Discover Financial Services

NYSE:DFS

Earnings Call Transcript 2020-Q1

[Operator]

Good morning. My name is Maria and I will be your conference operator today. At this time, I would like to welcome everyone to the First Quarter 2020 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 Instructions] Thank you. I will now turn the call over to Mr. Craig Streem, Head of Investor Relations. Please go ahead.

[Craig Streem, Head, Investor Relations]

Sure. Thanks a lot, Maria. Good morning, everybody and welcome to our call. We will begin on Slide 2 of our earnings presentation, which you can find as always in the Financials section of our Investor Relations website, investorrelations.discover.com.

Our discussion this morning 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 on today’s earnings press release and presentation. Our call this morning will include remarks from our CEO, Roger Hochschild and from John Greene, our Chief Financial Officer. And after we conclude our formal comments, there will be time as Maria said for question-and-answer session. During the Q&A session, we would appreciate that if you limit yourself initially to one question, if you have a follow-up maybe queue back in, so we can be sure to accommodate as many participants as possible.

And now, it’s my pleasure to turn the call over to Roger.

[Roger Hochschild, Chief Executive Officer]

Thanks, Craig and thanks to our listeners for joining today’s call. I hope all of you and your families are staying healthy and safe during these very challenging times. I would also like to take a moment to acknowledge and thank the healthcare workers, first responders, grocery store workers and many others, who have working so hard and often great personal sacrifice for the benefit of our communities and country. We will be a bit different than our traditional earnings calls. After my opening remarks, John will discuss our first quarter results with a particular focus on the reserve builds. I will then come back and provide additional information as to what we have been seeing since the end of the first quarter.

Here at Discover, our top priority has been the health and safety of our employees. Our headquarters functions moved to work from home on March 16 with minimal disruption. And our technology team and field leadership did an incredible job getting nearly all of our 8,000 Discover call center team members working from the safety of their homes within two weeks. Our robust business continuity plans, digital business model and a 100% U.S. based customer service helped ensure our representatives were ready even as we faced an unprecedented increase in call volumes from concerned customers impacted by the coronavirus. Early on in the crisis, we answered 95% of calls in less than 5 minutes and for April, as our team got more comfortable working from home, average full-times have been under 1 minute.

We are providing significant support to our customers across every product that helped them through this crisis. We have expanded payment plans across our credit card, student and personal loan and home equity products and waived fees on CD early withdrawals for customers who need emergency access to their funds. Our strong capital position and balanced funding model are also a source of strength. John will provide additional detail, but I am especially pleased with the strong demand we are seeing for our deposit products.

Some of the early impacts of the pandemic can be seen in our first quarter results, specifically in sales volume and card loan growth. For the company overall, we generated a net loss of $61 million or $0.25 per share as the benefits of solid growth in average loans were more than offset by higher provision expense. As we adopted the CECL reserve methodology on January 1, the reserve build this quarter reflected the life of loan view as well as an outlook for a weaker economy and higher unemployment. Actions we have taken since the crisis began, includes significant tightening of underwriting for new card and personal loan accounts with additional employment verification. And we have pulled back on balance transfer offers and line increases.

As I have mentioned on prior calls, for the last 18 months, we have been tightening credit at the margin as we have felt for some time that we are on late credit cycle. But given the present environment, we are adopting a significantly more cautious view. To give you a sense for how our card portfolio compares today with how it looked at the end of 2007, our contingent liability meaning the total open-to-buy for our card products has been reduced from roughly 5.7x loans to around 2.7x and the percentage of the portfolio below a FICO score of 660 has gone from 26% at that time down to 19% at the end of 2019. So while we are not immune from the impacts of deterioration in the economy, our portfolio significantly better positioned than it was ahead of the last financial crisis. In addition to our credit actions, we are taking a hard look at operating expenses to ensure investments align with the economic environment. We are implementing approximately $400 million of cost reductions over the remaining three quarters of 2020 and we will continue to review expense levels as the economic environment evolves.

I will now ask John to discuss key aspects of our financial results in more detail, then I will come back to discuss the current environment.

[John Greene, Chief Financial Officer]

Thank you, Roger and good morning everyone. Before I begin, I want to echo Roger’s thanks to all the people working on the frontline through the pandemic. I also want to thank all of Discover associates. They have pivoted to a work from home environment, while maintaining their high service levels and professionalism throughout. Today, I will summarize the results for the quarter then provide details on our credit performance and loan provisions. I will conclude with an update on capital and funding trends before turning the call back over to Roger to summarize our COVID-19 response actions.

In light of the uncertainty in the economy, we are withdrawing our previously provided guidance. But as Roger mentioned, we are targeting $400 million of cost reductions through the balance of the year with the majority in the second half. Our expense actions include reducing account acquisition expense, cutting spending on brand awareness and consideration activities, and reducing vendor and technology spend. We will continue to review all discretionary spending as the payback on incremental spend has changed.

In the interest of focusing our comments this morning on the impacts of the pandemic and our responses, we are not going to review our customary slides on loan growth, payment volumes and revenue, so you can find additional disclosures on Slide 11 to 16 in the appendix to this presentation. And as always, we are happy to take questions on these or any other aspects of the quarterly results.

On Slide 4, looking at key elements of the income statement, revenue, net of interest expense, increased 5% this quarter driven primarily by a 6% increase in average loans and a $35 million net gain in our payment services segment principally from the sale of a portion of an equity investment. Net interest margin was 10.21% for the first quarter. This was down 25 basis points year-over-year due largely to lower loan yields as a prime rate came down in response to Fed rate cuts in September and October of last year. This was partially offset by lower funding costs. The additional Fed rate cuts in March of this year will impact net interest margin beginning in the second quarter.

Provisions for credit losses included net charge-off of $769 million, up 8% from last year and an increase in reserves of approximately $1 billion, reflecting a deterioration in the economic outlook. I will have some additional comments in credit in a moment, but before we turn to the next slide, I want to discuss operating expenses. They were up 13% from their prior year first quarter. The increase was principally due to higher compensation expense, increased marketing cost and investments in technology.

Turning now to Slide 5 showing our key credit metrics, credit performance remained stable in the first quarter. We did not see any discernible impacts from the national COVID-19 containment activities or from our own credit mitigation actions in response. Card charge-offs increased 15 basis points from last year’s quarter due principally to seasoning of loan growth. The credit card 30-plus delinquency rate was up 17 basis points from last year, but flat versus the prior quarter with both metrics reflecting consistent performance in typical seasonal patterns. Our private student loan and personal loan portfolios also had credit performance in the quarter with both showing slight improvements in charge-off and delinquency rates.

On Slide 6, you will see our allowance for credit losses. We added $2.5 billion to the allowance for credit losses in January of this year as we transition to a life of loan CECL basis. At the end of the quarter, we added approximately $1 billion to the allowance largely due to changes in the macroeconomic forecast. The reserve build assumes unemployment rising to more than 9%, recovering through 2022 and a decline in GDP of nearly 18%. We also included our best estimate of reserve implications of the government stimulus programs. As the economic outlook evolves and the impacts of the various government relief programs become more clear, we will adjust our allowance accordingly.

Turning to Slide 7, our common equity Tier 1 ratio increased 10 basis points sequentially, mainly due to a decrease in loan balances partially offset by capital returns. For purpose of calculating regulatory capital, we have elected to defer recognition of the CECL Day 1 adjustment for 2 years. So we will begin to phase in our Day 1 CECL impact in 2022 with 100% saved in by 2025. The federal banking regulators have also provided a phase in for the Day 2 impacts of CECL with 25% of the quarterly reserve build also being deferred until 2022 and then create the same as the Day 1 deferral. Our payout ratio, which includes buybacks, was 99% over the last 12 months.

As Roger noted, we have suspended our share buyback program, but we will continue to fund our regular quarterly dividends. Our liquidity position remains very strong. As of the end of the quarter, we had $19 billion in liquid assets, $6 billion in committed borrowing capacity through privately placed asset-backed securitizations, and $35 billion in borrowing capacity at the Federal Reserve discount window. As of April 20, our liquid assets have grown to more than $23 billion. In addition to those forms of actual and committed liquidity, we have access to funding through our direct-to-consumer deposit channel with average deposits increasing 20% year-over-year and now making up over 55% of total funding. Based on the strength of consumer demand yesterday, we reduced rates on our savings account by 10 basis points and will continue to look for opportunities to do so.

In summary, good progress on the expense front. Liquidity is robust. Capital remains strong and we continue to monitor and manage our credit exposure. And now I will turn the call back over to Roger.

[Roger Hochschild, Chief Executive Officer]

Thanks, John. While we will not be providing new guidance given the uncertain economic outlook, I do want to provide you with an update on two key areas, where the COVID-19 pandemic is impacting our business in a way that was not captured in the Q1 results.

On Slide 8, we are giving you a detailed look at sales volume trends to illustrate how COVID-19 has affected cardholder spending in April as compared to the much smaller impact we saw on the first quarter sales. The first column shows the composition of sales by category for the full year 2019. So you can see where our cardholders spend is normally distributed by industry. We then give you the year-over-year growth percentages for the first quarter of 2020 and month-to-date April. On a day-adjusted basis everyday sales which includes gas, groceries, and wholesale clubs and makes up about 22% of total sales, so growth of 10% during the quarter.

So far in April however, everyday sales are down 14% year-over-year as increased spending on groceries is more than offset by a 60% reduction in spend in petroleum. Discretionary spend is down 33% driven by the travel category, which although only 8% of cardholder spending is down 99% and by retail, which is down 11%. As long as stay at home orders remain in place and many businesses remained closed, we expect the weak sales volume trend to continue and future trends will depend upon the pace of the recovery.

Turning to Slide 9, I want to take you through the Skip-a-Payment programs we have implemented to help our customers during this period of economic difficulty. We have recognized that COVID-19 has placed financial stress on the Discover customers who maybe out of work or has suffered reduced wages. One of the key differences in this downturn compared to the great recession of 2008, 2010, has been the staggering pace of job loss, but also the amount of government stimulus and the potential for many of those jobs to be restored after a hopefully brief period of unemployment. Therefore, we are offering support to those impacted by COVID-19 with Skip-a-Payment programs available across all of our products, many modeled on the relief we traditionally provide for natural disaster.

Through the first half of April, we have enrolled over 450,000 customers and roughly $3.8 billion in receivables in Skip-a-Payment programs to provide financial relief to our customers across our lending products. The receivables enrolled now represent 4% of total loans, but we are encouraged that the number of daily enrollments has been declining since the level peaked in late March. We will continue to work with these customers closely and potentially extend programs when required to meet the customers’ needs.

Let me close by summarizing some of the actions we have taken to respond to the COVID-19 pandemic. We have shifted virtually all of our employees to work from home in a sustainable model that still continues to provide an industry leading customer experience across all of our products. We have taken swift and meaningful action to adjust our credit policies to reflect the new environment continuing to lend, but with tightened standards for new accounts and for growing existing accounts. We are implementing expense reduction initiatives while preserving key investments that will allow us to grow our business over the long-term and we are prepared for additional actions as the environment evolves.

While our capital position is strong, we have suspended our share repurchase program in order to enhance our capital base. Clearly, we will have some challenging quarters ahead, but I am confident that we have taken the correct actions. None of us can perceive when the pandemic impacts will subside and allow the U.S. economy to begin to recover, but Discover is well positioned for the recovery that we know will eventually come. We have a loyal customer base, committed employees and a strong financial foundation to build from as we look to deliver long-term value to our customers and shareholders.

That concludes our formal remarks. So I will turn the call back to our operator, Maria to open the line for Q&A.

[Operator]

Thank you. [Operator Instructions] And we will take our first question from Bob Napoli of William Blair.

[Bob Napoli, William Blair]

Thank you and good morning, everybody. Hope everybody is well. A question on your outlook for unemployment and GDP that you are reserving for the life of the loans and I know you gave some numbers, but are you – can you just go over those numbers for 2020, 2021 and what you are expecting as far as recovery and what effects will that have on loan growth?

[John Greene, Chief Financial Officer]

Okay. Thanks Bob. This is John. I will take a shot at that. So there is a wide degree of economic forecast that we took a look at while we are building our models and ultimately our allowance. So what we have built in was unemployment peaking at 9% and staying relatively high through the balance of this year. So about 7% through the end of the year and then it recovers slowly through 2022, so not expecting a real quick recovery and rather slow in our allowances as reflected that dynamic as we modeled it out. The loan – and your second part of your question on loan growth, the loan growth will be depending on how we see the economy and the recovery proceeding. As Roger mentioned in his comments, we have been cautious coming into this cycle. And when the pandemic hit we have pulled back further, so loan growth will be subject to essentially the recovery of the economy.

[Bob Napoli, William Blair]

But we would expect to see loans declining I guess from here at least for the next quarter or two, I mean, is that fair?

[Roger Hochschild, Chief Executive Officer]

You know Bob there are lot of factors that will go into where loans go. Certainly, the retail spend numbers that I gave you will have a significant impact on that. The credit action and expense actions we have taken will have an impact on loan growth as well. But to John’s point, there is a lot of uncertainty that will be determined by the pace of the recovery.

[Bob Napoli, William Blair]

Thank you. Appreciate it.

[Operator]

Our next question comes from the line of Sanjay Sakhrani of KBW.

[Sanjay Sakhrani, KBW]

Thanks. Good morning. And I hope you guys are doing well as well. I guess it’s been pretty well documented that since the end of March some of the economic forecasts have actually been revised worse. So, could you just talk about how that might be contemplated in the future whether or not you guys thing it should be? And then also how you guys are incorporating some of these Skip-a-Payment to cure rates and such inside your loss assumptions?

[John Greene, Chief Financial Officer]

Okay. Thank you. So there is, as I said in my response to last question is, there is a wide degree of variation on the estimate. So when we put this together, we were looking at what a likely scenario was. Now, the economic backdrop continues to evolve. So we certainly did consider that. There are some overlays related to how we think about recoveries. And certainly, we did put a mild overlay in for the government stimulus programs, but it is uncertain. And if the economy deteriorates further and we don’t see a recovery that will have reserve implications if it runs out as we have modeled that will also play through into the balance sheet in the P&L. So, I know I am not being real specific on your answer, but at this point given the uncertainty, this was our best estimate. In terms of your second part of your question on Skip-a-Pay, so that – the nature of that program is for card is that an inbound call will happen. The customer, if they are impacted by COVID will get an automatic basically payment deferral. They won’t have to make the payment. If they call back second time, they can get a second deferral on the payment. And after that, they would either pay and go current or continue to kind of roll into delinquency buckets and ultimately charge-offs. So as we provisioned we thought about life of loan provisions and feel like we did a reasonably good job of capturing the dynamics on the portfolio. The one impact on Skip-a-Pay is that if the customer is in trouble and is unable to pay, it will result in up to a 2-month deferral into charge-off just by the nature of how things roll, but I do want to point that just over 80% of those customers who entered into to the Skip-a-Pay program were current at that time.

[Sanjay Sakhrani, KBW]

Okay. And just to clarify I guess that the same forecasts you used for your assumptions in the first quarter, have those actually been revised for the worst in early into the second quarter and if everything remain the same, would that mean that there would have to be an additional provision or are you saying that it’s really subjective based on sort of how you are seeing things on fall based on your own forecast?

[John Greene, Chief Financial Officer]

Yes. So there is a number of factor and I am not trying to be elusive here, Sanjay, but unemployment and GDP contraction are obviously key inputs. The duration of the slowdown will also be important. Geographic input impacts are important. Job classes are important. So ultimately, it will be a matter of the pace of the recovery, but just to go back and clarify my remarks, so we assumed just over 9% unemployment levels at a peak and then a very, very slow recovery in 2020 and then coming into 2022?

[Roger Hochschild, Chief Executive Officer]

And Sanjay, just to build on that, the reserve is calculated at a point in time. And so we will go through a similar process next quarter. My guess is there will be a lot of ups and downs in economic forecast between now and then. And I would contrast that with in terms of how we make our credit decisions that is done on a near continuous basis in a much more granular level. And so we are looking by industry sector, we are looking by geographic area, we are making decisions on who we book, line assignment, how much employment verification we do. So I contrast the reserve calculation with how we are managing credit, which is near continuous.

[Sanjay Sakhrani, KBW]

Okay, great. Thank you.

[Operator]

Our next question comes from the line of Mark DeVries of Barclays.

[Mark DeVries, Barclays]

Yes, good morning. Thanks for taking the question. It sounds like your macro assumptions are not too dissimilar from the last recession as far as kind of where unemployment peaks and the pace of the recovery. Yet, the card reserve reflects cumulative losses that are probably less than half of what you are experienced in ‘08/09 timeframe. Could you talk about how the portfolios change in the manner that to make sure you are comfortable that losses won’t approach what we saw in the last recession?

[John Greene, Chief Financial Officer]

There is a couple of important pieces related to the portfolio that changed. So Roger mentioned this in his comments in terms of the open to buy. So, the open to buy has reduced by about $54 billion from the last recession to this recession. Average FICO scores in the portfolio have increased between 500 and 600 basis points, which is a material change. Our underwriting frankly is far more sophisticated than it was 10 years ago. And frankly, the actions that this business undertook when the pandemic started to actually drive some real difficult employment numbers, was drastic and very, very quick. So, I don’t know if there is a perfect corollary between the last recession and this recession time will tell, but certainly, I feel like the business is well positioned and took decisive action. And again if the economic outlook changes, we will adjust the reserves and the allowance accordingly.

[Mark DeVries, Barclays]

Okay, fair enough. Thank you.

[Operator]

Our next question comes from the line of Don Fandetti of Wells Fargo. Don, your line is open. Make sure you are not on mute.

[Don Fandetti, Wells Fargo]

Yes, John. Trying to sort of tie you to a specific number on the stimulus, is it realistic that could you have as you have looked at your scenarios maybe a point or two lower net charge-offs from stimulus? And then secondarily, most financial institutions have said there would probably be another reserve build, a sizable reserve build in Q2, just wanted to – I know you have talked a lot about it, but is that the case as you sit here today in April?

[John Greene, Chief Financial Officer]

So, real difficult to answer at this point. So, we are going to monitor the economy and our portfolio and actually how our customers are performing and make appropriate calls on reserve builds in subsequent quarters. In terms of the government stimulus programs, the impact that we have modeled was relatively modest so I don’t know if I would go to a full percentage point on charge offs but there was a mild impact and as we see that on full it will become more clear. The key thing on the stimulus programs at least initially was would be unemployment checks going out in the $600 as a benefit that’s a front loaded impact and we will have to see how things develop on the back half of the year.

[Don Fandetti, Wells Fargo]

Okay, thank you. That’s helpful.

[Operator]

Our next question comes from the line of Bill Carcache of Nomura.

[Bill Carcache, Nomura]

Thank you. Good morning Roger and John. I was hoping to follow-up on your thoughts about the potential benefit from government relief programs specifically on the Paycheck Protection Program, can you comment on the idea that unemployed consumers were receiving payments under PPP and therefore are not receiving unemployment insurance maybe understanding the true level of initial claims which you guys have always cited as an important leading indicator of credit performance? And then if we extend line of thinking how much of a concern is there that like those receiving unemployment insurance employees participating in PPP faced uncertainty about their employment outlook and still have to make decisions about which builds to pay first, what that means for the unsecured credit card, but just I guess the overall consensus view seems to be that PPP is a positive in the near-term but it is not a longer term fix. I was just hoping that you could maybe speak a little bit more to drag us to a broad potential that the PPP program will benefit your loss experience and you confidence level of that? Thanks.

[Roger Hochschild, Chief Executive Officer]

Yes, I mean I think all of the government stimulus provides a benefit, but given the depth of the decrease in economic activity, what we all really need is for the economy to start backup again and that will depend on the pace of re-openings in different states and is impossible for us to forecast as we sit here. Some of the traditional relationships may breakdown a bit a lot of initial unemployment claims have been driven by I would say entry level employees in retail restaurant other industries that may have less of a correlation with what we see in our prime card base s o there isn’t necessarily even the same one-to-one interaction that we would have seen in previous downturns where the job mix was different and that job mix may change over time during this recession as well so I would summarize with the government programs are helpful but what we really need is the economy to get going again and so why this will depend on the pace of the recovery/

[Bill Carcache, Nomura]

Thanks. That’s helpful. I guess maybe if I could just follow-up with the conceptual question on CECL I guess a different way of asking would come up and the idea that if macro conditions were to continue to deteriorate related to your expectations at the end of Q1 at a high level, is it reasonable to expect that we will see additional reserve building? And then therefore when condition start deteriorating we will start seeing additional reserve building and maybe a kind of another way to ask that as if you can envision a scenario where you will need to continue to build more reserves even after economic conditions start to improve so just trying to get the big picture idea of CECL is going to work?

[Roger Hochschild, Chief Executive Officer]

Okay. So big picture if the economic conditions continue to deteriorate there will be two dynamics that are likely to happen one would be CECL life of loan provisions would increase, so the allowance would increase we would also take appropriate actions to ensure that our portfolio was stable and that the lending activity we were doing made sense, so you could expect that the portfolio frankly might not increase and would actually decrease and if that was the case we would see some level of offset as a result of reserve releases tied to the portfolio size or the overall loan size so there is multiple dynamics there that come into play, but I hope that’s conceptually helpful.

[Bill Carcache, Nomura]

Thank you.

[Operator]

Our next question comes from the line of Jason Kupferberg of Bank of America.

[Mihir Bhatia, Bank of America]

Hi, thank you for taking my question. I just wanted to ask a little bit more about just the forbearance programs, sorry, firstly, this is Mihir on for Jason. I wanted to ask about the forbearance programs and the Skip-a-Pay? Are you also continuing to look at typical modification programs and can you just help us a little bit with the mechanics in terms of just how you deal with the fact with whether you do a credit limit available to borrow etcetera for those who seek either of these programs? And just how you expect that to lead like if it’s Skip-a-Pay whether you – will people be transitioning from that if they continue to grow through the delinquency buckets to your other modification programs or is it that once you do the Skip-a-Pay now you don’t – you aren’t eligible for some of those other programs, so just want to understand a little bit more on how you are dealing with some of the delinquencies? Thank you.

[Roger Hochschild, Chief Executive Officer]

Yes, it’s Roger. Let me try it at a high level. As John described, for card, it’s a 2 months program, up to 2 months for Skip-a-Pay, but they do 1 month less than 5% have renewed for the second month. So, we will see how that plays out over time. We do still have our program for customers that need a longer period of assistance. Regulators have been encouraging us and others to maximize the support we provide for customers, but again, I think it really does depend on the pace of recovery. As John pointed out, over 80% of those taking advantage of Skip-a-Pay are current. And so our hope would be and again that’s why we have modeled it after some of the disaster relief programs we traditionally had that they will require a shorter bridge and then we will be able to get back to paying their builds, if not we have longer term programs to assist them.

[Mihir Bhatia, Bank of America]

And just – sorry just to clarify on that one, do you do anything with the longer – with Skip-a-Pay that there is no change to their credit limits available to borrowers, etcetera, correct?

[Roger Hochschild, Chief Executive Officer]

No, for those who have signed up for Skip-a-Pay, it does not impact their credit limits.

[Mihir Bhatia, Bank of America]

Understood. Thank you.

[Operator]

Our next question comes from the line of Rick Shane of JPMorgan.

[Rick Shane, JPMorgan]

Hi, guys. Thanks for taking my questions this morning. Thank you for all the information on the Skip-a-Pay. I am curious what you are seeing in terms of payment behaviors for consumers who are on Skip-a-Pay programs. Are you seeing an increase in consumers who are making minimum payments on a monthly basis?

[John Greene, Chief Financial Officer]

So, we are still [Technical Difficulty] pattern to emerge and part of it is driven by the drastic reduction in sales volume that you have seen. But I would say that reduction in sales is relatively equal across transactors and revolvers. And so it’s balanced in that way, but what happens with payment rate, I think will be determined on how quickly those sales ramp up, some people making larger payments and you can see from the inflow into our deposit products, there are lot of households were still okay, but are looking to fortify their position. So I think it’s too early to really pick out a pattern in terms of the impact of all these changes on payment rate.

[Rick Shane, JPMorgan]

Got it, okay. And look we share your view on looking at this in the context of a natural disaster in terms of how the challenges emerge, but one thing that historically has been subsequent to a natural disaster are significant insurance payments into those regions, which create things like huge cash inflows we have seen deposit spikes associated with that. I don’t necessarily think that we are going to see that this time. Is it your view that, that will actually change the post event payment behavior and credit characteristics?

[Roger Hochschild, Chief Executive Officer]

There is a lot of speculation out there. In some ways, this is like a natural disaster, in other ways, there is a big debate in terms of the resurgence of economic activity that you get from rebuilding after disaster. You won’t quite have that here. And so is the economic – people aren’t going to go to twice as many restaurants. And so is that economic activity just lost? I would say probably while you don’t have the degree of insurance payments, you do have an unprecedented amount of governmental assistance and my guess is you will continue to see additional programs. So that is probably bit of an offset compared to what you would have seen coming out of insurance.

[Rick Shane, JPMorgan]

Got it. Hey, thank you for taking my questions and we wish everybody their health and safety. Thank you.

[Roger Hochschild, Chief Executive Officer]

Thanks, Rick.

[Operator]

Our next question comes from the line of Kevin Barker of Piper Sandler.

[Kevin Barker, Piper Sandler]

Thanks. Just maybe with regards to the liability side of the balance sheet, are you seeing changes in behavior on your deposit buys and what are your expectations going into the second and third quarter on just overall deposit growth given the different stimulus checks combined with the stress across unemployment, I know it’s difficult to really pinpoint it, but it seems like there could be a lot of overlays where we might actually see a little bit of pickup in deposits and then maybe a decline. Can you just give us a little idea on your expectations there?

[John Greene, Chief Financial Officer]

Yes. So I think supply and demand are starting to come into balance, but it’s going to take another quarter or so. The appetite for our deposit products has actually been very, very good. We have traditionally been second or third on the bank rate table. We have been – recently been a little bit more aggressive on the downward side based on the overall demand for our products. So I think certain people are coming out of equities and looking for a safe place to put their cash. I think other folks have looked at our offerings and our service levels and decided that we are a good spot and they have chosen us. So as we look forward in future, I will say, future quarters, it will be subject to a couple of things. So the supply and the demand factors, what our competitors are doing and then obviously our performance, but we look to kind of move on the deposit pricing to actually pullback some of the NIM that was impacted by the Fed actions.

[Kevin Barker, Piper Sandler]

Okay. And then in regard to some of the programs that you laid out with the $400 million expense savings, could you assume that, that’s off of what your previous guidance was or is that slightly separate from? What do you expect?

[John Greene, Chief Financial Officer]

No, thank you. Yes, that was off the previous guidance. And as we said when we issued it was – it would be based on a strict payback analysis. So are we going to get long-term returns for the incremental investment with the economic backdrop changing we of course made the appropriate decisions.

[Kevin Barker, Piper Sandler]

Thanks for taking my questions.

[Operator]

Our next question comes from the line of John Hecht of Jefferies.

[John Hecht, Jefferies]

Good morning guys and thanks very much for taking my questions. The first question is where are we on utilization rates and average balances and how did that compare to maybe a period like entering the vast recession?

[Roger Hochschild, Chief Executive Officer]

I am sorry can you repeat the first part of that question?

[John Hecht, Jefferies]

Utilization.

[Roger Hochschild, Chief Executive Officer]

Utilization rates. So as you look at overall utilization rates for the portfolio, I think we show that the amount of contingent liability, i.e., the ratio of, which is kind of the opposite of utilization, is significantly down from prior years. So, one as part of the credit tightening that we have done over the last several years, a key component has been tightening contingent liability and tightening that exposure?

[John Hecht, Jefferies]

Okay, thank you. And then currently quantify the effects of the rate changes in March yet, how much of the impact to benchmark rates did you see in the quarter, I know it was later in the quarter and what do we think about NIM trends over the next quarter or two?

[John Greene, Chief Financial Officer]

Okay. So we didn’t see any impact in the quarter from the said reductions at the end of March. So there is about 150 basis points of reduction. So we have – we are not giving guidance but I am going to give you a couple of points in terms of how to think about it. So the 150 basis points hit, there is an impact for three quarters of the year on that. Our deposit betas have traditionally been about 50%. We took some proactive steps early in the year reducing overall deposit rates by 20 basis points to 50 basis points depending on the product. And then we are pulling back on the promo mix, which should also help rates. So you put those factors together and I think it draws a picture of how our NIM could look for the year. Now the quarterly trends are going to be a little bit different based on what’s happening in the particular quarter on revolver and transactor mix.

[John Hecht, Jefferies]

Perfect. Thank you guys very much.

[Operator]

Our next question comes from the line of Moshe Orenbuch of Credit Suisse.

[Moshe Orenbuch, Credit Suisse]

Great, thanks. Roger, maybe as you kind of sit and think and obviously you are going to be doing less marketing but you’re going to be doing it kind of in a different mix of products. And as you think about Discover’s product set and service niche, kind of how do you think about what you are going to be doing and where there are opportunities to capitalize, and maybe if you could also just throw in thoughts on rewards competition in this environment as well? Thanks.

[Roger Hochschild, Chief Executive Officer]

Yes, thanks Moshe for the question. One of the things we’re trying to do is keep an eye on the opportunity in this environment. And so even as we’ve made cuts we continue to make investments as well that will strengthen Discover, build the brand, and make sure we’re in great shape for the future. So we’re excited about the partnership with Quibi that just launched. Products such as our Miles Card where you have the ability to redeem at Amazon and PayPal, that’s a lot more useful than programs that were structured just around travel. Our third quarter promotion is for restaurants, for the 5% program. We think that will resonate very, very well. And our rewards rate and product is really structured well for a wide variety of scenarios. So for example, issuers that have big sign up bonuses, they are having to extend the period to earn those because of the reduced level of retail sales and complaints from their customers where ours is just a flat match for the first year of spending. So we’re very excited about where our products are positioned. We’ve talked a lot about the traction we’re getting in deposits. I also think a lot of our messages really will resonate in this environment. Who wants to waste money on a credit card with an annual fee? And we’re the only one with only no annual fee products. So we’re really excited about some of the opportunities we’re seeing in this environment.

[Moshe Orenbuch, Credit Suisse]

Great. I would assume that you would expect better – whether it’s a response rate or conversion rates and things, you know like that in this – while marketing is lower you might have some of that?

[Roger Hochschild, Chief Executive Officer]

Yes, we are seeing – and some of it plays out in the personal loan space for example, some of the traditional competitors and the fin-techs who do not have robust funding models are cutting very, very aggressively. So even with reduced marketing, we’re still hoping to generate good results.

[Moshe Orenbuch, Credit Suisse]

Great. Thanks very much.

[Operator]

Our next question comes from the line of Betsy Graseck of Morgan Stanley.

[Betsy Graseck, Morgan Stanley]

Hi, good morning, and thanks for all the comments. A couple of questions. Just one earlier, I think you mentioned something about how this recession is going to be very different from previous ones in part because of the quick job losses and then expected recoveries. Do you know the job types by customer that you have?

[Roger Hochschild, Chief Executive Officer]

We get it at the time of underwriting so some of it can drift over time. It varies a bit by product. We have much better information for the personal loan customers, is an example. We don’t have our student loan customers given they haven’t been employed. So it does vary, but I would say, we have very strong for personal loans and a good amount on the card portfolio.

[Betsy Graseck, Morgan Stanley]

Okay. And then separately on the reserving as you know, folks like us who are looking at the reserve levels relative to the 2018 bank loan stress test just to get a sense as to how you are comping this upcoming recession versus that stress loss scenario that you ran a couple of years ago? And when we look at that the credit card reserve that you’ve taken is running, if my math is right, around 45%ish of that stress loss period, but the other consumer is running much higher. And on the other consumer products I think it averages around high ‘80%s, low ‘90%s. So I was just wondering is there a reason why you feel this kind of recession is going to be tougher on that other consumer and does it have to do with your answer you just gave or is there anything else there?

[Roger Hochschild, Chief Executive Officer]

I would say it really has to do with more technical differences between the nature of those two different stresses. A lot of it has to do with when a recovery comes in. So just comparing scenarios based on peak loss can give you different numbers. So I wouldn’t say it’s anything different we’re seeing by asset class. It’s more technical based on those scenarios.

[Betsy Graseck, Morgan Stanley]

Okay. And then just two other quick ones, when people sign up for Skip-a-Pay, and let’s say they go for the one month, is it automatic that they can go for the two months or they have to call in every time or check it on the e-mail?

[Roger Hochschild, Chief Executive Officer]

Yes, Betsy, they have to call in on the card side.

[Betsy Graseck, Morgan Stanley]

Okay, alright. And I guess with the call times being extremely low, that’s not going to be a challenge for them. And then lastly, on the forbearance side with the call-ins that you’ve been receiving, from the slide deck, obviously, it shows that the beginning of April was the peak and I got a few questions overnight. Why do you think that’s the case that the requests for Skip-a-Pay have already started to decelerate at a time when unemployment claims are still rising here?

[John Greene, Chief Financial Officer]

Yes, that’s a good question. Some of it could be related to the government stimulus programs and then it could be just the cycle. We do expect the trend to decline and then a modest pick up as they approach into the second month for certain customers, but we will have to see.

[Roger Hochschild, Chief Executive Officer]

Yes, I mean, I guess I would probably point to, a), people may have a better feel of what stress is coming their way even before they’re actually unemployed and so they may have called us, knowing that their boss say, hey, we got one week left and then we’re closing down. So there isn’t necessarily that line of sight. The second thing, my personal view is unemployment claims have actually been gated by capacity to process as opposed to each week 6 million people are losing their jobs. And so, that’s why we would have seen the bubble earlier, because we didn’t have that same capacity constraint that I believe you’ve seen around unemployment claims.

[Betsy Graseck, Morgan Stanley]

Okay. That would be great. It would be great to update that as you get in front of people to over the quarter. Thanks.

[Operator]

Our next question comes from the line of Meng Jiao of Deutsche Bank.

[Meng Jiao, Deutsche Bank]

Hey, good morning guys. One quick question, I guess on the Skip-a-Pay payment. Can you guys give further demographics, I guess on what you’re seeing in these customers? I mean, is it-is it safe to assume that the lower FICO score customers are the ones currently enrolling in the Skip-a-Pay payments or is that too much of a generalization?

[Roger Hochschild, Chief Executive Officer]

I would say, we talked about over for a card at least over 80% are current. They are relatively highly utilized in terms of the amount of balance. But there’s actually a mix of some that are transactors as well historically in that. So that’s probably the information we’re willing to provide at this time.

[Meng Jiao, Deutsche Bank]

Okay. Thank you.

[Craig Streem, Head, Investor Relations]

Maria, our last question.

[Operator]

Our last question comes from the line of Bob Napoli of William Blair.

[Bob Napoli, William Blair]

[Technical Difficulty]

[Roger Hochschild, Chief Executive Officer]

Bob, you are very hard to hear. Bob?

[Bob Napoli, William Blair]

[Technical Difficulty]

[John Greene, Chief Financial Officer]

Yes, hey, Bob, I am sorry, hey, this is John.

[Craig Streem, Head, Investor Relations]

Maria, it sounds like we may have a line crossed or some other call. I am not sure if that’s the questioner. Something sounded really strange there.

[Operator]

And I went ahead and removed Bob from the queue.

[Craig Streem, Head, Investor Relations]

Okay. And you can prompt if there is anything else and if not, we will terminate the call.

[Operator]

[Operator Instructions] And I am showing no further questions sir. I would like to turn it back over for management for any additional or closing remarks.

[Roger Hochschild, Chief Executive Officer]

Thanks, Maria. Everybody, thank you for your attention, your interest this morning and we will talk to you again as needed. Thanks.

[John Greene, Chief Financial Officer]

Stay safe. Thank you.

[Operator]

Thank you, ladies and gentlemen. This does conclude the first quarter 2020 Discover Financial Services conference call. You may now disconnect.