Discover Financial Services: Financial Performance and Leadership Changes
2024-01-20
Discover Financial Services held its Q4 2023 Earnings Call on January 18, 2024. The participants in the earnings call included Eric Wasserstrom, the Senior Vice President of Corporate Strategy and Investor Relations, John Owen, the Interim CEO, and John Greene, the CFO. During the call, the company shared its financial results for the fourth quarter of 2023.
In terms of earnings, Discover Financial Services reported an EPS of $1.54 for Q4 2023, falling short of expectations by $0.97. However, the company's revenue for the quarter was $4.20 billion, surpassing expectations by $90.22 million.
John Owen, as the Interim CEO, emphasized the importance of advancing the culture of compliance, delivering an excellent customer experience, and maintaining strong financial performance. He highlighted that Discover Financial Services achieved a net income of $2.9 billion for the full year 2023, with earnings per share reaching $11.26. This marked the third best year for EPS performance in the company's history. Additionally, in 2023, Discover Financial Services was recognized for the first time as one of Fortune 100's best companies to work for.
During the call, it was announced that Michael Rhodes would be joining the company as the new Chief Executive Officer. Rhodes brings extensive experience in managing various aspects of Consumer Banking, including credit cards, payments, online and mobile banking. He previously served as the Group Head of Innovation and Technology. In 2023, Discover successfully launched a cashback debit account on a national scale and revealed its intention to exit the private student lending business.
Regarding financial performance, Discover Financial Services reported a net income of $388 million for the fourth quarter of 2023, along with a revenue growth of 13%. The company identified three significant trends in its financial results for the quarter: a 13% increase in revenue, a $1 billion rise in provision expense, and a 19% increase in expenses. The decline in net interest margin was primarily driven by higher funding costs and interest charge-offs, partially offset by higher prime rates and increases in revolving balances.
Discover's card receivables experienced a 13% year-over-year increase, although new account growth slowed compared to previous years. Despite the sale of 15% of the portfolio, the company expects loan growth to remain flat due to new account growth and a slower payment rate. Discover Financial Services also discussed its commitment to capital return and allocation, temporarily pausing buybacks in the fourth quarter to address compliance and risk management matters associated with the new CEO's arrival.
The call also focused on the company's risk and compliance management activities, with nearly 3,000 resources dedicated to these areas. Discover Financial Services addressed issues related to customer remediation, merchant tiering reserve, and regulatory agencies. The company also discussed its expense guidance, with plans to carefully examine the cost base in the future. Additionally, the call covered the company's perspective on net interest margin, cost of funding, and liquidity.
Delinquency rates, credit quality, and charge-off levels were also topics of discussion. Discover Financial Services expects delinquency formations to decrease, with the 2023 vintage performing profitably. The charge-off guide is subject to factors such as changes in macros, servicing issues, and forecasting accuracy. The company anticipates flat loan growth for 2024, with payment rate and underwriting standards influencing loan growth.
The potential impact of higher interest rates, the company's exit from the student loan business, and the reserve rate for 2024 were also addressed during the call. Discover Financial Services reiterated its commitment to capital return and allocation, and discussed its loan growth expectations for 2024. The company anticipates peak net charge-offs in 2024 and plans to reduce the reserve rate assuming consistent macros and portfolio performance.
Overall, the Q4 2023 Earnings Call for Discover Financial Services covered a wide range of topics, including financial performance, leadership changes, loan growth, expense guidance, risk and compliance management, customer remediation, and regulatory matters.