Eric Wasserstrom: So, Todd, I think we have time for one more, please.
Operator: Thank you, sir. We’ll go next to John Hecht with Jefferies.
John Hecht: Morning guys. Thanks for taking my question. I know you’ve answered a lot on credit, so I apologize for one more. But your 2018 and 2019 charge-off levels were in the low 3% range. And I think we — we’ve all kind of said that was a good environment, but a relatively normal environment. You’re guiding toward a high — relatively higher, closer to 5% charge-off rate this year despite low unemployment. I know you kind of called out the 2022 vintage is something to think about there. But maybe can you talk about the attribution of the difference in charge-off rates between that period and now? I think the kind of — the reason for the question is just to give us a sort of level of understanding of where we are in the credit cycle and give us comfort that things will stabilize, if not improve from here?
John Greene: Yes, happy to, John. So, a few points. So, we’re in a significantly different environment today than we were back in 2018 and 2019. So, we’re coming off of two years of abnormally low losses, so sub 2%. We had an incredibly high payment rate in — going back two years ago, that is normalized. What we’re seeing is that consumers had significant amount of savings. Those savings levels have been depleted. You had a spending pattern with the consumers across the Board that was reflecting kind of pent-up demand. And as savings rate came down, the consumers needed to adjust their spending patterns. Some did successfully, some not. And then you’re also seeing inflation, if you go back 1.5 years or two years ago, inflation significantly outpacing wage growth.
And that put certainly the lower quartile of the consumers in a significant amount of stress and that’s across all sectors of the economy. So not specifically to our prime revolver segment. And on top of that, you also had in ’21 and ’22, two very large vintages. And so you put all those together, what naturally is going to happen is you’re going to have charge-offs. What I’ll say is peak before they normalize back to levels that you’re accustomed to seeing from Discover. So my sense is that given real wage growth, our consumers will end up in, frankly, a better spot in ’24 and ’25 than they were in ’22 and ’23. And our charge-off forecast and reserves reflect a view that the consumers will manage through this and delinquency formation will continue to slow.
So anyway, I hope that — hopefully, this color is helpful.
John Hecht: That’s super helpful. And maybe could you give us a sense of the charge-offs by product or maybe like the — is the mix going to be consistent with historical mixes just to give us a sense from a modeling perspective?
John Greene: Yes. The only piece of information I’m going to give is in the fourth quarter, we expect student loan charge-offs to be significantly lower because we’re exiting.
John Hecht: Thank you.
Eric Wasserstrom: All right. Well, I think we’re going to conclude the call there. Thank you for joining us. I know there was a few of you still in queue, who we didn’t get to, but feel free to reach out to the IR team. We’ll be around all day and available to answer additional questions. Thanks for joining us, and have a great day.
Operator: And this does conclude today’s Discover Financial Services earnings conference call. You may disconnect your line at this time, and have a wonderful day.
