Discover Financial Services (NYSE: DFS) today reported net
income of $666 million or $1.82 per diluted share for the first
quarter of 2018, as compared to $564 million or $1.43 per diluted
share for the first quarter of 2017. The company’s return on equity
for the first quarter of 2018 was 25%.
First Quarter Highlights
- Total loans grew $6.9 billion (9%) from
the prior year to $82.7 billion.
- Credit card loans grew $5.8 billion
(10%) to $65.6 billion, on Discover card sales volume of $30.9
billion.
- Total net charge-off rate, excluding
purchased credit-impaired ("PCI") loans, increased 48 basis points
from the prior year to 3.17% and the total 30+ day delinquency rate
excluding PCI loans increased 26 basis points from the prior year
to 2.23%.
- Consumer deposits grew $4.2 billion
(11%) from the prior year to $41.3 billion.
- Payment Services transaction dollar
volume was $56.1 billion, up 19% from the prior year.
“Our performance this quarter was characterized by robust loan
and revenue growth reflecting the strength of the Discover
franchise as we continued to invest in product and service
enhancements," said David Nelms, chairman and CEO of Discover. “I'm
proud of our strong return on equity of 25%. In addition, this is
the first full quarter reflecting the benefits of tax reform which,
combined with share repurchases, led to a 27% year-over-year
increase in earnings per share."
Segment Results:
Direct Banking
Direct Banking pretax income of $811 million in the quarter
declined by $13 million from the prior year driven by an increase
in the provision for loan losses and higher operating expenses,
partially offset by higher revenue.
Total loans ended the quarter at $82.7 billion, up 9% compared
to the prior year. Credit card loans ended the quarter at $65.6
billion, up 10% from the prior year. Personal loans increased $644
million (10%) from the prior year. Private student loans increased
$234 million (3%) year-over-year, and grew $727 million (11%),
excluding purchased student loans.
Net interest income increased $208 million (11%) from the prior
year, driven by loan growth and a higher net interest margin. Net
interest margin was 10.23%, up 16 basis points from the prior year.
Card yield was 12.85%, an increase of 20 basis points from the
prior year as a result of increases in the prime rate, partially
offset by a change in portfolio mix and higher interest
charge-offs. Interest expense as a percent of total loans increased
23 basis points from the prior year, primarily as a result of
higher market rates.
Other income increased $19 million (5%) from the prior year,
driven by higher discount and interchange revenue.
The delinquency rate for credit card loans 30+ days past due was
2.33%, up 27 basis points from the prior year and 5 basis points
from the prior quarter. The credit card net charge-off rate for the
first quarter was 3.32%, up 48 basis points from the prior year and
29 basis points from the prior quarter. The student loan net
charge-off rate, excluding PCI loans, was 1.17%, up 34 basis points
from the prior year. The personal loans net charge-off rate of
4.03% increased by 87 basis points from the prior year. Net
charge-off rates were generally higher because of supply-driven
credit normalization and the seasoning of loan growth from the last
few years.
Provision for loan losses of $751 million increased $157 million
from the prior year due to higher net charge-offs and a higher
reserve build. The reserve build for the first quarter of 2018 was
$116 million, compared to a reserve build of $107 million in the
first quarter of 2017.
Expenses increased $83 million from the prior year as a result
of higher employee compensation and marketing expenses.
Additionally, we expanded investments to build financial literacy,
support diversity and inclusion, and strengthen the communities in
which we operate. Employee compensation increased as a result of
higher staffing levels and higher average salaries. Marketing
expenses increased as a result of higher account acquisition costs
and brand advertising.
Payment Services
Payment Services pretax income was $45 million in the quarter,
up $1 million from the prior year, primarily driven by higher
transaction processing and interchange revenue offset by a reserve
release in the first quarter of 2017.
Payment Services transaction dollar volume was $56.1 billion, up
19% versus the prior year. PULSE transaction dollar volume was up
20% year-over-year primarily driven by merchant and acquirer
routing decisions. Diners Club volume increased 14% year-over-year
driven by continued strength of newer franchise relationships.
Network Partners volume increased by 24% from the prior year driven
by AribaPay.
Share Repurchases
During the first quarter of 2018, the company repurchased
approximately 7.5 million shares of common stock for $584 million.
Shares of common stock outstanding declined by 1.8% from the prior
quarter.
Conference Call and Webcast Information
The company will host a conference call to discuss its first
quarter results on Thursday, April 26, 2018, at 4:00 p.m. Central
time. Interested parties can listen to the conference call via a
live audio webcast at https://investorrelations.discover.com.
About Discover
Discover Financial Services (NYSE: DFS) is a direct banking and
payment services company with one of the most recognized brands in
U.S. financial services. Since its inception in 1986, the company
has become one of the largest card issuers in the United States.
The company issues the Discover card, America's cash rewards
pioneer, and offers private student loans, personal loans, home
equity loans, checking and savings accounts and certificates of
deposit through its direct banking business. It operates the
Discover Network, with millions of retail and cash access
locations; PULSE, one of the nation's leading ATM/debit networks;
and Diners Club International, a global payments network with
acceptance in 190 countries and territories. For more information,
visit www.discover.com/company.
A financial summary follows. Financial, statistical, and
business related information, as well as information regarding
business and segment trends, is included in the financial
supplement filed as Exhibit 99.2 to the company's Current Report on
Form 8-K filed today with the Securities and Exchange Commission
(“SEC”). Both the earnings release and the financial supplement are
available online at the SEC's website (http://www.sec.gov) and the
company's website (https://investorrelations.discover.com).
This press release contains forward-looking statements within
the meaning of the Private Securities Litigation Reform Act of
1995. Such statements, which speak to our expected business and
financial performance, among other matters, contain words such as
“believe,” “expect,” “anticipate,” “intend,” “plan,” “aim,” “will,”
“may,” “should,” “could,” “would,” “likely,” and similar
expressions. Such statements are based upon the current beliefs and
expectations of the company's management and are subject to
significant risks and uncertainties. Actual results may differ
materially from those set forth in the forward-looking statements.
These forward-looking statements speak only as of the date of this
press release, and there is no undertaking to update or revise them
as more information becomes available.
The following factors, among others, could cause actual results
to differ materially from those set forth in the forward-looking
statements: changes in economic variables, such as the availability
of consumer credit, the housing market, energy costs, the number
and size of personal bankruptcy filings, the rate of unemployment,
the levels of consumer confidence and consumer debt, and investor
sentiment; the impact of current, pending and future legislation,
regulation, supervisory guidance, and regulatory and legal actions,
including, but not limited to, those related to tax reform,
financial regulatory reform, consumer financial services practices,
anti-corruption, and funding, capital and liquidity; the actions
and initiatives of current and potential competitors; the company's
ability to manage its expenses; the company's ability to
successfully achieve card acceptance across its networks and
maintain relationships with network participants; the company's
ability to sustain and grow its non-card products; difficulty
obtaining regulatory approval for, financing, closing,
transitioning, integrating or managing the expenses of acquisitions
of or investments in new businesses, products or technologies; the
company's ability to manage its credit risk, market risk, liquidity
risk, operational risk, compliance and legal risk, and strategic
risk; the availability and cost of funding and capital; access to
deposit, securitization, equity, debt and credit markets; the
impact of rating agency actions; the level and volatility of equity
prices, commodity prices and interest rates, currency values,
investments, other market fluctuations and other market indices;
losses in the company's investment portfolio; limits on the
company's ability to pay dividends and repurchase its common stock;
limits on the company's ability to receive payments from its
subsidiaries; fraudulent activities or material security breaches
of key systems; the company's ability to remain organizationally
effective; the company's ability to increase or sustain Discover
card usage or attract new customers; the company's ability to
maintain relationships with merchants; the effect of political,
economic and market conditions, geopolitical events and unforeseen
or catastrophic events; the company's ability to introduce new
products or services; the company's ability to manage its
relationships with third-party vendors; the company's ability to
maintain current technology and integrate new and acquired systems;
the company's ability to collect amounts for disputed transactions
from merchants and merchant acquirers; the company's ability to
attract and retain employees; the company's ability to protect its
reputation and its intellectual property; and new lawsuits,
investigations or similar matters or unanticipated developments
related to current matters. The company routinely evaluates and may
pursue acquisitions of or investments in businesses, products,
technologies, loan portfolios or deposits, which may involve
payment in cash or the company's debt or equity securities.
Additional factors that could cause the company's results to
differ materially from those described in the forward-looking
statements can be found under “Risk Factors,” “Business -
Competition,” “Business - Supervision and Regulation” and
“Management's Discussion and Analysis of Financial Condition and
Results of Operations” in the company's Annual Report on Form 10-K
for the year ended December 31, 2017, which is filed with the SEC
and available at the SEC's internet site (http://www.sec.gov).
DISCOVER FINANCIAL SERVICES (unaudited, in millions,
except per share statistics) Quarter Ended
March 31, December 31, March 31,
2018 2017 2017
EARNINGS
SUMMARY
Interest Income $2,569 $2,556 $2,278 Interest Expense 469 436 386
Net Interest Income 2,100 2,120 1,892 Discount/Interchange
Revenue 646 717 596 Rewards Cost 392 434 363 Discount and
Interchange Revenue, net 254 283 233 Protection Products Revenue 53
54 58 Loan Fee Income 96 96 89 Transaction Processing Revenue 43 43
39 Other Income 29 18 28 Total Other Income 475 494 447
Revenue Net of Interest Expense 2,575 2,614 2,339 Provision
for Loan Losses
751
679 586 Employee Compensation and Benefits 405 411 363
Marketing and Business Development 185 213 168 Information
Processing & Communications 82 80 80 Professional Fees 155 189
147 Premises and Equipment 26 26 25 Other Expense 115 117 102 Total
Other Expense 968 1,036 885 Income Before
Income Taxes 856 899 868 Tax Expense 190 512 304 Net Income $666
$387 $564 Net Income Allocated to Common Stockholders $646
$359 $551
PER SHARE
STATISTICS
Basic EPS $1.82 $0.99 $1.43 Diluted EPS $1.82 $0.99 $1.43 Common
Stock Price (period end) $71.93 $76.92 $68.39 Book Value per share
$30.93 $30.43 $29.46
SEGMENT- INCOME
BEFORE INCOME TAXES
Direct Banking $811 $870 $824 Payment Services 45 29 44 Total $856
$899 $868
BALANCE SHEET
SUMMARY
Total Assets $101,967 $100,087 $94,795 Total Liabilities 91,096
89,195 83,530 Total Equity 10,871 10,892 11,265 Total Liabilities
and Stockholders' Equity $101,967 $100,087 $94,795
TOTAL LOAN
RECEIVABLES
Ending Loans 1, 2 $82,744 $84,248 $75,853 Average Loans 1, 2
$83,254 $81,802 $76,185 Interest Yield 12.21% 12.14% 11.94%
Gross Principal Charge-off Rate 3.74% 3.45% 3.25% Gross Principal
Charge-off Rate excluding PCI Loans 3 3.84% 3.54% 3.37% Net
Principal Charge-off Rate 3.09% 2.85% 2.60% Net Principal
Charge-off Rate excluding PCI Loans 3 3.17% 2.92% 2.69% Delinquency
Rate (over 30 days) excluding PCI Loans 3 2.23% 2.20% 1.97%
Delinquency Rate (over 90 days) excluding PCI Loans 3 1.06% 0.99%
0.92% Gross Principal Charge-off Dollars $769 $711 $611 Net
Principal Charge-off Dollars $635 $583 $489 Net Interest and Fee
Charge-off Dollars $136 $119 $106 Loans Delinquent Over 30 Days 3
$1,800 $1,806 $1,445 Loans Delinquent Over 90 Days 3 $855 $815 $675
Allowance for Loan Loss (period end) $2,736 $2,621 $2,264
Reserve Change Build/(Release)4
$116 $96 $97 Reserve Rate 3.31% 3.11% 2.98% Reserve Rate excluding
PCI Loans 3 3.35% 3.15% 3.04%
CREDIT CARD
LOANS
Ending Loans $65,577 $67,291 $59,757 Average Loans $65,983 $64,791
$60,122 Interest Yield 12.85% 12.79% 12.65% Gross Principal
Charge-off Rate 4.08% 3.73% 3.61% Net Principal Charge-off Rate
3.32% 3.03% 2.84% Delinquency Rate (over 30 days) 2.33% 2.28% 2.06%
Delinquency Rate (over 90 days) 1.18% 1.12% 1.03% Gross Principal
Charge-off Dollars $663 $612 $535 Net Principal Charge-off Dollars
$540 $496 $422 Loans Delinquent Over 30 Days $1,529 $1,532 $1,233
Loans Delinquent Over 90 Days $777 $751 $616 Allowance for
Loan Loss (period end) $2,252 $2,147 $1,892
Reserve Change Build/(Release)
$105 $56 $102 Reserve Rate 3.43% 3.19% 3.17% Total Discover
Card Volume $34,327 $38,574 $32,406 Discover Card Sales Volume
$30,850 $35,339 $29,134 Rewards Rate 1.27% 1.23% 1.25%
NETWORK
VOLUME
PULSE Network $43,158 $42,386 $36,066 Network Partners 4,553 3,280
3,661
Diners Club International 5
8,390 8,373 7,382 Total Payment Services 56,101 54,039 47,109
Discover Network - Proprietary 32,382 36,267 29,859 Total $88,483
$90,306 $76,968
1 Total Loans includes Home Equity and
other loans.
2 Purchased Credit Impaired ("PCI") loans
are loans that were acquired in which a deterioration in credit
quality occurred between the origination date and the acquisition
date. These loans were initially recorded at fair value and accrete
interest income over the estimated lives of the loans as long as
cash flows are reasonably estimable, even if the loans are
contractually past due. PCI loans are private student loans and are
included in total loan receivables.
3 Excludes PCI loans (described above)
which are accounted for on a pooled basis. Since a pool is
accounted for as a single asset with a single composite interest
rate and aggregate expectation of cash flows, the past-due status
of a pool, or that of the individual loans within a pool, is not
meaningful. Because the Company is recognizing interest income on a
pool of loans, it is all considered to be performing.
4 Allowance for loan loss includes the net
change in reserves on PCI pools having no remaining non-accretable
difference which does not impact the reserve change build/(release)
in provision for loan losses.
5 Volume is derived from data provided by
licensees for Diners Club branded cards issued outside of North
America and is subject to subsequent revision or amendment.
Note: See Glossary for definitions of
financial terms in the financial supplement which is available
online at the SEC's website (http://www.sec.gov) and the Company's
website (http://investorrelations.discoverfinancial.com).
View source
version on businesswire.com: https://www.businesswire.com/news/home/20180426006826/en/
Discover Financial ServicesInvestors:Craig Streem,
224-405-5923craigstreem@discover.comorMedia:Jon Drummond,
224-405-1888jondrummond@discover.com
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