Growth In Loans Drives Discover’s Q2 Earnings

Discover Financial (NYSE:DFS) reported a net income of $644 million for the second quarter, up 7% from $602 million in the second quarter of 2013, driven by growth in cards, personal and student loans and share repurchases. Total company revenues registered a 6% increase for the second quarter. ^[1] Discover card sales volume also increased by 6% on a year-on-year basis, mainly due to higher Discover IT sales volume.

Discover repurchased approximately 3 million shares of common stock for $177 million during the second quarter. We have a price estimate of $60 for Discover’s stock , which is slightly below the current market price.

See our complete analysis of Discover Financial here

Growth in Loans and Lower Risks

Total loans grew $4.2 billion, up 7% year-over-year to $65.9 billion. The total yield on loans was 11.42%, up 18 basis points over the previous year, driven by higher card and private student loan yields. The year-over-year increase in card yield primarily reflects a higher portion of balances coming from revolving customers as well as lower interest charge-offs. ^[2]

The credit card net charge-off rate, or the percentage of loans that are considered nonredeemable, increased by one basis point to 0.33% and the 30 plus day delinquency rate decreased by nine basis points to 1.63%. In this quarter the company enhanced its card line with new designs and new cash back reward cards primarily targeted to students. Credit card loans grew by $3.0 billion to $52.7 billion when compared to June quarter 2013.

The economic environment and consumer spending sentiment greatly impacts the performance of credit card companies. According to the Bureau of Economic Analysis, personal income increased 0.4% to $58.8 billion in May 2014 over the previous month and disposable personal income (DPI) increased to $55.6 billion from $50.8 billion during the same period. ^[3] Personal consumption expenditures (PCE) also increased $18.3 billion, or 0.2% as compared to an increase of just $2.3 billion in April. ^[4]

The direct banking business continued to add to the company growth. Private student loans increased by $370 million, up 5% from the prior year. The net charge-off rate excluding purchase loans was down one basis point to 1.3% and the 30 plus day delinquency rate decreased by 13 basis points to 1.66%. Personal loans increased 26% year-over-year to $4.5 billion. The net charge-off rate for personal loans was down 12 basis points to 1.95% and the over 30 day delinquency rate also fell two basis points to 0.66%.

There was an 11%, or $159 million, increase in net interest income due to loan growth, lower interest expenses and a higher loan yield. As the loan yield rose and funding costs declined, net interest margins also improved by 41 basis points y-o-y to 9.85%.

We are in the process of updating our model to reflect the changes after the second quarter results.

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1. Discover Financial Services’ CEO Discusses Q2 2014 Results – Earnings Call Transcript [↩]
2. SEC 8-K Filing, July 22 2014 [↩]
3. News Release June 25 2014, Bureau of Economic Analysis [↩]
4. Personal Income and Outlays, May 2014 Bureau of Economic Analysis [↩]