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Discover Financial (DFS) Beats Q2 Earnings on Low Costs

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Discover Financial Services(DFS - Free Report) second-quarter 2016 earnings of $1.47 per share beat the Zacks Consensus Estimate of $1.42 by 3.5%. The bottom line also improved 10.5% year on year.

Discover Financial Services (DFS - Free Report) Street EPS & Surprise Percent - Last 5 Quarters | FindTheCompany

We wait to see how the stock fares in the trading session following the outperformance.

The company’s revenues, net of interest expenses, grew 1.9% year on year to $2.2 billion. The top line also surpassed Zacks Consensus Estimate of $1.8 billion by 22%.

Net interest income grew almost 7% year over year to $1.7 billion due to loan growth and higher net interest margin.

Total other expense decreased 2.3% to $906 million as the higher employee compensation and benefits were offset by the reduction in marketing and business development expenses, information processing and communication expenses, professional fees and other expenses.

Segment Update   

Direct Banking Segment

This segment’s pre-tax income decreased by $46 million from year-ago quarter to $868 million. This was because higher net interest income and lower operating expenses were offset by lower other income and increased provision for loan losses.

Total loans increased 4% year over year to $71.9 billion. Personal loans grew 10% year over year to $525 million. Credit card loans rose 4% year over year to $57.2 billion.

Private Student loans inched up 2% year over year. Excluding purchased student loans, however, Private Student loans grew 15%.

Other income decreased 15% year on year. Lack of mortgage origination revenues and increased promotional rewards resulted in the downside.

Credit card loans increased 4% year over year to $57.2 billion, while card sales volume grew 2% from the year-ago quarter.

Expenses decreased 2% year on year, mainly due to the closure of the mortgage origination business. However, higher regulatory and compliance costs were partial offsets.

Discover Financial’s credit card net charge-off rate increased 11 basis points (bps) year over year to 2.39%. The over-30 days’ delinquency rate increased to 1.63%, up 8 bps year on year and down 5 bps from the previous quarter.

Additionally, provisions for loan losses increased $105 million year over year to $411 million as a result of larger reserve build. The reserve build was $27 million in the reported quarter as against a reserve release of $41 million in the year-ago quarter.

PaymentServices Segment  
 
Pre-tax income at Discover Financial’s Payment Services segment increased to $30 million from $28 million in the year-ago quarter driven by lower expenses.

Payment Services transaction dollar volume fell 6% from the year-ago quarter to $44.8 billion. The transaction dollar volume from PULSE declined 9% year over year due to loss of some volume from a large debit issuer. In terms of Payment Services, Diners Club International’s volumes increased 6% year over year, largely due to the growth in Asia.

Financial Position

Discover Financial had total assets worth $87.5 billion as of Jun 30, 2016 compared with $84.7 billion as of Jun 30, 2015. Total equity was $11.4 billion at the end of Jun 30, 2016 as against $11.3 billion at the end of Jun 30, 2015.

Share Repurchase Update

During the reported quarter, Discover Financial bought back 7.8 million shares of common stock for $425 million. This led to a 1.9% sequential decline in common shares outstanding from the prior-year quarter.

DISCOVER FIN SV Price, Consensus and EPS Surprise

DISCOVER FIN SV Price, Consensus and EPS Surprise | DISCOVER FIN SV Quote

Zacks Rank and Stocks to Consider

Discover Financial presently carries a Zacks Rank #3 (Hold).

Some better-ranked players from the broader finance sector include First Midwest Bancorp Inc. , Monroe Capital Corporation (MRCC - Free Report) and Royal Bank of Canada (RY - Free Report) . All three stocks sport Zacks Rank #1(Strong Buy).

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