Discover Financial Q3 Earnings Preview: Direct Banking Will Drive Results

Discover Financial (NYSE:DFS) is scheduled to report third quarter earnings on Tuesday, October 21. ^[1] In the second quarter, growth in cards, personal and student loans propelled the company’s net income to $644 million compared to $602 million in the second quarter of 2013. ^[2]

For the third quarter, we expect direct banking to be a key driver for the company’s overall growth. We have a price estimate of $64 for the company’s stock, which is in line with the current market price.

See our complete analysis of Discover Financial here

Expect Steady Growth In Direct Banking

Direct banking has been a fast-growing business for the company. Total loans in the division grew at a 6% CAGR between 2009-2013 compared to 3% for other large banks. ^[3] And so far this year, the direct banking business has continued on that upward path. Total loans grew 7% year-over-year during the first six months of 2014 to about $65 billion. Net interest income from the business also grew 11% year-over-year during the first half of the current calendar year. ^[4] Additionally, the company’s net interest margin has seen an improvement of over 40 basis points to hover in the range of 9.85-9.88% during the first two quarters. Personal loans, in particular, witnessed a surge during the first two quarters, registering 26% year-over year growth.

However, the delinquency rate, or the percentage of loans at least 30 days past due, in the previous quarter was 0.66% for personal loans compared to 0.64% a year ago. Going forward it will be crucial for Discover to be able to keep bad loans and charge off rates in check.

According to the data released by the Federal Reserve, total non-revolving consumer credit (includes motor vehicle loans, student loans and other personal purposes) grew at a seasonally adjusted annual rate of 7-8% during the July-August period. ^[5] We expect Discover’s loan balance to further improve and contribute towards the company’s earnings for the quarter.

Expect Moderate Growth From Discover Cards

Discover’s card sales grew 6% year-over-year during the previous quarter on the back of strong IT sales. Credit card loans also jumped up by 6% year-over-year. However, economic indicators showed only a marginal upswing in consumer spending in the U.S. during the third quarter. During July, there was no change in personal consumption expenditures (PCE), while August saw an improvement of 0.5% compared to the preceding month. Disposable personal income improved by 0.2% and 0.3%, respectively, during the two months. This is a slower pace of growth compared to what was observed in the second quarter. ^[6] We expect this to have an impact on Discover’s card business in the third quarter.

View Interactive Institutional Research (Powered by Trefis):
Global Large Cap | U.S. Mid & Small Cap | European Large & Mid Cap
More Trefis Research

1. Q3 2014 Discover Financial Services Earnings Conference Call, Investor Relations, Discover Financial Services [↩]
2. Discover Financial Services’ CEO Discusses Q2 2014 Results – Earnings Call Transcript [↩]
3. 2014 Financial Community Briefing Presentation, Investor Relations, Discover Financial Services [↩]
4. SEC 8-K Filing [↩]
5. Consumer Credit, October Release, Federal Reserve [↩]
6. Personal Income and Outlays, August 2014, Bureau of Economic Analysis [↩]