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Discover Financial Services  (NYSE:DFS)
Q4 2018 Earnings Conference Call
Jan. 03, 2019, 5:00 p.m. ET

Contents:

  • Prepared Remarks
  • Questions and Answers
  • Call Participants

See all our earnings call transcripts.

Prepared Remarks:

Operator

Good afternoon. My name is Sylicia, and I will be your conference operator today. At this time, I would like to welcome everyone to the Fourth Quarter 2018 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

Thank you, Sylicia. Welcome everyone to our call this afternoon. I'll begin on slide two of the presentation which you can find in the Financial section of our Investor Relations website.

Our discussion today contains certain forward-looking statements about the company's future financial performance and business prospects, which are subject to risks and uncertainties and speak only as of today. Factors that could cause actual results to differ materially from these forward-looking statements are set forth within today's earnings press release, which was provided to the SEC in an 8-K report and in our 2017 10-K and third quarter 2018 Qs, which are on our website and on file with the SEC.

In the fourth quarter 2018 earnings materials, we've provided information that compares and reconciles our non-GAAP financial measures with GAAP financial information and we explain why these measures are useful to management and investors. We urge you to review that information in conjunction with today's discussion.

Our call today will include remarks from Chief Executive Officer, Roger Hochschild, covering fourth quarter and full year highlights and developments; and then Mark Graf, our Chief Financial Officer, will take you through the rest of the presentation. After Mark completes his comments, as Sylicia said, we will have time for Q&A session, and we would ask, of course, that you hold your Q&A to one with one follow-up, so that we have time for everyone to submit their questions.

So, thank you. Now it's my pleasure to turn the call over to Roger.

Roger C. Hochschild -- President and Chief Executive Officer

Thanks, Craig, and thanks to our listeners for joining today's call. With this being our year end call, I want to begin by reviewing full year highlights and key performance indicators on slide three. Then turn the call over to Mark to review fourth quarter results. Later in the call we will cover our guidance elements for 2019.

We earned $2.7 billion after-tax or $7.79 per share in 2018, generating return on equity of 25%, as we put our capital to work to grow the business and repurchase our shares. Once again, we generated a very strong return on equity, reflecting our unique combination of businesses across consumer lending and payments, as well as strong operating performance.

Our performance in 2018 reflected robust receivables and revenue growth, particularly in the card business. We've continued to invest in brand advertising, in marketing analytics, and in superior service, and together, these investments continue to drive profitable growth. And of course, we remain focused on providing an exceptional customer experience and are proud to have won the J.D. Power award for Credit Card Customer Satisfaction in 2018.

On the subject of how we treat our customers, I want to take a minute to acknowledge the difficult financial situation now faced by furloughed government employees. To support customers in that situation, we are providing payment holidays to those that asked for flexibility at this time. Overall, credit performance continues to stabilize. The impact of normalization is diminishing and we are experiencing tangible benefits from enhancements to our underwriting and collections strategies.

Our Payment Services segment generated strong volume gains up 15% in 2018, largely due to the performance of PULSE. The PULSE team has been successful at winning new relationships and building business with existing issuers by developing creative debit solutions that deliver meaningful value for partners.

Finally, I want to emphasize the importance of investing in our global acceptance footprint and technology. These are two distinct areas, but both are critical to our ongoing success. In terms of global acceptance, we continue to see a great opportunity to partner with local acquirers to enhance merchant acceptance. We made significant progress on this in the fourth quarter, signing a number of agreements in a variety of markets, including the UK and Continental Europe. Universal merchant acceptance remains an important objective as we pursue our longer term vision of being a leading global payments partner.

And in terms of technology spend, we are continuing to invest in initiatives to drive even better customer experience and competitive advantage. For example, we're making ongoing investments in machine learning to enable faster and better decisions about how to target our collection strategies and marketing campaign. We've begun to see the benefits of these investments in 2018, with positive impacts on loan growth and credit performance.

Now turning to slide four. We were pleased to generate strong total loan growth for the year of 7%, with card receivables up 8%. I alluded to this a moment ago when talking about machine learning, but I'm particularly pleased with our growth in new card accounts, even as we continue to tighten credit and brought down the average acquisition costs per account. Student lending turned in another great year, with organic receivables up 9% and record originations of $1.8 billion.

Our personal loan portfolio grew 1% in 2018, as we cut back on origination activity by tightening underwriting standards. Competitive intensity remains high with new entrance continuing to ramp-up originations. We will maintain our traditional underwriting discipline, as we focused on driving growth that meets our return objectives.

Turning to slide five. Credit continues to perform in line with our expectations, with seasoning of recent growth and normalization being the key drivers. We will have more to say about the overall credit environment when we discuss fourth quarter performance and 2019 later in the call. But as we enter 2019, we feel very good about underlying trends.

I'll now ask Mark to discuss our financial results in more detail.

R. Mark Graf -- Executive Vice President and Chief Financial Officer

Thanks, Roger, and good afternoon, everyone. I'll begin by addressing our summary financial results on slide six. Looking at key elements of the income statement, revenue growth of 7% this quarter was driven by strong loan growth and a slightly higher net interest margin. Provision for loan losses increased due to the combination of the seasoning of loan growth and ongoing supply driven normalization in the consumer credit industry. Operating expenses rose 7% year-over-year, as a result of investments in support of growth and new capabilities. This includes the higher level of incentive payments made in support of the global merchant acceptance initiatives that Roger talked about earlier.

Turning to slide seven. Total loans increased 7% over the prior year, led by 8% growth in credit card receivables. Growth in standard merchandise balances drove much of this increase, with a lesser contribution from promotional balances. We currently expect the promotional balance mix to decline modestly in 2019 and for standard merchandise balances to continue to be the primary engine for growth in card.

Moving to the results from our Payment segment. On the right-hand side of slide seven, you can see the proprietary volume rose 6% year-over-year. In Payment Services, PULSE continues to drive the lion share of both volume and growth, with volume up 11% compared to the prior year. Growth was driven by both new issuers, as well as incremental volume from existing issuers.

Moving to revenue on slide eight. Net interest income increased $182 million or 9% from a year ago, driven by higher loan balances and modest NIM expansion. Total non-interest income grew $11 million, primarily from a 13% increase in loan fee income. Sales volume grew by 5%, driven principally by growth in active card members. Adjusted for the number of processing days, sales growth would have been 6%, which is down from 9% on a day adjusted basis last quarter.

Our rewards rate for the fourth quarter was 128 basis points, up 5 basis points year-over-year. This increase is due to both portfolio mix, which continues to shift toward the Discover it product, with its slightly higher average rewards rate, as well as our decision to feature warehouse clubs in the 5% category in the fourth quarter.

As shown on slide nine, our net interest margin was 10.35% for the quarter, up 7 basis points on both a year-over-year and a sequential basis. Relative to the fourth quarter of the prior year, the benefit of a higher prime rate and the exploration of the FDIC surcharge were offset by the impact of an increase in promotional balances, higher deposit costs and higher interest charge-offs. Relative to the third quarter, the increase in net interest margin reflected a higher prime rate, the exploration of the FDIC surcharge and a mix shift in our liquidity portfolio from cash to investment securities.

Total loan yield increased 45 basis points from a year ago to 12.59%, primarily driven by a 41-basis point increase in card yield. Prime rate increases and a modest increase in the revolve rate, led card yield higher, partially offset by a mix -- higher mix of promotional balances and higher charge-offs.

On the liability side of the balance sheet, consumer deposits grew 12% as we continued to focus on more stable and cost effective sources of funding. Consumer deposit rates rose during the quarter, increasing 12 basis points sequentially and 56 basis points year-over-year. Deposit betas have increased, though cumulative betas continue to be better than historic norms.

Turning to slide 10, operating expenses rose $74 million from the prior year. Other expenses were up $40 million, with almost $35 million of the increase due to the investments in global merchant acceptance, which Roger spoke about earlier, and had previewed at the Goldman conference in December. These were driven by agreements that we signed with new partners, as well as existing partners in new territories. In some cases, acceptance milestones were achieved more quickly than anticipated and that contributed to the higher level of incentive payments in the fourth quarter.

In marketing, expenses were up as a result of greater brand and digital advertising activity. Finally, our ongoing investments in infrastructure and analytic capabilities accounted for the increase in information processing costs.

I'll now discuss credit results on slide 11. Total net charge-offs rose 23 basis points from the prior year. The seasoning of loan growth from the past few years and supply driven credit normalization continue to be the primary drivers of the year-over-year increase in charge-offs. Credit card net charge-offs rose 20 basis points year-over-year. From a sequential perspective, this quarter represented the fifth consecutive quarter of slowing year-over-year increases in card charge-offs. The credit card 30 plus delinquency rate was up 15 basis points year-over-year and 11 basis points sequentially. Our disciplined approach to managing credit with both new and existing accounts has led to continued solid credit performance in the card business.

Private student loan credit performance has also been very strong, with net charge-offs down 17 basis points year-over-year and 10 basis points, sequentially. Personal loan net charge-offs were up 87 basis points from the prior year and 40 basis points sequentially, slightly better than the 50 basis points to 60 basis points we had expected. The 30 plus delinquency rate was up 20 basis points year-over-year and 3 basis points sequentially.

Looking at capital on slide 12. Our common equity Tier 1 ratio decreased 30 basis points sequentially as loan balances grew. Our payout ratio for the last 12 months was 93%.

To sum up the quarter on slide 13. We generated 7% total loan growth and a 25% return on equity. Our consumer deposit business also posted robust growth of 12%, while deposit rates increased 56 basis points year-over-year. With respect to credit, our total company charge-off rate just over 3% reflects positive underlying trends in card and student loans. And finally, we're continuing to execute on our capital plan, with strong loan growth and capital returns, helping to bring our capital ratio closer to target levels.

Turning to slide 14. I want to shift gears and review the key factors that we believe will contribute to another year of strong returns, even as we continue to invest for a longer term growth.

First, our base case for 2019 adopts the consensus view that macroeconomic conditions remain stable. Although, our growth plan does contemplate a degree of tightening at the margin. The economy is growing. Of particular importance to us as a consumer lender, employment and wages are growing, and consumer leverage remains manageable. Very simply, we don't see any indication in the data of a turn in the credit cycle.

Second, Discover has a very strong and widely recognized brand, which consumers associate with value, trust and exceptional customer service, particularly in card. These attributes remain core to driving profitable growth and we will continue to invest in brand awareness for our other consumer banking products as well.

Third, we will continue to invest in technology, supporting the deployment of advanced analytics and automation. This will allow us to make better, faster decisions, drive operational efficiencies in account acquisition, servicing, fraud and collections. And of course, the thread that weaves all this together is our relentless focus on customer experience. We recognize that we live in a highly competitive environment, but we've been able to distinguish ourselves by introducing features and benefits that customers value. Our customer-centric approach has been fundamental to our consistently strong growth and returns.

With that, let's move on to 2019 guidance on slide 15. As I said a moment ago, our base assumption for 2019 is a continuation of the current economic environment. If this proves to be wrong and we see meaningful deterioration in macroeconomic conditions, we would in all likelihood pull back on growth and experience an increase in net charge-offs. Of course, we would also have flexibility in managing rewards costs and operating expenses, which would provide a degree of mitigation.

Looking at the specific guidance elements. First, we've established a loan growth target range of 6% to 8% based on opportunities that we believe will allow us to continue driving disciplined, profitable loan growth. Moving to expenses, we expect operating expenses to be in a range of $4.3 billion to $4.4 billion. This reflects higher base levels of expenses to support growth in the business, as well as continuing investments in the initiatives that Roger and I have mentioned. With respect to rewards, we expect the rate to come in between 132 basis points and 134 basis points for 2019, a modest increase largely resulting from the ongoing shift in product mix, as we originate all of our new card accounts on the Discover it platform, which has a slightly higher average rewards rate than the predecessor product.

Moving to our outlook for net interest margin, we expect the full year NIM to come in around 10.3% with a bias to the upside. The prime rate increases from last year will contribute positively to NIM in 2019. We also anticipate a modest NIM benefit from a lower mix of promotional balances. Potentially offsetting these benefits would be deposit pricing pressure, wider wholesale funding spreads and modestly higher interest charge-offs. In terms of credit costs, we expect the total net charge-off rate this year to be in a range of 3.2% to 3.4%, as a result of the seasoning of a growing portfolio, as well as continued though moderating supply driven credit normalization.

So to sum things up, we're pleased with our performance in 2018 and look forward to continued momentum in the year ahead. One final comment, earlier today we announced internally that Noelle Whitehead will be assuming a leadership role in our student lending business. I want to take this opportunity to thank her publicly for her outstanding service as a member of the Investor Relations team over the last several years.

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

Questions and Answers:

Operator

(Operator Instructions) We will take our first question from the line of Mark DeVries with Barclays.

Mark C. DeVries -- Barclays Capital, Inc. -- Analyst

Yeah. Thanks. I think you guys indicated the last quarter that you saw better than expected growth in promotional balances in part due to some more effective marketing on your end. Could you just talk about whether that trend kind of held this past quarter and what your outlook is for that into 2019 and what if any impact it may have on your NIM guidance?

Roger C. Hochschild -- President and Chief Executive Officer

Sure, Mark. Happy to tackle it. We did continue to see promotional growth play a role in our -- in the growth in our card book over the course of the quarter, but it was a secondary level of growth and it was a distant secondary level of growth to standard merchandise purchases. So I would say, we saw moderation in the component of the growth that was represented by promotional balances. As we think about looking into 2019, we would continue to see the proportion of growth represented by promotional balances continues to decline modestly.

So, in terms of NIM guidance, that's what's kind of baked in there, thought through there. I think in terms of the 10.3% with a bias to the upside on the NIM thought just generally, that guidance doesn't include any increases in rates by the Fed, any short-term increases. It's following the forward curve instead of the dot plots. So that would be also be a little bit of upside to margin, if we were to get some of that, probably, to the tune of about 4 basis points to 6 basis points for every 25 from the Fed.

Mark C. DeVries -- Barclays Capital, Inc. -- Analyst

Okay. And anything you can share around what you're assuming around deposit betas in that guidance?

Roger C. Hochschild -- President and Chief Executive Officer

Yeah. We've never talked about our deposit betas specifically, but I would tell you cumulatively the betas looking -- so CDs are 33% of the book, CDs always have a beta close to 1, right? So we'll put that aside. But for the indeterminate maturity deposits, the cumulative beta is sitting at 51 as we sit here right now. So it continues to be well below where you'd expect it to be cycle-to-date. I would not expect there to be a lot of upward pressure on that from market rates. If there's any pressure, it's likely to come from competitors as opposed to a lot of movements in the market.

Mark C. DeVries -- Barclays Capital, Inc. -- Analyst

Okay. Great. Thank you.

Roger C. Hochschild -- President and Chief Executive Officer

You bet.

Operator

Your next question comes from the line of Sanjay Sakhrani with KBW.

Sanjay Sakhrani -- Keefe, Bruyette & Woods -- Analyst

Thanks. Good evening. I guess on loan growth, I think, it's clear that your baseline on the economy that it's look OK and you're seeing opportunities for growth. But I was wondering if there was any specific attributes in the loan growth that make you comfortable with their resilience through a cycle, because I mean it's pretty robust growth?

R. Mark Graf -- Executive Vice President and Chief Financial Officer

Yeah. Sure, Sanjay. I would say, if I sit and I look at the nature of the growth, the line weighted FICOs and acquisition in the card side continue to be right at about 730. So they continue to be very consistent in terms of what we have booked over time. And as we continue to book these new vintages, we see the card members come on more engaged with the brand, more engaged with the card and driving the types of behaviors that tend to drive long-term profitability.

So, we feel real good about that. In terms of line utilization, it's not like all of these folks are coming on board and maxing out their lines, so it's good responsible behavior that we're seeing out of those folks. The student lending business just continues to be a fabulous product for us, risk adjusted basis. It drives great returns. We think it's a great introduction of new young people into the fold who can become a part of the broader Discover family as they grow.

The personal loans business, I think, we've talked there, and I would say, we don't expect personal loans to be a giant grower as we look into 2019. We do expect it's probably going to be -- balances there will be flattish to maybe a little up, but not a major contributor. And of course, in student, you're fighting a little bit of attrition from the acquired book too. So we would expect card to be the -- to drive the lion's share of the growth in loans over the course of 2019.

Sanjay Sakhrani -- Keefe, Bruyette & Woods -- Analyst

Okay. My follow up is for Roger. I guess, you guys talked about the importance of building out a global merchant acceptance via those initiatives. Is there any way to sort of assess the payoff economically as we look as those investments?

Roger C. Hochschild -- President and Chief Executive Officer

It's hard to look at that on a merchant-by-merchant basis. The payoff comes when you reach critical mass of coverage in any given market and that benefits not just our own card issuing business, but also our Network Partners around the world, who will see the benefits from that. So we have a very disciplined investment process that look at -- looks at target cost per merchant. When we can do a partnership with a network in a market that, of course, lets us build acceptance at a very affordable cost. But that ongoing level of investment is embedded in the expense guidance we've provided for 2019.

R. Mark Graf -- Executive Vice President and Chief Financial Officer

Yeah. And I think the -- trying to just to pile on to that for a second. I think, the $35 million or so that came in in the fourth quarter, I would say, largely we encourage you guys think about that a one-time -- as a one time. That's why, Roger, kind of called it out specifically at Goldman. Anything else that we see currently is obviously baked into our guidance for 2019.

Sanjay Sakhrani -- Keefe, Bruyette & Woods -- Analyst

Okay. All right. Thank you.

Roger C. Hochschild -- President and Chief Executive Officer

You bet.

Operator

Your next question comes from the line of Ken Bruce with Bank of America Merrill Lynch.

Kenneth Bruce -- Bank of America Merrill Lynch -- Analyst

Thank you. Good evening. Let me pick up where you just left off on the comment about the building out of the global network. Understanding you've got some, I guess, factored into your guidance for next year. Is -- do you feel like you're in the early stages of an investment cycle in terms of building out that acceptance? Is it something that is that we're going to be looking at in terms of a longer term payback, maybe just give us a sense as to the kind of where we are in that cycle and kind of what the payback horizon may look like?

Roger C. Hochschild -- President and Chief Executive Officer

Yeah. I would say it's been a long process of investment. So it's been continuous. It's been something we've been at for many years. I think the reason it's maybe attracting some attention now is really the lumpiness, Mark, talked about it in the fourth quarter. But we view building out acceptance both in the US, but also in these international markets as critical components to our network strategy, which, again, is both monetizing it through our third-party payment segment, but also driving our proprietary card growth.

Kenneth Bruce -- Bank of America Merrill Lynch -- Analyst

Okay. And then maybe a two-part follow-up, so I can finish on that. So you would expect the payback to be over a longer horizon, if I can just make that assumption, you can correct it if not. And then, my follow-up is just on the -- in comp -- in the area of competition, we've seen quite a bit of increase in costs related to whether it be acquisitions or rewards across the Board. And I'd like for you to maybe discuss where you think the competitiveness is within the specific segments that Discover is active in and how we should be thinking whether that is, in a sense, getting more competitive or if, in fact, there maybe is some easing, which was suggested by the press recently?

Roger C. Hochschild -- President and Chief Executive Officer

Yeah. I mean that we -- with our lend focused model are always in the prime lending space. We're not a sub-prime issuer. That business is always competitive. It can go up and down a bit. But in my 25-plus years in card issuing, there's never an easy time. You can see from our performance around new accounts that we're booking more new accounts, our cost per account is coming down and all of that is occurring as we've been tightening credit over the last couple of years. So we feel very good about our value proposition and how it can compete.

In terms of overall activity, we believe a lot of the rewards competition has plateaued. You're not seeing the same pace of introduction of new programs. So, yeah, it's going to remain competitive. But we feel good about our product, how it's positioned and if you're buying business with big upfront incentives or at the highest reward rate in the market, you will attract a disproportionate share of gamers and transactors, neither fit with our long-term focus on the business.

Kenneth Bruce -- Bank of America Merrill Lynch -- Analyst

Great. Thank you.

Operator

Your next question comes from the line of Rick Shane with JPMorgan.

Richard Shane -- JPMorgan -- Analyst

Hey, guys. Thanks for taking my question. Roger, I appreciate your comments related to the shutdown and just wanted to ask two questions related to that. One is, how do you think your customer base index is sort of more broadly against government employees. Are you slightly higher concentrated in line or lower? And then, second, given that we're now almost 34 days in, which is a pretty significant chunk of time, have you seen any slowdown or change in spending behaviors?

Roger C. Hochschild -- President and Chief Executive Officer

So, I'll start with the second one. We have not seen change in overall spending behaviors across our portfolio. Govern -- I don't think we over index for government employees. We don't have necessarily the employer card for our entire base, but it's not a meaningful percent. I think it's very important that all of us do everything we can to support the employees in this situation, so that's why I called it out. But compared to programs we've done around major national disasters, for example, in the past those have had a much more significant scale.

Richard Shane -- JPMorgan -- Analyst

Okay. That's helpful context. Thank you.

Operator

Your next question comes from the line of Eric Wasserstrom with UBS.

Eric Wasserstrom -- UBS Securities -- Analyst

Thanks very much. Just two questions related to the guidance. Mark, on the rewards rate, I think, historically, the transition from Discover to the Discover it product had about a 2-basis point inflation in the rewards rate. Is that still true?

R. Mark Graf -- Executive Vice President and Chief Financial Officer

Yeah. I would say, it's run somewhere over time between 2 basis points and 3 basis points. I think last year it was 3 basis points. So if you think about the sort of the guidance range, if you will, what we're kind of calling out is, we really don't expect any pressure in rewards other than that continued migration as a greater percentage of the portfolio is made up of it card members.

Eric Wasserstrom -- UBS Securities -- Analyst

Okay. Great. And then, just on the NCO guidance. I think last quarter you indicated that on the personal loans component you expected a change third quarter to fourth and you came in a bit better. But I think the fourth quarter to first quarter of this year, I think, that guidance was something like an incremental 40 basis points. Is that still your outlook?

R. Mark Graf -- Executive Vice President and Chief Financial Officer

Yeah. I would say that feels somewhere in the right general zip code. I'm not going to call it out as a specific number at this point in time. But really we saw a little bit of goodness in the fourth quarter relative to what we expected. We installed a number of new technologies in the personal lending business that are helping us really do a better job sniffing out synthetic fraud and really segregating our underwriting a little bit better. So we are hopeful we can do better than that 5%-ish kind of guidance we gave last quarter. But for right now we're early in the year, so I think I'll stick to something pretty close to that 40 basis points for the first quarter.

Eric Wasserstrom -- UBS Securities -- Analyst

Thanks very much.

Roger C. Hochschild -- President and Chief Executive Officer

You bet.

Operator

Your next question comes from the line of Chris Brendler with Buckingham.

Christopher Brendler -- Buckingham. -- Analyst

Hi. Thanks. Good evening. Thanks for taking my question. Just wanted to ask on domestic spending. It's for the 6% normalized rate down from 9% normalized last quarter, despite what appeared to be a pretty successful rewards quarter. Is that just sort of tougher comps or a little bit of macro slowdown, seemed like we had a good Christmas, so it's a little bit of a surprise to see that magnitude of acceleration? Thanks.

Roger C. Hochschild -- President and Chief Executive Officer

Yeah. There are a mix of factors in there. Part of it is a bit tougher comps. We booked a lot of new accounts in the fourth quarter last year and those, of course, come on and activate and start spending quickly. There was a slowdown in holiday spending toward the back half of the holiday season. I think you -- that's not just us, you've seen a number of major retailers call that out. So those are probably the biggest drivers on the sales front.

Christopher Brendler -- Buckingham. -- Analyst

Okay. And a follow-up on your NIM guidance, Mark, does it matter that much what the Fed does, if the Fed sort of stays on a more aggressive path, it would sort of help out your yields, if not, potentially deposit costs could start to catch up with yields. Is that a big swing factor or is that doesn't play in fast enough to really matter to 2019 outlook?

R. Mark Graf -- Executive Vice President and Chief Financial Officer

No. It's not a giant swing factor. I mean, if -- it's a little bit of inside baseball. If I go back to the fall when we were putting together our operating plan for the year and you looked at the forward curve, it say -- it assumed two rate increases, one in June and one in December. So you'd have gotten the benefit of half a year of one of those increases and essentially none of the year of the other of those increases. So if you go to zero, it's not a giant impactor, if you will. So I'd take you back to that other thought, really sitting back and saying, roughly if we do get them, all in including the deposit beta assumptions and everything else, you're probably looking at somewhere between 4 basis points to 6 basis points of NIM accretion coming -- flowing through as a result of the 25-basis-point move wherever we get one.

Christopher Brendler -- Buckingham. -- Analyst

Awesome. Thanks so much guys.

Roger C. Hochschild -- President and Chief Executive Officer

You bet.

Operator

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

Betsy Graseck -- Morgan Stanley -- Analyst

Hi. Good evening. A follow-up to that question. So 4 bps to 6 bps up, if you get another 25 bp hike. But if we don't get another hike then I know your guidance is saying 10.3 plus-minus with a bias to the upside. Is that bias also a 4 bp to 6 bp range?

Roger C. Hochschild -- President and Chief Executive Officer

No. Really, Betsy, it would depend on too much of what happens. I mean I've got -- and pulling together thoughts around guidance, we've obviously got 50 scenarios we have run about what if this and what if this and what if this. I think how you should interpret it is a lot more of those scenarios come out better than 10.3 then come out tougher than 10.3 and that's why we're kind of talking about a bias to the upside.

I think at the end of the day, if we see continued mitigation in the rate of increase and delinquency formation, which is kind of pretty flat right now or if we see charge-off formation continue to moderate, there can be some goodness there. But in terms of, overall, it's going to be a function of market rates, portfolio mix, promo activity, interest charge-offs, deposit betas, funding mix and a whole host of other things, so it's hard to call. But I emphasize the bias to the upside for a reason.

Betsy Graseck -- Morgan Stanley -- Analyst

Okay. And then maybe I could just have a follow-up on how you're thinking about reinvesting the deposits that you've guided. In this past quarter, deposit growth was very strong and I believe the mid-teens or so. Maybe you could give us some color on how you're thinking about driving that growth rate in a flat rate environment. Should we expect that that tails off, blows down or do you think you hold that level of deposit growth? And then, how do you think about the reinvestment of that, given that the loan growth is more in the mid singles?

Roger C. Hochschild -- President and Chief Executive Officer

Yeah. Clearly we have multiple channels to use in our funding mix. So it's not as if we -- we'll have to go out and buy assets or accelerate asset growth. Mark will do his magic on the treasury side. I think we and others benefited from a big investor move toward cash in the fourth quarter and so that drove flows up across the industry.

Betsy Graseck -- Morgan Stanley -- Analyst

Yeah.

Roger C. Hochschild -- President and Chief Executive Officer

But we do feel good about our ability to continue to grow deposits without posting at the top of the rate tables and having a value proposition very similar to card, in terms of differentiated products, service, customer experience, leveraging our brand and then also cross-selling into the card base. So deposits will continue to be the most significant part of our funding mix. We expect it to grow faster than assets, but that will just, therefore, result in us shifting the overall mix.

Betsy Graseck -- Morgan Stanley -- Analyst

Okay. Thanks.

Operator

Your next question comes from the line of Bill Carcache with Nomura.

William Carcache -- Nomura Instinet -- Analyst

Good evening. The high end of your expense guidance is a bit higher than the low end of your loan growth and I know there -- it's difficult to be precise with all of the moving parts. But at a high level, Mark, you mentioned all of the different scenarios. Maybe could you just speak to at a high level your commitment to controlling expenses for the revenue environment and generating positive operating leverage in 2019. You guys have historically done a good job with positive operating leverage, but curious if you could speak to that in 2019?

R. Mark Graf -- Executive Vice President and Chief Financial Officer

Sure. Happy to. I would say the bulk of that investment activity, I mean, obviously there is spend ongoing to support the generation of assets in a -- let's call it a BAU-type environment. But the bulk of that incremental spend is really investment into a lot of these new technology platforms that Roger and I spoke about. Most of these new technologies are domiciled in the cloud as opposed to resident in our four walls.

One of the big differences between traditional systems development within your own four walls and the cloud is you capitalize the traditional version, so it doesn't have a big annual impact on expenses. Cloud based development gets expensed. So a chunk of the increase, really a big driver of the increase you're seeing year-over-year is the result of our continued migration to and deployment of lot of these new technologies that, the results we're seeing from them are just really strong and we feel very good about that.

In terms of just overall the commitment to expense discipline, no question. I mean, I appreciate your commentary on the positive operating leverage. I think it's been a number of years since there was a negative number in front of that, despite some really big investment activity on our part. So I think it underscores the strength of the revenue engine as well. But we definitively are committed to managing our operating expense base. We're committed to positive operating leverage and we unequivocally have leverage in the model, as I called out in my prepared remarks, that if we see something in the environment start to change, we've got leverage in marketing dollars, we've got leverage in rewards costs and we've got leverage in a lot of different line items in the P&L that we won't hesitate to pull those levers if it's the right thing to do.

William Carcache -- Nomura Instinet -- Analyst

That's very helpful. Thanks, Mark. If I can follow-up quickly on credit. On an annual basis we saw your provision growth exceed your loan growth by incrementally larger amounts in 2015, 2016 and 2017. But the excess of provision growth over loan growth actually shrank in 2018 and this trajectory is consistent with some of the favorable credit trends that you highlighted in your prepared remarks. As we look ahead to 2019, is it reasonable to think -- to expect that that excess of provision growth over loan growth should continue to compress modestly?

Roger C. Hochschild -- President and Chief Executive Officer

Yeah. I'm going to kind of stay away from answering that one specifically, because I don't want to give provision guidance. What I would say is, we have called out that we continue to see the rate of increase in charge-offs in the card business moderate for five consecutive quarters. We obviously set our reserves and provide on a quarterly basis based on a whole number of factors that we see at that point in time. But the fundamental underlying underpinning piece that is the biggest component of it obviously is what are the trends we're seeing in credit. And those trends with normalization slowing continue to feel pretty good. But in terms of actually calling on a forward basis what provision is going to be, I'm going to better stay away from that one.

William Carcache -- Nomura Instinet -- Analyst

Understood. Thanks very much for taking my questions.

Roger C. Hochschild -- President and Chief Executive Officer

You bet.

Operator

Your next question comes from the line of Bob Napoli with William Blair.

Robert Napoli -- William Blair -- Analyst

Thank you and good afternoon. New card growth and the cost -- 11% and cost per account down 6%, a pretty impressive combination. Is the new card growth and acceleration and what is going on with net card growth? Is the run-offs picking up? What is driving those really, really good metrics in card growth and cost per account? And are those, I guess, the same quality of accounts, are you seeing any faster run-off of accounts?

Roger C. Hochschild -- President and Chief Executive Officer

Yeah. So in terms of, I would separate the two. First, we have not seen any change in attrition and given how we deliver on customer experience, our attrition tends to be the lowest in the industry. In terms of what's driving our card acquisition performance, it really is a lot of those investments around technology, in particular, next-generation analytics and modeling, as well as just how well the value proposition competes with millennials and younger consumers especially. So we're very pleased to see that, and again, I'll repeat, all of that is in the context of continuing to tighten credit around our new account underwriting.

Robert Napoli -- William Blair -- Analyst

Great. Thank you. Follow-up question, just in line with the 2019 growth, Mark, one area you didn't give any color around, like, you have in the past, is the non-interest income revenue growth and that's kind of been a low single-digit revenue growth item. Is that the continued expectation is kind of low single-digit growth of non-interest revenue?

R. Mark Graf -- Executive Vice President and Chief Financial Officer

Yeah. I don't think we've historically guided on non-interest revenue, Bob, and so I'm going to kind of stay away from that one. It's not really a giant driver of our -- components of our P&L.

Robert Napoli -- William Blair -- Analyst

Okay. Great. Thank you very much. Appreciate it.

Roger C. Hochschild -- President and Chief Executive Officer

You bet.

Operator

Your next question comes from the line of Chris Donat with Sandler O'Neill.

Christopher Donat -- Sandler O'Neill -- Analyst

Good afternoon. Thanks for taking my question. Mark, I had sort of a clarification as you used the expression, supply driven credit normalization, a few times on the call. Just want to see if you could expand on that one. And then if you want to get philosophical, maybe also give us your view on if at some point we ever had an end to the credit cycle, what might cause that?

Mark C. DeVries -- Barclays Capital, Inc. -- Analyst

Well, on the first part, that's easy to do. I would say the supply driven credit normalization, if you think about the components that would drive an increase in charge delinquencies and charge-offs, you really have an incidence component, in other words, what percentage of the portfolio comes under stress and then you have a severity component, which is once an account does come under stress, what's happened to the balance, are they bigger now than they were couple years ago. And I would say, the driver cycle to-date in this has really been, in our case, has really been -- we have seen severities increase much more so that we have seen incidence rates increase.

So if you think about it, going through the crisis, consumers de-levered either by choice or otherwise and so for a number of years coming out of the crisis, they carried really low levels of leverage, few years back, consumer credit availability started creeping back in, consumers started levering up. So while we're not seeing a greater percent -- a much greater percentage of the book come under stress, when somebody does come under stress, they're carrying more debt, therefore the severity of the charge-off is bigger. We're referring to that as supply driven normalization, because it's supply of consumer credit that's really been the primary driver of that.

Speculating as far as what's going to be the driver of the next recession. There is a lot smarter people than me that you could ask who could give you a better sense on that one. I guess, what I would say is, looking at the data, seeing everything we see, we don't see it as a consumer led issue. It feels more geopolitical, global macro, something like that, as opposed to an over leveraged consumer or a consumer asset bubble.

Christopher Donat -- Sandler O'Neill -- Analyst

Got it. I appreciate that one. And then just as a follow-up, I'll ask a very pedestrian one of the other expense line on the income statement just a little higher than normal. Is that where we saw some of the merchant acquisition or your cloud-based investments show up in that line or are those elsewhere?

R. Mark Graf -- Executive Vice President and Chief Financial Officer

It's the global network stuff that we spoke about earlier on the merchant side that is showing up there.

Christopher Donat -- Sandler O'Neill -- Analyst

Okay. Got it. Okay. Thanks very much Mark.

Operator

Your next question comes from the line of John Hecht with Jefferies.

John Hecht -- Jefferies -- Analyst

Well, all of my questions have been asked, so I'm going to throw out a painful topic, Mark, and it's related to CECL.

R. Mark Graf -- Executive Vice President and Chief Financial Officer

Sure.

John Hecht -- Jefferies -- Analyst

I think the specific question is, I believe you're all supposed to start running parallel models now, and I guess, the specific question is, do you have enough, I guess, insight to all of the elements of CECL to begin running that. If not, where are the uncertainties around, what the modeling would entail, and if so, do you have any comments on that at this point?

R. Mark Graf -- Executive Vice President and Chief Financial Officer

I knew the question was going to come up, so no worries about the painful ask. Not a problem. I guess, I would say, one of the places a lot of that technology that Roger and I have alluded to a few times ago has been put to work in is in the CECL modeling, trying to break away and come up with some machine learning approaches, really starting to think about every way we can to start slicing and dicing our portfolios. So we were in the process of going through what I would describe as a giant Monte-Carlo simulation. The standard itself is very broad in terms of how you can think about it and how you can define certain things. So we're doing a Monte-Carlo simulation to really kind of figure out what the right answer for Discover is, right? What's going to produce essentially the best least volatile answer that most accurately reflects the lost content in the portfolio.

So I would say the technology is largely in place. Now we're in the process of running these Monte-Carlo simulations to figure out how exactly we want to think about this going forward. So, parallel, yes, some point in time this year we will go to a full parallel. There's no question about that. And as we said, at that point in time, once we have a sense of what that CECL reserve is going to look like, we feel like we have a disclosure obligation we'd put it in front of you. I would say -- right now I would just underscore what we've said before and that is in a CECL environment reserves will be higher and more volatile for consumer loans. That's just the nature of the beast in terms of the way the standard is set and it would work.

On the positive note, we continue to interact heavily with the FASB along with a number of our peer institutions who are also actively engaged. There is a proposal out there to run a lot of the volatility created CECL through AOCI as opposed to through the income statement. And we're hopeful that the powers that we will see the wisdom in that instead of creating a truckload of EPS volatility that doesn't reflect the underlying trends in the business.

John Hecht -- Jefferies -- Analyst

Really appreciate that color. Thanks very much.

Roger C. Hochschild -- President and Chief Executive Officer

You bet.

Operator

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

Moshe Orenbuch -- Credit Suisse -- Analyst

Great. Thanks. Most of my questions actually also have been asked and answered. And I think that it is kind of interesting that you've been talking for a couple of quarters about improvement in account acquisition costs, and I think, it's particularly notable that you're able to do that with -- without increased reliance on promotional balances. And so, maybe it's not a fair question, but it seems like the entire industry is trying to do that. What -- is there anything you can tell us that you're able to -- any reason that you're able to do that and others aren't?

R. Mark Graf -- Executive Vice President and Chief Financial Officer

Yeah. One thing we've always highlighted is the differences we get from our proprietary network. And so I do think you have seen two issuers that have proprietary network, really stand out in terms of growth and both of us tend to be conservative on the credit side. The other thing I would say is, just that relentless focus on the customer. We've won the J.D. Power Customer Experience Award for the last five years. It's not just the great 100% US-based customer service, it's the mobile app, it's the rewards, it's the new features and benefits. So we look carefully at our target customers and are always thinking of new ways to add value.

Moshe Orenbuch -- Credit Suisse -- Analyst

Got it. And maybe just from a credit standpoint, since you've kind of given some expectation that losses will be higher, the rate of increase on the Personal loan side, while it's a smaller piece of the portfolio, is going to be higher than your overall expected rate of increase, I guess, I mean, the aesthetic conclusion is that, you're expecting the increase in losses on credit cards set to be less than that. I mean, so, I mean, I think that is -- any kind of thoughts or additional insight you can give us there?

Roger C. Hochschild -- President and Chief Executive Officer

No. I would say mathematically, I agree with your conclusion, Moshe. It really -- we've seen some pretty big increases in the personal loan book and I think we've kind of called that out and talked about that one, as you know, pretty extensively in the past. We're hopeful that we can actually produce a better result than what we called out over the course of the last couple of quarters, in terms of looking into 2019 there. But we're early in the year, so I'm not going to declare victory.

But, yeah, the rate of increase in the charge-offs, in the card book continues to moderate. We feel very good about that. Student loan book, you can see in the supplement, the statistics there is performing exceptionally well. So -- and unless something else pops up that changes the trend, it really does feel that both the card and the student businesses are performing really well from a credit perspective right now.

Moshe Orenbuch -- Credit Suisse -- Analyst

Great. Thanks so much.

Roger C. Hochschild -- President and Chief Executive Officer

You bet.

Operator

Your next question comes from the line of Don Fandetti with Wells Fargo.

Donald Fandetti -- Wells Fargo -- Analyst

Hi. Good evening. So, Roger, are there any competitive implications from the Fiserv-First Data acquisition in terms of PULSE on pin debit? And then, secondarily, how do you think about that business, is that a strategic asset, I know it sort of leverages into the rewards and debit cards and plays into checking. But have you ever thought seriously about trying to monetize that?

Roger C. Hochschild -- President and Chief Executive Officer

Yeah. So first we don't discuss M&A, so acquisitions and divestitures. But in terms of the merger, I'd say it's probably too early to tell. Those companies are good partners of ours. We compete in some parts. We partner in others. And so, I think, we will watch that very carefully.

In terms of the PULSE business, coming off a very strong year of performance, and clearly, as we look at our payment segment being able to offer both credit and debit capabilities out there is very important as a network. So we feel very good about the payments assets we've assembled, both through the PULSE acquisition, as well as Diners and are working hard to continue to increase the share profits that come from payments.

Donald Fandetti -- Wells Fargo -- Analyst

Got it. That's all I have. Thank you.

Operator

Your next question comes from the line of Vincent Caintic with Stephens.

Vincent Caintic -- Stephens -- Analyst

Thanks. Good evening, guys. Just a few quick follow-ups. So just -- first one a follow-up on the global merchant acceptance. So it's great to see the partnerships that you've put together. Just kind of wondering when we think about the medium-term, what are your thoughts about increasing the merchant acceptance in terms of what activities do you plan to do, should we expect more partnerships, different products, other investments?

Roger C. Hochschild -- President and Chief Executive Officer

Yeah. I would say it's a continuation of a multi-year journey. So, again, getting a lot of attention because of lumpiness in a single quarter, but we've been working and if you go back and look at the stream of announcements, we've been working with merchant acquirers in markets outside the US for many years. The one part, I would say we're quite particularly focused on are our partnerships with networks around the world, which brings us both broad acceptance in different markets, but also volume as they leverage our account number ranges, our chip specs and so it helps strengthen the overall network and so that's a strategic thrust that you can expect to continue.

Vincent Caintic -- Stephens -- Analyst

Okay. Great. Thank you. And then just one more, shifting to the private student loan markets. I've noticed that the credit trends have gotten better year-over-year in 2018 and they got progressively better over the course of each quarter in 2018. I'm just wondering, if there's anything that's -- in particular that's driving that and what should we expect for 2019? Thank you.

Roger C. Hochschild -- President and Chief Executive Officer

I would say, you've had a growing portfolio at a pretty rapid rate over the course of a couple years and as that portfolio seasoned, it was getting to a maturation level, you were seeing a bit of uptick in the credit statistics and the charge-off rates and the like. As that portfolio begins to -- as the growth there begins to moderate a little bit, I think, you're seeing some of the impact of that. I think the other key piece of the puzzle is really just the discipline nature of the underwriting that's continued to go on there. You've got an average FICO in that book on the order of 750 right now. So it's a full 20 points higher coming on the books than the average card account is.

And just to remind all of you who don't live in the FICO world, normally 20 -- every 20 FICO points doubles default risk. So a 750 defaults at half the risk of a 730 as a starting point on addition to that. So I would say that's a key piece of the puzzle as well. And obviously, not to try taking credit for brilliance, you also have a really strong economy out there. These kids are coming out of school and they are able to find jobs, right? So that's a piece of the puzzle as well. So I'd say all of those are contributing factors.

Vincent Caintic -- Stephens -- Analyst

Great. Thanks very much.

Roger C. Hochschild -- President and Chief Executive Officer

You bet.

Operator

Your next question comes from the line of Dominick Gabriele with Oppenheimer.

Dominick Gabriele -- Oppenheimer -- Analyst

Hi. Thanks for taking my question. The new loan growth guidance is a bit lower than what we saw in 2019. Could you talk about how much this is related to gas prices and non-gas price impacts, could the impact be about maybe 2%? And then are there any other categories that are standing out within the spend that you see potentially slowing down or is this just really related to you tightening those new card acquisitions? Thank you.

Roger C. Hochschild -- President and Chief Executive Officer

You bet. So I think there's a couple of pieces embedded in there. We do over index as a card to gas. It tends to be on the order, these days of about 5% of our sales. That's down from about 10% of our overall sales when gas prices were higher. So there definitely is a muting impact associated with the decline in gas prices. There's no question about that. Certainly, an element of it reflects the -- just the tightening around the margin that Roger referenced earlier in terms of our credit standards in terms of booking new accounts.

And then the third piece of it, obviously, is look, personal loans, as we've talked about, we expect to be a pretty much a flat to a very modestly growing book. So and that's a book that over the last couple of years has been a significantly higher grower. So I think taking that growth component out of the mix as well also has an impact. So put all those together and that's kind of how we're triangulating on that range.

Dominick Gabriele -- Oppenheimer -- Analyst

Great. Thank you. And just really quick, can you talk about if you expect any impacts in the next few years in your student loan originations and loan growth, given that that Navion is kind of coming up to that here with a new in-school student lending product? And then maybe pushing a little harder on the refinance loans, could you talk about the industry dynamics there? Thanks so much.

Roger C. Hochschild -- President and Chief Executive Officer

Yeah. I mean, I think, we tend to not to focus on any specific one competitor. So I would say in general the refi volume, not them, but just the whole growth of student loan refi has had an impact on our payment rate and so that's something we're watching closely. We've still been able to grow through that, but it's had a noticeable impact. And so, I think, we'll see how sustainable that is, both, A, as those companies at some point need to focus on profitability, and then, B, also as rates have risen. So refi does have an impact, but we are continuing to grow through it.

Dominick Gabriele -- Oppenheimer -- Analyst

Thanks so much. Really appreciate it.

Operator

Your final question comes from the line of Jill Shea with Citi.

Craig Streem -- Head, Investor Relations

Jill?

Roger C. Hochschild -- President and Chief Executive Officer

Jill, are you there?

Craig Streem -- Head, Investor Relations

Sylicia, it looks like Jill may have dropped, so.

Jill Shea -- Citigroup -- Analyst

Sorry about that. Can you hear me?

Roger C. Hochschild -- President and Chief Executive Officer

Yeah. We got you.

Jill Shea -- Citigroup -- Analyst

Okay. Thanks so much. So maybe just quickly on credit quality. In the past you've mentioned a portion of the loan loss reserve bill that's related to the seasoning of the accounts versus the normalization of the backlog. I was just wondering if you could give us an update there and what you're seeing in terms of trends?

Roger C. Hochschild -- President and Chief Executive Officer

Sure. I'll be happy too. In the fourth quarter, this isn't a sniper rifle kind of estimate, it's more of a ballpark estimate, but I would say about two-thirds of the provisioning was related to new accounts, about one-third of the provisioning ballpark was related to the seasoning of the back book, again, reflecting that moderating pace of normalization taking place across the industry that we referenced earlier.

Jill Shea -- Citigroup -- Analyst

Okay. Great. Thank you.

Roger C. Hochschild -- President and Chief Executive Officer

You bet.

Operator

And at this time, there are no further questions. I'd like to turn the call back over to Craig Streem for any additional or closing remarks.

Craig Streem -- Head, Investor Relations

Sure. Thanks, Sylicia, and thanks everybody for your questions, and we're available for any follow-ups that you might have. Thanks. Have a good evening.

Operator

This concludes today's call. You may now disconnect.

Duration: 65 minutes

Call participants:

Craig Streem -- Head, Investor Relations

Roger C. Hochschild -- President and Chief Executive Officer

R. Mark Graf -- Executive Vice President and Chief Financial Officer

Mark C. DeVries -- Barclays Capital, Inc. -- Analyst

Sanjay Sakhrani -- Keefe, Bruyette & Woods -- Analyst

Kenneth Bruce -- Bank of America Merrill Lynch -- Analyst

Richard Shane -- JPMorgan -- Analyst

Eric Wasserstrom -- UBS Securities -- Analyst

Christopher Brendler -- Buckingham. -- Analyst

Betsy Graseck -- Morgan Stanley -- Analyst

William Carcache -- Nomura Instinet -- Analyst

Robert Napoli -- William Blair -- Analyst

Christopher Donat -- Sandler O'Neill -- Analyst

John Hecht -- Jefferies -- Analyst

Moshe Orenbuch -- Credit Suisse -- Analyst

Donald Fandetti -- Wells Fargo -- Analyst

Vincent Caintic -- Stephens -- Analyst

Dominick Gabriele -- Oppenheimer -- Analyst

Jill Shea -- Citigroup -- Analyst

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