Growth In Loans Drives Discover’s Third Quarter Earnings

Discover Financial (NYSE:DFS) announced its third quarter earnings on Tuesday, October 21. The company reported net income of $644 million, up 8% year-over-year but about flat sequentially. ^[1] ((Discover Financial Services’ CEO Discusses Q2 2014 Results – Earnings Call Transcript)) Total revenues, net of interest income, increased by 6% year-over-year to $2.2 billion driven by growth in total loans and Discover card sales.  ((Discover Financial Services’ (DFS) CEO David Nelms on Q3 2014 Results – Earnings Call Transcript, Seeking Alpha))

We have a price estimate of $64 for the company’s stock, which is in line with the current market price.

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Loan Growth Boosts Direct Banking

Discover’s direct banking business continued the growth momentum from the previous quarter, with a 7% year-over-year increase in pretax income. ^[2] Total loans also rose over 7% year-over-year to $67.3 billion during the quarter. Personal loans grew solidly once again, up 21% year-over-year, and private student loans increased 4.5% year-over-year. This growth in loans, as well as an improved net interest margin, drove revenue net of interest expense up $129 million over a year ago.

Discover Card  Sales Increase

The company reported a 5.8% year-over-year increase in Discover card sales volume, with credit card loans expanding by 6.6% year-over-year to $53.7 billion during the quarter. ^[3] Higher sales volume resulted in a 7% increase in net discount and interchange revenue.

Payment services pretax income remained unchanged at $28 million compared to a year ago. The transaction dollar volume rose by 2% year-over-year to approximately $50 billion, while the transaction dollar volume of Discover Pulse shot up 3% year-over-year during the quarter. The credit card net charge-off rate of 2.16% was up 11 basis points compared to a year ago, while the delinquency rate (percentage of loans at least 30 days past due) also rose by 4 basis points from the previous year to 1.71%.

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1. SEC 8-K Filing [↩]
2. Sec 8-K Filing [↩]
3. ref:3 [↩]