Thursday, April 25, 2013
DFS Q1 Earnings
Discover Financial Services (DFS) reported earnings on April 23, 2013. Discover reported a diluted EPS of $1.33 which was up 10% from last year. The main driven mainly through loan growth and the share repurchase program.
Discover's business plan of organic growth is going strong. This can be seen in the 7% organic receivables growth. The growth was driven by a 5% increase in card receivables and a combined 10% increase in private student loans and personal loans. The PULSE growth slowed due to merchant routing, competitor actions and Discover's objective to focus on being a more profitable business rather than just volume growth. The company had and ROE of 27%. The board of directors also approved a 43% dividend increase. Discover continues to be very well capitalized which allows them to continue their focus on organic growth.
Revenue net of interest expense increased by $189 million to almost $2 billion, which represents a 10% increase. Net interest margin improved by 30bps to 9.39%. This was due to the decreased funding costs from lower interest rates. Total loans grew by 7% and credit card loans grew by 5%. Also helping to boost revenue was record low card delinquencies. Delinquencies over the past 30 days hit a record low of 1.77%. Other income increased by $59 million due to to inclusion of Discover Home Loans. Expenses for DFS were still high Y/Y. They were up 12%, which was mainly due to the increased compensation and marketing associated with the Home Loan Center acquisition. As time passes these expenses are expected to decrease.
Going forward I expect DFS to continue to have strong organic growth. This can be seen in how well Discover Home Loans has taken off since being launched in June 2012. I also believe the expenses will continue to decline once the home loan business becomes more well known. The sooner synergistic effects can be recognized Discover will benefit.