Discover Financial Services (NYSE: DFS):
First Quarter Results
2020
2019
YOY Change
Total loans, end of period (in
billions)
$93.0
$88.7
5%
Total revenue net of interest expense (in
millions)
$2,888
$2,763
5%
Total net charge-off rate
3.27%
3.25%
2 bps
Net income/(loss) (in millions)
($61)
$726
(108%)
Diluted EPS
($0.25)
$2.15
(112%)
Discover Financial Services (NYSE: DFS) today reported a net
loss of $61 million or ($0.25) per diluted share for the first
quarter of 2020, as compared to net income of $726 million or $2.15
per diluted share for the first quarter of 2019.
“While our results this quarter were heavily impacted by the
emerging effects of the coronavirus, I could not be prouder of the
team here at Discover and the work they did protecting employees
and serving our customers in these challenging times,” said Roger
Hochschild, CEO and President of Discover. “We have taken decisive
actions including suspending our share repurchase program,
launching payment programs to support our customers, and
implementing $400 million of expense reductions. I believe our
digital business model, strong capital position, and robust funding
channels will allow us to operate effectively during the downturn
and position us well for the recovery.”
Actions taken in response to COVID-19:
- Enabled nearly 100% of employees to work from home
- Enhanced employee support programs
- Funded incremental community support
- Established "Skip-a-Payment" programs for impacted
customers
- Implemented actions to mitigate impact of pandemic on future
credit performance
- Identified $400 million of planned expense reductions
- Suspended share repurchase program
Segment Results:
Direct Banking
Direct Banking pretax loss of $161 million for the quarter was
$1.0 billion lower than pretax income for the prior year period
driven by an increase in the provision for credit losses and higher
operating expenses partially offset by higher net interest
income.
Total loans ended the quarter at $93.0 billion, up 5%
year-over-year. Credit card loans ended the quarter at $73.8
billion, up 4% year-over-year. Personal loans increased $223
million, or 3%, year-over-year. Private student loans increased
$355 million, or 4%, year-over-year. The organic student loan
portfolio, which excludes purchased loans, increased $719 million,
or 9% year-over-year.
Net interest income for the quarter increased $93 million, or
4%, from the prior year period, primarily driven by higher average
loans slightly offset by net interest margin compression. Net
interest margin was 10.21%, down 25 basis points versus the prior
year period. Card yield was 12.90%, a decrease of 52 basis points
from the prior year period primarily driven by prime rate decreases
partially offset by favorable portfolio mix. Interest expense as a
percent of total loans decreased 39 basis points from the prior
year period, primarily as a result of lower market rates.
The 30+ day delinquency rate for credit card loans was 2.62%, up
17 basis points year-over year and flat from the prior quarter. The
credit card net charge-off rate was 3.65%, up 15 basis points from
the prior year and up 24 basis points from the prior quarter. The
student loan net charge-off rate was 0.68%, up 2 basis points from
the prior year and down 34 basis points from the prior quarter. The
personal loans net charge-off rate of 3.59% was down 94 basis
points from the prior year and down 67 basis points from the prior
quarter. The overall net charge-off rate was higher primarily due
to the seasoning of recent years' loan growth.
Provision for credit losses of $1.8 billion increased $998
million from the prior year period driven by the impact of a higher
reserve build and higher net charge-offs. The reserve build for the
first quarter of 2020 was $1.1 billion, compared to a reserve build
of $94 million in the first quarter of 2019. The company adopted
CECL on January 1st of this year, and this quarter’s reserve build
reflects the CECL reserve methodology, and an updated macroeconomic
outlook.
Total operating expenses were up $129 million year-over year
primarily as a result of increases in employee compensation,
marketing, professional fees and information processing. Employee
compensation increased as a result of higher average salaries and
headcount. Marketing expenses increased as a result of higher
investment in brand awareness and consideration. Professional fees
increased primarily in connection with achieving a higher level of
recoveries and information processing increased due to investments
in technology capabilities and infrastructure.
Payment Services
Payment Services pretax income was $83 million in the quarter,
up $32 million year-over-year, primarily driven by a one-time gain
on the sale of an equity investment.
Payment Services volume was $63.9 billion, up 5% year-over-year.
PULSE dollar volume was up 4% year-over-year, which reflects the
impact of growth from existing issuers and acquirers, as well as
new issuing and acquiring relationships. Network Partners volume
increased by 23% year-over-year driven by AribaPay.
Share Repurchases
During the first quarter of 2020, the company repurchased
approximately 4.7 million shares of common stock for $343 million.
The company suspended the share repurchase program in March. Shares
of common stock outstanding declined by 1.2% from the prior
quarter.
Adoption of Accounting Standard for Measurement of Credit
Losses
The company’s results for the first quarter 2020 reflect the
January 1, 2020 effectiveness of Accounting Standards Update No.
2016-13, Financial Instruments-Credit Losses (Topic 326):
Measurement of Credit Losses on Financial Instruments for the
Company (the “ASU”). For purposes of calculating the company’s
regulatory capital, the company has elected to defer recognition of
the estimated impact of the ASU on regulatory capital for two years
in accordance with the interim final rule adopted by federal bank
regulatory agencies on March 27, 2020. Pursuant to the interim
final rule, the estimated impact of the ASU on regulatory capital
will be phased in over a three year period beginning in 2022.
Conference Call and Webcast Information
The company will host a conference call to discuss its first
quarter results on Thursday, April 23, 2020, at 7:00 a.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 digital 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
loans, checking and savings accounts and certificates of deposit
through its 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: the effect of the coronavirus disease 2019 ("COVID-19")
pandemic and measures taken to mitigate the pandemic, including
their impact on our credit quality and business operations as well
as their impact on general economic and financial markets, 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, 2019 which is filed with the SEC
and available at the SEC's internet site (http://www.sec.gov) and
subsequent reports on Forms 8-K and 10-Q, including the company's
Current Report on Form 8-K filed today with the SEC.
DISCOVER FINANCIAL SERVICES (unaudited, in millions,
except per share statistics) Quarter Ended March
31,2020 December 31,2019 March 31,2019
EARNINGS SUMMARY Interest
Income
$2,982
$3,039
$2,937
Interest Expense
584
615
632
Net Interest Income
2,398
2,424
2,305
Discount/Interchange Revenue
694
800
677
Rewards Cost
478
519
446
Discount and Interchange Revenue, net
216
281
231
Protection Products Revenue
47
48
49
Loan Fee Income
119
123
104
Transaction Processing Revenue
44
51
46
Other Income
64
17
28
Total Other Income
490
520
458
Revenue Net of Interest Expense
2,888
2,944
2,763
Provision for Loan Losses
1,807
836
809
Employee Compensation and Benefits
467
447
425
Marketing and Business Development
231
234
195
Information Processing & Communications
114
113
99
Professional Fees
193
214
167
Premises and Equipment
30
27
28
Other Expense
124
149
110
Total Other Expense
1,159
1,184
1,024
Income Before Income Taxes
(78)
924
930
Tax Expense
(17)
216
204
Net Income
($61)
$708
$726
Net Income Allocated to Common Stockholders
($78)
$704
$705
PER SHARE
STATISTICS Basic EPS
($0.25)
$2.25
$2.15
Diluted EPS
($0.25)
$2.25
$2.15
Common Stock Price (period end)
$35.67
$84.82
$71.16
Book Value per share
$31.55
$38.24
$34.60
BALANCE SHEET SUMMARY
Total Assets
$112,657
$113,996
$110,720
Total Liabilities
102,992
102,137
99,461
Total Equity
9,665
11,859
11,259
Total Liabilities and Stockholders' Equity
$112,657
$113,996
$110,720
TOTAL LOAN RECEIVABLES
Ending Loans 1
$92,963
$95,894
$88,743
Average Loans 1
$94,501
$93,437
$89,353
Interest Yield
12.34%
12.52%
12.79%
Gross Principal Charge-off Rate 2
4.15%
4.00%
4.02%
Net Principal Charge-off Rate 2
3.27%
3.19%
3.25%
Delinquency Rate (30 or more days)
2.39%
2.41%
2.29%
Delinquency Rate (30 or more days) excluding Purchased Loans 3
2.38%
2.40%
2.28%
Delinquency Rate (90 or more days)
1.18%
1.15%
1.09%
Delinquency Rate (90 or more days) excluding Purchased Loans 3
1.19%
1.15%
1.10%
Gross Principal Charge-off Dollars
$975
$941
$887
Net Principal Charge-off Dollars
$769
$751
$715
Net Interest and Fee Charge-off Dollars
$178
$166
$158
Loans Delinquent 30 or more days
$2,218
$2,312
$2,030
Loans Delinquent 30 or more days excluding Purchased Loans 3
$2,189
$2,276
$1,988
Loans Delinquent 90 or more days
$1,095
$1,098
$970
Loans Delinquent 90 or more days excluding Purchased Loans 3
$1,088
$1,089
$959
Allowance for Credit Losses (period end) 4
$6,913
$3,383
$3,134
Reserve Change Build/(Release) 5, 6, 7
$1,069
$85
$94
Reserve Rate
7.44%
3.53%
3.53%
CREDIT CARD LOANS Ending
Loans
$73,811
$77,181
$70,789
Average Loans
$75,337
$74,814
$71,363
Interest Yield
12.90%
13.08%
13.42%
Gross Principal Charge-off Rate
4.64%
4.34%
4.40%
Net Principal Charge-off Rate
3.65%
3.41%
3.50%
Delinquency Rate (30 or more days)
2.62%
2.62%
2.45%
Delinquency Rate (90 or more days)
1.38%
1.32%
1.26%
Gross Principal Charge-off Dollars
$869
$818
$774
Net Principal Charge-off Dollars
$683
$644
$616
Loans Delinquent 30 or more days
$1,935
$2,019
$1,731
Loans Delinquent 90 or more days
$1,016
$1,020
$891
Allowance for Credit Losses (period end) 4
$5,306
$2,883
$2,622
Reserve Change Build/(Release) 5, 6
$756
$84
$94
Reserve Rate
7.19%
3.74%
3.70%
Total Discover Card Volume
$37,474
$42,794
$36,386
Discover Card Sales Volume
$33,988
$39,188
$32,899
Rewards Rate
1.40%
1.32%
1.35%
SEGMENT- INCOME BEFORE INCOME
TAXES Direct Banking
($161)
$883
$879
Payment Services
83
41
51
Total
($78)
$924
$930
NETWORK VOLUME PULSE
Network
$49,174
$50,037
$47,106
Network Partners
6,980
7,099
5,663
Diners Club International 8
7,737
8,831
8,278
Total Payment Services
63,891
65,967
61,047
Discover Network - Proprietary
35,180
40,579
34,051
Total
$99,071
$106,546
$95,098
1 Total Loans includes Home Equity and other loans. 2 Prior
to adoption of ASU No. 2016-13 on January 1, 2020, net charge-offs
on Purchased Credit Impaired ("PCI") loans generally did not result
in a charge to earnings 3 Prior to adoption of ASU No.
2016-13 on January 1, 2020, Purchased loans (formerly referred to
as PCI) were accounted for on a pooled basis. Since a pool was
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, was not
meaningful. Because the Company was recognizing interest income on
a pool of loans, it was all considered to be performing 4
Prior to adoption of ASU No. 2016-13 on January 1, 2020, credit
losses were estimated using the incurred loss approach. Under the
new current expected credit loss (“CECL”) approach, reserves are
now recorded for expected losses, not simply those deemed to be
already incurred, and the loss estimate period is extended to
include the entire life of the loan 5 Prior to adoption of
ASU No. 2016-13 on January 1, 2020, the allowance for credit loss
included the net change in reserves on PCI pools having no
remaining non-accretable difference which did not impact the
reserve change build/(release) in provision for credit losses
6 Excludes January 1, 2020 CECL day one impact 7
Excludes release of the liability for expected credit losses on
unfunded commitments as the offset is recorded in accrued expenses
and other liabilities in the Company's condensed consolidated
statements of financial condition 8 Volume is derived from
data provided by licencees 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/20200422006041/en/
Investors: Craig Streem, 224-405-5923
craigstreem@discover.com
Media: Jon Drummond, 224-405-1888
jondrummond@discover.com
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