Q4 2023 Earnings Summary
- Discover Financial Services expects average loan growth of 5-6% in 2024, driven by positive new account growth and potential further declines in payment rates. ,
- The planned sale of Discover's $9.5 billion student loan portfolio is progressing on schedule, expected to improve net interest margin by 10-20 basis points and free up at least $2 billion of capital, enabling potential capital returns to shareholders. ,
- Credit trends are improving, with delinquency formations declining month-over-month since September 2023, indicating that charge-offs are expected to plateau in mid-2024 and begin decreasing in 2025, reinforcing confidence in future credit performance. , ,
- Discover projects net charge-offs to increase to between 4.9% and 5.3% in 2024, significantly higher than historical levels, indicating worsening credit performance.
- An $80 million remediation charge related to servicing issues, primarily in student loans, was recognized, suggesting ongoing operational and compliance problems.
- Loan growth is expected to be relatively flat, with sales projected to be relatively flat year-over-year and cautious underwriting, potentially limiting revenue growth.
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Credit Quality and Charge-offs
Q: Are charge-offs peaking and what comes after?
A: Charge-offs are expected to peak mid-year and then plateau. This is due to the seasoning of the 2021 and 2022 vintages and normalization after unusually low losses during the pandemic. We anticipate charge-offs will plateau and begin to step down in 2025. -
Loan Growth Expectations
Q: Why is loan growth guidance flat despite prior growth?
A: We project modest loan growth of 5–6% , reflecting conservative underwriting and elevated payment rates. Sales are expected to be relatively flat year-over-year, and new account growth will be positive but down from last year. We're being cautious before increasing growth aggressively. -
Reserve Rates Outlook
Q: How will reserve rates change over 2024?
A: Reserve rates may decrease in 2024. As we approach peak losses, reserve levels increase, typically peaking one to two quarters before losses. Assuming stable macros and portfolio performance, there's potential to reduce the reserve rate. -
Student Loan Portfolio Sale
Q: What's the status and impact of the student loan sale?
A: We signed a servicing agreement with Nelnet and expect to sell the $9.5 billion portfolio in the second half. The sale will positively impact net interest margin by 10–20 basis points and free up at least $2 billion of capital. -
Regulatory Issues and Capital Return
Q: How do regulatory matters affect capital return plans?
A: We're progressing on compliance but remain paused on buybacks pending regulator feedback. The FDIC consent order does not include the misclassification issue. We remain committed to returning excess capital to shareholders. -
Delinquency Formations
Q: Are delinquency rates starting to roll over?
A: Month-over-month delinquency formations have declined since September, from a 26 basis points increase in September to 11 basis points in December. This trend gives us confidence in our credit outlook. -
Net Interest Margin Guidance
Q: How will rate cuts impact NIM in 2024?
A: We assume four rate cuts in 2024, which could affect deposit betas and pricing. Despite this, we expect NIM to remain strong, targeting the upper end of our guidance range. -
Expenses and Remediation Charges
Q: What's driving higher expenses and remediation reserves?
A: We accrued an $80 million customer remediation reserve unrelated to the merchant misclassification issue. This mainly concerns servicing issues in student loans. We continue to invest in compliance and risk management. -
Underwriting Strategy
Q: Why is account growth slowing?
A: We've tightened underwriting throughout 2023. We're awaiting further confirmation of delinquency trends before being more aggressive in new account growth. Our current approach is conservative to ensure long-term profitability. -
Efficiency Ratio Outlook
Q: What's the sustainable long-term efficiency ratio?
A: We expect the long-term efficiency ratio to be below 40%. While expenses may increase due to compliance efforts, we aim to manage costs effectively.