Discover Financial Services
(
DFS
) reported second-quarter 2012 earnings per share of $1.00, a penny
ahead of the Zacks Consensus Estimate but lower than $1.09 recorded
in the year-ago quarter.
Net income declined 10.5% year over year to $537 million from
$600 million. Net income allocated to common shareholders also
declined to $532 million from $593 million in the year-ago
quarter.
The decline in profits resulted from lower reserve releases,
which offset revenue growth and higher interest income. Results
were also affected by higher expenses and a decline in the pre-tax
income from the Direct Banking segment.
Total revenue, net of interest expense, increased 6.3% year over
year to $1.85 billion. Net interest income also improved 10.2% year
over year to $1.32 billion. However, total other expenses jumped
18% year over year to $749 million.
Direct Banking
The Direct Banking segment reported pre-tax income of $820
million, reflecting a $63 million decrease from the year-ago
quarter. Discover card sales volume grew 5% year over year to $26.1
billion.
Total loans improved 9% year over year to $57.1 billion, boosted
by an increase of $1.6 billion in credit card loans, $2.9 billion
in private student loans (including purchase of a $2.4 billion loan
portfolio in the fourth quarter of 2011) and $703 million in
personal loans.
Other income decreased 4% year over year, primarily due to lower
late fee assessment, protection products revenue as well as
transition services revenue in connection with the acquisition of
Student Loan Corporation. Additionally, expenses in the segment
enhanced 18% year over year based on higher reserves related to
litigation.
The credit card net charge-off rate declined 222 basis points
(bps) year over year and 28 bps from the prior quarter to 2.79%.
Moreover, the over-30-days delinquency rate was at an all-time low
of 1.91%, having witnessed a substantial 88 bps decrease year over
year and 31 bps sequentially, reflecting an overall better credit
trend since the fourth quarter of 2009.
The provisions for losses surged 32% or $56 million year over
year to $232 million, reflecting lower reserve release, which was
partly offset by lower charge-offs. Reserve release was $110
million in the reported quarter, as opposed to $401 million in the
year-ago quarter.
Payment Services
The Payment Services segment's pre-tax income grew 10% year over
year to $47 million. Revenues were up $10 million, reflecting an
increase in point-of-sale transactions on the PULSE network, which
carry a higher margin, and higher third-party issuer volume, partly
offset by increased incentives.
Moreover, expenses increased $6 million from the year-ago level.
Payment Services dollar volume accelerated 12% from the year-ago
quarter to $51.4 billion, reflecting higher PULSE and third-party
issuer volume.
Share Repurchase Update
During the reported quarter, Discover repurchased 13.5 million
shares for $447 million under its $2 billion share repurchase
program.
Our Take
Discover has been generating exceptional card sales volume over
the past few quarters, owing to improved consumer spending and
credit quality trends. Moreover, operating performance of the
Payment Services segment was impressive, which contributed to the
bottom-line growth. Also, the company has a strong inorganic growth
policy, which apart from boosting earnings also fosters portfolio
diversification.
However, the expenses of Discover have been rising due to higher
compensation and benefit expenses, infrastructure development and
growth initiatives. Moreover, the company expects its litigation
expenses to rise, and has been strengthening its reserves for this
reason.
Nevertheless, the remarkable improvement in credit quality makes
us optimistic about Discover's future earnings. Additionally, the
company's extensive network, sound capital position and cost
containment initiatives are expected to accentuate growth over the
long term.
Discover competes with other card companies like
MasterCard Inc.
(
MA
) and
Visa Inc.
(
V
). Currently, the company caries a Zacks #2 Rank, implying a Buy
rating in the short term.
DISCOVER FIN SV (DFS): Free Stock Analysis
Report
MASTERCARD INC (MA): Free Stock Analysis Report
VISA INC-A (V): Free Stock Analysis Report
To read this article on Zacks.com click here.
Zacks Investment
Research