Discover Financial (DFS) Q4 Earnings Miss on Higher Expenses
Discover Financial Services DFS reported fourth-quarter 2023 adjusted earnings per share (EPS) of $1.54, which missed the Zacks Consensus Estimate by 38.4%. The bottom line dropped 59% year over year.
DFS' revenues, net of interest expenses, climbed 13% year over year to $4.2 billion. The top line beat the consensus mark by 2.4%.
The weak fourth-quarter earnings were caused by a blow from escalating operating costs, feeble contributions from the Digital Banking segment and higher provision for credit losses. The company facing challenges from rising charge-offs may have worried the investors. The stock dropped 9.7% after hours. Nevertheless, the negatives were partially offset by receivables growth, deposit inflows and growing PULSE and Diners Club volumes.
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 $1.8 billion escalated 19% 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 higher than our estimate of $1.5 billion. Moreover, operating efficiency (total operating expenses divided by revenues, net of interest expenses) deteriorated 210 basis points (bps) year over year to 42.3% in the fourth quarter.
Interest expenses increased 77% year over year to $1.4 billion in the quarter under review. Discover Financial’s net income of $388 million tumbled 62% year over year.
Segmental Performance
Digital Banking
The segment reported a pretax income of $458 million, which fell 65% year over year in the fourth 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 missed our estimate by 29.6%. Provision for credit losses increased 116% year over year to $1.9 billion.
Total loans rose 15% year over year to $128.4 billion in the quarter under review. Personal loans also grew 23% year over year. Credit card loans advanced 13% year over year, whereas private student loans increased only $44 million from a year ago.
Net interest income of $3.5 billion climbed 13% year over year in the fourth quarter thanks to increased average receivables, partially offset by a lower net interest margin. The figure surpassed our estimate of $3.2 billion. The net interest margin deteriorated 29 bps year over year to 10.98%.
Payment Services
The segment's pretax income was $54 million, comparing favorably with the prior-year quarter’s income of $37 million. The significant improvement came from an increase in PULSE revenues. Expanding PULSE and Diners Club volumes also contributed to the upside. However, the metric missed the Zacks Consensus Estimate by 14.1%.
The Payment Services volume of $98.4 billion advanced 14% year over year in the fourth quarter. The PULSE dollar volume rose 19% year over year on improved debit transaction volume. Meanwhile, the Diners Club volume climbed 14% year over year, attributable to continued strength in most of the regions. However, the Network Partners’ volume dipped 16% year over year in the quarter under review due to reduced AribaPay volume.
Financial Position (as of Dec 31, 2023)
Discover Financial exited the fourth quarter with total assets of $151.5 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 $23.3 billion, higher than $19.8 billion at 2022-end.
Borrowings increased from $20.1 billion at 2022-end to $21.3 billion. Total liabilities of $136.7 billion at the fourth-quarter end were higher than $117.4 billion at 2022-end. Total equity rose from $14.3 billion at 2022-end to $14.8 billion.
Share Repurchase Update
For full-year 2023, its share repurchased remained at $1.9 billion, which it achieved in the first half of the year with a repurchase of 18.1 million common shares. Earlier, management decided to pause share repurchases as an internal review of corporate governance, risk management and compliance was taking place.
2024 Guidance
Management expects the loans to be relatively flat for this year, while it achieved 15% loan growth in 2023. The net interest margin is forecasted at 10.5-10.8%, down from the 2023 reported figure of 11.07%.
Operating expenses are estimated to rise in mid-single digits from $6 billion in 2023. The average net charge-off rate is estimated to be 4.9-5.3% for the full year. The estimate stands higher than the 2023 figure of 3.42%.
Zacks Rank & Key Picks
Discover Financial currently has a Zacks Rank #3 (Hold). Some better-ranked stocks in the broader Finance space are Alerus Financial Corporation ALRS, Navient Corporation NAVI and Finward Bancorp FNWD, each currently sporting a Zacks Rank #1 (Strong Buy) at present. You can see the complete list of today’s Zacks #1 Rank stocks here.
The consensus mark for Alerus Financial’s 2023 full-year earnings is pegged at $1.60 per share, which remained stable over the past week. ALRS beat earnings estimates in three of the past four quarters and missed once, with an average surprise of 16.6%.
The Zacks Consensus Estimate for Navient’s 2023 full-year earnings is pegged at $3.49 per share, indicating a 9.4% year-over-year increase. It has witnessed one upward estimate revision against none in the opposite direction during the past month. The consensus mark for NAVI’s revenues in full-year 2023 is pegged at $920.2 million.
The Zacks Consensus Estimate for Finward’s 2023 full-year earnings is pegged at $2.07 per share, which has improved 63% in the past 60 days. FNWD has witnessed one upward estimate revision against none in the opposite direction during this time.
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