Discover Financial Services (DFS)

DFS 
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Discover Financial Services (DFS)

Q4 2012 Earnings Call

December 20, 2012 11:30 am ET

Executives

Bill Franklin

David W. Nelms - Chairman and Chief Executive Officer

R. Mark Graf - Chief Financial Officer and Executive Vice President

Analysts

Sanjay Sakhrani - Keefe, Bruyette, & Woods, Inc., Research Division

Michael P. Taiano - Telsey Advisory Group LLC

Bill Carcache - Nomura Securities Co. Ltd., Research Division

Jason Arnold - RBC Capital Markets, LLC, Research Division

Mark C. DeVries - Barclays Capital, Research Division

Scott Valentin - FBR Capital Markets & Co., Research Division

Ryan M. Nash - Goldman Sachs Group Inc., Research Division

Moshe Orenbuch - Crédit Suisse AG, Research Division

Donald Fandetti - Citigroup Inc, Research Division

Richard B. Shane - JP Morgan Chase & Co, Research Division

Robert P. Napoli - William Blair & Company L.L.C., Research Division

Christopher C. Brendler - Stifel, Nicolaus & Co., Inc., Research Division

James E. Friedman - Susquehanna Financial Group, LLLP, Research Division

Sameer Gokhale - Janney Montgomery Scott LLC, Research Division

Christopher R. Donat - Sandler O'Neill + Partners, L.P., Research Division

Martin Kemnec - Jefferies & Company, Inc., Research Division

David S. Hochstim - The Buckingham Research Group Incorporated

Kenneth Bruce - BofA Merrill Lynch, Research Division

Presentation

Operator

Welcome to the Q4 2012 Discover Financial Services Earnings Conference Call. My name is John and I'll be your operator for today's call. [Operator Instructions] Please note: this conference is being recorded. I will now turn the call over to Mr. Bill Franklin, Head of Investor Relations. Mr. Franklin, you may begin.

Bill Franklin

Thank you, John. Good morning, everyone. We appreciate all of you -- for joining us on this morning's call. The discussion today contains certain forward-looking statements about the company's future financial performance and business prospects, which are 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; in our Form 10-K for the year ended November 30, 2011; and in our Form 10-Q for the quarters ended August 31 and May 31, 2012, which are on our website and on file with the SEC.

In the fourth quarter 2012 earnings release and supplement, which are now posted on our website at discoverfinancial.com and have been furnished to the SEC, we have provided information that compares and reconciles the company's non-GAAP financial measures with the GAAP financial information, and we explain why these presentations are useful to management and investors. 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 Mark Graf, our Chief Financial Officer. After Mark completes his comments, there will be time for a question-and-answer session. [Operator Instructions] Now it is my pleasure to turn the call over to David.

David W. Nelms

Thanks, Bill. Good morning, everyone, and thank you for joining us today. This morning, I'm going to start off by discussing the fourth quarter and then walk through some highlights of our full year accomplishments.

Before the market opened, we reported quarterly diluted earnings per share of $1.07, up 13% over the prior year, driven primarily by loan growth and share repurchases. During the quarter, we generated return on equity of 23% and returned approximately $451 million of capital to common shareholders through repurchases and dividends. Our robust results, strong capital position and positive outlook led us to announce a 40% increase in our dividend to common shareholders.

This quarter, we accelerated our organic growth to 6% on total receivables. Card receivables growth for the quarter was the highest in over 5 years, driven by spin from the revolver segment of our card base. Our strong receivables and sales growth results demonstrate the effectiveness of our marketing programs, consumers' preference for cash rewards and our acceptance and awareness initiatives.

For the fourth quarter, our noncard assets, specifically our personal and private student loans, achieved a combined 11% year-over-year growth as we broadened marketing and added new schools and a fixed-rate product in student loans earlier in the year. Our Payments segment experienced 13% year-over-year purchase volume growth, driven largely by PULSE. Volume processed on our networks achieved an all-time high for the fourth quarter.

We also increased our level of investment to drive future growth and achieved the full potential of our Direct Banking and payment strategy. Important new initiatives included new domestic and global payments partners; a new core banking system; our first checking product, which we expect to launch in early 2013; and Discover it, our new credit card product that is testing successfully in select markets and will be launched nationally next month.

Our card net charge-off rate set another record low, but our over-30-day delinquency rate ticked up slightly due to seasonality. While the continued improvement in credit appears to be nearing an end, we don't believe we were -- we are at a point where charge-offs are poised to rise significantly.

Now, I'd like to share some thoughts on how we performed against our 2012 priorities. We had 2 principal priorities for our Direct Banking segment. First, we wanted to build on the momentum from 2011 and grow card sales and receivables. Second, we wanted to grow our noncard product offerings. During the year, we successfully grew card sales and receivables in a challenging environment by increasing our marked wallet share and achieving double-digit new account growth. We increased customer engagement through our rewards programs, marketing initiatives and by expanding online and mobile capabilities. We increased merchant participation in our rewards program, which also enhanced the value for our card members. For the full year, card receivables grew by $3 billion or 6%.

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