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.