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Discover Financial's (DFS) Q2 Earnings Lag Expectations

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Discover Financial Services’ (DFS - Free Report) second-quarter 2017 earnings of $1.40 per share missed the Zacks Consensus Estimate by 3.4%. Bottom line also declined 4.8% year over year.

For the reported quarter, the company’s revenue net of interest expenses increased 9.2% year over year to $2.4 billion. Top line also surpassed the Zacks Consensus Estimate by 32%.

Operational Update

For the reported quarter, total loans increased 8% from the prior-year quarter to $78 billion.

Credit card loans jumped 8% to $61.8 billion and Discover card sales volume increased 5% from the prior year.

Consumer deposits grew 11% from the year-ago quarter to $37.7 billion.

Payment Services transaction dollar volume was $50.1 billion, up 12% year over year.

Net interest income grew almost 10.7% year over year to $1.9 billion. The upside may be attributed to increased interest income.

Interest expenses of $400 million jumped 18%, mainly due to change in funding mix and higher market rates.

Total other expenses increased 0.7% to $912 million due to higher employee compensation and benefits, and professional fees.

Segment Update
 
Direct Banking Segment

This segment’s pre-tax income declined 4% to $831 million. This was because of higher provision for loan losses.

Total loans increased 8% year over year to $78 billion. Credit card loans rose 8% to $61.8 billion.  Personal loans increased 22%, Private student loans increased 2% and jumped 12% excluding purchased student loans, all on a year-over-year basis.

Other income increased 3% from the prior year, driven by higher discount and interchange revenues.

Net interest income increased 11% from the prior year, driven by loan growth and a higher net interest margin. Net interest margin was 10.11%, up 16 basis points from the prior year.

Provision for loan losses of $639 million increased 55% from the prior year primarily because of higher net charge-offs.

Payment Services Segment

Payment Services pretax income was $36 million in the quarter, up 20% from the prior year, primarily driven by higher transaction processing revenues and lower operating expenses.

Payment Services transaction dollar volume was $50.1 billion, up 12% from the prior year.

PULSE transaction dollar volume went up 15% year over year.

Diners Club International volume rose 8% from the prior year, driven by growth across all regions.

Discover Financial Services Price, Consensus and EPS Surprise

Financial Position

Discover Financial had total assets worth $93.7 billion as of Jun 30, 2017, up 7.1% year over year.

Total liabilities as of Jun 30, 2017 were $82.5 billion, up 8.4% year over year.

Total equity was $11.2 billion on Jun 30, 2017, down 1.2% year over year.

Discover Financial’s return on equity for the second quarter was 19%.

Share Repurchase Update

During the second quarter, the company repurchased approximately 7.2 million shares of common stock for $450 million.

Shares of common stock outstanding declined 1.9% from the prior quarter.

Zacks Rank and Stocks to Consider

Discover Financial presently carries a Zacks Rank #3 (Hold). You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

Other firms in the same space that have already reported results include American Express Company (AXP - Free Report) , Visa Inc. (V - Free Report) and SLM Corporation (SLM - Free Report) . American Express and Visa’s bottom line beat their respective Zacks Consensus Estimate, while SLM Corp’s earnings met expectations.

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