Discover Financial Services
) reported fourth-quarter 2013 earnings per share (EPS) of $1.23,
which exceeded the Zacks Consensus Estimate of $1.17 per share.
EPS also improved 16% from the year-ago quarter's number of
The improvement in Discover Financial's EPS is largely
attributable to growth in loans and share repurchases during the
quarter. Net income allocated to common shareholders increased to
$588 million from $530 million in the year-ago quarter.
Discover Financial's total revenue, net of interest expense,
increased 6% year over year to $2.1 billion, beating the Zacks
Consensus Estimate of $1.74 billion. The enhancement came on the
back of loan growth and higher net interest margin in the Direct
Banking segment as well as growth in card sales volume. Net
interest income also improved 10% to $1.57 billion reflecting
loan growth, higher loan yield and a decline in interest
Moreover, total other income for Discover Financial decreased
4.8% from the prior-year quarter to $560 million. On the other
hand, total other expenses increased 4.4% to $838 million.
Direct Banking Segment
Discover Financial's Direct Banking segment reported pre-tax
income of $911 million, reflecting a 12% rise from the year-ago
quarter. Revenues, net of interest expense, for the segment
increased 6% to $115 million. The rise was supported by higher
loans as well as an increase in net interest margin that was
fueled by lower funding costs and an improvement in loan
Discover card sales volume grew 3% year over year to $29.5
billion. Total loans improved 5% to $65.8 billion, boosted by a
4% increase in credit card loans, a 5% increase in private
student loans and a 27% surge in personal loans.
Other income decreased 5% year over year, primarily due to a
decline in direct mortgage related income. Meanwhile, expenses
increased 4% to $781 million.
Discover Financial's credit card net charge-off rate declined
to 2.09% from 2.31% in the year-ago quarter. The dip was
primarily attributable to growth in personal loans. Similarly,
the over-30 days delinquency rate improved to 1.72% from
In addition, provisions for losses decreased $18 million year
over year to $352 million, reflecting a decline in reserve
additions and charge-offs. Reserve build during the quarter was
$50 million, lower than $57 million in the year-ago quarter.
Payment Services Segment
Pre-tax income in Discover Financial's Payment Services
segment declined 18.7% year over year to $26 million. Revenues in
the segment in fourth-quarter 2013 decreased $2 million to $85
million, reflecting a decline in transaction processing revenues
Payment Services dollar volume declined 1% from the year-ago
quarter to $49.8 billion. Meanwhile, the transaction dollar
volume from PULSE was in line with the year-ago quarter.
Full Year Highlights
For full year 2013, Discover Financial recorded operating
earnings per share of $4.96, up 10% from $4.50 in 2012. Full year
earnings also surpassed the Zacks Consensus Estimate of
Revenues net of interest expense increased 7% year over year
to $8.2 billion.
Total other income improved 2% year-over-year to $2.3 billion,
while total other expenses increased 4% to $3.2 billion.
Discover Financial had total assets worth $79.3 billion as of
Dec 31, 2013, increasing from $73.5 billion as of Dec 31, 2012.
Total equity stood at $10.8 billion at the end of Dec 2013, up
from $9.9 billion at the end of Dec 2012.
Book value per share was $22.89 at the end of the fourth
quarter of 2013, compared with $19.83 as of Dec 31, 2012.
Return on equity was 34% at the end of 2013, compared to 26%
at year-end 2012. Tier 1 common capital ratio at the end of 2013
was 14.3%, compared to 13.6% at the end of 2012.
Share Repurchase Update
During the reported quarter, Discover Financial repurchased 7
million shares for $345 million, leading to a sequential decline
of 1% in shares outstanding.
On Oct 16, 2013, the board of Discover Financial declared a
quarterly cash dividend of 20 cents per share, payable on Feb 20,
2014 to shareholders of record as of Feb 6, 2014.
Discover Financial successfully met the earnings and revenue
expectation. Loan growth and net interest margin expansion was
impressive in the quarter. These coupled with share repurchases
aided the outperformance in the quarter. Additionally, lower
attritions and charge-offs helped Discover Financial to keep its
earnings streak alive.
The Direct Banking segment performed impressively during the
quarter, with growth in card sales that was fueled by higher
wallet share with the prevailing customers as well as by
receiving new accounts. Going forward, the launch of products
like Cashback, home equity installment loans and the initiation
of the FICO scores on the "Discover it" cards is expected to help
the segment generate more revenues, making way for long-term
However, a highly competitive environment marred the Payments
Services segment's performance. Although headwinds like a
challenging economic environment in Europe and the active debit
card environment might continue to weigh on the financials of the
segment in the near term, the long-term prospects look promising.
Currently, Discover Financial caries a Zacks Rank #3 (Hold).
Some better-ranked stocks in the financial services space include
Fidelity National Information Services, Inc.
Heartland Payment Systems, Inc.
). While Fidelity and Heartland carry a Zacks rank #1 (Strong
Buy), MasterCard carries a Zacks Rank #2 (Buy).
DISCOVER FIN SV (DFS): Free Stock Analysis
FIDELITY NAT IN (FIS): Free Stock Analysis
HEARTLAND PAYMT (HPY): Free Stock Analysis
MASTERCARD INC (MA): Free Stock Analysis
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