Discover Financial Services
) reported 133% increase in net income to $600 million for the
quarter ended May 31 compared to $258 million the same time last
year. Thought a moderate increase in both card sales volume and
total loans supported the increase, a 76% decline in provision for
loan losses helped the company report its all time record quarterly
net income. Discover Financial Services is a direct banking
and payment services company that offers credit cards, student
loans, personal loans and deposit products. It competes with other
financial firms like Capital One (
), Visa (NYSE:V) and MasterCard (NYSE:MA).
We have a price estimate of
$23 on Discover's stock
which is nearly 10% below the current market price.
Declining Provision for Losses
Provision for loan losses for Discover was $724 million in Q2
2010 which reduced to $176 million in Q2 2011. The 76% decline in
provisions for loan losses is driven by lower charge-offs and
a reduction in the allowance for loan losses. Charge-offs decreased
by $424 million from the prior year. Also the improvement
in credit outlook resulted in a reserve release of $401
million in the second quarter of 2011 versus a release of $277
million in the second quarter of 2010 which supplemented the
The decline in charge-off rates and provision for loan losses is
a result of conservative lending approach adopted by the industry
in the aftermath of the global economic crisis of 2009. Stricter
regulations on the banking industry have also caused many banks to
raise their lending requirements.
We expect Discover's provision for losses as a percentage of
average credit card loans to be around 3.4% in 2011 and remain
stable during the Trefis forecast period.
See our full analysis of Discover Financial