Discover Financial (DFS) Q3 Earnings Miss on Higher Expenses
Discover Financial Services DFS reported third-quarter 2023 adjusted earnings per share (EPS) of $2.59, which missed the Zacks Consensus Estimate by 17.8%. The bottom line dropped 26.8% year over year.
Revenues, net of interest expenses, of DFS climbed 16.1% year over year to $4,044 million.The top line beat the consensus mark by 2.5%.
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 $1,454 million escalated 6% 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 $1,546.9 million. Moreover, operating efficiency (total operating expenses divided by revenues, net of interest expenses) declined 350 basis points (bps) year over year to 36% in the third quarter.
Interest expenses increased more than one-fold year over year to $1,288 million in the quarter under review.
Discover Financial’s net income of $683 million tumbled 33% year over year.
Segmental Performance
Digital Banking
The segment reported a pretax income of $803 million, which fell 37% year over year in thethird 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 $955.9 million.
Provision for credit losses increased more than one-fold year over year to $1,702 million.
Total loans rose 17% year over year to $122.7 billion in the quarter under review. Personal loans also grew 25% year over year. Credit card loans advanced 16% year over year, whereas private student loans improved 1% year over year.
Net interest income of $3,322 million climbed 17% year over year in the third quarter, thanks to increased average receivables partially offset by a lower net interest margin. The figure surpassed our estimate of $3,166.1 million by 4.9%. The net interest margin deteriorated 10 bps year over year to 10.95%.
Payment Services
The segment's pretax income was $85 million, comparing favorably with the prior-year quarter’s income of $32 million. The metric beat our pretax income estimate of $59.6 million by 42.6%. The significant improvement came from an increase in PULSE revenues. Expanding PULSE and Diners Club volumes also contributed to the upside.
The Payment Services volume of $91.8 billion advanced 9% year over year in the third quarter. The PULSE dollar volume rose 14% year over year on improved debit transaction volume.Meanwhile, the Diners Club volume climbed 11% year over year, attributable to continued strength in all regions. However, the Network Partners’ volume dipped 17% year over year in the quarter under review due to reduced AribaPay volume.
Financial Position (as of Sep 30, 2023)
Discover Financial exited the third quarter with total assets of $143.4 billion, higher than $131.7 billion at 2022-end. The liquidity portfolio (comprising cash and cash equivalents and other investments, excluding cash-in-process) amounted to $21.2 billion, higher than $19.8 billion at 2022-end.
Borrowings decreased from $20.1 billion at 2022-end to $19.5 billion. Total liabilities of $129.2 billion at the third-quarter end were higher than $117.4 billion at 2022-end. Total equity fell from $14.3 billion at 2022-end to $14.2 billion.
Share Repurchase Update
The company did not repurchase any shares in the third quarter of 2023. The management has decided to pause share repurchases as an internal review of corporate governance, risk management and compliance is taking place. The company bought back 18.1 million common shares worth $1.9 billion in the first half of 2023.
2023 Guidance
Management revised the loan growth to be in the mid-teens range for this year, from the earlier guidance of loan growth in the low mid-teens. 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, unchanged from the previous guidance.
The average net charge-off rate is estimated to be 3.4-3.6%, unchanged from the previous guidance. The mid-point of the 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 Axos Financial, Inc. AX, Blue Owl Capital Corporation OBDC and Globe Life Inc. GL. Axos Financial sports a Zacks Rank #1 (Strong Buy), while Blue Owl Capital and Globe Life carry a Zacks Rank #2 (Buy).You can see the complete list of today’s Zacks #1 Rank stocks here.
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Blue Owl Capital’s earnings outpaced estimates in each of the trailing four quarters, the average surprise being 4.5%. The Zacks Consensus Estimate for OBDC’s 2023 earnings and revenues suggests an improvement of 31.2% and 28.7%, respectively, from the year-ago reported figures. The consensus mark for OBDC’s 2023 earnings has moved 1% north in the past 60 days.
The bottom line of Globe Life outpaced estimates in each of the last four quarters, the average surprise being 2.2%. The Zacks Consensus Estimate for GL’s 2023 earnings and revenues suggests an improvement of 28.7% and 4.1%, respectively, from the year-ago reported figures.
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