Earnings Review: Loans Drive Discover’s Profit Growth

Discover Financial Services (NYSE: DFS) reported earnings for the fourth quarter and full year of fiscal year 2016 on Tuesday, January 24th. The company announced a 13% increase in net income for the fourth quarter compared to 2015, resulting in a 23% increase in diluted earnings per share as the company bought back 8% of its outstanding stock. This meant that the company reported a 4% increase in net income for the full year, resulting in a 12% increase in diluted earnings per share. Over the full year, the company bought back 7% of its outstanding stock.

Discover reported a 4% increase in revenue. Its interest income net of expenses increased by 8% for the full year, as credit card loans, student loans and personal loans all grew in volume, resulting in overall loan growth of 7%, while its non-interest income declined by 9%, as the number of transactions processed on the PULSE network declined by 11%. The total dollar volume of transactions processed on Discover’s network declined by 2% for the full year as a result of the 8% decline in the Gross dollar volume processed on the PULSE network, failing to offset the 7% and 8% increase in the dollar volume of transactions processed on Discover’s partners network and Diners Club International network. However, the company managed to control operating costs, which declined by 1% for the full year, resulting in a 1% increase in pre-tax income. Discover’s provision for loan losses continued to increase in 2016 — they increased by 23% — as it looks to win back consumer trust following the problems in 2015.

Going forward, the company is focusing on improving product quality, both in its direct banking and loan services, as well as in its payment services. In the former, the company has managed to reduce charge off rates significantly, but it still has room to create better products and services. In the latter, it needs to increase the number of co-branding partners in order to raise the number of transactions done on its network as well as the dollar volume of those transactions. This will require increasing the spend on customer rewards and marketing and promotion expenses to drive customer spending.

Have more questions about Discover? See the links below:

• How Much Did Discover’s Revenue & Net Profit Grow In The Last Five Years?
• How Much Can Discover’s Revenue Grow In The Next Five Years?
• What Is Discover’s Fundamental Value Based On Expected 2016 Results?
• How Has Discover’s Revenue Composition Changed In The Last Five Years?

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