Discover Financial's (DFS) Q2 Earnings Beat, Improve Y/Y

Discover Financial Services DFS reported second-quarter 2021 adjusted earnings of $5.55 per share, beating the Zacks Consensus Estimate of $3.68 by a whopping 50.8%. The bottom line rebounded from the year-ago quarter’s loss of $1.20 per share. Results were driven by marketing investments, growing sales trends and a solid credit performance.

This upside can also be attributed to strength in its Digital Banking and Payment Services businesses.

Discover Financial Services Price, Consensus and EPS Surprise

Discover Financial Services Price, Consensus and EPS Surprise

Discover Financial Services price-consensus-eps-surprise-chart | Discover Financial Services Quote

Operational Update

In the reported quarter, the company’s revenues — net of interest expenses — rose 34% year over year to $3.5 billion.

The top line beat the Zacks Consensus Estimate by 24.7% on the back of its Direct Banking business.

Interest expenses of $290 million decreased 39.8% year over year.

Total operating expenses increased 13.5% to $1.2 billion due to higher employee compensation and benefits, marketing and business development, and other expense.

Segmental Update

Digital Banking Segment

This segment’s pre-tax income came in at $1.5 billion against the year-ago quarter’s loss of $484 million. This is attributable to a decline in provision for credit losses and higher revenue net of interest expenses. However, the same was partly offset by higher operating expenses.

Total loans dipped 1% year over year to $87.7 billion. Credit card loans fell 2% to $68.9 billion.

Personal loans were down 6% while private student loans inched 1%, both on a year-over-year basis. Net interest income increased 5% year over year owing to a favourable impact from lower market rates and lower interest charge-offs.

Net interest margin was 10.68%, up 87 basis points from the year-ago quarter’s level.

Payment Services Segment

Pre-tax income was $692 million in the quarter under review, up from the year-earlier period’s figure of $29 million.

Payment Services volume was 22% above the prior-year period’s number.

PULSE dollar volume expanded 19% year over year, aided by growth in all debit products, led by an increased spend from the economic recovery.

Diners Club volume expanded 41% from the year-earlier quarter’s tally following the COVID-19 impact.

Network Partners volume rose 30%, backed by AribaPay.

Strong Financial Position

Discover Financial’s total assets were worth $110.9 billion as of Jun 30, 2021, down 2.5% year over year.

Total liabilities as of Jun 30, 2021 were $97.8 billion, down 6.1% year over year.

Total equity was $13.1 billion on Jun 30, 2021, up 36.6% year over year.

Share Repurchase and Dividend Update

In the second quarter, the company bought back shares worth $553 million. Shares of common stock outstanding dipped 1.6% from the previous quarter’s reading.

Management declared a new $2.4-billion share buyback plan. It also hiked the divided by 14% to 50 cents. The latest share repurchase planspans three quarters through Mar 31, 2022.

The company’s board of directors approved a quarterly cash dividend of 50 cents per share payable Sep 2, 2021 to its shareholders of record on Aug 19, 2021.

Zacks Rank

Discover Financial has a Zacks Rank #3 (Hold), currently. You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

Upcoming Releases from Finance Sector

Here are a few companies worth considering from the finance sector as our model shows that these have the right combination of elements to beat on earnings this reporting cycle:

PJT Partners Inc. PJT has an Earnings ESP of +2.13% and a Zacks Rank #2, currently. You can uncover the best stocks to buy or sell before they’re reported with our  Earnings ESP Filter.

Moodys Corp. MCO has an Earnings ESP of +2.44% and a Zacks Rank of 3 at present.

Principal Financial Group, Inc. PFG has an Earnings ESP of +0.05% and is currently Zacks #3 Ranked.

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