Discover Financial Services (DFS)
F4Q09 Earnings Call
December 17, 2009 11:00 am ET
Craig Streem – VP, IR
David Nelms – Chairman and CEO
Roy Guthrie – EVP and CFO
Andrew Wessel – JP Morgan
Mike Taiano – Sandler O’Neill
Sanjay Sakhrani – KBW
Bill Carcache – Macquarie
David Hochstim – Buckingham Research Group
Chris Brendler – Stifel, Nicolaus
Moshe Orenbuch – Credit Suisse
Bruce Harding – Barclays
Rick Shane – Jefferies
Craig Maurer – CLSA
Scott Valentin – FBR
Henry Coffey – Sterne, Agee
Brad Ball– Ladenburg FSG
John Stilmar – SunTrust
Previous Statements by DFS
» Discover Financial Services F3Q09 (Qtr End 08/31/09) Earnings Call Transcript
» Discover Financial Services Q2 2009 Earnings Call Transcript
» Discover Financial Services F1Q09 (Qtr End 2/28/09) Earnings Call Transcript
Thank you. Good morning everyone and we all want to welcome you to this morning’s call and we appreciate your joining us today as always.
I want to begin of course by reminding everyone that the discussion today contains certain forward-looking statements about the company’s future financial performance and business prospects, which are of course subject to risks and uncertainties and speak only as of today. Factors that could cause actual results to differ materially from these forward-looking statements are set forth within today’s earnings press release, which was furnished to the SEC in an 8-K report, and in our Form 10-Q for the quarters ended February 28, 2009; May 31, 2009; August 31, 2009 and in our Form 10-K for the year ended November 30, 2008, all of which are on file with the SEC.
In the fourth quarter 2009 earnings release and supplement, which are now posted on our website and have also been furnished to the SEC, we have provided information that compares and reconciles the company’s managed basis financial measures with GAAP financial information and we explained why these presentations are useful to management and to investors. Of course we urge you to review that information in conjunction with today’s discussion.
Our call this morning will include formal remarks from David Nelms, our Chairman and Chief Executive Officer, and Roy Guthrie, our Chief Financial Officer, and of course, ample time for Q&A following the formal remarks.
Now it’s my pleasure to turn the call over to David.
Thanks Craig. In my comments this morning I would like to take a few moments to review the highlights of the year, focusing on three main themes; our credit quality, the actions we have taken to strengthen the Discover franchise and finally capital management.
We accomplished a great deal this year in each of these areas which I will discuss more in a moment and we are going into 2010 having improved our competitive positioning in direct banking and in global payments.
Let’s first take a look at our full-year 2009 results. We earned $1.3 billion or $2.42 per share and we were profitable for the year even excluding the Visa settlement which we think is a terrific result in the face of the highest level of unemployment rates and credit losses the credit card industry has ever experienced.
The economic environment has taken a heavy toll this year but we believe we will report the lowest full-year charge off rate of our major competitors. Our fourth quarter managed net charge off rate came in at 8.43% just under our guidance and only four basis points above the third quarter. In dollar terms this is the first time since 2007 that we have achieved a sequential decline in charge-off dollars which is certainly encouraging.
Unfortunately, we have not yet seen sustained improvement in the US economy plus our fourth quarter delinquencies were somewhat higher which leads us to conclude we may be approaching but likely have not yet reached a peak loan loss rate. For the first quarter of 2010 we expect our total managed net charge off rate will be in a range of 8.4% to 8.9%.
In addition to carefully managing credit performance we are focused on enhancing the Discover franchise and strengthening the foundation for future growth. A key contributor to building our franchise has been the steady increase in the number of US merchants accepting the Discover Card with the number of active merchants at the end of November up by more than 6% from last year. In addition we launched new advertising that focuses on how our customers value Discover’s Cash Back Bonus program. The stories depicted in our ads resonate well with our customers and emphasize Discover’s core brand strength.
Perhaps the clearest indicator of the success of these initiatives has been our strong relative performance in credit card sales volume which suggests we are continuing to take market share. In terms of year-over-year sales volume for Discover Card, we began to see some positive comparisons in the fourth quarter with sales volume down less than 1% year-over-year. Normalizing for day count October was the first month this year where sales volume did not decline and November was the first month of sales growth in over a year and we are pleased the positive trends we saw in November have continued so far in December. In fact, starting in mid-October and continuing through the most recent week our year-over-year sales by week have been positive which is a nice trend relative to what we had seen earlier in the year.
Another area of significant emphasis for us has been our other direct to consumer banking businesses where we have achieved outstanding growth in deposits as well as in student and personal lending. Our deposit book exceeded $12.5 billion at the end of the quarter, more than double the level of one year ago and we are continuing to invest in this business.