Net Interest Income Drove Discover’s Top Line In Q1

by Trefis Team
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Discover Financial (NYSE:DFS) released its first quarter results on April 25, with net revenues increasing by 7% to $2.7 billion over the prior quarter and dropping by 1.5% sequentially. The company’s EPS came in at $2.15, growing by 18% over the prior year quarter due to a sharp drop in marketing and business development costs over the previous quarter.

The Trefis price estimate for Discover stands at $83 per share, which is higher than the current market price. You can view our interactive dashboard on How Has Discover Financial Fared In Recent Quarters? to observe quarterly revenue trends and modify key revenue drivers to gauge the impact on the stock price, and see more of our financial services data here.

Revenues were driven by net-interest income

  • Net-interest income increased by 10% to $2.3 billion over the prior year quarter due to higher loan balances and interest yield. The total loan receivables increased by 7% over the prior year quarter, driven by growth in credit card loans, which account for nearly 80% of the company’s loan portfolio. Net-interest income has been a major driver for the company over the last few years, as its share of the total net revenues has increased from 76% in 2015 to 82% in 2018. 
  • Non-interest income decreased by 3.5% to $458 million over the prior year quarter due to lower discount and interchange revenues. The gross discount and interchange revenues increased by 5% over the prior year quarter but incurred higher rewards cost due to enhanced customer engagement. Payment services observed an improvement of 13% over the prior year quarter, driven by 7% growth in network volume and 13% growth in network transactions. Network volumes saw a 4% dip sequentially, likely due to low retail sales growth during the early part of the year. Network volumes have seen mid-teens growth over the last two years, which we expect to continue for the full year.

Employee compensation and marketing expenses contribute nearly 60% of the total non-interest expenses. For the quarter, the total non-interest expenses increased by 5% to $1.02 billion over the prior year quarter and decreased by 8% sequentially, resulting in higher earnings for the quarter. The marketing expenditure increased by 5% to $195 million this quarter, lower than previous periods due to better expense management.

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