Discover Financial Services (NYSE: DFS):
First Quarter Results 2019 2018
YOY Change Total loans, end of period (in billions)
$88.7 $82.7 7% Total revenue net of interest expense
(in millions) $2,763 $2,575 7% Total net
charge-off rate 3.25% 3.09% 16 bps Net income
(in millions) $726 $666 9% Diluted EPS
$2.15 $1.82 18%
Discover Financial Services (NYSE: DFS) today reported net
income of $726 million or $2.15 per diluted share for the first
quarter of 2019, as compared to $666 million or $1.82 per diluted
share for the first quarter of 2018. The company’s return on equity
for the first quarter of 2019 was 26%.
“Once again, this quarter showed the power of the Discover
business model to deliver outstanding shareholder returns. Our
solid execution on growth initiatives, effective credit risk
management and operating efficiency drove strong profitability,"
said Roger Hochschild, CEO and president of Discover. "The Discover
brand and our reputation for outstanding service continue to
resonate with our customers and drive competitive
differentiation."
Segment Results:
Direct Banking
Direct Banking pretax income of $879 million increased by $68
million from the prior year driven by higher net interest income,
partially offset by an increase in the provision for loan losses
and higher operating expenses.
Total loans ended the quarter at $88.7 billion, up 7% compared
to the prior year. Credit card loans ended the quarter at $70.8
billion, up 8% from the prior year. Personal loans increased $121
million, or 2%, from the prior year. Private student loans
increased $230 million, or 2%, year-over-year, and grew $655
million, or 9%, excluding purchased student loans.
Net interest income increased $205 million, or 10%, from the
prior year, driven by loan growth and net interest margin
expansion. Net interest margin was 10.46%, up 23 basis points
versus the prior year. Card yield was 13.42%, an increase of 57
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 59 basis points from the prior year, primarily as a
result of higher market rates.
Other income decreased $22 million, or 6%, from the prior year,
driven by higher promotional rewards cost.
The 30+ day delinquency rate for credit card loans was 2.45%, up
12 basis points from the prior year and 2 basis points from the
prior quarter. The credit card net charge-off rate was 3.50%, up 18
basis points from the prior year and 27 basis points from the prior
quarter. The student loan net charge-off rate, excluding PCI loans,
was 0.79%, down 38 basis points from the prior year. The personal
loans net charge-off rate of 4.53% increased by 50 basis points
from the prior year. Net charge-off rates were generally higher
because of the seasoning of recent years' loan growth and
supply-driven credit normalization.
Provision for loan losses of $809 million increased $58 million
from the prior year due to higher net charge-offs, partially offset
by a lower reserve build. The reserve build for the first quarter
of 2019 was $94 million, compared to a reserve build of $116
million in the first quarter of 2018.
Expenses increased $57 million from the prior year primarily as
a result of higher employee compensation and information processing
expenses. Employee compensation increased as a result of higher
average salaries. Information processing increased due to ongoing
investments in infrastructure and analytic capabilities.
Payment Services
Payment Services pretax income was $51 million in the quarter,
up $6 million from the prior year, due to higher revenue driven by
transaction volume growth.
Payment Services transaction dollar volume was $61.0 billion, up
9% versus the prior year. PULSE transaction dollar volume was up 9%
year-over-year, which reflects the impact of new issuers on the
network as well as strong growth from existing issuers. Network
Partners volume increased by 24% from the prior year driven by
AribaPay.
Share Repurchases
During the first quarter of 2019, the company repurchased
approximately 7.2 million shares of common stock for $487 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 25, 2019, at 5:00 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 around the world. 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, 2018, 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,
2019 2018 2018
EARNINGS
SUMMARY
Interest Income $2,937 $2,907 $2,569 Interest Expense 632 605 469
Net Interest Income 2,305 2,302 2,100 Discount/Interchange
Revenue 677 752 646 Rewards Cost 446 475 392 Discount and
Interchange Revenue, net 231 277 254 Protection Products Revenue 49
50 53 Loan Fee Income 104 108 96 Transaction Processing Revenue 46
46 43 Other Income 28 24 29 Total Other Income 458 505 475
Revenue Net of Interest Expense 2,763 2,807 2,575 Provision
for Loan Losses 809 800 751 Employee Compensation and
Benefits 425 414 405 Marketing and Business Development 195 230 185
Information Processing & Communications 99 93 82 Professional
Fees 167 190 155 Premises and Equipment 28 26 26 Other Expense 110
157 115 Total Other Expense 1,024 1,110 968
Income Before Income Taxes 930 897 856 Tax Expense 204 210 190 Net
Income $726 $687 $666 Net Income Allocated to Common
Stockholders $705 $681 $646
PER SHARE
STATISTICS
Basic EPS $2.15 $2.04 $1.82 Diluted EPS $2.15 $2.03 $1.82 Common
Stock Price (period end) $71.16 $58.98 $71.93 Book Value per share
$34.60 $33.58 $30.93
SEGMENT- INCOME
BEFORE INCOME TAXES
Direct Banking $879 $874 $811 Payment Services 51 23 45 Total $930
$897 $856
BALANCE SHEET
SUMMARY
Total Assets $110,720 $109,553 $101,967 Total Liabilities 99,461
98,423 91,096 Total Equity 11,259 11,130 10,871 Total Liabilities
and Stockholders' Equity $110,720 $109,553 $101,967
TOTAL LOAN
RECEIVABLES
Ending Loans 1, 2 $88,743 $90,512 $82,744 Average Loans 1, 2
$89,353 $88,207 $83,254 Interest Yield 12.79% 12.59% 12.21%
Gross Principal Charge-off Rate 4.02% 3.77% 3.74% Gross Principal
Charge-off Rate excluding PCI Loans 3 4.10% 3.85% 3.84% Net
Principal Charge-off Rate 3.25% 3.08% 3.09% Net Principal
Charge-off Rate excluding PCI Loans 3 3.31% 3.14% 3.17% Delinquency
Rate (30 or more days) excluding PCI Loans 3 2.28% 2.31% 2.23%
Delinquency Rate (90 or more days) excluding PCI Loans 3 1.10%
1.08% 1.06% Gross Principal Charge-off Dollars $887 $839 $769 Net
Principal Charge-off Dollars $715 $686 $635 Net Interest and Fee
Charge-off Dollars $158 $142 $136 Loans Delinquent 30 or more days
3 $1,988 $2,049 $1,800 Loans Delinquent 90 or more days 3 $959 $961
$855 Allowance for Loan Loss (period end) $3,134 $3,041
$2,736 Reserve Change Build/(Release) 4 $94 $114 $116 Reserve Rate
3.53% 3.36% 3.31% Reserve Rate excluding PCI Loans 3 3.57% 3.39%
3.35%
CREDIT CARD
LOANS
Ending Loans $70,789 $72,876 $65,577 Average Loans $71,363 $70,563
$65,983 Interest Yield 13.42% 13.20% 12.85% Gross Principal
Charge-off Rate 4.40% 4.01% 4.08% Net Principal Charge-off Rate
3.50% 3.23% 3.32% Delinquency Rate (30 or more days) 2.45% 2.43%
2.33% Delinquency Rate (90 or more days) 1.26% 1.22% 1.18% Gross
Principal Charge-off Dollars $774 $713 $663 Net Principal
Charge-off Dollars $616 $575 $540 Loans Delinquent 30 or more days
$1,731 $1,772 $1,529 Loans Delinquent 90 or more days $891 $887
$777 Allowance for Loan Loss (period end) $2,622 $2,528
$2,252 Reserve Change Build/(Release) $94 $104 $105 Reserve Rate
3.70% 3.47% 3.43% Total Discover Card Volume $36,386 $40,655
$34,327 Discover Card Sales Volume $32,899 $37,208 $30,850 Rewards
Rate 1.35% 1.28% 1.27%
NETWORK
VOLUME
PULSE Network $47,106 $47,082 $43,158 Network Partners 5,663 4,680
4,553 Diners Club International 5 8,278 8,700 8,390 Total Payment
Services 61,047 60,462 56,101 Discover Network - Proprietary 34,051
38,502 32,382 Total $95,098 $98,964 $88,483 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/20190425005987/en/
Investors:Craig Streem,
224-405-5923craigstreem@discover.comMedia:Jon Drummond,
224-405-1888jondrummond@discover.com
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