Discover Financial Services Earnings Call Nuggets: Payment Protection, Interchange Revenue
On Thursday, Discover Financial Services (NYSE:DFS) reported its third quarter earnings and discussed the following topics in its earnings conference call. Take a look.
Ryan Nash – Goldman Sachs: So, just on payment protection, now that you’ve settled with the agencies and refined your prices. Can you just help us, how we think about that line going forward. I know you’ve said historically, it should migrate lower, and I know that you have changed some of your practices and pulled back or marketing. If you could just give us a sense how we should think about that as we look forward?
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R. Mark Graf – EVP and CFO: Ryan its Mark. I guess what I would say is, we do continue to market the products, but the best guidance I can give you at this point in time is we continue to expect that line item as you well noted to decline over time. We’re still working through a number of things in that consent order and until all that’s finalized it’s really hard to give you more definitive outlook.
Ryan Nash – Goldman Sachs: Then, I guess on a – one follow-up just in terms of margin, I think you said Mark that you think it’s going to be elevated from now to the end of year, but can you help us think of how we should think about the outlook as you look beyond, and I think you’ve said, as we move into year end, we should start to migrate towards the 9%. Any change in that outlook. I know some of the maturities slow as we look out over the next couple of quarters, but anything beyond just the next quarter or two?
R. Mark Graf – EVP and CFO: Yeah. I would say we can see a path to an elevated margin beyond just the next quarter or so. I’m a little reticent to say it keeps getting better forever and ever because there can be shocks to the funding environment that change things, and at some point in time, credit will actually turn on us, and as interest charge-offs won’t continue to decline at the rate they have. But at this point and time, Ryan, I guess what I would say is, clearly, the margin can remain elevated beyond the end of the year. Exactly how much longer, candidly remains to be seen.
Sanjay Sakhrani – KBW: I guess, the question I have is on one of the more significant inter-quarter items that you guys talked about earlier is the deal with PayPal. I was wondering David, can you just talk about how we should think about this opportunity strategically for Discover and whether or not we could see more of these types of opportunities as e-wallets evolve in the marketplace? Then secondarily, just a question for Mark, you talked about the rewards expense kind of staying elevated. How should we think about that net interchange income line? I mean, is that the way to look at it? Thanks.
David W. Nelms – Chairman and CEO: Sanjay we’ve been talking for quite some time about our strategy in the Payments area to be the most flexible and best partner for a number of other players, and you’ve seen us execute that strategy with a number of foreign networks over – ranging from the Japanese, Chinese, Koreans to open up our network to their cardholder base and to provide full acceptance across the U.S. for them. So, one way to think about this is PayPal is entirely consistent with that. It is different because they have a huge customer base and they are very big online and they are uniquely focused and uniquely positioned. So, I don’t think there would be any deal exactly like this one because no one else is positioned as uniquely and in some cases as well as PayPal because to some degree a lot of people (indiscernible) wallets these days and getting into it, but they have been in this a long time, they have enhanced it and they have got a huge customer base, huge volume online. We are opening up the offline to them and doing it in a way that is backward compatible with existing terminals and future ready for all the new technologies that will deployed at point-of-sale. So, I expect us to continue executing that strategy. We are focused and excited about PayPal, but we will also continue to do different kinds of deals with multiple other parties over time.
R. Mark Graf – EVP and CFO: With respect to rewards situation, I would say, we are the leader in the cash award space in terms of market share and we will continue to reinvest in our product as you might expect a leader to do to not only protect but to enhance that position. In terms of the net interchange revenue line item that you noted, I think that’s probably a pretty good way to think about things and about one of the metrics we use to look at things. I would say any of the enhancements we make, we look at the NPV of those enhancements to the products to make sure that they are in the best interest to shareholders over the long haul with all the puts and takes, and I would expect that that 1% guidance would result in that net interchange line being roughly flat going forward. It may bounce a basis point or two here or there due to some fluctuations in the market or in the actual product offerings quarter-over-quarter, but that’s probably a pretty good metric to keep your eye on.
A Closer Look: Discover Financial Services Earnings Cheat Sheet>>