Earnings Review: Discover’s Banking Segment Strength Offsets The Decline In Credit Card Related Services

October 27th, 2016 by Trefis Team
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DFS: Discover Financial Services logo
DFS
Discover Financial Services

Discover Financial Services (NYSE: DFS) reported financial results for the third quarter of fiscal year 2016 on Tuesday, October 25th. The company reported an earnings per share growth of 12.6% compared to the EPS figure in the third quarter of fiscal year 2015. The U.S. based payments company reported a 5.2% increase, most of which came on the back of a 8.3% increase in interest income. Apart from interest income and income generated from fees obtained for the origination of loans, the company saw revenue from all other divisions decline on a year-over-year basis, compared to the third quarter of fiscal year 2015.

Discover has two main revenue sources, its direct banking segment and services built on its credit card business. While the direct banking segment seems to be doing well, the company has struggled to grow the revenue streams from its credit card related businesses. In the third quarter, revenue from the three services Discover offers as a result of its credit cards and payments network — processing, interchange and transaction fee revenue, identity protection and theft related services, and all other services — declined by 7.3%, 3.2% and 18.5%, respectively.

On a net income basis, the company grew by 4.4% but as a result of buying back 7.4% of its common stock, its earnings per share grew by 12.6% year over year. We’ve noted this trend in the past: read how Discover’s share buyback activity has propped up its EPS, even as one of its business segments has declined. In recent quarters, some of the impact of that decline has been offset by the strength of the banking segment, as charge off rates have increased to 2.1% and credit card loans originated have increased to $ 58 billion or 4%.

dfs q3

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Notes:

1) The purpose of these analyses is to help readers focus on a few important things. We hope such lean communication sparks thinking, and encourages readers to comment and ask questions on the comment section, or email content@trefis.com
2) Figures mentioned are approximate values to help our readers remember the key concepts more intuitively. For precise figures, please refer to our complete analysis for Discover
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