Discover Financial Services
) reported fourth-quarter 2012 earnings per share of $1.07,
lagging the Zacks Consensus Estimate of $1.13. However, earnings
per share surpassed the year-ago quarter's earnings of 95
Moreover, net income improved 7.4% year over year to $551
million from $513 million. Net income allocated to common
shareholders also increased to $541 million from $508 million in
the year-ago quarter.
The improvement in 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.
Total revenue, net of interest expense, increased 11% year
over year to $2.0 billion. Net interest income also improved 11%
year over year to $1.39 billion.
Moreover, total other income increased 11% over the prior-year
quarter to $604 million. However, total other expenses jumped 20%
year over year to $800 million.
Direct Banking Segment
The Direct Banking segment reported pre-tax income of $827
million, reflecting a 7% increase from the year-ago quarter.
Discover card sales volume grew 6% year over year to $26.5
Total loans improved 6% year over year to $61.0 billion,
boosted by a 6% increase in both credit card and private student
loans and a 24% surge in personal loans. Other income increased
11% year over year, primarily due to higher interchange revenue
owing to improved sales, additional revenues from Discover Home
Loans, launched in June 2012, and gain on sale of minority
Expenses in the segment surged 18% year over year on increased
marketing expenses and elevated headcount along with higher
employee compensation and marketing expenditure related to the
Home Loan Center acquisition.
The credit card net charge-off rate declined 14 basis points
(bps) sequentially to 2.29%. However, the over-30-days
delinquency rate increased 5 bps over the prior quarter to 1.86%,
reflecting a reversal in the constantly improving credit trend
since the fourth quarter of 2009.
Besides, the provisions for losses hiked 6% or $19 million
year over year to $338 million, reflecting higher loan loss
reserves, which was partly offset by lower charge-offs. Reserve
created during the quarter was $38 million, against reserve
release of $68 million in the year-ago quarter.
Payment Services Segment
The Payment Services segment's pre-tax income fell 21% year
over year to $33 million. Revenues were up $8 million, reflecting
an increase in point-of-sale transactions on the PULSE network,
which carry a higher margin. Meanwhile, expenses increased $17
million from the year-ago level as a result of a surge in
marketing and employee expenses due to the recent partnerships
and other expansion initiatives.
Payment Services dollar volume accelerated 13% from the
year-ago quarter to $49.0 billion, reflecting higher volume from
PULSE and Network Partners.
Discover had total assets worth $75.24 billion as of Nov 30,
2012, increasing from $68.78 billion as of Nov 30, 2011. Total
equity stood at $9.73 billion at the end of fiscal 2012, up from
$8.24 billion at the end of fiscal 2011. Book value per share was
$19.55 at the end of November 2012, compared with $15.59 as of
Nov 30, 2011.
Share Repurchase Update
During the reported quarter, Discover repurchased 10 million
shares for $401 million under its $2 billion share repurchase
Concurrently, Discover announced a quarterly cash dividend of
14 cents per share, payable on Jan 17, 2013, to shareholders of
record as of Jan 3, 2013.
Currently, Discover caries a Zacks #2 Rank (Buy). We maintain
a long-term Neutral recommendation on the stock.
), which closely competes with Discover shares the same Zacks
) carries a Zacks #3 Rank (Hold).
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