Earnings Review: Discover’s Bottom Line Continues To Face The Squeeze

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DFS: Discover Financial Services logo
DFS
Discover Financial Services

Discover Financial Services (NYSE: DFS) reported earnings for the first quarter of fiscal year 2017 on Tuesday, April 25. The U.S. based payments services company has seen its net income fall in recent quarters as a result of growing expenditure on client reward points and provisions for loan losses faster than it has been able to grow its revenue from either its banking segment or its revenue from the payments services division. This trend continued in this quarter. Even though the company managed to grow its revenue from its payments division, its costs related to client incentives and provisions for loan losses grew much faster. This resulted in a 1.9% year over year decline in net income. However, consistent with recent quarters, the company bought back its shares and managed to report a 5.9% increase in earnings per share (EPS).

dfs q1 17

In this quarter, transactions processed on the company’s network grew by 3% but the dollar volume of those transactions grew at 5%. This resulted in a 38% increase in the segment income of payments services. In contrast, the income of the direct banking division for the company declined by 7%. Interest income increased by 9% but interest expenses increased by 16%, resulting in the decline.

Going forward, the company needs to find a way of growing its revenue from payments services, the number of transactions processed on its network, and the gross dollar volume of those transactions. Simultaneously, it needs to figure out a way to control client incentives and provisions for losses made on loans given out to credit card holders for Discover. These are important as the company cannot keep propping up its EPS by buying back shares indefinitely.

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Notes:

1) The purpose of these analyses is to help readers focus on a few important things. We hope such lean communication sparks thinking, and encourages readers to comment and ask questions on the comment section, or email content@trefis.com
2) Figures mentioned are approximate values to help our readers remember the key concepts more intuitively. For precise figures, please refer to our complete analysis for Discover
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