Yahoo Finance Discover Financial (DFS) Misses on Q1 Earnings, Ups Dividend
Discover Financial Services DFS reported first-quarter 2023 adjusted earnings of $3.58 per share, which missed the Zacks Consensus Estimate of $3.84 by 6.8%. The bottom line dropped 15% year over year.
Revenues — net of interest expenses — of DFS climbed 29% year over year to $3,753 million. The top line beat the consensus mark by 2.6%.
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.
Operational Update
Operating efficiency (total operating expenses divided by revenues, net of interest expenses) deteriorated 210 basis points (bps) year over year to 36.8% in the first quarter.
Total operating expenses of $1,383 million escalated 22% 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 also surpassed our estimate of $1,348.7 million.
Interest expenses increased nearly four-fold year over year to $945 million in the quarter under review.
Discover Financial’s net income of $976 million tumbled 21% year over year.
Discover Financial Services Price, Consensus and EPS Surprise
Discover Financial Services price-consensus-eps-surprise-chart | Discover Financial Services Quote
Segmental Performance
Digital Banking
The segment reported a pretax income of $1,221 million, which fell 29% year over year in the first 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.
Provision for credit losses increased more than seven-fold year over year to $1,102 million.
Total loans rose 21% year over year to $112.7 billion in the quarter under review. Personal loans also grew 21% year over year. Credit card loans advanced 22% year over year, whereas private student loans improved 2% year over year.
Net interest income of $3,132 million climbed 26% year over year in the first quarter, thanks to increased average receivables and a higher net interest margin. The figure surpassed the Zacks Consensus Estimate of $2,803 million. The net interest margin improved 49 bps year over year to 11.34%.
Payment Services
The segment's pretax income was $47 million, comparing favorably against the prior-year quarter’s loss of $101 million. The metric beat our pretax income estimate of $44.5 million. The significant improvement came on the back of higher net losses on equity investments reported in the prior-year quarter. Expanding PULSE and Diners Club volumes also contributed to the upside.
The Payment Services volume of $85.1 billion advanced 10% year over year in the first quarter. The PULSE dollar volume rose 9% year over year on improved debit transaction volume. Meanwhile, the Diners Club volume climbed 28% year over year, attributable to higher global travel and entertainment, and corporate spending. However, the Network Partners volume dipped 1% year over year in the quarter under review due to reduced transaction volume.
Financial Position (as of Mar 31, 2023)
Discover Financial exited the first quarter with total assets of $133.1 billion, which climbed 24% year over year. The liquidity portfolio (comprising cash and cash equivalents and other investments, excluding cash-in-process) amounted to $21,450 million, which rose 44% year over year.
Borrowings increased 6% year over year to $18,163 million. Total liabilities of $118.7 billion advanced 26% year over year at the first-quarter end. Total equity rose 7% year over year to $14,315 million.
Share Repurchase Update
In the reported quarter, Discover Financial bought back 11.3 million common shares worth $1.2 billion. Shares of common stock outstanding decreased 4% sequentially.
Concurrently, management authorized a new share repurchase program of $2.7 billion, which will substitute the previous program and run till the end of June 2024.
Dividend Hike Announced
The board of directors sanctioned a 17% hike in the quarterly cash dividend. The increased dividend stands at 70 cents per common share, which will be paid out on Jun 8, 2023, to shareholders of record as of May 25, 2023.
2023 Guidance
Management forecasts loan growth in the low to mid-teens range for this year, while the earlier guidance was pegged at low-double-digit growth. In 2022, loan growth increased 20% year over year.
The net interest margin is likely to stay decently higher than the 2022 reported figure of 11.04%.
Operating expenses are anticipated to rise less than 10% from the 2022 reported figure of $5,236 million.
The average net charge-off rate is estimated to be 3.5-3.8% compared with the prior mentioned 3.5-3.9%. The mid-point of the revised outlook stands higher than the 2022 figure of 1.82%.
Zacks Rank
Discover Financial currently carries a Zacks Rank #3 (Hold). You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.
Other Finance Sector Releases
Of the other Finance sector players that have reported first-quarter results so far, the bottom-line results of The Goldman Sachs Group, Inc. GS, U.S. Bancorp USB and Morgan Stanley MS beat the Zacks Consensus Estimate.
Goldman Sachs reported first-quarter 2023 earnings per share of $8.79, which surpassed the Zacks Consensus Estimate of $8.14. The bottom line fell significantly from $10.76 in the year-earlier quarter. Our estimate for earnings was $7.70 per share. Net earnings of $3.23 billion declined 18% from the prior-year quarter.
Net revenues of $12.22 billion fell 5% from the year-ago quarter. The top line missed the Zacks Consensus Estimate of $13.03 billion. The Asset & Wealth Management division of GS generated revenues of $3.22 billion in the reported quarter, up 24% year over year.
U.S. Bancorp’s first-quarter 2023 earnings per share (excluding merger and integration-related charges) of $1.16 handily beat the Zacks Consensus Estimate of $1.13 per share. It grew 17.2% from the prior-year quarter. Net income (GAAP basis) was $1.7 billion, up 9.4% from the prior-year quarter.
Total net revenues in the quarter were $7.14 billion, up 28.2% year over year. The top line surpassed the Zacks Consensus Estimate of $7.13 billion. USB’s non-interest income rose 4.6% year over year to $2.5 billion. Average total loans improved 7.4% sequentially to $386.7 billion.
Morgan Stanley reported first-quarter 2023 earnings of $1.70 per share, which surpassed the Zacks Consensus Estimate of $1.67. The bottom line, however, reflects a decline of 16% from the year-ago quarter. Quarterly net revenues were $14.52 billion, down 2% from the prior-year quarter.
The top line beat the Zacks Consensus Estimate of $13.91 billion. Our estimate for revenues was $13.47 billion. Equity underwriting fees of MS decreased 22% from the prior-year quarter and fixed-income underwriting declined 6%. Fixed-income trading revenues decreased 12% and equity trading income declined 14%.
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