Discover Financial Services (NYSE: DFS):
Third Quarter Results
2019
2018
YOY Change
Total loans, end of period (in
billions)
$92.5
$86.9
6%
Total revenue net of interest expense (in
millions)
$2,900
$2,724
6%
Total net charge-off rate
3.05%
2.97%
8 bps
Net income (in millions)
$770
$720
7%
Diluted EPS
$2.36
$2.05
15%
Discover Financial Services (NYSE: DFS) today reported net
income of $770 million or $2.36 per diluted share for the third
quarter of 2019, as compared to $720 million or $2.05 per diluted
share for the third quarter of 2018. The company’s return on equity
for the third quarter of 2019 was 26%.
Commenting on the company's results, Roger Hochschild, CEO and
President of Discover, said, “We had a strong third quarter,
achieving key objectives for loan growth, margin expansion and
credit performance, against the backdrop of continued stability in
the consumer sector of the U.S. economy. We continued to invest in
our operating model with the objective of driving sustained
profitable growth and solid returns.” Hochschild added, “Once again
this quarter we generated an outstanding return on equity of 26%,
reflecting the strength of our business model. Looking ahead to the
fourth quarter, we expect to finish the year on a very solid
footing, achieving all elements of our 2019 financial and
operational guidance.”
Segment Results:
Direct Banking
Direct Banking pretax income of $943 million increased by $20
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 $92.5 billion, up 6% compared
to the prior year. Credit card loans ended the quarter at $74.0
billion, up 7% from the prior year. Personal loans increased $51
million, or 1%, from the prior year. Private student loans
increased $333 million, or 4%, year-over-year. The organic student
loan portfolio, which excludes purchased loans, increased $727
million, or 9% from the prior year.
Net interest income increased $179 million, or 8%, from the
prior year, driven by loan growth and net interest margin
expansion. Net interest margin was 10.43%, up 15 basis points
versus the prior year. Card yield was 13.35%, an increase of 29
basis points from the prior year primarily driven by prime rate
increases in 2018 as well as favorable portfolio mix, partially
offset by higher interest charge-offs and recent prime rate
decreases. Interest expense as a percent of total loans increased
19 basis points from the prior year, primarily as a result of
higher market rates.
Other income decreased $12 million, or 3%, from the prior year,
primarily driven by higher rewards costs.
The 30+ day delinquency rate for credit card loans was 2.50%, up
18 basis points from the prior year and up 16 basis points from the
prior quarter. The credit card net charge-off rate was 3.32%, up 18
basis points from the prior year and down 17 basis points from the
prior quarter. The student loan net charge-off rate, excluding PCI
loans, was 0.69%, down 50 basis points from the prior year and down
4 basis points from the prior quarter. The personal loans net
charge-off rate of 3.99% was down 10 basis points from the prior
year and down 34 basis points from the prior quarter. The higher
overall net charge-off rate was primarily due to the seasoning of
recent years' loan growth and supply-driven credit
normalization.
Provision for loan losses of $799 million increased $57 million
from the prior year as higher net charge-offs were slightly offset
by a lower reserve build. The reserve build for the third quarter
of 2019 was $98 million, compared to a reserve build of $100
million in the third quarter of 2018.
Expenses were up $90 million from the prior year primarily as a
result of increases in employee compensation, professional fees and
marketing. Employee compensation increased as a result of higher
average salaries and benefits. Professional fees increased
primarily in connection with achieving a higher level of
recoveries. Marketing expense increased as a result of higher
investment in new account acquisition.
Payment Services
Payment Services pretax income was $51 million in the quarter,
up $7 million from the prior year, due to higher revenue driven by
transaction volume growth.
Payment Services volume was $62.6 billion, up 7% versus the
prior year. PULSE dollar volume was up 5% year-over-year, which
reflects the impact of strong growth from existing issuers and
acquirers, as well as new issuing and acquiring relationships.
Network Partners volume increased by 30% from the prior year driven
by AribaPay.
Share Repurchases
During the third quarter of 2019, the company repurchased
approximately 5.1 million shares of common stock for $419 million.
Shares of common stock outstanding declined by 1.4% from the prior
quarter.
Conference Call and Webcast Information
The company will host a conference call to discuss its third
quarter results on Tuesday, October 22, 2019, 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 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, 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
June 30, 2019, 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 September
30, 2019 June 30, 2019 September 30, 2018
EARNINGS SUMMARY Interest
Income
$3,040
$2,977
$2,781
Interest Expense
638
645
558
Net Interest Income
2,402
2,332
2,223
Discount/Interchange Revenue
775
759
753
Rewards Cost
520
460
473
Discount and Interchange Revenue, net
255
299
280
Protection Products Revenue
48
49
51
Loan Fee Income
120
102
103
Transaction Processing Revenue
52
48
47
Other Income
23
22
20
Total Other Income
498
520
501
Revenue Net of Interest Expense
2,900
2,852
2,724
Provision for Loan Losses
799
787
742
Employee Compensation and Benefits
439
427
408
Marketing and Business Development
230
224
218
Information Processing & Communications
96
101
89
Professional Fees
189
183
166
Premises and Equipment
26
26
26
Other Expense
127
117
108
Total Other Expense
1,107
1,078
1,015
Income Before Income Taxes
994
987
967
Tax Expense
224
234
247
Net Income
$770
$753
$720
Net Income Allocated to Common Stockholders
$749
$747
$699
PER SHARE
STATISTICS Basic EPS
$2.36
$2.32
$2.05
Diluted EPS
$2.36
$2.32
$2.05
Common Stock Price (period end)
$81.09
$77.59
$76.45
Book Value per share
$37.20
$35.97
$32.60
BALANCE SHEET SUMMARY
Total Assets
$110,786
$110,707
$105,842
Total Liabilities
99,069
99,214
94,826
Total Equity
11,717
11,493
11,016
Total Liabilities and Stockholders' Equity
$110,786
$110,707
$105,842
TOTAL LOAN RECEIVABLES
Ending Loans 1, 2
$92,493
$90,229
$86,894
Average Loans 1, 2
$91,345
$89,358
$85,855
Interest Yield
12.76%
12.82%
12.45%
Gross Principal Charge-off Rate
3.87%
4.03%
3.63%
Gross Principal Charge-off Rate excluding PCI Loans 3
3.93%
4.10%
3.71%
Net Principal Charge-off Rate
3.05%
3.22%
2.97%
Net Principal Charge-off Rate excluding PCI Loans 3
3.09%
3.27%
3.03%
Delinquency Rate (30 or more days) excluding PCI Loans 3
2.32%
2.18%
2.22%
Delinquency Rate (90 or more days) excluding PCI Loans 3
1.06%
1.04%
1.00%
Gross Principal Charge-off Dollars
$891
$898
$785
Net Principal Charge-off Dollars
$702
$718
$642
Net Interest and Fee Charge-off Dollars
$156
$158
$135
Loans Delinquent 30 or more days 3
$2,114
$1,939
$1,894
Loans Delinquent 90 or more days 3
$968
$922
$854
Allowance for Loan Loss (period end)
$3,299
$3,202
$2,927
Reserve Change Build/(Release) 4
$97
$69
$100
Reserve Rate
3.57%
3.55%
3.37%
Reserve Rate excluding PCI Loans 3
3.59%
3.58%
3.41%
CREDIT CARD LOANS Ending
Loans
$73,968
$72,393
$69,253
Average Loans
$73,248
$71,492
$68,613
Interest Yield
13.35%
13.44%
13.06%
Gross Principal Charge-off Rate
4.25%
4.43%
3.90%
Net Principal Charge-off Rate
3.32%
3.49%
3.14%
Delinquency Rate (30 or more days)
2.50%
2.34%
2.32%
Delinquency Rate (90 or more days)
1.21%
1.18%
1.12%
Gross Principal Charge-off Dollars
$784
$789
$674
Net Principal Charge-off Dollars
$611
$623
$543
Loans Delinquent 30 or more days
$1,847
$1,692
$1,608
Loans Delinquent 90 or more days
$897
$857
$777
Allowance for Loan Loss (period end)
$2,799
$2,691
$2,424
Reserve Change Build/(Release)
$108
$69
$90
Reserve Rate
3.78%
3.72%
3.50%
Total Discover Card Volume
$41,168
$39,935
$39,414
Discover Card Sales Volume
$37,432
$36,664
$35,896
Rewards Rate
1.38%
1.25%
1.31%
SEGMENT- INCOME BEFORE INCOME
TAXES Direct Banking
$943
$941
$923
Payment Services
51
46
44
Total
$994
$987
$967
NETWORK VOLUME PULSE
Network
$47,535
$47,389
$45,244
Network Partners
6,656
5,950
5,113
Diners Club International 5
8,386
8,472
8,370
Total Payment Services
62,577
61,811
58,727
Discover Network - Proprietary
38,722
37,891
36,642
Total
$101,299
$99,702
$95,369
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/20191022006144/en/
Investors: Craig Streem, 224-405-5923
craigstreem@discover.com
Media: Jon Drummond, 224-405-1888
jondrummond@discover.com
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