Discover Financial Services Conference Call Nuggets: Volume Trend, PULSE and Building Reserves

Discover Financial Services (NYSE:DFS) reported its fourth quarter earnings and investors bid up the stock to end last week. We sifted through the earnings conference call and found management discussed the following important topics.

Network Volume Trend

Jason Arnold – RBC Capital Markets asked: Could you give us a little color on the network volume trend this quarter? It looks like most were down sequentially. Is this more macro driven or what other the factors apply here?

David W. Nelms – CEO responded: I was pleased with the continuing 8 percent volume growth on Discover sales.

PULSE – If you look at the full year, we were up 19 percent as I mentioned on volume year-over-year, which is one of the strongest in the world of debit.

We do see quarterly movements in this, partly because there are some chunky volumes that can move in or out. One of the trends that we saw this year is that there were a number of large issuer deals that were on hold waiting to see what the ultimate fed rules came out related to Durbin.

The second half of this year there wasn’t a lot of shares that shifted hands. I think right now we are in the middle of a lot of RFPs and I think that by April 1, when the network routing rules go in place, we will see some more shifts.

We don’t have more to report on that now, but as we’ve consistently reported, we wouldn’t expect to see any volume pickup from that until hopefully we are successful in the second quarter onward as some of this volume starts to move around in debit.


Arnold asked: It seems like there’s more opportunity than anything else for you to gain share on the PULSE side. Can you comment on that or do you want to save it for next quarter?

Nelms responded: We have been a leader in the hundred $10 billion dollar size institutions, and so I think that volume is not particularly at risk.

I would say also virtually all of our cards have two brands on the cards; we are typically a PIN debit and there’s almost always someone else’s signature on the front.

We do view it as more opportunity versus risk.

How much that opportunity is, is the thing we are working aggressively to try to pursue right now. We just can’t comment on where we’ll end up.

Building Reserves

Ryan Nash – Goldman Sachs asked: One follow-up on credit. We talked a lot on last quarter’s call that you are going to start building reserves at some point in 2012. I understand that it is pretty formulaic, but if you think about the economic background we have seen some of the data begin to improve. We see jobless claims down materially today, we have seen a pickup in GDP growth.

Are you still comfortable with the guidance that we are going to need to build reserves next year or is there any change in the outlook?

R. Mark Graf – EVP and CFO responded: No, I would be still be very comfortable with that guidance. I would say that it was based not so much on a turn in the credit environment as it was based on growth expectations.