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Discover Financial (DFS) Q4 Earnings Beat on Record Loan Growth
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Discover Financial Services (DFS - Free Report) reported fourth-quarter 2022 adjusted earnings of $3.77 per share, which outpaced the Zacks Consensus Estimate of $3.58 by 5.3%. The bottom line improved 4% year over year.
Revenues — net of interest expenses — of DFS amounted to $3,732 million, which rose 27% year over year. The top line outpaced the consensus mark of $3,649 million and our estimate of $3,532.9 million.
The quarterly results benefited on the back of solid loan growth and improved net interest margin. The strong performance of its Payment Services segment also contributed to the upside. However, the upside was partly offset by an elevated expense level within the Digital Banking segment.
Discover Financial Services Price, Consensus and EPS Surprise
Operating efficiency (total operating expense divided by revenues, net of interest expense) came in at 40%, which deteriorated 470 basis points (bps) year over year in the fourth quarter.
Total operating expenses increased 14% year over year to $1,495 million due to higher expenses linked with employee compensation and benefits, marketing and business development, information processing & communications, professional fees and premises and equipment. Our estimate for DFS’s operating expenses stands at $1,530.9 million.
Interest expenses of $789 million increased three-fold year over year in the quarter under review.
Discover Financial reported a net income of $1,033 million, down 3% year over year. Our estimate for the metric stands at $871.8 million.
Segmental Performance
Digital Banking
The pretax income of the segment came in at $1,317 million, which decreased 10% year over year in the fourth quarter. The decline was due to an increase in provision for credit losses and elevated operating expenses, partly offset by growth in revenues, net of interest expense.
Provision for credit losses increased more than three-fold year over year to $883 million, while our estimate for the metric stands at $860.8 million.
Total loans of $112.1 billion rose 20% year over year in the quarter under review. Credit card loans grew 21% year over year, while private student loans improved 2% year over year. Personal loans climbed 15% year over year.
Net interest income advanced 24% year over year to $3,067 million in the fourth quarter on the back of rising average receivables and an expanded net interest margin. The metric came higher than the Zacks Consensus Estimate of $2,891 million. Net interest margin of 11.27% improved 46 bps year over year.
Payment Services
The segment’s pretax income of $37 million compares favorably against the prior-year quarter’s loss of $97 million but came lower than the consensus mark of $49.3 million. The improvement in the metric came on the back of net losses on equity investments amounting to $138 million reported in the prior-year quarter. Improved PULSE and Diners Club volumes also drove the segment’s results.
Payment Services volume improved 4% year over year to $86.4 billion. Higher debit transaction volume contributed to the 3% year-over-year growth in PULSE dollar volume. Diners Club volume climbed 24% year over year on the back of rebounding global travel and entertainment (T&E) spending. However, Network Partners’ volume dropped 7% year over year due to reduced transaction volume.
Financial Position (as of Dec 31, 2022)
Discover Financial exited the fourth quarter with total assets of $131.6 billion, which advanced 19% year over year. The liquidity portfolio (comprising cash and cash equivalents and other investments but excluding cash-in-process) rose 32% year over year to $19,798 million.
Borrowings of $20,108 million dipped 1% year over year. Total liabilities increased 21% year over year to $117 billion. Total equity of $14,590 million grew 9% year over year at the fourth-quarter end.
Capital Deployment
The share repurchase program, which DFS had temporarily put on hold, has been resumed in the fourth quarter. In the quarter under review, it bought back around 5.9 million shares worth $602 million.
Shares of common stock outstanding decreased 2.1% sequentially.
The board of directors approved a quarterly cash dividend of 60 cents per common share, which will be paid out on Mar 9, 2023, to shareholders of record on Feb 23, 2023.
Simultaneously, management also announced semi-annual cash dividends on Discover Financial’s preference shares. On Fixed Rate Non-Cumulative Perpetual Preferred Stock, Series C, a dividend of $27.50 per depositary share was approved. Meanwhile, a dividend of $30.625 per depositary share was announced on Fixed Rate Non-Cumulative Perpetual Preferred Stock, Series D.
Full-Year Update
For 2022, DFS reported adjusted earnings per share of $15.50, which declined 13% year over year.
Revenues — net of interest expenses — improved 10% year over year to $13,337 million.
Net income of $4,392 million plunged 19% year over year last year.
2023 Guidance
Management anticipates loan growth to rise in low double digits in 2023, while the metric registered 20% growth last year. Net interest margin is likely to stay decently higher than 2022 reported figure of 11.04%.
Operating expenses are forecasted to remain less than 10% higher from the 2022 reported figure of $5,236 million.
The average net charge-off rate is projected in the 3.5-3.9% range, higher than the 2022 figure of 1.82%.
The current buyback program, which will run till the end of June 2023, has a leftover fund of $2.8 billion.
Of the Finance sector players that have reported fourth-quarter results so far, the bottom-line results of Bank of New York Mellon Corporation (BK - Free Report) , JPMorgan Chase & Co. (JPM - Free Report) and Morgan Stanley (MS - Free Report) beat the respective Zacks Consensus Estimate.
BNY Mellon’s fourth-quarter 2022 adjusted earnings of $1.30 per share surpassed the Zacks Consensus Estimate of $1.22. The bottom line reflects a rise of 25% from the prior-year quarter. BK’s net income applicable to common shareholders (GAAP basis) was $509 million or 62 cents per share, down from $822 million or $1.01 per share recorded in the year-ago quarter. Total revenues grew 6% year over year to $4.28 billion.
JPMorgan’s fourth-quarter 2022 adjusted earnings of $3.56 per share, which surpassed the Zacks Consensus Estimate of $3.11. Mortgage fees and related income declined 69% as mortgage rates remained above the 6% mark in the fourth quarter. Fixed-income market revenues of JPM grew during the quarter to $3.8 billion, while equity trading numbers were disappointing at $1.9 billion. Total market revenues of $5.7 billion increased 7%.
Morgan Stanley reported fourth-quarter 2022 adjusted earnings of $1.31 per share surpassing the Zacks Consensus Estimate of $1.25. The bottom line reflects a decline of 37% from the year-ago quarter. Equity underwriting fees of MS decreased 73% from the prior-year quarter and fixed-income underwriting declined 38%. Advisory fees were down 34% year over year. Therefore, IB fees declined 49%.
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Discover Financial (DFS) Q4 Earnings Beat on Record Loan Growth
Discover Financial Services (DFS - Free Report) reported fourth-quarter 2022 adjusted earnings of $3.77 per share, which outpaced the Zacks Consensus Estimate of $3.58 by 5.3%. The bottom line improved 4% year over year.
Revenues — net of interest expenses — of DFS amounted to $3,732 million, which rose 27% year over year. The top line outpaced the consensus mark of $3,649 million and our estimate of $3,532.9 million.
The quarterly results benefited on the back of solid loan growth and improved net interest margin. The strong performance of its Payment Services segment also contributed to the upside. However, the upside was partly offset by an elevated expense level within the Digital Banking segment.
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 40%, which deteriorated 470 basis points (bps) year over year in the fourth quarter.
Total operating expenses increased 14% year over year to $1,495 million due to higher expenses linked with employee compensation and benefits, marketing and business development, information processing & communications, professional fees and premises and equipment. Our estimate for DFS’s operating expenses stands at $1,530.9 million.
Interest expenses of $789 million increased three-fold year over year in the quarter under review.
Discover Financial reported a net income of $1,033 million, down 3% year over year. Our estimate for the metric stands at $871.8 million.
Segmental Performance
Digital Banking
The pretax income of the segment came in at $1,317 million, which decreased 10% year over year in the fourth quarter. The decline was due to an increase in provision for credit losses and elevated operating expenses, partly offset by growth in revenues, net of interest expense.
Provision for credit losses increased more than three-fold year over year to $883 million, while our estimate for the metric stands at $860.8 million.
Total loans of $112.1 billion rose 20% year over year in the quarter under review. Credit card loans grew 21% year over year, while private student loans improved 2% year over year. Personal loans climbed 15% year over year.
Net interest income advanced 24% year over year to $3,067 million in the fourth quarter on the back of rising average receivables and an expanded net interest margin. The metric came higher than the Zacks Consensus Estimate of $2,891 million. Net interest margin of 11.27% improved 46 bps year over year.
Payment Services
The segment’s pretax income of $37 million compares favorably against the prior-year quarter’s loss of $97 million but came lower than the consensus mark of $49.3 million. The improvement in the metric came on the back of net losses on equity investments amounting to $138 million reported in the prior-year quarter. Improved PULSE and Diners Club volumes also drove the segment’s results.
Payment Services volume improved 4% year over year to $86.4 billion. Higher debit transaction volume contributed to the 3% year-over-year growth in PULSE dollar volume. Diners Club volume climbed 24% year over year on the back of rebounding global travel and entertainment (T&E) spending. However, Network Partners’ volume dropped 7% year over year due to reduced transaction volume.
Financial Position (as of Dec 31, 2022)
Discover Financial exited the fourth quarter with total assets of $131.6 billion, which advanced 19% year over year. The liquidity portfolio (comprising cash and cash equivalents and other investments but excluding cash-in-process) rose 32% year over year to $19,798 million.
Borrowings of $20,108 million dipped 1% year over year. Total liabilities increased 21% year over year to $117 billion. Total equity of $14,590 million grew 9% year over year at the fourth-quarter end.
Capital Deployment
The share repurchase program, which DFS had temporarily put on hold, has been resumed in the fourth quarter. In the quarter under review, it bought back around 5.9 million shares worth $602 million.
Shares of common stock outstanding decreased 2.1% sequentially.
The board of directors approved a quarterly cash dividend of 60 cents per common share, which will be paid out on Mar 9, 2023, to shareholders of record on Feb 23, 2023.
Simultaneously, management also announced semi-annual cash dividends on Discover Financial’s preference shares. On Fixed Rate Non-Cumulative Perpetual Preferred Stock, Series C, a dividend of $27.50 per depositary share was approved. Meanwhile, a dividend of $30.625 per depositary share was announced on Fixed Rate Non-Cumulative Perpetual Preferred Stock, Series D.
Full-Year Update
For 2022, DFS reported adjusted earnings per share of $15.50, which declined 13% year over year.
Revenues — net of interest expenses — improved 10% year over year to $13,337 million.
Net income of $4,392 million plunged 19% year over year last year.
2023 Guidance
Management anticipates loan growth to rise in low double digits in 2023, while the metric registered 20% growth last year. Net interest margin is likely to stay decently higher than 2022 reported figure of 11.04%.
Operating expenses are forecasted to remain less than 10% higher from the 2022 reported figure of $5,236 million.
The average net charge-off rate is projected in the 3.5-3.9% range, higher than the 2022 figure of 1.82%.
The current buyback program, which will run till the end of June 2023, has a leftover fund of $2.8 billion.
Zacks Rank
Discover Financial currently carries a Zacks Rank #3 (Hold). You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.
Finance Sector Releases
Of the Finance sector players that have reported fourth-quarter results so far, the bottom-line results of Bank of New York Mellon Corporation (BK - Free Report) , JPMorgan Chase & Co. (JPM - Free Report) and Morgan Stanley (MS - Free Report) beat the respective Zacks Consensus Estimate.
BNY Mellon’s fourth-quarter 2022 adjusted earnings of $1.30 per share surpassed the Zacks Consensus Estimate of $1.22. The bottom line reflects a rise of 25% from the prior-year quarter. BK’s net income applicable to common shareholders (GAAP basis) was $509 million or 62 cents per share, down from $822 million or $1.01 per share recorded in the year-ago quarter. Total revenues grew 6% year over year to $4.28 billion.
JPMorgan’s fourth-quarter 2022 adjusted earnings of $3.56 per share, which surpassed the Zacks Consensus Estimate of $3.11. Mortgage fees and related income declined 69% as mortgage rates remained above the 6% mark in the fourth quarter. Fixed-income market revenues of JPM grew during the quarter to $3.8 billion, while equity trading numbers were disappointing at $1.9 billion. Total market revenues of $5.7 billion increased 7%.
Morgan Stanley reported fourth-quarter 2022 adjusted earnings of $1.31 per share surpassing the Zacks Consensus Estimate of $1.25. The bottom line reflects a decline of 37% from the year-ago quarter. Equity underwriting fees of MS decreased 73% from the prior-year quarter and fixed-income underwriting declined 38%. Advisory fees were down 34% year over year. Therefore, IB fees declined 49%.