Discover Financial Services (NYSE: DFS) today reported net
income of $669 million or $1.91 per diluted share for the second
quarter of 2018, as compared to $546 million or $1.40 per diluted
share for the second quarter of 2017. The company’s return on
equity for the second quarter of 2018 was 25%.
Second Quarter Highlights
- Total loans grew $6.8 billion, or 9%,
from the prior year to $84.8 billion.
- Credit card loans grew $6.0 billion, or
10%, to $67.8 billion, and Discover card sales volume increased 9%
from the prior year, to $35.1 billion.
- Total net charge-off rate increased 40
basis points from the prior year to 3.11%. Excluding purchased
credit-impaired ("PCI") loans, total net charge-off rate increased
39 basis points from the prior year to 3.18% and the total 30+ day
delinquency rate increased 15 basis points from the prior year to
2.08%.
- Consumer deposits grew $4.5 billion, or
12%, from the prior year to $42.3 billion.
- Payment Services transaction dollar
volume was $57.3 billion, up 14% from the prior year.
“Our investments in the Discover brand and in growth initiatives
across our product set continued to drive outstanding returns this
quarter. The direct impact of these initiatives was evident in our
continued strong loan and revenue growth," said David Nelms,
chairman and CEO of Discover. “Our new capital plan includes a 14%
increase in our dividend which, combined with share repurchases, is
expected to contribute to a robust level of capital return over the
next year."
Segment Results:
Direct Banking
Direct Banking pretax income of $837 million in the quarter
increased by $6 million from the prior year driven by higher net
interest income, largely offset by an increase in the provision for
loan losses and higher operating expenses.
Total loans ended the quarter at $84.8 billion, up 9% compared
to the prior year. Credit card loans ended the quarter at $67.8
billion, up 10% from the prior year. Personal loans increased $349
million, or 5%, from the prior year. Private student loans
increased $186 million, or 2%, year-over-year, and grew $666
million, or 10%, excluding purchased student loans.
Net interest income increased $191 million, or 10%, from the
prior year, driven by loan growth and a higher net interest margin.
Net interest margin was 10.21%, up 10 basis points from the prior
year. Card yield was 12.88%, an increase of 22 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
34 basis points from the prior year, primarily as a result of
higher market rates.
Other income decreased $10 million, or 2%, from the prior year,
driven by higher promotional rewards cost.
The 30+ day delinquency rate for credit card loans was 2.16%, up
16 basis points from the prior year and down 17 basis points from
the prior quarter. The credit card net charge-off rate for the
second quarter was 3.34%, up 40 basis points from the prior year
and 2 basis points from the prior quarter. The student loan net
charge-off rate, excluding PCI loans, was 1.16%, up 1 basis point
from the prior year. The personal loans net charge-off rate of
3.97% increased by 79 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.
Provision for loan losses of $742 million increased $103 million
from the prior year due to higher net charge-offs, partially offset
by a lower reserve build. The reserve build for the second quarter
of 2018 was $93 million, compared to a reserve build of $119
million in the second quarter of 2017.
Expenses increased $72 million from the prior year as a result
of higher employee compensation and marketing expenses. Employee
compensation increased as a result of higher staffing levels and
higher average salaries. Marketing expenses increased as a result
of higher investment in new account acquisition and brand
advertising.
Payment Services
Payment Services pretax income was $40 million in the quarter,
up $4 million from the prior year, due to higher revenue driven by
international growth.
Payment Services transaction dollar volume was $57.3 billion, up
14% versus the prior year. PULSE transaction dollar volume was up
14% year-over-year, which reflects the impact of new issuers on the
network as well as strong growth from existing issuers. Diners Club
volume increased 8% year-over-year driven by continued strength of
newer franchise relationships. Network Partners volume increased by
33% from the prior year driven by AribaPay.
Share Repurchases
During the second quarter of 2018, the company repurchased
approximately 7.6 million shares of common stock for $555 million.
Shares of common stock outstanding declined by 2.0% from the prior
quarter.
Federal Reserve Response To 2018 Capital Plan
On June 28, 2018, Discover Financial Services announced that the
Board of Governors of the Federal Reserve System notified Discover
that it has no objections to the company's planned capital actions
through June 30, 2019, which include an increase in the company's
quarterly dividend from $0.35 to $0.40 per share of common stock
and share repurchases of up to $1.85 billion during the four
quarters ending June 30, 2019.
Conference Call and Webcast Information
The company will host a conference call to discuss its second
quarter results on Thursday, July 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 Global Network, comprised of Discover Network, with
millions of merchant 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, and “Management's Discussion
& Analysis of Financial Condition and Results of Operations” in
the company's Quarterly Report on Form 10-Q for the quarter ended
March 31, 2018, which are 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
June 30, March 31, June 30,
2018 2018 2017
EARNINGS
SUMMARY
Interest Income $2,636 $2,569 $2,338 Interest Expense 507 469 400
Net Interest Income 2,129 2,100 1,938 Discount/Interchange
Revenue 724 646 666 Rewards Cost 461 392 388 Discount and
Interchange Revenue, net 263 254 278 Protection Products Revenue 50
53 56 Loan Fee Income 95 96 83 Transaction Processing Revenue 42 43
42 Other Income 24 29 22 Total Other Income 474 475 481
Revenue Net of Interest Expense 2,603 2,575 2,419 Provision
for Loan Losses 742 751 640 Employee Compensation and
Benefits 400 405 367 Marketing and Business Development 224 185 192
Information Processing & Communications 86 82 77 Professional
Fees 161 155 156 Premises and Equipment 24 26 23 Other Expense 89
115 97 Total Other Expense 984 968 912 Income
Before Income Taxes 877 856 867 Tax Expense 208 190 321 Net Income
$669 $666 $546 Net Income Allocated to Common Stockholders
$663 $646 $532
PER SHARE
STATISTICS
Basic EPS $1.91 $1.82 $1.41 Diluted EPS $1.91 $1.82 $1.40 Common
Stock Price (period end) $70.41 $71.93 $62.19 Book Value per share
$31.66 $30.93 $30.01
SEGMENT- INCOME
BEFORE INCOME TAXES
Direct Banking $837 $811 $831 Payment Services 40 45 36 Total $877
$856 $867
BALANCE SHEET
SUMMARY
Total Assets $102,751 $101,967 $93,757 Total Liabilities 91,862
91,096 82,498 Total Equity 10,889 10,871 11,259 Total Liabilities
and Stockholders' Equity $102,751 $101,967 $93,757
TOTAL LOAN
RECEIVABLES
Ending Loans 1, 2 $84,789 $82,744 $77,997 Average Loans 1, 2
$83,648 $83,254 $76,854 Interest Yield 12.28% 12.21% 11.98%
Gross Principal Charge-off Rate 3.78% 3.74% 3.36% Gross Principal
Charge-off Rate excluding PCI Loans 3 3.87% 3.84% 3.47% Net
Principal Charge-off Rate 3.11% 3.09% 2.71% Net Principal
Charge-off Rate excluding PCI Loans 3 3.18% 3.17% 2.79%
Delinquency Rate (30 or more days)
excluding PCI Loans 3
2.08% 2.23% 1.93%
Delinquency Rate (90 or more days)
excluding PCI Loans 3
0.99% 1.06% 0.88% Gross Principal Charge-off Dollars $789 $769 $645
Net Principal Charge-off Dollars $649 $635 $520 Net Interest and
Fee Charge-off Dollars $138 $136 $110
Loans Delinquent 30 or more days 3
$1,725 $1,800 $1,457
Loans Delinquent 90 or more days 3
$821 $855 $667 Allowance for Loan Loss (period end) $2,828
$2,736 $2,384
Reserve Change Build/(Release) 4
$93 $116 $120 Reserve Rate 3.34% 3.31% 3.06% Reserve Rate excluding
PCI Loans 3 3.38% 3.35% 3.11%
CREDIT CARD
LOANS
Ending Loans $67,812 $65,577 $61,797 Average Loans $66,594 $65,983
$60,700 Interest Yield 12.88% 12.85% 12.66% Gross Principal
Charge-off Rate 4.12% 4.08% 3.71% Net Principal Charge-off Rate
3.34% 3.32% 2.94%
Delinquency Rate (30 or more days)
2.16% 2.33% 2.00%
Delinquency Rate (90 or more days)
1.09% 1.18% 0.98% Gross Principal Charge-off Dollars $684 $663 $561
Net Principal Charge-off Dollars $555 $540 $445
Loans Delinquent 30 or more days
$1,466 $1,529 $1,237
Loans Delinquent 90 or more days
$743 $777 $603 Allowance for Loan Loss (period end) $2,334
$2,252 $1,980
Reserve Change Build/(Release)
$82 $105 $88 Reserve Rate 3.44% 3.43% 3.21% Total Discover
Card Volume $38,430 $34,327 $35,297 Discover Card Sales Volume
$35,077 $30,850 $32,172 Rewards Rate 1.31% 1.27% 1.20%
NETWORK
VOLUME
PULSE Network $44,308 $43,158 $38,848 Network Partners 4,602 4,553
3,461 Diners Club International 5 8,417 8,390 7,800 Total Payment
Services 57,327 56,101 50,109 Discover Network - Proprietary 36,339
32,382 33,342 Total $93,666 $88,483 $83,451 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/20180726005971/en/
Discover Financial ServicesInvestors:Craig Streem,
224-405-5923craigstreem@discover.comorMedia:Jon Drummond,
224-405-1888jondrummond@discover.com
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