Discover Financial Services Q4 2021 Earnings Call Transcript

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January 20, 2022

Key Takeaways

  • Record earnings in Q4 and full year: Discover reported $1.1 billion after‐tax in Q4 ($3.64 EPS) and $5.4 billion for 2021 ($17.83 EPS), highlighting the strength of its differentiated model.
  • Technology and DEI investments: The company enhanced its data and analytics platform with machine learning, modernized to a hybrid cloud, and opened a 1,000-job customer care center in Chicago’s Chatham neighborhood to boost diversity and inclusion.
  • Resumed loan growth: Card receivables rose 4% year-over-year (6% sequentially) driven by a 23% increase in new accounts and 25% higher sales volume, while new network alliances expanded global acceptance.
  • Strong credit performance: Q4 net charge-off rate improved to 1.37% (down 101 bps YoY), the reserve rate fell to 7.3% after a $50 million release, and net credit losses are guided to normalize at 2.2%–2.6% in 2022.
  • Capital return and outlook: In 2021 Discover returned $2.3 billion in buybacks and raised its dividend 14%, and for 2022 it expects high-single-digit loan growth, flat net interest margin, mid-single-digit expense growth, and continued share repurchases.
AI Generated. May Contain Errors.
Earnings Conference Call
Discover Financial Services Q4 2021
00:00 / 00:00

There are 16 speakers on the call.

Operator

Good morning. My name is Britney, and I will be your conference operator today. At this time, I would like to welcome everyone to the 4th Quarter and Full Year 2021 Discover Financial Services Earnings Conference Call. All lines have been placed on mute to prevent any background noise. After the speakers' remarks, there will be a question and answer session.

Operator

To thank you. I would now like to turn the call over to Mr. Eric Wasserstrom, Head of Investor Relations. Please go ahead.

Speaker 1

Thank you, Britney, and good morning, everyone. Welcome to this morning's call. I'll begin on Slide 2 of our earnings call. You can find in the financial section of our Investor Relations website, investorrelations. Discover.com.

Speaker 1

Our discussion today contains certain forward looking statements that are subject to risks and uncertainties that may cause actual results to differ materially. Please refer to our notices regarding forward looking statements that appear in our Q4 earnings press release and presentation. Fiscal year 2020. Our call today will include remarks from our CEO, Roger Hochschild and John Green, our Chief Financial Officer. After we conclude our formal comments, there will be time for a question and answer session.

Speaker 1

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

Speaker 2

Thanks, Eric, and thanks to our listeners for joining today's call. I'll begin by reviewing the highlights and key metrics business. Then John will take you through the details of our Q4 results and our perspectives on 2022. 2021 was another year of unique challenges related to the pandemic, and I'm very pleased that once again the Discover team was able to successfully execute against our business priorities in a fluid operating environment. This was evident in our 4th quarter results, which were the capstone to an outstanding year.

Speaker 2

For the Q4, we earned $1,100,000,000 after tax to shareholders or $3.64 per share and for the full year $5,400,000,000 after tax dispositions or $17.83 per share. These results underscore the strength of our differentiated model and were achieved as we continue to make meaningful enhancements to our capabilities and invest for future growth. Discussion. Let me share a few examples from this past year. Throughout 2021, we continue to make advancements discussion.

Speaker 2

Our data and analytics platform, enhancing our capabilities in areas including targeting, collections and fraud detection. We also made investments in machine learning to provide faster and better insights to improve customer personalization, And we continue to modernize our infrastructure and build out our hybrid cloud platform. We also opened a new customer care center in Chatham, to a vibrant African American community on Chicago Southside. Once fully operational, the center will provide nearly 1,000 full time jobs. To discuss our Chatham Center challenges the traditional notions of corporate site selection, has helped us connect with a talented pool of diverse candidates and suppliers, is transforming how we approach diversity, equity and inclusion, and it is already performing at an industry leading level.

Speaker 2

We hope our commitment to Chatham will serve as a springboard for further economic development in other areas that have long been denied opportunity. Slide 4 of our presentation captures another important element of our results, which was our pivot into new account acquisition as the Economic recovery took hold in late 2020 early 2021. In the face of intensifying competition, Our value proposition of cash back rewards, no annual fee and industry leading service remain very attractive to consumers. The strong level of card acquisition contributed to our return to loan growth over the second half of last year. In payments, we continue to expand our business, increase network volume and establish new strategic partnerships.

Speaker 2

We expanded global acceptance and announced new network alliances in Portugal, Bahrain, Jordan and Malaysia that will benefit us discussion as cross border travel recovers. We remain committed to building out our international acceptance and we'll continue to make investments to expand our reach. Discussion. Our record earnings through the year generated significant capital, which we continue to put to good use. In addition to our investments in acquisition, brands, technology and people, we also returned significant capital to shareholders through dividends and buybacks by repurchasing $2,300,000,000 of common stock and increasing our quarterly dividend by 14%.

Speaker 2

Discussion. As we look forward into 2022, I'm very optimistic about the trajectory of our business. Discussion. While macroeconomic conditions created strong tailwinds this past year, we acted on opportunities to strengthen our business, to discuss our financial results. We started the new year in an excellent position, and I'm confident that our integrated digital banking and payments model will continue to create long term value for our shareholders and customers.

Speaker 2

I'll now ask John to discuss key aspects of our quarterly financial results in more detail.

Speaker 3

Thank you, Roger, and good morning, everyone. Results. As we review our Q4 results, I echo Roger's points that the actions we took last year position us for strong performance in 2022 and beyond. Results. I'll begin with our financial summary on Slide 5.

Speaker 3

Our strong 4th quarter results were characterized by accelerating receivable growth, decision to provide an update on our financial results. Revenue net of interest expense increased 4% from the prior year, Excluding $139,000,000 unrealized loss on our equity investments, total revenue was up 9%. Net interest income increased 4%, driven by growth in average receivables and an 18 basis point improvement in our net interest margin, which was sequentially flat at 10.81%. Our NIM trend reflects the continued benefit from decreased funding deposit costs and lower interest charge offs. So these were partially offset in the 4th quarter by a higher mix of promotional rate balances.

Speaker 3

The growth in receivables was largely driven by card, which was up 4% year over year and 6% sequentially. Discussion. The primary drivers of year over year growth were continued strong sales volume and significant new account growth throughout 2021, which was up 23% year over year and 13% versus 2019. As has been the case for most of last year, to discuss the financial results. A significant portion of the benefits from strong sales and new accounts was offset by the sustained high payment rate.

Speaker 3

The payment rate leveled off during the quarter, but remains approximately 500 basis points above pre pandemic levels. We currently expect that the payment rate will decline slightly over the course of 2022. However, Our expectations for card receivable growth is robust as I'll detail in a few moments. Our student loan portfolio also contributed to our growth. Organic student loans were up 4% over the prior year benefiting from the to turn to in person learning in 2021.

Speaker 3

We continue to gain share in this product and are well positioned for continued organic expansion. Personal loans decreased 3% year over year, mainly driven by high payment rates, but were sequentially flat as we returned our underwriting criteria to pre pandemic levels. The second significant driver of our revenue growth to discuss higher net discount interchange revenue, which increased $103,000,000 or 43%, driven by a 25% increase in sales volume year over year. The strong volume has continued into this year. Sales are up 24% through the first half of January.

Speaker 3

One significant item that relates to our net discount interchange revenue is our rewards cost. And having covered most of our key revenue drivers, I'll point your attention to the reward rate reflected on Slide 8. We continue to benefit from strong card member engagement with our cash back rewards program. Our rewards cost increased versus last year on higher sales volume. However, the reward rate declined 3 basis points year over year to 9 basis points sequentially.

Speaker 3

This reflects the benefit of our integrated model and our discipline in managing the program while delivering substantial value to card members and merchant partners. For the full year 2021, our rewards rate was 1.37%, up 2 basis basis points from the prior year. Consistent with the historical trends, we expect about 2 to 4 basis points of annual rewards cost inflation, driven mostly by shifts in mix. Now I'd like to spend a moment speaking about expense trends on Slide 9. Total operating expenses increased $34,000,000 or to 3% year over year.

Speaker 3

Focusing on the most significant items here, marketing expense was up $112,000,000 as we continue to invest to new account growth and brand marketing with the launch of our new media campaign, which went live across all channels in the quarter. This pushed our marketing expense towards the top end of our previously guided range. Employee compensation was down $5,000,000 year over year, driven mainly by a $26,000,000 charge last year. Excluding this, our comp expense was up 4% year over year, driven largely by a higher bonus accrual. Information processing was down $73,000,000 year over year and professional fees increased as a result of higher recovery fees.

Speaker 3

Moving to credit on Slide 10. The net charge off rate improved to 1.37% in the quarter, to a decrease of 101 basis points year over year and a 9 basis point improvement from the prior quarter. Net charge off dollars were down $218,000,000 from the prior year and decreased $12,000,000 sequentially. Strong credit performance continued across all products. Card net charge offs were down 113 basis points from the prior year Moving to the allowance for credit losses on Slide 11.

Speaker 3

Our reserve rate continued to decline, Dropping 38 basis points to 7.3%. Two factors contributed to the decrease in reserve rate. Discussion. First, we released $50,000,000 from reserves during the quarter, driven by the continued strong credit performance of our portfolio and the relative stability of the macroeconomic outlook. These factors were partially offset by the 5% increase in total loans from the prior quarter.

Speaker 3

Our future reserves will be dictated by our portfolio credit trends, our receivable growth and any changes to our macroeconomic assumptions. Results. Looking at Slide 12. We remain extremely well capitalized and above our 10.5 to returning capital to shareholders as we executed on our share repurchase plan and bought back $773,000,000 of common stock in the quarter dividend of $0.50 per share. Looking at funding, average consumer deposits decreased 3 to $1,000,000,000 year over year and declined 1% sequentially.

Speaker 3

This sequential decline was driven by a 5% decrease in consumer CDs, to 2021 and finish the year with consumer deposits representing 68% of total funding. We will continue to target 70% to 80% of discussion. Moving to Slide 13, where we'll provide some perspectives on 2022. We entered the year in a very strong position and our outlook reflects this. We expect loan growth in the high single digits.

Speaker 3

This view is based on current expectations of sales trends and the contribution from recently acquired accounts combined with a very modest decline in the payment rate. We believe this view of payment rates substantially derisks our loan growth forecast. Discussion. We expect our NIM rate to be relatively in line with the full year of 2021 with quarter to quarter variability. Fiscal year 2020.

Speaker 3

We expect to benefit from higher loan yields with rising interest rates. This may be offset by other factors, including a higher mix of promotional rate balances, to some degree of credit normalization and higher deposit rates, which will be subject to funding needs and competitive dynamics. Turning to expenses. We expect our total GAAP expenses will increase at a mid single digit rate this year. We'll continue to invest for growth as we see profitable opportunities and currently expect that our marketing investments to be above 2019 levels.

Speaker 3

Outside of marketing, we expect operating costs to increase at a low single digit percent level reflecting disciplined expense control. Our commitment to positive operating leverage over the medium term decision remains a priority. We expect net credit losses will average in the range of 2.2% to 2.6% for the full year. As credit normalizes from historically low levels in 2021, we expect net charge offs to increase sequentially over the course of the year. Discussion.

Speaker 3

Lastly, we remain committed to returning substantial capital to shareholders through dividends and share buybacks. And expect to announce a new share repurchase authorization next quarter. In summary, we had an excellent 4th quarter and full year with Accelerating loan growth driven by robust account acquisition and strong sales volumes, excellent credit performance and a reduction in the reserve rate, disciplined management of operating costs and sustained return of excess capital to shareholders. I'm exceptionally pleased with Discover's execution against our business priorities in 2021. Our value proposition continues to resonate with consumers.

Speaker 3

We've prudently invested for growth, resulting in significant new accounts growth and strong sales. We continue to optimize our funding mix and actively manage core deposit costs. These actions and the improved macroeconomic outlook have positioned us well. With that, I'll turn the call back to our operator, Britney, to open the line for Q and A.

Operator

You may do so by pressing the pound key. We'll take our first question from Moshe Orenbuch with Credit Suisse. Your line is open.

Speaker 4

Great. Thanks and congratulations on Pretty strong numbers here. Maybe just focus on the account growth. It was up 11%. Could you talk about like how that compares to discuss in terms of just raw numbers of accounts to where you would have been pre pandemic and the cost and anything you've done kind of from a difference in channel or credit loss to get there.

Speaker 2

Yes, we don't disclose the number of new accounts, but what I would to say in terms of credit, our card credit policies are pretty much on top of where they were pre pandemic. Costs have gone up since the low levels that we saw during the pandemic as we sort of kept marketing and a lot of others pulled back. But But I would say as we look forward into 2022, our expectation is the cost per account will be roughly where it was pre pandemic.

Speaker 4

Great. And just as a follow-up, very pleased to hear about the commitment to operating leverage and the numbers You put out there would suggest kind of an upper single digit revenue growth rate and a mid single digit expense growth rate. Could you talk about to Even if it's unlikely, what would happen to your expense expectations if revenue growth just didn't materialize? Like how would you to make adjustments there.

Speaker 3

Yes. Moshe, I'll take that one. We'll react based on the company performance and opportunities that we see in the marketplace. So over the past couple of years, I feel like the team has done a really, really good job in terms of making calls in terms of expense allocations. We'll continue to do that to make sure that we're positioned for growth and marching towards the to positive operating leverage that we talked about.

Speaker 4

Thanks very much.

Operator

We will take our next question from Mark DeVries with Barclays. Your line is now open.

Speaker 5

Yes, thanks. Could you give us a little more color about what you're seeing in credit right now? I mean, I think The guidance around charge offs calls for some pretty meaningful normalization in 2022. And what kind of gets you to the low end of that guidance range and what gets you to the high end? All right.

Speaker 5

Great. And what gets you to the high end?

Speaker 3

Great. Mark, thanks for the question. So what we're seeing in the portfolio is to really, really strong performance. I think the numbers in the quarter demonstrate that. We are seeing some difference between to higher FICO and lower FICO account performance overall, all within expectations.

Speaker 3

So What we're projecting here is a slow normalization of credit. Discussion. And in terms of the guidance that we reflected here, we've got pretty good line of sight to the 1st 6 months just as the accounts will go through their normal roll rates and gives us an ability to predict quite accurately. Once we get out beyond 6 months, we rely more heavily on our models and the models themselves discussions. You know, are built with a number of assumptions.

Speaker 3

2021 was frankly, it was a tough year to call based on how we had designed our models and what actually happened in the portfolio. So what we decided to do is give From my standpoint, a relatively broad range that we think over time we'll be able to tighten. And in terms of lower end versus higher end, strong portfolio performance, The slight difference that we saw between the higher FICO and the lower FICO's, that continuing to to kind of roll out as we expect and a positive macro environment should bring us towards the lower end.

Speaker 5

Okay. That's helpful. Just to follow-up on that. On the model that you use, is there some element of just Mean reversion when charge offs are this low relative to kind of normal, that'll push your estimates higher Even if kind of all the macro drivers seem like they're more of a tailwind than a headwind?

Speaker 3

Yes, there is a level of mean revision in there in the 2nd part of the year. And just one other piece of, I'll say, information. So you can think about The breakout, at least this is how we thought about it, of charge offs, to the predominant piece in the second half of the year. So you can think 40 five-fifty 5 split between first half and second half We'll continue to update that over the year.

Speaker 5

Okay. That's very helpful. Thank you.

Operator

Discussion. We will take our next question from John Hecht with Jefferies. Your line is now open.

Speaker 6

Good morning, guys. Thanks very much for taking my questions. Just thinking about NIM, understanding you guys are guiding for a relatively flat NIM this year. But even thinking this year and beyond given that we're in a rate hike cycle, you're in I guess the last cycle was 2015 to 2019 and Your car deals went up about 50% of the Fed funds changes and prime changes And your cost to Capital One or your deposits went up a little less than that. I'm just wondering, as we go into this rate cycle, Should we expect any differences in that kind of in that call it NIM input range?

Speaker 6

Is there any mix shift in the deposits that will cause the betas to be different there? Or is there any different policies with respect 0 balance transfers that we should think about just in terms of the quarter to quarter fluctuations as the government or the Fed raises rates.

Speaker 3

Yes. It's actually a pretty complex question there. So Rather than try to hit each of the elements, I'll give you a view in terms of how we thought about NIM for 2021. So we do expect some impact to NIM from credit normalization. We also are expecting a higher mix of BT and promotional balances, which will also impact net interest margin.

Speaker 3

We do get nice fees from that, but certainly net interest margin will be impacted. The revolve rate, as the payment rate starts to normalize, we'll see some benefits there. Fed funds rate changes, we plan for 2, to 2 in the year. If there's more, that'll create some upside. And in terms of impacts there, You could expect per fed change somewhere between 3 5 bps On a total year basis on NIM depending on timing.

Speaker 3

And then funding, we're still going to see some funding benefits from to the actions we did to optimize our debt stack in 2020 2021. So from that standpoint, it gets us to about flat, but there's a lot of moving pieces. In terms of deposit pricing, There's still a wide gap between where we're priced and the brick and mortar banks are priced. So somewhere close to 45 basis points. Now the digital banks, most have Increased deposit pricing about 10 basis points over the past 3 to 4 weeks.

Speaker 3

We're a lagger on that. At some point, our funding needs and competitive dynamics will be such that we'll take a look and make appropriate changes and we'll do that throughout the year. So The deposit betas, specifics around that, I would rather think about competitive dynamics and funding needs in order to get a view on how we're going to price deposits on the up cycle.

Speaker 6

Okay. That's very good color. Appreciate that. A follow-up question, I guess unrelated is, You're in the zone of where you were on your allowance levels as we entered post CECL implementation pandemic era. Are we at a point now where you kind of say this is the new base for ALL Ex changes in our economic forecast or is there any kind of further room for Allowance bleeds tied to increases during the last couple of years.

Speaker 3

Yes. So, we go through a pretty robust process every single quarter to make sure that our reserves are Fairly stated under GAAP. Now, when we did CECL day 1, decision. We had we were seeing charge offs in the low 3s and we ended up posting reserve rate of, I think it was 6.09%. So as we look at where we are today, where it's at around 7.2%.

Speaker 3

Assuming strong credit performance and a positive macroeconomic outlook. My sense is that there is some opportunity to to take that reserve rate closer to day 1.

Speaker 6

All right, perfect. I really appreciate the answer. Thanks very much.

Speaker 3

You're welcome.

Operator

We will take our next question from Rick Shane with JPMorgan. Your line is now open.

Speaker 4

Hey guys, thanks for taking my questions. I'm actually curious if there is some sort of eightytwenty rule that impacts deposit. What I'm curious is if you guys have done any analysis on revolve versus transaction behavior to differ materially by spending categories specifically like everyday spend versus large episodic spend. And I'm wondering if to what we're seeing in terms of payment rates with all the other factors is being impacted by BNPL.

Speaker 3

Yes. I wouldn't say there's an eightytwenty rule on payment rates. Quite honestly, as we looked at it in 2021, we didn't call the curve right. To discuss the financial results. And so what we did in the 2022 guidance is assumed a very modest decrease in payment rate.

Speaker 3

We felt like that derisked our loan growth. In terms of kind of behaviors between revolvers and transactors. That payment rate has been relatively consistent. The one difference in our portfolio discussion is the new accounts that we originated in 2020 tended to be higher FICO's. So more of those tend to transact versus revolve, but we'll see as the liquidity to end up getting used in the overall economy and what that does to payment rates.

Speaker 3

So, we've modeled it multiple different ways. There's really no standard rule of thumb. It's frankly somewhat dynamic in terms of what we're seeing month to month and quarter to quarter.

Speaker 2

And just to build on that, we look pretty carefully by merchant, by customer segment. There's nothing to support a view that buy now, pay later is having Any impact on payment rate.

Speaker 4

Great. I really appreciate the answers guys. Thank you very much.

Speaker 7

You're welcome.

Operator

Decision. And we will take our next question from Sanjay Sakhrani with KBW. Your line is open.

Speaker 8

Thanks. Good morning. First question, I guess, for Roger. Just on the competitive backdrop, obviously, we've gotten bank earnings and a lot of the large banks are talking about to investing more in marketing and you guys have some pretty aggressive growth targets. How should we think about sort of the risks to that target given the competitive backdrop?

Speaker 2

Good question, Sanjay. As I mentioned earlier, our forecast for next year is cost per account relatively flat to where it was before the pandemic. And so I think This sort of focus on competition is a little bit overblown. The card business is just always competitive. You have big players with good capabilities.

Speaker 2

To Each issuer out there has their set of products, set of channels. And I think some natural limits discussion on how much money they can be put to work effectively. So I don't see it as a particularly high risk to our 2022 growth forecast. And we have a very differentiated product. We're seeing good benefits on the acquisition side from our investments in analytics.

Speaker 2

So, yes, we feel good, even in the current environment.

Speaker 8

Okay, great. I guess I have one for John. The non interest income revenue line to has done quite well over the course of this year, even excluding obviously excluding the investment gains. Could you just talk about What kind of growth we should expect in that line going forward?

Speaker 3

Yes. The big driver there was obviously discount and interchange revenue, which was up to 28% year over year and then after rewards cost, 43% in the quarter. So super strong growth there, which That will generally run consistent with sales and we're expecting sales to not to stay in the mid-20s, but kind of come down to kind of strong double digits and then into weaker double digits by the Q4. I don't know if that's right or not. It seems like there's been a lot of benefit to take a look at the new account acquisition and also where our card has been positioned with people's wallets.

Speaker 3

So that's been positive. There's also the factor that people are using less cash and charging more. So that'll continue to benefit sales interchange and net discount and interchange. In terms of the other items, the amount of cash in the economy to actually help cash advance fees, which was positive. And our expectation is that We'll have, outside of discount and interchange growth, growth fairly similar to net interest income.

Speaker 8

Okay, great. Thank you.

Operator

Discussion. And we will take our next question from Betsy Grunsak with Morgan Stanley. Your line is open.

Speaker 9

Hi, good morning.

Speaker 2

Good morning, Betsy.

Speaker 9

Hi, can you hear me? Okay. Yes. One, maybe it's a little bit of a theoretical question, but I'm just trying to understand how you are thinking about borrower capacity, the borrowing capacity of your customer set relative to pre COVID. I'm asking a question because jobs more available, wages rising.

Speaker 9

So that seems like they might have more capacity to borrow, But then we've got inflation increasing. So, yes, how do you think through those things?

Speaker 2

It'll, of course, vary by segment, but certainly households that are seeing rising incomes will have a greater ability for debt service. To the Q4. And for many households, that's how they determine how much debt they take on. It's complicated a bit by some households still having pent up savings to from strong earnings and not many opportunities to spend. And of course, other costs going up, whether it's childcare or day to day expenses.

Speaker 2

On one hand, we'll drive increases in sales, But on the other hand, decreases disposable income for debt service. So mix of factors, but we net net would expect strong consumer demand for credit next year.

Speaker 9

Okay. And then as I'm thinking about the other

Speaker 2

to the 2nd quarter. The next

Speaker 9

question comes from the line of Alex. The Could you talk through how you see those drivers impacting the 2022 growth guide that you've got?

Speaker 2

Sure. So student loans, we feel really good about where we're positioned in the market, our products, our brand, our ability to take share. What's a bit the wildcard is just enrollment. And I think enrollments were down year over year, which was a to surprise to I think the entire higher education industry. There's a bit of a correlation, the stronger the job market, fewer people to decide to pursue an education because they're making too much outside.

Speaker 2

So I think it'll be more that factor and we'll see peak season, but I'm confident in our ability to continue gaining share. For personal loans, we took a little longer to return to pre pandemic credit criteria for that product, just given the higher volatility. But as John said, quarter over quarter, we're now flat. And so we would expect that to return to growth In 2022.

Speaker 9

And the balance transfer activity, there's a bit of a to the link between personal and card. I know balance transfer comes before personal loan growth, but how is that to 2nd quarter lagging in at this stage. Is that has there been a take up beginning there yet? Or is that more of a back half twenty twenty two outlook.

Speaker 2

So John talked about promotional balances as having an impact on NIM. I would say a lot of that is driven by new accounts. So as you ramp up new accounts, you'll see that, but also portfolio activity as well.

Speaker 9

Thank you.

Speaker 1

Thanks.

Operator

Discussions. We will take our next question from Kevin Barker with Piper Sandler. Your line is now open.

Speaker 10

Thank you. Given your growth rates that you're projecting out there. I mean, do you feel like you can achieve a sub-forty percent efficiency ratio sometime in the foreseeable future, whether it be run rate close to late 2022, maybe early 2023? Discussion.

Speaker 3

Yes. Thanks, Kevin. We specifically commented on positive operating leverage. So As we deliver that, obviously, the efficiency ratio will improve. My expectation is that to We can get into the high-30s within the medium term.

Speaker 3

We built the plan, essentially contemplating significant investment in marketing And then working through the other elements of the cost structure in order to create as much to drive new growth. As that model continues to build upon itself, My expectation is that those high-thirty numbers are certainly very, very achievable.

Speaker 10

And then a follow-up on some of your comments around credit. I believe you said you expected to increase sequentially throughout the year. Did I hear that correctly? And then I mean, could you just give us a little bit more detail on your expectations for the cadence of net charge offs given to We're at exceptionally low level, and typically you have quite a bit of seasonality. Can you just give us a little bit more color around to your expected cadence on charge offs throughout the year.

Speaker 3

Yes. So, it'll be difficult to expand more deeply upon the comments that I've already made. So, we do expect to increase sequentially. There is some degree of seasonality. I don't view that as like a material driver to what we're going to be seeing.

Speaker 3

And I also mentioned that the charge offs are more weighted to the second half of the year than the first half of the year. And then we've got pretty decent line of sight to the first half. That split out somewhere around 45 first half, 55 second half is probably as deep as I can go On

Speaker 1

the charge off numbers right now.

Speaker 6

Okay. Thank you for the color.

Speaker 3

Yes, of course.

Operator

Discussion. And we will take our next question from Don Fandetti with Wells Fargo. Your line is now open.

Speaker 3

Hi, good morning. Roger, as you come out of the pandemic, I was just curious if there's any areas of strategic interest, new products, etcetera, that you're looking at. It's been pretty consistent for the last several years.

Speaker 2

Yes. Certainly, we're always looking for new to the Q4 and full year 2020 1. And there, the versatility of our capabilities, you saw some of that with our partnership with Sezzle in terms of to our ability to provide easier connectivity to merchants. So on the payment side, both in the U. S.

Speaker 2

And globally, we're looking for opportunities. On the card side, we feel really good about the product set we have. We are virtually 100% focused on consumer. Discussion. I think there is a huge opportunity to continue to grow our non card products.

Speaker 2

And so we talked about investing more on marketing our deposit products before the pandemic. Clearly, when we were in a significant excess liquidity position. It didn't make sense to put a lot of marketing behind deposits, but that's something I would expect to see in 2022.

Speaker 3

Okay. And any changes on your international acceptance push or is it sort of you just kind of

Speaker 2

to continue to push out. I think what you heard in the call, Our favorite way of expanding internationally is through network to network partnerships. It's just much more cost effective to Dan, working with individual acquirers, although we do that as well. There's also a big focus on acceptance Distributed Remote Commerce, everything from transit implementations. But again, we're now up to 26 net to net partnerships And I feel that there's room to continue growing.

Speaker 2

Recently announced a partnership in Serbia actually this week.

Speaker 6

Discussion. Thank you.

Operator

And we will take our next question from Dominick Gabriele with Oppenheimer. Your line is now open. Great.

Speaker 11

Thanks so much for the time.

Speaker 7

I just want to follow-up on one

Speaker 11

of the answers you had before. Do you think that the ability to reach more customers and spur spend through marketing to as an overall direct relationship between which FICO band or income level these customers have. And is this why you think perhaps There could be those diminishing returns on marketing investment at perhaps slightly different overall rates between what customer base one Issuer may have versus another? Thanks. I just have a follow-up.

Speaker 2

Yes. I don't think we said we expected diminishing returns on marketing. Credit is pretty similar to what it was pre pandemic. And I mentioned our projected cost per account and a lot of our marketing does go to new accounts. Cost per account, we're projecting that to be pretty much on top of where it was pre pandemic.

Speaker 2

Different issuers Certainly have different business models. There's one who's particularly focused on subprime. Others are much more aggressive at the super prime. Yes. We have been very clear for many, many years that ours is a lend focused business, going after that prime revolver segment.

Speaker 2

We've to tailor to our products for that, our underwriting capabilities. And again, we feel very good about the return we're getting on the dollars we spend

Speaker 12

in marketing.

Speaker 11

Great. Thank you. And can you maybe talk about how the competitive to the Q4 and full year 2021. And what products are likely to either meaningfully compete, not ultimately compete and somewhat compete with your everyday spend credit card

Speaker 2

Yes. I think clearly what everyone is watching is Buy now, pay later. As I mentioned earlier, we haven't seen that have a noticeable impact on our base. In my mind, it's closer to traditional sales finance. So there have always been competing products out there, whether it's on the private label decision to decide whether it's personal loans for debt consolidation, etcetera.

Speaker 2

So we focus on getting a broad mix spend. Even through this year, we're seeing strong performance across every category. Travel is holding up actually in January surprisingly well, given the state of that pandemic. So we think we'll continue to grow across categories. And in fact, it's one of the beauties of our 5% program.

Speaker 2

It sort of reinforces different categories of spend on a rotating basis as opposed to products that are really particularly tailored to an individual category of spend.

Speaker 11

Perfect. Thanks so much.

Operator

And we will take our next question from Robert Napoli with William Blair. Your line is now open.

Speaker 13

Thank you. Good morning, everybody, Roger, John. Nice quarter. Really like the guide on loan growth versus expense growth. Just on the expense growth side, I mean, if you There's a lot of investment going on.

Speaker 13

It's certainly at some of the major banks on technology. And I know that Discover has invested in technology Over the years, that was just maybe just your thought process on where your tech stack stands? Your thoughts on private cloud versus public cloud and the need to invest to compete over the next several years?

Speaker 2

Discussion. Yes. Good question. I think our perspective may be a little different than some of the big banks. And of course, we have to a narrower range of businesses.

Speaker 2

So I can't really comment on some of their investment. Certainly, we are focused on competing with the fintechs, to discuss. But it's not just about spending money. It reminds me of it's like someone saying, I'm just going to keep eating more and more until I lose weight. The competition, those Fintechs are not spending more on technology.

Speaker 2

Our focus is around capabilities. It's on agility. It's on speed to market. And so if you look at last year, once you sort of sort through for one time items, technology spend was relatively flat, But that doesn't mean there wasn't a huge focus around our capabilities. We've talked about our investments in data and analytics.

Speaker 2

So it's really more about speed and you don't get there just through sheer dollars of spending.

Speaker 13

Okay. And I guess, I mean, just private cloud versus public cloud and the importance of Your cloud strategy? Yes. So great question.

Speaker 2

We're focused on a hybrid cloud strategy, so a mix of both. I think there's sometimes companies seem to take a purest element that there's something great about having 100% of your applications on to the cloud. Whether or not your GL resides on the cloud is not going to really make a difference for your business. But we are heavy users of the public cloud, In particular for our data and analytics areas where the speed and massive amounts of storage are critically important.

Speaker 13

Thank you. And if I could just sneak in, your spend growth is really strong. How much of that is inflation, Ben, what are your thoughts on inflation? How it to your business and the impact that maybe it's having on the spend growth numbers you reported, which were pretty strong.

Speaker 3

Bob, I'll take that. Yes, we've been really pleased with the sales running through the card. The inflation has had a small impact. So you think to kind of on average maybe 1% to 2% in 2021 and 2022. We didn't model that out specifically.

Speaker 3

My sense is it'd be 2%.

Speaker 13

Great. Thank you. Appreciate it.

Operator

And we will take our next question from me here back to you with Bank of America. Your line is now open.

Speaker 7

Hi, good morning and thank you for taking my question. Maybe first, I just wanted to go back and just clarify a little bit about your guidance. I Just wanted to make sure I understand some of the key assumptions embedded in there. So firstly on payment rates, I think you said you expect to slightly decline a little bit in 2022. And I was wondering if we were to see normalization happen to a little bit faster.

Speaker 7

Let's say they normalize back to the normalized levels in 2022. Would that push your loan growth up to like low double digits or am I be or is that like too ambitious in terms of like the impact? What I'm trying to understand is the impact of to the payment rate on loan growth there. And then just also related to just this guidance question, On rate hikes. And I apologize if I missed this in your earlier comments.

Speaker 7

Did you say how many rate hikes or how many basis points you were assuming in your guidance?

Speaker 3

Yes. So we assumed thanks for the questions. We assumed 2 rate hikes And in our guidance and in terms of payment rate, As I said, very modest improvement, so or reduction. So If payment rate were to normalize at the pace you just described, Widgey, I don't think it will. But if we were to do that, it would certainly be very accretive to loan growth.

Speaker 3

I'm not going to get into specifics whether it takes to double digits or not.

Speaker 7

Okay. No, I understand that. That's helpful though. Decision. And then just wanted

Speaker 4

to the other question I want

Speaker 7

to ask is just about understanding your credit underwriting or risk appetite currently. You did mention normalization happening maybe a little bit more on the lower FICO's. Have you tweaked your underwriting or marketing in the last to a few weeks or quarters in response to that or is it still very much as expected, so it's all systems go?

Speaker 2

Yes. No, we haven't. And I think it's important to note that the life of loan losses assumptions we use for new account underwriting It is not driven by where losses are currently. So, John, we're seeing all portfolio performance and what we're seeing, But we use sort of by segment and actually by individual account forecasts of life of loan as we determine our marketing and credit criteria. Discussion.

Speaker 2

Thank you. Thanks.

Operator

And we will take our next question from Bill Carcache with Wolfe Research. Your line is now open.

Speaker 14

Thank you. Good morning, Roger and John. Is there any reason to be concerned about the pace Of credit normalizing faster than receivables growth?

Speaker 3

From my perspective, no. And I'll tell you why. First, The macros are the macroeconomic conditions are super positive, right? So there's more job openings than there are People looking for jobs. The consumers will have more dollars into their paycheck as a result of the disinflation.

Speaker 3

And there is a substantial amount of to savings still left in the economy from largely from kind of change in behaviors and government stimulus. So I'm not to frankly seeing that as a risk in 2023 excuse me, 2022. So we get out into 2023, to there's less certainty around that.

Speaker 14

Understood. Maybe a related follow-up. There's a lot of consternation around NCOs normalizing higher. But do you think that to the environment that we're in today, where you're seeing the revenue benefits from the accelerating loan growth that you're putting up on one hand. And then also on top of that, you've also got the And so when you think about the risk of growth math headwinds and the need to build reserves on to that strong loan growth that you're seeing, the risk that, that overwhelms the revenue benefits from the loan growth and the fact that the reserve rate is higher.

Speaker 14

Can you talk to that interplay and how you're thinking about that?

Speaker 3

Yes. So when we let me start with the reserves because it plays into to the rest of your questions. So when we looked at reserves for the quarter, what we wanted to see was The impact of the ending the end of most of the government support programs, most ended in September. So we had 1 quarter worth of data. We looked at it.

Speaker 3

We saw no real change to the portfolio dynamics. We're hoping to see another quarter and then reevaluate overall reserve rate. But that day one number and I'll say the normalized charge offs in the 3s, would support a view that to discuss the Q4. Down the road, we'll have some opportunity on reserves. In terms of new vintages and the kind of charge off impacts from those.

Speaker 3

This company has been through years years of cycles with new vintages. We're very thoughtful in terms of how we do the underwriting. We've got some improvements from the within underwriting from the advanced analytics tools that we've put in place. So my sense is portfolio seasons, we're going to see some increases in charge offs, but well within the expectations of how we underwrite to discuss and well within the expectations of this guidance in the macroeconomic outlook.

Speaker 14

Very helpful. Thank you for

Speaker 7

taking my questions.

Speaker 3

You got it, Phil.

Operator

And we will take our next question from Menjal with Deutsche Deutsche Bank. Your line is now open.

Speaker 15

Hi, great. Good morning, guys. I wanted to follow-up with a question on the competitive environment. We've seen a few competitors coming in with new offerings. And I was So I'm hoping for some more color as to whether you've seen, any read throughs to possibly yields, possibly tightening or sort of anything else outside of elevated marketing spend with this increase in competition.

Speaker 2

Yes. Great question. In general, the competition takes the form of to the Q4. Higher rewards, increased marketing spend, you'll see some players start putting up big one time signing bonuses as they look to grow. To some players may start extending their promotional periods, but given sort of the inability to reprice cards post card act, you tend not to see it drive yield compression.

Speaker 2

And as I mentioned earlier, a lot of those products and the competition seems to be targeting a sort of super prime Transactor segment that is not one that we aggressively go after. So our projection for flat cost per account next year reflects our view on our ability to compete in this environment.

Speaker 15

Got you. Great. And then secondly, John, I want to sort of circle back on your comments regarding the difference That you're seeing between higher and lower FICO scores. I mean, are you sort of seeing that in early stage delinquencies sort of diverging? Just Any other further details that you might be able to provide in that specific difference?

Speaker 3

Yes. It's in the kind of roll to 1, so one delinquent bucket out there. And the fact that we're talking about it is, I'll say, It is intended to indicate that we're paying attention to the entire portfolio and that we have to get a growing comfort in terms of how the credit outlook is in the performance of the company into 2022. Discussion.

Speaker 15

Got it. Thank you for taking my questions.

Operator

And we will take our next question from Bill Ryan with Seaport Research Partners. Your line is now open.

Speaker 12

Good morning. Thanks for taking my questions. Just a couple of things. First on promotional balances. Decision.

Speaker 12

Looking at your portfolio today as a percent of the total, where are you versus kind of like the history of the company or the historic norm, if you will? And what is the typical duration of the promotional balances? And then I'll go ahead and ask the second question. But It looks like there's a little bit of a drop in protection product revenue this quarter as a percent of the portfolio. I'm just curious if there's any specific callouts there.

Speaker 12

Thanks.

Speaker 3

Okay, great. So the kind of the promotional balance content of the portfolio, We tend not to kind of go into expansive detail about that. My comments on net interest margins should give an indication that we intend to to use that as a tool to help some origination activity. In terms of the protection revenue, so we have an existing product that we stopped marketing some time ago to essentially providing value to the customer set. But if you don't market a tool, obviously, revenue line gets impacted.

Speaker 3

We have a new product that we launched, very, very soft We actually haven't done any broad marketing yet. So my expectation is that That line will be flat to down in 2022.

Speaker 6

Okay. Thank you.

Speaker 1

All right. Well, Brittany, I think we're going to conclude our call here. But thank you all for joining us. And if there's any additional follow ups, Please reach out to us here in Investor Relations. Thank you and have a great morning.

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