Discover Financial Services (DFS)

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Discover Financial Services (DFS)

Q4 2011 Earnings Call

December 15, 2011 10:30 am ET

Executives

Craig A. Streem - Vice President of Investor Relations

David W. Nelms - Chairman and Chief Executive Officer

R. Mark Graf - Chief Financial Officer, Chief Accounting Officer, and Executive Vice President

Analysts

Richard B. Shane - JP Morgan Chase & Co, Research Division

Sanjay Sakhrani - Keefe, Bruyette, & Woods, Inc., Research Division

Ryan M. Nash - Goldman Sachs Group Inc., Research Division

Moshe Orenbuch - Crédit Suisse AG, Research Division

Donald Fandetti - Citigroup Inc, Research Division

Christopher Brendler - Stifel, Nicolaus & Co., Inc., Research Division

Scott Valentin - FBR Capital Markets & Co., Research Division

Kenneth Bruce - BofA Merrill Lynch, Research Division

David S. Hochstim - Buckingham Research Group, Inc.

Craig J. Maurer - Credit Agricole Securities (USA) Inc., Research Division

John Stilmar - SunTrust Robinson Humphrey, Inc., Research Division

Matthew Howlett - Macquarie Research

Brian Foran - Nomura Securities Co. Ltd., Research Division

Jason Arnold - RBC Capital Markets, LLC, Research Division

Robert P. Napoli - William Blair & Company L.L.C., Research Division

Presentation

Operator

Welcome to the Discover Financial Services Fourth Quarter 2011 Earnings Conference Call. My name is Christine, and I will be your operator for today's conference. [Operator Instructions] Please note, today's conference is being recorded. I will now turn the call over to Craig Streem, Vice President, Investor Relations. You may begin.

Craig A. Streem

Thank you, Christine. Good morning, everyone, and welcome to today's call. Let me begin by reminding all of you that the discussion today contains certain forward-looking statements about the company's future financial performance and business prospects which are subject to risks and uncertainties and speak only as of today. Factors that could cause actual results to differ materially from these forward-looking statements are set forth within today's earnings press release, which was furnished to the SEC in an 8-K report, and in our Form 10-K for the year ended November 30, 2010, and in our Form 10-Q, for the third quarter 2011, all of which are on file with the SEC. In the fourth quarter 2011 earnings release and supplement, which are now posted on our website at discoverfinancial.com and have been furnished to the SEC, we've provided information that compares and reconciles the company's non-GAAP financial measures with the GAAP financial information and we explain why these presentations are useful to management and to investors. And of course, we urge you to review that information in conjunction with today's conversation.

Our call this morning will include formal remarks from David Nelms, our Chairman and Chief Executive Officer; Mark Graf, our Chief Financial Officer; and then as always, a question-and-answer session. I would encourage you that during the Q&A period, it will be helpful if you limit yourself to one question and one related follow-up. And now, it is my pleasure to turn the call over to David.

David W. Nelms

Good morning, everyone, and thanks for joining us. Earlier today, we reported fourth quarter net income of $513 million or $0.95 per share, driven by continued improvements in credit and receivables growth in all products. Our strong results and positive outlook for Discover led us to announce a 67% increase in our dividend and to continue to execute on our share repurchase program.

This morning, I'm going to start off by discussing our fourth quarter, and then walk you through some of the highlights of our full year results.

First, regarding the fourth quarter, Discover card sales volume grew 8% compared to the prior year. The strong sales performance continues to include higher spending from the revolver segment of our portfolio, helping us to grow card receivables, $47 billion. Our continued success in growing sales and receivables reflects greater effectiveness in marketing programs, cash rewards leadership and expanded merchant acceptance, all of which contribute to increases in profitable growth. One example of this is our recently announced program with amazon.com, in which Discover card members can pay directly with cashback bonus at this site, as well as earn double rewards on their purchases until the end of the year. Since we launched the program in October, we have seen a significant increase in card member purchases at Amazon.

Another highlight this quarter is the continued improvement in card credit, as our 30-plus day delinquency rate had another all-time record low at 2.39%. In addition, the card net charge-off rate dropped to 3.24%. I'm very proud of these strong results which were due in large part, to our efforts in credit risk management, collections and marketing.

In our other lending product portfolios, which include personal and private student loans, we grew loans to $10 billion with the acquisition of approximately $2.5 billion in additional private student loans from Citi. Our ongoing expansion outside of Card continues to drive earnings growth with attractive yields and strong credit performance.

Our Payment Services segment experienced total volume growth at 7% for the quarter versus the prior year. All segments, PULSE, Diners Club, and third-party issuing delivered good volume growth year-over-year this quarter. As it relates to PULSE's strategy to win new PIN debit volume post Durbin, we are responding to numerous RFPs and should have more to report in this regard next quarter.

Our fourth quarter performance provided a strong finish to 2011, an all-time record net income of $2.2 billion for the full year. These results were primarily driven by improved credit cost and profitable loan growth in our Direct Banking segment, and 18% higher Payment Services profits for the year. On our 3 payment networks, we achieved record volume of over $280 billion. Additionally, return on equity for the year was 30%, considerably higher than our 15% long-term target.

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