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Discover Financial (DFS) Weighs Sale of Student-Loan Division

Discover Financial Services DFS recently announced that its board of directors has permitted the management to consider the sale of its Student Loans portfolio. Servicing of these loans will be transferred to a third-party provider, and starting from Feb 1, 2024, it will no longer be accepting student loan applications. This decision is not expected to affect current student loan customers or their payments.

This move bodes well for the company as DFS will distance itself from reputational risks amid ongoing regulatory issues with the company. Although the private student loan business has a relatively lower net charge-off rate compared with credit card and personal loans, divesting it will enable the company to focus on its core offerings. Private Student Loan receivables amounted to 8.5% of DFS’s total loan receivables as of Sep 30, 2023.

The company is expected to leverage growth opportunities if it exits from the sale of the private student loan business. This move will free up capital while providing a greater amount of protection for the depositor’s funds. Freed-up capital highlights a higher capital adequacy ratio and should result in investor confidence in the company’s prospects. Intensifying its focus toward core banking products will enhance long-term shareholder value.

DFS’s student loan unit has faced regulatory scrutiny even in the past, as it is one of the few companies offering private student loans. It is expected to continue the optimization of its business, taking into account the returns and capital usage. A move to streamline operations can also reduce its debt burden, which was $19.5 billion as of Sep 30, 2023. Management is aiming to build an improved compliance and risk framework.

Price Performance

Discover Financial’s shares have gained 8.3% in the past month compared with the 7.6% rise of the industry.

Zacks Investment Research
Zacks Investment Research


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Zacks Rank & Key Picks

Discover Financial currently has a Zacks Rank #3 (Hold).

Some better-ranked stocks from the broader Finance space are Arch Capital Group ACGL, CNA Financial Corporation CNA and HCI Group, Inc. HCI. Each company currently sports a Zacks Rank #1 (Strong Buy). You can see the complete list of today’s Zacks #1 Rank stocks here.

The Zacks Consensus Estimate for Arch Capital’s 2023 and 2024 earnings indicates year-over-year increases of 58.1% and 1%, respectively. ACGL delivered a four-quarter average earnings surprise of 35.2%. The consensus estimate for 2023 and 2024 earnings has moved up 0.4% and 0.1%, respectively, in the past week.

CNA Financial delivered a four-quarter average earnings surprise of 9.2%. The Zacks Consensus Estimate for CNA’s 2023 and 2024 earnings indicates year-over-year increases of 14.8% and 7.4%, respectively. The consensus estimate for 2023 and 2024 earnings has moved up 2.8% and 5.3%, respectively, in the past 30 days.

HCI Group delivered a four-quarter average earnings surprise of 519.6%. The Zacks Consensus Estimate for HCI’s 2023 and 2024 earnings indicates year-over-year increases of 194.9% and 51.4%, respectively. The Zacks Consensus Estimate for 2023 and 2024 revenues indicates year-over-year increases of 5.5% and 19.5%, respectively.

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Discover Financial Services (DFS) : Free Stock Analysis Report

CNA Financial Corporation (CNA) : Free Stock Analysis Report

Arch Capital Group Ltd. (ACGL) : Free Stock Analysis Report

HCI Group, Inc. (HCI) : Free Stock Analysis Report

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