Discover Financial (DFS) Beats On Q3 Earnings & Revenues

Discover Financial Services’ (NYSE:DFS) third-quarter 2016 earnings of $1.56 per share beat the Zacks Consensus Estimate of $1.48 by 5.4%. The bottom line also improved 13% year on year.

The company’s revenues, net of interest expenses, grew 5.2% year on year to $2.3 billion. The top line also surpassed the Zacks Consensus Estimate of $1.8 billion by 28%.

Net interest income grew almost 8.3% year over year to $1.8 billion, attributable to loan growth and higher net interest margin.

Total other expense increased a nominal 1.2% to $895 million as higher employee compensation and benefits were offset by a reduction in marketing and business development expenses, information processing and communication expenses, professional fees and other expenses.

Segment Update

Direct Banking Segment

This segment’s pre-tax income decreased $19 million or 2% from the year-ago quarter to $931 million. This was because higher net interest income was offset by lower other income, higher operating expenses and increased provision for loan losses.

Other income decreased 6% year on year to $476 million mainly due to increased promotional rewards.

Provision for loan losses increased 34% to $445 million from the prior year due to a larger reserve build and higher net charge-offs.

Discover Financial’s credit card net charge-off rate increased 13 basis points (bps) year over year to 2.2%. The over-30 days’ delinquency rate increased to 1.87%, up 22 bps year on year. Net charge-off rates were higher due to expected seasoning of recent growth.

Total loans increased 5% year over year to $73.5 billion. Personal loans grew 16% year over year to $525 million. Credit card loans rose 4% year over year to $58 billion. Private student loans inched up 3% year over year. Excluding purchased student loans, however, private student loans grew 14%.

Discover Financial’s total card sales volume grew roughly 1% year over year.

Net interest income grew 8.3% from the prior year to $1.8 billion due to loan growth and higher net interest margin. Net interest margin increased 37 bps year over year to 10%.

Expenses increased 2% year on year to $19 million, mainly due to increased marketing investments and higher regulatory and compliance staffing costs that partially offset savings from the closure of the mortgage origination business. Marketing expenses increased primarily due to card investments. Employee compensation increased mostly due to higher staffing levels driven in part by regulatory and compliance activities. However, Professional fees were lower than the prior year because of the completion of the look back related anti-money laundering remediation activities earlier this year.

Interest expense as a percent of total loans increased 12 bps year over year, primarily due to higher market rates and higher FDIC expense.

Payment Services Segment

Pre-tax income at Discover Financial’s Payment Services segment grew $6 million to $30 million year over year driven by lower expenses.

Payment Services transaction dollar volume fell 3% from the year-ago quarter to $44.6 billion.

Transaction dollar volume from PULSE declined 6% year over year due to loss of some volume from a large debit issuer.

Diners Club International’s volumes increased 12% year over year, largely due to continuous growth in Asia.

Financial Position

Discover Financial had total assets worth $90.5 billion as of Sep 30, 2016 compared with $85.5 billion as of Sep 30, 2015.

Total liabilities as of Sep 30, 2016 were $79.2 billion compared with $74.2 billion as on Sep 30, 2015.

Total equity was $11.3 billion at the end of Sep 30, 2016 compared with $11.3 billion at the end of Sep 30, 2015.

Discover Financial’s return on equity for the third quarter of 2016 was 23%.

Share Repurchase Update

During the third quarter of 2016, Discover spent approximately $582 million to repurchase 10.1 million shares of common stock.

Diluted shares outstanding declined 2.5% year over year.

DISCOVER FIN SV Price, Consensus and EPS Surprise

Zacks Rank and Stocks to Consider

Discover Financial presently carries Zacks Rank #3 (Hold). You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

Among the other players from the finance sector that have reported their earnings so far, the bottom line at Alliance Data Systems Corporation (NYSE:ADS) , Progressive Corp (NYSE:PGR) and American Express Company (NYSE:AXP) comfortably beat their respective Zacks Consensus Estimate.

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