Discover Financial Services ( DFS ) reported
first-quarter 2013 earnings per share (EPS) of $1.33, surpassing
the Zacks Consensus Estimate of $1.12. EPS also surpassed the
year-ago quarter's earnings of $1.21.
Moreover, Discover Financial's net income improved 3.5% year
over year to $673 million from $650 million. Net income allocated
to common shareholders also increased to $659 million from $644
million in the year-ago quarter.
The improvement in Discover Financial's net income was due to
revenue growth and improved interest income. Strong operating
results in the Direct Banking segment overshadowed the decline in
pre-tax income of the Payment Services segment.
Discover Financial's total revenue, net of interest expense,
increased 10% year over year to $2.0 billion, beating the Zacks
Consensus Estimate of $1.64 billion. Net interest income also
improved 9% year over year to $1.41 billion.
Moreover, total other income for Discover Financial increased
14% over the prior-year quarter to $582 million. However, total
other expenses also jumped 12% year over year to $753 million.
Direct Banking Segment
Discover Financial's Direct Banking segment reported pre-tax
income of $1 billion, reflecting a 3% increase from the year-ago
quarter. Revenues, net of interest expense, for the segment
amounted to $184 million, up 11% from the year-ago quarter. The
increase was due to increased loans, additional revenues from
Discover Home Loans, launched in Jun 2012, and decline in funding
Discover card sales volume grew 4% year over year to $24.9
billion. Total loans improved 7% year over year to $60.4 billion,
boosted by a 5% increase in credit card loans, a 6% increase in
private student loans and a 21% surge in personal loans.
Other income increased 15% year over year, primarily due to
higher interchange revenue owing to improved sales and additional
revenues from Discover Home Loans.
Expenses in the segment surged 12% year over year on higher
employee compensation and marketing expenditure related to the Home
Loan Center acquisition, increased card marketing initiatives and
The credit card net charge-off rate increased 5 basis points
(bps) sequentially to 2.36%. However, the over-30-days delinquency
rate declined 2 bps over the prior quarter to a record low of
The provisions for losses hiked $75 million year over year to
$159 million, reflecting lower reserve release, which was partly
offset by lower charge-offs. Reserve release during the quarter was
$154 million, against $274 million in the year-ago quarter.
Payment Services Segment
Discover Financial's Payment Services segment's pre-tax income
fell 2% year over year to $47 million. Revenues were up $5 million
over the first quarter of 2012. Meanwhile, expenses increased $6
million from the year-ago level as a result of a surge in
professional fees and marketing expenses due to the recent
partnerships and other expansion initiatives.
Payment Services dollar volume increased 2% from the year-ago
quarter to $48.8 billion. Meanwhile, the year-over-year growth rate
of transaction volume from PULSE has reduced to 4% due to increased
competition and merchant routing.
Discover Financial had total assets worth $76.14 billion as of
Mar 31, 2013, increasing from $71.19 billion as of Mar 31, 2012.
Total equity stood at $10.3 billion at the end of Mar 2013, up from
$8.7 billion at the end of Mar 2012. Book value per share was
$20.90 at the end of Mar 2013, compared with $16.41 as of Mar 31,
Share Repurchase Update
During the reported quarter, Discover Financial repurchased 6
million shares for $238 million under its $2.4 billion share
Discover Financial has changed its reporting period from this
quarter. As a result, the company's fiscal year now ends on Dec 31,
rather than Nov 30.
Currently, Discover Financial caries a Zacks Rank #2 (Buy).
Other companies worth considering in the financial sector are
Encore Capital Group, Inc. ( ECPG ), Credit
Acceptance Corp. ( CACC ) and
Total System Services, Inc. ( TSS ). All these
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