Discover Financial (DFS) Q2 Earnings Miss, Revenues Up Y/Y
Discover Financial Services DFS reported second-quarter 2023 adjusted earnings per share (EPS) of $3.54, which missed the Zacks Consensus Estimate by 3.3%. The bottom line dropped 10.6% year over year.
Revenues, net of interest expenses, of DFS climbed 20.2% year over year to $3,878 million. The top line beat the consensus mark by 0.1%.
The quarterly results received a blow from escalating operating costs and feeble contributions from the Digital Banking segment. Nevertheless, higher receivables growth, record deposit inflows and the solid performance of its Payment Services segment contributed to the upside.
Discover Financial Services Price, Consensus and EPS Surprise
Discover Financial Services price-consensus-eps-surprise-chart | Discover Financial Services Quote
Operational Update
Total operating expenses of $1,404 million escalated 15% year over year due to increased employee compensation and benefits expenses, marketing and business development costs, professional fees, and information processing & communications expenses. The figure came lower than our estimate of $1,404.9 million. However, operating efficiency (total operating expenses divided by revenues, net of interest expenses) improved 190 basis points (bps) year over year to 36.2% in the second quarter.
Interest expenses increased nearly four-fold year over year to $3,177 million in the quarter under review.
Discover Financial’s net income of $901 million tumbled 18.3% year over year.
Segmental Performance
Digital Banking
The segment reported a pretax income of $1,099 million, which fell 23% year over year in the second quarter. The decline was due to an increased provision for credit losses and elevated operating expenses, partly offset by growing revenues, net of interest expenses. The metric was lower than our estimate of $1,168 million.
Provision for credit losses increased more than one-fold year over year to $1,305 million.
Total loans rose 19% year over year to $117.9 billion in the quarter under review. Personal loans also grew 27% year over year. Credit card loans advanced 19% year over year, whereas private student loans improved 2% year over year.
Net interest income of $3,177 million climbed 22% year over year in the second quarter, thanks to increased average receivables and a higher net interest margin. The figure surpassed our estimate of $3,089.5 million by 2.8%. The net interest margin improved 12 bps year over year to 11.1%.
Payment Services
The segment's pretax income was $70 million, comparing favorably with the prior-year quarter’s income of $20 million. The metric beat our pretax income estimate of $55.6 million by 25.9%. The significant improvement came from higher net losses on equity investments reported in the prior-year quarter. Expanding PULSE and Diners Club volumes also contributed to the upside.
The Payment Services volume of $89.3 billion advanced 8% year over year in the second quarter. The PULSE dollar volume rose 10% year over year on improved debit transaction volume. Meanwhile, the Diners Club volume climbed 18% year over year, attributable to higher global travel and entertainment and corporate spending. However, the Network Partners’ volume dipped 10% year over year in the quarter under review due to reduced transaction volume.
Financial Position (as of Jun 30, 2023)
Discover Financial exited the second quarter with total assets of $138.1 billion, which climbed 20% year over year. The liquidity portfolio (comprising cash and cash equivalents and other investments, excluding cash-in-process) amounted to $20.9 billion, which rose 29% year over year.
Borrowings increased 1% year over year to $20.2 billion. Total liabilities of $124.2 billion advanced 23% year over year at the second-quarter end. Total equity rose 2% year over year to $13.9 billion.
Share Repurchase Update
In the reported quarter, Discover Financial bought back 6.8 million common shares worth $700 million. Shares of common stock outstanding decreased 2.6% sequentially.
Concurrently, the management has decided to pause share repurchases as an internal review of corporate governance, risk management and compliance is pending.
2023 Guidance
Management forecasts loan growth in the low to mid-teens range for this year, unchanged from the earlier guidance. In 2022, loan growth increased 20% year over year.
The net interest margin is forecasted at 11%, in line with the 2022 reported figure.
Operating expenses are anticipated to rise in low double digits against the earlier expectation of less than a 10% rise from the year ago figure.
The average net charge-off rate is estimated to be 3.4-3.6% compared with the prior mentioned 3.5-3.8%. The mid-point of the revised outlook stands higher than the 2022 figure of 1.8%.
Zacks Rank & Key Picks
Discover Financial currently carries a Zacks Rank #3 (Hold).
Investors interested in the broader finance space can also check better-ranked companies like Burford Capital Limited BUR, Houlihan Lokey, Inc. HLI and NerdWallet, Inc. NRDS. Each of these companies presently carries a Zacks Rank #2 (Buy). You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.
Based in Saint Peter Port, Guernsey, Burford Capital offers legal finance products and services worldwide. The Zacks Consensus Estimate for BUR’s 2023 EPS is pegged at $2.16, indicating a massive jump from 14 cents a year ago.
Los Angeles-based Houlihan Lokey is an investment banking company. The Zacks Consensus Estimate for HLI’s 2023 earnings implies 6.6% year-over-year growth. Houlihan Lokey beat earnings estimates in all the last four quarters, with an average of 16.8%.
Headquartered in San Francisco, NerdWallet is an operator of a digital platform that provides consumers with personal finance information, among many other products. The Zacks Consensus Estimate for NRDS’s 2023 earnings indicates a 142.9% year-over-year improvement. It beat earnings estimates in three of the past four quarters and missed once, with an average surprise of 42.1%.
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Discover Financial Services (DFS) : Free Stock Analysis Report
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