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Discover Financial (DFS) Beats on Q2 Earnings, Suspends Dividend

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Discover Financial Services (DFS - Free Report) reported second-quarter 2022 adjusted earnings of $3.96 per share, which beat the Zacks Consensus Estimate by 5.6%. However, the bottom line plunged 29% year over year.

DFS’s revenues — net of interest expenses — amounted to $3,224 million, which declined 10% year over year. However, the top line beat the consensus mark by 2.2%.

Improved PULSE and Network Partners revenues, higher global travel and entertainment spending, and margin expansions supported the better-than-expected second-quarter results. The positives were partially offset by elevated marketing and business development, employee compensation and benefitscosts, and weak Payment Services performance.

Discover Financial Services Price, Consensus and EPS Surprise

Discover Financial Services Price, Consensus and EPS Surprise

Discover Financial Services price-consensus-eps-surprise-chart | Discover Financial Services Quote

Operational Update

Operating efficiency (total operating expense divided by revenues net of interest expense) came in at 37.9%, which increased 380 basis points (bps) year over year in the second quarter.

Total operating expenses marginally increased year over year to $1,223 million mainly due to increased marketing and business development and employee compensation and benefits, which were partially offset by lower information processing and communications, and other costs.

Interest expenses of $305 million increased 5% year over year in the quarter under review.

Net income of Discover Financial plunged 35% year over year to $1,111 million in the quarter under review.

Segmental Performance

Digital Banking Segment

The segment reported a pre-tax income of $1,432 million, which declined 6% year over year in the second quarter. The decline was due to increased provision for credit losses and elevated operating expenses, partly offset by higher revenues net of interest expense. The provision for credit losses jumped to $549 million in the second quarter, from $135 million a year ago.

At second-quarter end, total loans of $99,301 million advanced 13% year over year. While credit card loans increased 15% year over year to $79,237 million, total private student loans grew 2% year over year to $10,074 million. Personal loans increased 4% year over year to $7,145 million.

Net interest income rose 14% year over year to $2,610 million on the back of improved average receivables and expanded net interest margin. Net interest margin came in at 10.94%, which improved 26 bps year over year in the quarter under review.

Payment Services Segment

The segment's pretax income of $20 million plunged 97% year over year. The performance of the segment was hurt by reduced revenues stemming from a net loss on equity investments. Nevertheless, improved PULSE and Network Partners revenues partly offset the downside. Payment Services volume increased 6% year over year to $82,905 million for the second quarter.

PULSE dollar volume was in line with the year-ago figure due to subsiding spending on debit products linked with the end of federal stimulus. While Diners Club volume climbed 37% year over year driven by higher global travel and entertainment spending, better AribaPay volume led to a 22% year-over-year rise in Network Partners volume.

Financial Position (as of Jun 30, 2022)

Discover Financial exited the second quarter with total assets of $114.6 billion, which rose 3% year over year. The liquidity portfolio (comprising cash and cash equivalents and other investments but excluding cash-in-process) plunged 30% year over year to $16.2 billion.

Borrowings at second-quarter end were at around $20 billion, up 3% year over year. Total liabilities of nearly $100.8 billion increased 3% year over year. Meanwhile, total equity grew 5% year over year to $13.8 billion.

Capital Deployment

Discover Financial bought back shares worth $601 million in the second quarter. Shares of common stock outstanding decreased by 2% sequentially. As such, the company might have $3.6 billion remaining under its share buyback program. However, DFS suspended its stock buyback program due to an internal investigation of its student loan servicing practices.

The board of directors announced a quarterly cash dividend of 60 cents per common share, which will be paid out on Sep 8, 2022, to shareholders of record on Aug 25.

2022 Guidance

The company expects loan growth to be in low teens, up from the prior estimate of high single digits. The average net charge-off rate is projected between 1.9-2.1% compared with the prior outlook of 2.2-2.4%.

It reiterated the mid-single digit rise forecast for total operating expenses. Net interest margin is estimated to witness improvement within 5-15 bps when compared with the first-quarter 2022 figure.

Zacks Rank & Key Picks

Discover Financial currently has a Zacks Rank #3 (Hold). Some better-ranked stocks in the broader finance space are Encore Capital Group, Inc. (ECPG - Free Report) , SmartFinancial, Inc. (SMBK - Free Report) and Paramount Group, Inc. (PGRE - Free Report) , each carrying a Zacks Rank #2 (Buy) at present. You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

Headquartered in San Diego, CA, Encore Capital is a global debt recovery solutions provider. The Zacks Consensus Estimate for ECPG’s 2022 bottom line indicates a 14.4% increase from the prior-year reported number.

Based in Knoxville, TN, SmartFinancial is a leading financial services provider for individuals and corporate clients. The Zacks Consensus Estimate for SMBK’s 2022 revenues indicates 17.5% year-over-year growth.

New York-based Paramount Group works as a fully-integrated real estate investment trust. The Zacks Consensus Estimate for PGRE’s 2022 bottom line indicates 3.3% year-over-year growth.