Discover Financial
Services (DFS) reported first-quarter 2014 earnings per
share (EPS) of $1.31, which exceeded the Zacks Consensus Estimate
of $1.25 per share. However, EPS decreased 1.6% from the year-ago
quarter’s $1.33.
The year-over-year deterioration is
largely attributable to decline in both the Direct Banking and
Payments Services segment income. Net income allocated to common
shareholders decreased to $618 million from $659 million in the
year-ago quarter.
Discover Financial’s total revenue,
net of interest expense, increased 4% year over year to $2.1
billion, beating the Zacks Consensus Estimate of $1.77 billion. The
improvement came on the back of loan growth and higher net interest
margin in the Direct Banking segment as well as growth in card
sales volume. Net interest income also improved 11% to $1.56
billion, reflecting higher loan growth and an increase in net
interest margin.
Total other income for Discover
Financial decreased 11.5% from the prior-year quarter to $515
million.
On the other hand, total other
expenses increased 4.1% to $784 million.
Segment Update
Direct Banking
Segment
Discover Financial’s Direct Banking
segment reported pre-tax income of $994 million, reflecting a 4%
decline from the year-ago quarter. Revenues, net of interest
expense, for the segment increased 5% to $94 million.
Discover card sales grew 3.4% year
over year to $25.7 billion, mainly stemming from high spend
transactors. Total loans improved 6% to $63.8 billion, boosted by a
5% increase in credit card loans, a 5% rise in private student
loans and a 27% surge in personal loans. The company is also
achieving solid returns on equity in the private student loans and
personal loans businesses.
Other income decreased 12% year
over year, primarily due to a decline in direct mortgage related
income and an increase in rewards costs. Meanwhile, expenses
increased 3% on higher headcount and a surge in information
processing and other expenses.
Discover Financial’s credit card
net charge-off rate declined to 2.32% from 2.36% in the year-ago
quarter. Similarly, the over-30 days delinquency rate improved to
1.72% from 1.77%.
In addition, provisions for loan
losses increased $111 million year over year to $270 million,
reflecting a decline in reserve release. Reserve build during the
quarter was $59 million, lower than $154 million in the year-ago
quarter.
Payment Services
Segment
Pre-tax income at Discover
Financial’s Payment Services segment declined 40% year over year to
$28 million. Revenues in the segment, in first-quarter 2014,
decreased 9% year over year reflecting a decline in transaction
processing margins from PULSE.
Payment Services transaction dollar
volume rose 4% from the year-ago quarter to $50.8 billion.
Meanwhile, the transaction dollar volume from PULSE increased 5%
year over year.
Financial
Position
Discover Financial had total assets
worth $79.6 billion as of March 31, 2014, indicating a rise from
$79.3 billion as of Dec 31, 2013. Total equity stood at $11.0
billion at the end of March 2014, up from $10.8 billion at the end
of Dec 2013. Book value per share was $23.53 as on March 31, 2014,
compared with $22.89 as of Dec 31, 2013.
Return on equity stood at 23% for
the first quarter of 2014. Tier 1 common capital ratio at the end
of the first quarter of 2014 was 14.9%, up 60 bps sequentially.
With the completion of the inaugural CCAR stress test, Discover
Financial now targets Basel III Tier 1 common ratio of 11%.
Share Repurchase
Update
During the reported quarter,
Discover Financial repurchased 5.5 million shares worth $305
million, leading to a sequential decline of 1% in shares
outstanding.
On April 16, 2014, Discover
Financial authorized a $3.2 billion share repurchase program that
will replace the $2.4 billion share repurchase plan authorized in
March 2013. This new program is slated to expire on April 15, 2016.
Dividend
Update
On April 16, 2014, the board of
Discover Financial increased its quarterly cash dividend by 20% to
24 cents per share. The increased dividend is payable on May 22,
2014 to shareholders of record as of May 8, 2014.
Our Take
Discover Financial successfully surpassed our earnings and revenue
expectations. However, earnings declined year over year mainly on
account of soft performance across its segments.
The company witnessed growth across its loan businesses. Discover
Financial is also piloting its student loan consolidation product,
which will be launched later this year. Also, the company is slated
to implement its core banking system that is expected to assist the
direct checking product launch this year.
The company's prudent marketing and capital deployment initiatives
are helping it move toward its long-term goals. Management launched
Discover it in 2013 that drove new account growth, added free FICO
scores on statements and is up for significant product
enhancements. Moreover, the recent capital deployment initiatives
(dividend hike and share repurchase authorization) are expected to
bolster investor sentiment.
Zacks Rank
Currently, Discover Financial
caries a Zacks Rank #3 (Hold). Some better-ranked stocks in the
financial services space include Capital One Financial
Corporation (COF), World Acceptance Corp.
(WRLD) and Tree.Com, Inc. (TREE). All three stocks
carry a Zacks Rank #2 (Buy).
CAPITAL ONE FIN (COF): Free Stock Analysis Report
DISCOVER FIN SV (DFS): Free Stock Analysis Report
TREE.COM INC (TREE): Free Stock Analysis Report
WORLD ACCEPTANC (WRLD): Free Stock Analysis Report
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