Discover Financial Services (DFS)

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Discover Financial Services (DFS)

F4Q2010 Earnings Call Transcript

December 16, 2010 11:00 am ET

Executives

Craig Streem – IR

David Nelms – Chairman and CEO

Roy Guthrie – EVP and CFO

Analysts

Sanjay Sakhrani – Keefe Bruyette & Woods

Michael Taiano – Sandler O'Neill

Craig Maurer – CLSA

Bill Carcache – Macquarie

Jason Arnold – RBC Capital Markets

Scott Valentin – FBR Capital

Moshe Orenbuch – Credit Suisse

Donald Fandetti – Citigroup

Bradley Ball – EverCore Partners

Christopher Brendler – Stifel Nicolaus

Richard Shane – JPMorgan

Bruce Harting – Barclays Capital

David Hochstim – Buckingham Research

Ed Groshans – Height Analytics

John Stilmar – SunTrust

Michael Kelly – Morgan Stanley

Kenneth Bruce – Bank of America-Merrill Lynch

Presentation

Operator

Welcome to the fourth quarter 2010 earnings release conference call. My name is Roza and I'll be your operator for today's call. At this time, all participants are in a listen-only mode. Later, we will conduct a question-and-answer session. Please note that this conference is being recorded.

I would now like to turn the call over to Craig Streem. Sir, you may begin.

Craig Streem

Thanks, Rosa. Good morning, everyone and welcome to this morning's conference call. I want to begin as always, by reminding you that 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-Qs for each of the prior quarters of this year and in our Form 10-K for the year ended November 30, 2009, all of which are on file with the SEC.

In the fourth quarter 2010 earnings release and financial supplement, which are now posted on our website at discoverfinancial.com, and have been furnished to the SEC, we've 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 to investors. Certainly, we urge you to review that information in conjunction with today's discussion.

In addition to make comparisons more meaningful, we're providing historical results on a basis that excludes income statement impacts of the VISA/MasterCard settlement and the Morgan Stanley special dividend agreement dispute, and also adjust for the effects of FAS 166, 167. This as adjusted information was made available in today's earnings release and in our 8-K filing on March 1st.

Our call this morning will be led by David Nelms, our Chairman and Chief Executive Officer; and Roy Guthrie, Executive Vice President and Chief Financial Officer. As always, we will take your questions following the formal remarks.

Now it's my pleasure to turn the call over to David.

David Nelms

Thanks, Craig. Good morning and thanks for joining us. Before the market opened this morning, we reported fourth quarter net income of $350 million or $0.64 per share. While we had strong results across the Board, including a significant reduction in our net charge-off rate and higher transaction volume growth, this quarter also benefitted from an unusually large change in reserve levels. That points to a significant improvement in credit expectations over the next 12 months.

This morning I am going to highlight the fourth quarter and then walk you through our full year results. I was pleased with Discover card sales, where sales volumes grew 6% for the quarter versus last year.

As you know, we have put in place a variety of programs aimed at growing wallet share with our primary card users. These efforts continue to payoff for us, with sales in this segment of our portfolio up 10% compared to the last quarter of 2009.

Virtually, all our sales volume growth in the first three quarters of this year was from the transactor segment of our base, and the positive volume trend from this segment has continued through the fourth quarter.

In addition though, beginning with the month of September, our customer who revolved balances on their Discover cards also increased their spending year-over-year, and this has continued through October and November.

Turning to card receivables, we finished the year down 5% from last year end, but once again fairly flat to the previous quarter. We've achieved some stability through the last two quarters and we are working to achieve some modest credit card portfolio growth in the second half of 2011.

Some of the expected growths had come from additional usage and revolving behavior as we continued to improve wallet share, and some will come through more new accounts and higher balance transfer volume.

We've already increased our balance transfer activity and promotional volumes were up approximately $500 million from last year's fourth quarter.

That being said, total portfolio loan balances will increase from the acquisition of The Student Loan Corporation portfolio in the first quarter and we expect personal loans and private student loans to grow at a faster rate than cards at least in the near term.

Our Payment Services segment generated volume growth of 21% for the quarter versus the prior year. PULSE contributed most of the growth as volume was up 27% and transactions processed were up 33% which we are very pleased with.

In addition, volume from third party issuers was up 16% year-over-year. I am particularly pleased to report a new third party credit card issuing agreement with the First National Bank of Omaha, a top 15 issuer of credit cards in the U.S.

The fourth quarter was a great finish of the year. Now I'd like to review our full year 2010 results and achievements.

Read the rest of this transcript for free on seekingalpha.com