Discover Financial Services (DFS)

DFS 
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Discover Financial Services (DFS)

Q3 2012 Earnings Call

September 27, 2012 10:00 am ET

Executives

Bill Franklin

David W. Nelms - Chairman and Chief Executive Officer

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

Analysts

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

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

Eric Beardsley - Barclays Capital, Research Division

Donald Fandetti - Citigroup Inc, Research Division

Bradley G. Ball - Evercore Partners Inc., Research Division

Andrew McNellis - Evercore Partners Inc., Research Division

Kenneth Bruce - BofA Merrill Lynch, Research Division

David S. Hochstim - The Buckingham Research Group Incorporated

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

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

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

Matthew O'Neill - Credit Agricole Securities (USA) Inc., Research Division

Daniel Furtado - Jefferies & Company, Inc., Research Division

Michael P. Taiano - Telsey Advisory Group LLC

Henry J. Coffey - Sterne Agee & Leach Inc., Research Division

Presentation

Operator

Welcome to the Third Quarter 2012 Discover Financial Services Earnings Conference Call. My name is Sandra, and I will be your operator for today's call. [Operator Instructions] Later we will conduct a question-and-answer session. Please note that this conference is being recorded.

I will now turn the call over to Mr. Bill Franklin, Vice President, Investor Relations. Mr. Franklin, you may begin.

Bill Franklin

Thank you, Sandra. Good morning, everyone. We appreciate all of you for joining us on this morning's call. 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, in our Form 10-K for the year ended November 30, 2011, and in our Form 10-Q for the quarter ended May 31, 2012, which are on our website and on file with the SEC.

In the third quarter 2012 earnings release and supplement, which are now posted on our website at discoverfinancial.com and have been furnished to the SEC, we have 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 investors. We urge you to review that information in conjunction with today's discussion.

Our call this morning will include formal remarks from David Nelms, our Chairman and Chief Executive Officer; and Mark Graf, our Chief Financial Officer. After Mark completes his comments, there will be time for a question-and-answer session. [Operator Instructions]

Now it's my pleasure to turn the call over to David.

David W. Nelms

Thanks, Bill. Good morning, everyone, and thank you for joining us. Before the market opened, we reported quarterly earnings of $627 million or $1.21 per share, driven by continued improvements in credit, robust loan growth and share repurchases. During the quarter, we generated a return on equity of 28% and returned approximately $400 million of capital to shareholders through share repurchases and dividends.

Before I further discuss our third quarter, let me first acknowledge that during the past week, we entered into a consent order with the FDIC and CFPB regarding the previously disclosed matters related to the telephone marketing practices of certain credit protection products. We agreed to provide refunds of approximately $200 million to cardholders who bought the products from December 2007 to August 2011 and to enhance our marketing practices. We will also pay an additional $14 million in civil monetary penalties. I am pleased that this settlement has been concluded. All of us at Discover are committed to doing the right thing for our customers.

Now let's talk about our third quarter performance. We achieved strong growth over the prior year as revenues were up 10% and total receivables grew 9%. Credit quality continued to improve for our card business, which, once again, realized historic lows for the over 30-day delinquency and principal charge-off rates. Another achievement during the quarter was an all-time high level of active merchants generating Discover Card sales, a direct consequence of our acceptance and awareness initiatives.

Discover year-over-year sales growth moderated somewhat over the prior quarter, in line with the movements in lower consumer confidence. August, however, was the strongest month in the quarter, and one thing I am particularly pleased with is that at a time when revolving debt for the industry is roughly flat over last year, we grew our card receivables by 4%. We also continued to grow private student and personal loans, which we expect will offer similar normalized returns to card.

In addition to growing our loan portfolio, we are executing on our strategy to be the leading direct banking and payments company with the launch of Discover Home Loans in June. Acquiring the assets of Home Loan Center from Tree.com allowed us to enter the mortgage business with a low-cost acquisition and an originate and sell model. During the first 100 days after launch, we originated approximately $1 billion in mortgages through this platform.

Our payments business continues to leverage existing assets in unique ways and build upon acceptance achievements. We have created momentum and established ourselves as a flexible partner in the evolving payments landscape. For instance, in the U.S., we will bring PayPal to the physical point-of-sale at millions of merchant locations currently accepting Discover. Over the next few quarters, we will be working hard to accommodate PayPal's launch.

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