Company Update (NYSE:DFS): Discover Financial Services Reports Second Quarter Net Income of $599 Million or $1.33 Per Diluted Share


Discover Financial Services (NYSE:DFS) reported net income of $599 million or $1.33 per diluted share for the second quarter of 2015, as compared to $644 million or $1.35 per diluted share for the second quarter of 2014. The company’s return on equity for the second quarter of 2015 was 21%.

Second Quarter Highlights

  • Total loans grew $3.2 billion, or 4.8%, from the prior year to $69.0 billion.
  • Credit card loans grew $2.2 billion, or 4.2%, to $54.9 billion and Discover card sales volume increased 2.3% from the prior year or approximately 5% excluding gas purchases.
  • Net charge-off rate for credit card loans decreased 5 basis points from the prior year to 2.28% and the delinquency rate for loans over 30 days past due decreased 8 basis points to 1.55%.
  • Payment Services transaction dollar volume for the segment was $47.5 billion, down 7% from the prior year.

“We once again generated solid loan growth amid heightened competition, marking more than four years of quarterly card receivables growth,” said David Nelms, chairman and CEO of Discover. “Our results benefited from strong credit results with both overall charge-off and delinquency rates declining versus last year.”

Segment Results: Direct Banking

Direct Banking pretax income of $914 million in the quarter was down $70 million, or 7%, driven by lower other income and higher expenses in part due to $42 million of expenses related to the exit of the Home Loans business and previously announced anti-money laundering and related compliance program enhancements.

Total loans ended the quarter at $69.0 billion, up 4.8% compared to the prior year. Credit card loans ended the quarter at $54.9 billion, up 4.2% from the prior year. Personal loans increased $604 million, or 13.2%, from the prior year and private student loans increased$269 million, or 3.3%, from the prior year. Excluding purchased student loans, private student loans grew $803 million, or 18.5%, from the prior year.

Revenue net of interest expense increased $12 million, up 1% from the prior year.

Net interest income increased $47 million, or 3%, from the prior year, benefiting from loan growth partially offset by margin compression. Net interest margin was 9.63%, down 22 basis points from the prior year primarily due to an increase in funding costs and a decline in card yield. Interest expense as a percent of total loans increased 13 basis points from the prior year as a result of actions taken in prior quarters to extend funding duration. Credit card yield was 12.04%, a decrease of 6 basis points from the prior year due to portfolio mix.

Other income decreased $35 million, or 7%, from the prior year due to higher rewards expense and lower protection products revenue.

The delinquency rate for credit card loans over 30 days past due was 1.55%, down 8 basis points from the prior year and down 9 basis points from the prior quarter. Credit card net charge-off rate for the second quarter was 2.28%, down 5 basis points from the prior year and down 12 basis points from the prior quarter. The student loan net charge-off rate excluding purchased credit- impaired (“PCI”) loans was 1.02%, down 28 basis points from the prior year. The personal loans net charge-off rate of 2.10% increased by 15 basis points from the prior year.

Provision for loan losses of $306 million decreased $54 million from the prior year. Net charge-offs increased $10 million due primarily to several years of consistent loan growth. The reserve release for the second quarter of 2015 was $41 million due to an improved outlook for card credit, versus a $23 million reserve build in the prior year.

Expenses increased $136 million, or 18%, from the prior year partially driven by higher regulatory and compliance costs. Professional fees increased in part due to $19 million in costs associated with anti-money laundering and related compliance program enhancements. Marketing expenses increased due to higher spending across lending products and the discontinuation of a previously recurring postal rebate that was in the prior year. Employee compensation increased largely due to increased staffing driven in part by regulatory and compliance needs. Non-recurring pretax charges associated with the closure of the Home Loans business totaled $23 million.

Payment Services

Payment Services pretax income was $28 million in the quarter, down $3 million from the prior year. Payment Services dollar volume was $47.5 billion, down 7% from the prior year. PULSE transaction dollar volume was down 10% year-over-year due to the loss of some volume from a large debit issuer. Network Partners volume was up $919 million, or 35% from the prior year driven by AribaPay volume.

Share Repurchases

During the second quarter of 2015, the company repurchased approximately 7 million shares of common stock for $425 million. Shares of common stock outstanding declined by 1.6% from the prior quarter. (Original Source)

Shares of Discover Financial Services closed today at $59.50, up $0.07 or 0.12%. DFS has a 1-year high of $66.75 and a 1-year low of $54.02. The stock’s 50-day moving average is $58.48 and its 200-day moving average is $58.64.

On the ratings front, Discover Financial Services has been the subject of a number of recent research reports. In a report issued on July 14, Oppenheimer analyst Ben Chittenden reiterated a Buy rating on DFS, with a price target of $76, which implies an upside of 28.1% from current levels. Separately, on May 6, Bernstein Research’s Kevin Pierre maintained a Hold rating on the stock .

According to TipRanks.com, which ranks over 7,500 financial analysts and bloggers to gauge the performance of their past recommendations, Ben Chittenden and Kevin Pierre have a total average return of -7.8% and 2.7% respectively. Chittenden has a success rate of 45.5% and is ranked #3581 out of 3711 analysts, while Pierre has a success rate of 75.0% and is ranked #2171.

Discover Financial Services is a direct banking and payment services company. The Company offers credit card loans, private student loans, personal loans, home equity loans and deposit products.