3 quarters ago, as some folks have pulled back. On the deposit side, I would almost echo the same comment. So, in terms of the cohort of competitors that we benchmark ourselves against, the pace of deposit pricing has changed, has abated a bit. So the timing between kind of rate changes has lessened as the asset builds have decreased. Also, as we separate ourselves from those institutions, or the time frame when those three institutions, in March, April, went upside down, we're seeing the kind of pace of deposit gathering activity by brick-and-mortar institutions not being quite as aggressive. Maybe to talk a little bit about what you're seeing on spend. You know, we just came through the early portion of the holiday season. Then another issuer before you said that October was a bit of a slower month. So can you maybe just update us on what you're seeing for the quarter and maybe any noticeable trends across the different cohorts of spend or spending categories? Yeah. Yeah. So we are seeing slowing sales. So in the third quarter, we were around 3% year-over-year growth. Fourth quarter, actually a very, very tough comp. There was significant growth last year, fourth quarter. But as we look at October and November, we're at somewhere between 0.5% and 1% up year-over-year. Now, the categories are fairly mixed, so what we've seen is every day spend down a bit, so led by gas prices, but largely across the board. We're seeing, you know, our 5% category, which is Amazon, Walmart, and Target this quarter, are actually experiencing significant growth, largely consistent with the economy. Overall, retail, other categories, we're seeing it down. Mm-hmm. Service spend up about 3%, service and entertainment. So the implications of that, I think, are that consumers in the lower half of the economy, I think, are belt-tightening. They've felt inflation, and they've belt-tightened. Then the upper, say, two quartiles of the economy are still spending at, you know, a single-digit rate, but certainly slower than what they did a year ago. Maybe to expand on that a little bit, you talked about, you know, what you're seeing in, you know, the more, I call it, the higher-end consumer versus the maybe the lower, more the more low end. Maybe just expand on your perspective on the health of the consumer more broadly from the lens of what you're seeing within your portfolio, whether it's their spend, what they're doing on borrowing, what they're doing on deposits. Yeah, and I think it's fairly representative of what we're seeing in the overall economy. You see, you look at the jobs data, and the jobs data is really, really good, but you look at consumer sentiment, and it's relatively negative. And you know, my sense is what is going on is the lower, certainly the lower quartile, has really felt the impact of inflation. And as a result, you know, you think about a consumer that makes $50,000 a year, right? When your inflation outpaces your wage growth, they're making choices in terms of what they're going to spend, what bill they're going to spend, and, you know, what they're gonna, frankly, put on their table. Mm-hmm. The upper end doesn't have to deal with, fortunately, for those folks, doesn't have to deal with those sorts of decisions. So, my sense is, the inflation impacts have been felt and, you know, our specific portfolio, there's been belt-tightening on the bottom, we call it the bottom half. On the upper half, I wouldn't say business as usual. They're impacting it, but they're impacted by it, but certainly not to the same extent. So the implications are that, I sense that real wage growth, what we've seen over the past quarter or so, will help certainly our portfolio and the credit dynamics of our portfolio profile, in 2024 and beyond. But, you know, the economic conditions, despite high, high employment rates, are challenging and will likely remain challenging for, you know, you know, a good portion of 2024. Maybe we're going to turn to the credit outlook, but maybe before we dive into some of the specific detail, you know, we've gotten sort of a lot of varying views on the economy across the presentations that we've heard today. Maybe could you outline your expectations for macro trends over the near term? Yeah. So, you know, my sense is, you know, unemployment levels will remain around, you know, 3.8%-4.4% into 2024. I think, you know, GDP will continue to be positive, but, you know, you're talking 1, 2... You know, 3% would be, you know, very, very surprising if it was that high in 2024. I think the Fed actions, in terms of prime rate, will be dictated based on what they see on inflation. Inflation is coming in. So right now, you know, my view is there could be, you know, 2 rate actions in 2024, not more than that. You know, I could be wrong. You know, there's people that are, you know, better at predicting this than I am. But overall, benign, benign macros, generally, inflation and it comes under, you know, tightens further. Wage growth increases, but at a slower rate. Essentially, we've had a handful of companies comment on their views on forward rates, and I think two seems to be the general consensus across most companies. Obviously, the forward curve prices in some other probabilities. That's good to hear, by the way. Yeah. I'm not an outlier. Seems like pretty consistent. Two cuts in the back half seems to be- Yeah in most companies' base case. So maybe digging into credit, obviously, losses and delinquencies have been rising at a fast pace. I think delinquency is up over 130 basis points year-over-year, charge-offs 200, but from really, really low levels. And some of this has been faster than peers. Can you maybe just talk about what the factors have been that have been driving the idiosyncratic performance for Discover? Yeah. So, a couple of things. So, you know, obviously, the pandemic impacted everybody, all, all lenders, and we saw abnormally low delinquency rates and charge-off rates. Now that has normalized, and it normalized most quickly in the lower quartile of customer sets. And the higher the credit quality or the higher the income of the customers were, typically, the longer it took for the charge-offs and delinquencies to normalize. So we had that dynamic going on across all vintages. We also in late 2021, 2022, we had some very what I'll say, strong growth. And, you know, there's a normal maturation process or seasoning of those loans that manifested itself in 2023. You know, that's performing to expectation. What I've said previously is the 2022 vintage losses came in slightly higher, but still remain profitable and within our expectations for returns. That remains to be the case. So, overall, you know, profitable vintage, a great set of new customers into the Discover family, that hopefully, you know, they'll be with us for a long time and continue to, you know, enjoy our high-quality service- Mm-hmm ... and we'll generate nice returns from them. So, you know, I think you noted that you expect losses to peak at some point in the, I call it, the mid to latter part of, of 2024. Can you maybe unpack for us why you expect that to be the timing, you know, your, your confidence in that? You talked about the 2022 vintage, maybe any other vintage performance to talk about, and how should we think about the risks to that outlook? Yeah. So, yeah, I'm more comfortable with it today than I was when we last spoke about it. And the reason being is, you know, we have very good line of sight in terms of traditional roll rate models- Mm-hmm ... for six months, in terms of, delinquency formation and then ultimate charge-off. You know, what I've said previously, when I had less certainty, I said that it'll be important to look at the month-over-month change- Change In overall delinquency rates. And so what we've seen in October is a slight decrease in delinquency formation. November, that trend continues. And our, you know, December, our expectation is that will also continue. So that gives me a level of confidence that peak charge-offs will be around the midpoint of 2024. Now, that does assume that we didn't call the macros wrong, certainly. But overall, good sign, good signs from the portfolio. I will say that there, as folks are taking a look at it, there is a seasonal impact, right? So as transactors come in, you know, that increases the denominator. So it's important to factor that in, but as we do, we have growing confidence in terms of kind of the midpoint of 2024, maybe even slightly better. But, it's probably too early to call that. The macro being the biggest risk to the outlook, you think? Yeah, from my standpoint, yes. You know, given that as a view, you know, we did see the card allowance rise to, I think, the highest level it's been post-pandemic in the low sevens. Can you talk about how you view the allowance as we approach peak losses? I know you've talked about it peaking, a couple of quarters, a quarter or so before- Yeah losses peak. And then how should we think about, you know, hypothetically, the performance once we do get to that peak loss timeframe? Yeah, that's a question that members of our audit committee ask every quarter, as a matter of fact. But, They gave it to me. What? So yeah, that's consistent with, you know, my expectations today, right? So, as we get more confidence in terms of the timing of the peak losses, our sense in terms of reserve build will peak one to two quarters prior to that. And then, depending on our outlook on the macros and our sense of the direction of the portfolio, there would be, you know, a reasonable view that overall reserve rate could begin to decrease. Now, you know, we tend to be very conservative in this, right? And as good stewards of our, you know, controllership and capital in the company, we want to make sure that we're not gyrating reserves inappropriately. Fair enough. Maybe to switch gears and talk a little bit about the regulatory environment for Discover. You were recently issued a consent order by the FDIC pertaining to risk governance and compliance. Maybe just talk about how this work is progressing, and how are you thinking about the associated expenses moving forward? So, yeah. And there, there's been a lot of work. So even prior to this becoming public, we had dedicated a high level of resource. And I've talked publicly about an incremental $300 million of spend from 2019 through to 2023, in terms of kind of benchmark period to period, not cumulative. Significantly more than that on a cumulative basis. So, you know, we're going to continue to invest whatever we have to invest in order to get the compliance issues behind us. You know, this year, you know, my sense is, you know, I thought we'd spend around $500 million. It may come in slightly lower than that, just based on timing. Next year, you know, we're planning to, you know, spend whatever we can. You know, today, you know, you know, I'll say around $500 million. Could be, could be more than that, certainly. And we'll hopefully have dealt with most of the major issues in terms of an identification and then remediation by the midpoint of 2024. And then from there, it's creating a sustainable compliance management process and systems so that we can, you know, meet our high expectations, and those of the regulators.... Just as a point of clarification, that's $500 million absolute, so a slight year-over-year increase. Obviously, if you have to spend more, you will, but that's their thinking as of right now? That's what we're seeing right now. But, I will say this, that there's been plenty of people who've called that wrong. And so, I am going to make sure that, you know, there's, you know, an appropriate amount of what I'll say, diligence around any figures- Mm-hmm that we give out when we give guidance on Yeah ... 21. You know, I, I do, I do want to say that that's our, our view today. Could be, could be more than that. Yep. No, that makes sense. Maybe moving on to the card tiering misclassification issue during 2Q. Any updates that you can share with us in terms of the progression, the negotiations with merchants, and any sort of thoughts, you know, regulatorily-wise, what could be happening there? Yeah. So, you know, our discussions with our merchant partners are progressing. So the overall situation, I would say, is progressing. There's been no data points that to me, at this point, indicate that our current reserve level is not sufficient based on those conversations with our merchants. So that's positive. The conversations with the regulators, you know, remain ongoing. And really there's, you know, no significant update on that point at this point. I guess no news is good news. Maybe switching gears to talk a little bit about loan growth. I mean, card loan growth still been growing at a mid-teens clip this year, despite the slowdown that, you know, we've seen in the economy, as you've seen customer acquisition slow, but payment rates have caught up.... As you look ahead to 2024, how are you thinking about the drivers of loan growth into the new year? Yeah. So the core drivers will remain the same, right? So it'll be sales growth, payment rate, new account acquisition, and then revolve rate. And so as we look at kind of 2023 versus 2024, you know, the quantum of balance transfers will likely be less. Mm-hmm. You know, that, that'll be helpful from a net interest margin standpoint. We have tightened credit through 2023. You know, that'll be negative to loan growth, overall, perhaps positive for reserves, and, you know, net interest margin, negative. Revolve rate may increase slightly, which will be positive for loan balances and NIM. And then payment rate, we expect to decline. You know, I've previously said I thought it, payment rate would be, you know, 100-200 basis points higher than the pre-pandemic levels. Based on what we're seeing right now, I don't know if that'll be the case. You know, there could be a further decline in payment rate, taking it down to about 2019 levels. We're still north of, you know, you know, probably 100 basis points north of 2019 levels, but we'll see how it plays out. That makes sense. And you mentioned a couple of puts and takes on the margin. I think for this year, full year, it's supposed to be around 11%. Maybe building on some of the things you talked about, maybe talk about the puts and takes. You know, and you know, obviously, the market's grappling with two environments. You talked about two cuts, the forward curve has three, and while it's taking a little bit of a backseat, I think there still is a higher for longer potential out there. You know, how are you thinking about those two different scenarios? From a Net Interest Margin standpoint? Net interest margins. Yeah. So from a net interest margin standpoint, yeah, so we do think we're gonna come in at 11, maybe slightly north of 11 for the year. And for next year, if you asked me two quarters ago, my expectation would be, you know, 30-40 basis points decline in net interest margin. Today, where we're sitting, based on kind of a decrease in balance transfers, a change in the view in terms of how many Fed rate decreases are likely, and our ability to kind of manage deposit pricing, you know, I do expect a mild decrement, but nowhere near the 30 basis points that I had mentioned before. Now, I say all that, we'll give updated guidance in January, but that's an indication of kind of a preliminary view right now. And two sort of follow-ups. Would that view, that 30-40, and then a much lower time, would that factor in the full exit of student lending, or is that before we, we would see the exit? Yeah, that, that is actually before the exit of student lending. You know, student lending, you know, relative kind of, net interest margin rate, lower than the- Company-wide ... card rate, and than the company-wide rate, so that, that also would be accretive to overall NIM rate. While we're only going to get a cut or two over the next, you know, call it 12, 13 months, you know, the margin today at 11%, while likely headed a little bit lower, it was in the kind of 10.3%-10.4% range. Do you feel it's going to be structurally higher? And if so, what do you see as the drivers of that? I do. I do think it'll be structurally higher. And, you know, the primary driver is how we've shaped the balance sheet in terms of deposit funding. So, you know, we've targeted 70%-80% to be deposit funded, deposit funded. We're getting close to that. The OSA, the OSA component of that remains significant. With cash back debit, you think about, you know, the benefit of that at scale, and, you know, essentially, the cost of those deposits, very, very sticky, you know, 1% or less. So that also structurally will help net interest margin. So, overall, the positioning of the company has been, you know, really beneficial to net interest margin and frankly, returns, returns overall. A couple other topics that I wanted to hit on. So we're all still sitting here waiting for the finalization of the late fee rule, obviously a smaller part of your business, just about 3% or less of revenues. What are your expectations on how this topic will play out, and what are the implications for Discover? Yeah. So kind of total, what we said previously is total late fees, you know, somewhere between $500 million-$600 million. Initially, we anticipated the implementation of that to be in the first quarter. You know, as I'm thinking about it now, I'm thinking about in the mid to midpoint of the year, perhaps beginning of the fourth quarter. And, you know, our plan is not to do any kind of any actions that will impact customers or our relationships with customers to try to offset that over time. There might be some decisions we'll make that you know, pending, you know, a final rule and, and, you know, some modeling to understand, you know, what's actually good economically and what is also fair to the customer. But there's plenty of work we have to do on that yet. So you gave us a lot of different moving pieces, as it pertains to credit, you know, revenue growth, margins and the like. You know, you've had this less than 40% efficiency, I'll call it, target for a period of time. As you think about incorporating all the things that you laid out, you know, increased regulatory costs, increased compliance costs, whether either in or they're gonna be coming into the run rate, do you think that is still the right level of efficiency for Discover, and do you, do you expect to be able to operate in that range? Yeah. So my expectation is that we can operate under 40. You know, my expectation is, for 2024, we will operate under 40. But I wanna be mindful that it'll be- we're gonna invest what we have to from a compliance- Mm-hmm standpoint. And then also, if we see opportunities to, you know, do something different that's gonna benefit the firm over the medium term or long term, we'll do that. But our commitment to being efficient in terms of how we allocate expense dollars and analytically to ensure we make kind of really, really good decisions around that, will remain intact. So you know, that gives me, you know, a level of confidence to say, "You know, we can be under 40. We can invest in what we need to from a compliance and growth standpoint, and still deliver that level of efficiency. So you've switched into capital, so, you know, you paused the buyback during the second quarter. So maybe just talk a little bit more about the main factors that will influence the timing of when you'll restart capital return, and how should investors think about a framework of the restarting eventually? Sure. So, yeah, let me, let me start with where we are from a- Yep CET1. So we're at about 11.6%. What we've said is our target is 10.5. You take CECL transition, call it 70 basis points. That gets pretty close to our target. You know, we had really strong growth in 2023. I don't expect the same level- Sure ... of loan growth. We also have what I'll say, seasoning of the book in terms of credit and the credit dynamics, all coming to play in 2024. We. Now I'm gonna go back to our decision to pause. So when we decided to recommend to the board to kind of pause the share repurchase, there was a number of factors. First, there was no indication, and there's still a commitment. There's no indication that we needed to do it from the regulator- Mm-hmm ... but we wanted to be conservative. Our capital priorities didn't, have not changed, so in terms of investing in the business and return capital to shareholders. But being mindful of the trajectory of CET1, we had the card tiering issue that we're contending with, and we wanted to make sure we sized it appropriately. And what we didn't want to happen is find that we sized it you know, to that 365 level, and then found it was significantly larger than we anticipated, and then have to have a knee-jerk reaction. So we were conservative on that. Board concurred with that recommendation. Now, as we look at 2024, you know, we're gonna want to get more certainty on the card tiering. You know, we expect we'll have, you know, more data points by the end of this year. We also wanted to finalize our view of 2024. It's actually looking, you know, in terms of capital generation- Yep ... more favorable than it was six months ago. And, we're also subject to CCAR this year. So we're gonna put those three factors and then take a view from, okay, a regulatory standpoint as well, and then we'll make a recommendation to the board. So, you know, my view is, you know, we could recommend something in January, or perhaps wait for the output- Sure ... of CCARs, but that's the- That's the range. ... the window that I'm- Okay -thinking about. You know, we're brushing up against time. Maybe just one last, hopefully, quick question. Yep. You know, historically, Discover's been a firm that's put up mid- to high-20s returns. You know, over the longer term, do you still believe these are the returns are achievable for the company? I can save time with that answer. Yes, I do. Excellent. Yeah, certainly. With that, please join me in thanking John. Thanks.