Discover’s Net Income Declines Due To One-Time Expenses, Portfolio Reshuffle To Boost Margins

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DFS: Discover Financial Services logo
DFS
Discover Financial Services

Discover Financial Services (NYSE: DFS) announced its Q2 2015 earnings on Wednesday, July 22. [1] It generated net income of $599 million in the quarter, a 7% decline year-over-year and diluted EPS of $1.33, which is about in line with the year ago figure. The company achieved total loan growth of 5% year-over-year, driven by growth in card loans, personal loans, and private student loans. The company also reshuffled its Direct Banking portfolio by exiting the home loans business and made a few other changes to its Diners Club franchisees. While these restructuring activities, as well as other compliance-related costs, have led to increased expenses for the company. However, by 2016 the company expects margins to return to historical levels.

Our price estimate of $64 for Discover’s stock is about 10% higher than the current market price.

See Full Analysis For Discover Financial Services Here

An Overview of Q2 Performance

The company’s total loans grew 4.8% from a year ago to $69 billion, while credit card loans grew 4.2% to $54.9 billion. Driven by loan growth, net interest income increased 3% year-over-year. The compliance-related and restructuring expenses (the latter amounted to $42 million) mentioned above fall under the Direct Banking division. Pre-tax income in the division fell 7% compared to last year, owing to these expenses. In the next two quarters, the company expects to incur an additional $25 to $30 million in restructuring expenses. However, exiting the Home loans business is also expected to yield some tax benefits in Q4 2014, which should offset these additional expenses.

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Student Loan Growth Could Be Key For Direct Consumer Banking Division

Discover’s direct consumer banking products include student loans, personal loans and deposit products. Student loans grew 4.4%, accounting for 12% of Discover’s loan portfolio, while personal loans grew by over 19% over the prior year, accounting for 7% of the company’s portfolio. Discover holds a 6% share of the $150 billion private student loan market in the U.S. Even though personal loans have been growing at a far higher rate than student loans, going forward, we believe student loans will be key for the division’s growth.

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Notes:
  1. Discover Financial Services Investor Relations []