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    Discover Financial Services (DFS)

    Business Description

    Discover Financial Services (DFS) operates as a digital banking and payment services company, managing its business activities in two main segments: Digital Banking and Payment Services. The company offers Discover-branded credit cards, personal loans, home loans, and deposit products, generating substantial revenue from interest income on these loan products . Additionally, DFS provides payment transaction processing and settlement services through the PULSE network, Diners Club, and the Network Partners business on the Discover Global Network . The company's primary revenues consist of interest income earned on loan receivables and fees from customers, financial institutions, merchants, and issuers .

    1. Digital Banking - Offers Discover-branded credit cards, personal loans, home loans, and deposit products, generating revenue primarily from interest income on loan products and fees related to discount and interchange, protection products, and loan fee income.
      • Credit Cards - Provides Discover-branded credit card products contributing significantly to revenue through interest income and fees.
      • Personal Loans - Offers personal loan products with revenue generated from interest income.
      • Home Loans - Provides home loan products, contributing to interest income.
      • Deposit Products - Includes consumer deposit products that fund business activities.
    2. Payment Services - Encompasses the PULSE network, Diners Club, and the Network Partners business, providing payment transaction processing and settlement services on the Discover Global Network.
      • PULSE Network - Generates transaction processing revenue.
      • Diners Club - Provides royalty and licensee revenue.
      • Network Partners - Offers additional payment services on the Discover Global Network.

    Q3 2024 Summary

    Initial Price$132.00July 1, 2024
    Final Price$136.40October 1, 2024
    Price Change$4.40
    % Change+3.33%

    What went well

    • Strong financial performance in Q3 2024, with net income of $965 million, up 41% from the prior year, driven by revenue growth and net interest margin expansion.
    • Credit performance in line with expectations with net charge-offs plateauing, and net charge-offs in card declining 27 basis points sequentially, outperforming seasonality.
    • Progress on strategic initiatives, including the sale of the private student loan portfolio (recognizing a $70 million gain in the quarter) and preparations for the merger with Capital One advancing well.

    What went wrong

    • Discover card sales were down 3% compared to the prior year, indicating a decline in customer spending or market share .
    • Operating expenses increased by $238 million or 16% year-over-year, which could pressure profitability if revenue growth doesn't keep pace .
    • Loan growth expectations have been revised down to low to mid-single digits, suggesting slower growth prospects .

    Key Metrics

    View all financials →
    Revenue by Segment - in Millions of USDFY 2013Q1 2014Q2 2014Q3 2014Q4 2014FY 2014Q1 2015Q2 2015Q3 2015Q4 2015FY 2015Q1 2016Q2 2016Q3 2016Q4 2016FY 2016Q1 2017Q2 2017Q3 2017Q4 2017FY 2017Q1 2018Q2 2018Q3 2018Q4 2018FY 2018Q1 2019Q2 2019Q3 2019Q4 2019FY 2019Q1 2020Q2 2020Q3 2020Q4 2020FY 2020Q1 2021Q2 2021Q3 2021Q4 2021FY 2021Q1 2022Q2 2022Q3 2022Q4 2022FY 2022Q1 2023Q2 2023Q3 2023Q4 2023FY 2023Q1 2024Q2 2024Q3 2024
    Digital Banking4,6104,876--20,1565,5395,6625,781
    - Interest Income4,0774,2904,6104,86817,8454,9484,9715,112
    -- Credit Card Loans3,3213,4663,7263,92514,4383,9383,9594,092
    -- Private Student Loans252255--1,033264256244
    -- PCI Student Loans--------
    -- Personal Loans248278--1,156333347360
    -- Other Loans6473653-464326115126138
    -- Other Interest Income192218231251892298283278
    - Other Income88115130117450132323129
    -- Discount & Interchange321-377-1,447371437-
    -- Protection Products43-42-1724242-
    -- Loan Fee Income--194-763200205-
    -- Transaction Processing67-82-3038791-
    -- Losses on Equity Invest.--6-(9)---
    -- Other Income42-21-8523239-
    Payment Services88115130117450132323129
    Total Revenue4,6984,9915,3325,58520,6065,6715,9855,910
    KPIs - Metric / QuarterFY 2013Q1 2014Q2 2014Q3 2014Q4 2014FY 2014Q1 2015Q2 2015Q3 2015Q4 2015FY 2015Q1 2016Q2 2016Q3 2016Q4 2016FY 2016Q1 2017Q2 2017Q3 2017Q4 2017FY 2017Q1 2018Q2 2018Q3 2018Q4 2018FY 2018Q1 2019Q2 2019Q3 2019Q4 2019FY 2019Q1 2020Q2 2020Q3 2020Q4 2020FY 2020Q1 2021Q2 2021Q3 2021Q4 2021FY 2021Q1 2022Q2 2022Q3 2022Q4 2022FY 2022Q1 2023Q2 2023Q3 2023Q4 2023FY 2023Q1 2024Q2 2024Q3 2024
    **Network Transaction Volume ($ million)**136,933146,412148,996156,817-152,100154,632155,700
    **Transactions Processed on Networks (million)**2,4752,7012,9753,282-3,1953,3493,375
    **Credit Card Volume ($ million)**54,10055,22955,00057,145-53,23956,44156,593
    **DiscoverSeries 3-Month Rolling Avg Excess Spread (%)**14.4514.4514.4214.75-14.1414.07-
    **Aggregate Sales Transaction Volume ($ million)**60,83365,85065,490--61,33261,886155,657
    **Direct-to-Consumer Deposits ($ billion)**75.377.381.284.0-87.387.390.309
    **Brokered Deposits ($ billion)**20.421.722.824.9-23.121.120.2
    **SCB Requirement (%)**2.52.52.52.5-2.52.52.5

    Executive Team

    NamePositionStart DateShort Bio
    Michael G. RhodesChief Executive Officer and PresidentFebruary 2024Michael G. Rhodes joined Discover in February 2024. Before joining Discover, he was the Group Head of Canadian Personal Banking at TD Bank Group. His previous experience includes leadership roles at Bank of America and MBNA America Bank. He holds an MBA from the Wharton School at the University of Pennsylvania and a bachelor's degree in engineering from Duke University .
    John T. GreeneExecutive Vice President, Chief Financial OfficerSeptember 2019John T. Greene has been the CFO at Discover since September 2019. Before joining Discover, he was the CFO at Bioverativ and held CFO positions at Willis Group Holdings and HSBC Holdings. He holds a bachelor's degree in accounting from the State University of New York and an MBA from the Kellogg School of Management at Northwestern University .
    Daniel P. CapozziExecutive Vice President, President - Consumer BankingJuly 2023Daniel P. Capozzi has been with Discover since 2007 and became President - Consumer Banking in July 2023. He oversees enterprise marketing, consumer products, and customer care operations. Previously, he served as President - US Cards. He holds a bachelor's degree in business administration from Northeastern University .
    Jason P. HansonExecutive Vice President, President - Payment ServicesJuly 2023Jason P. Hanson joined Discover in 2019 and became President - Payment Services in July 2023. Prior to Discover, he held roles at FIS/WorldPay, McKinsey & Company, and served as an officer in the U.S. Army. He holds a bachelor's degree in economics from the United States Military Academy, West Point, and an MBA from the University of Chicago Booth School of Business .
    Hope D. MehlmanExecutive Vice President, Chief Legal Officer, General Counsel, and Corporate SecretaryJanuary 2023Hope D. Mehlman joined Discover in January 2023. Before Discover, she was the General Counsel and Corporate Secretary at Bank of the West and BNP Paribas USA, Inc. She held leadership roles at Regions Financial Corp. She holds a bachelor's degree in Near Eastern Studies from Cornell University, a Juris Doctor from Seton Hall University Law School, and a Master of Laws in Taxation from New York University School of Law .
    Michael E. RoemerExecutive Vice President, Chief Risk OfficerJuly 2021Michael E. Roemer has been the CRO at Discover since July 2021. Before Discover, he was the Chief Compliance Officer at Wells Fargo and held compliance roles at Barclays. He holds a bachelor's degree from St. John's University and completed the Tuck Executive Program at Dartmouth College .
    Jason J. StrleExecutive Vice President, Chief Information OfficerJuly 2023Jason J. Strle became the CIO at Discover in July 2023. Prior to Discover, he was the Group CIO for Corporate Functions at Wells Fargo and held various roles at JPMorgan Chase. He holds a bachelor's degree in computer science from Ohio University .
    Keith E. ToneyExecutive Vice President, President - Credit and Decision ManagementJuly 2023Keith E. Toney joined Discover in December 2019 and became President - Credit and Decision Management in July 2023. Previously, he was President - Data and Analytics. He holds a bachelor's and a master's degree in mathematics from Ohio State University .
    J. Michael ShepherdInterim Chief Executive Officer and PresidentApril 1, 2024J. Michael Shepherd was appointed Interim CEO and President of Discover effective April 1, 2024. He was the former chairman and CEO of BancWest Corporation and Bank of the West. He has held various roles including general counsel and president. He served as chairman of BNP Paribas USA, Inc. and has extensive experience in financial services .

    Questions to Ask Management

    1. With the updated loan growth expectations now projected to decline low to mid-single digits, what specific strategies are you implementing to counteract the higher than anticipated payment rates and slightly lower card sales impacting growth?

    2. Given the SEC's disagreement with your accounting approach on the card misclassification matter, can you elaborate on the potential implications for future financial reporting and how you plan to address the SEC's concerns?

    3. Total operating expenses increased by 16% year-over-year, driven in part by professional fees up 15% due to higher recovery fees and merger and integration costs; how do you plan to manage these rising expenses, especially considering the pending merger with Capital One?

    4. Despite recognizing a gain from the sale of the private student loan portfolio, student loans were down 19% year-over-year; how will the continued sale of this portfolio impact your profitability and focus on a more streamlined business model moving forward?

    5. With net charge-offs in total loans at 4.86%, up 134 basis points from the prior year, and an increase in 30-plus day delinquency formation, what measures are you taking to mitigate credit risk, especially as consumer spending stabilizes and households face inflationary pressures?

    Past Guidance

    Q3 2024 Earnings Call

    • Issued Period: Q3 2024
    • Guided Period: FY 2024
    • Guidance:
      1. Loan Growth Expectations: Down low to mid-single digits; excluding student loan sale, low single digits .
      2. Net Interest Margin: 11.2% to 11.4% .
      3. Operating Expense Guidance: Unchanged .
      4. Net Charge-Offs: 4.9% to 5% .
      5. Capital Management Expectations: Unchanged .

    Q2 2024 Earnings Call

    • Issued Period: Q2 2024
    • Guided Period: FY 2024
    • Guidance:
      1. Loan Growth Expectations: Down low single digits; without student loan sale, consistent with prior view .
      2. Net Interest Margin: 11.1% to 11.4% .
      3. Operating Expense Guidance: Unchanged .
      4. Net Charge-Offs: Low end of 4.9% to 5.2% range .
      5. Capital Management Expectations: Unchanged .

    Q1 2024 Earnings Call

    • Issued Period: Q1 2024
    • Guided Period: FY 2024
    • Guidance:
      1. Loan Growth: Up low single digits .
      2. Net Interest Margin: 10.7% to 11% .
      3. Operating Expenses: Increase by mid-single digits .
      4. Net Charge-Offs: 4.9% to 5.2% .
      5. Compliance and Risk Management Expenses: Approximately $500 million .
      6. Sales Growth: Flat to slightly negative .
      7. Payment Rates: About 70 basis points above 2019 levels .
      8. Student Loan Portfolio Sale: Expected by late Q3 or Q4 .

    Q4 2023 Earnings Call

    • Issued Period: Q4 2023
    • Guided Period: FY 2024
    • Guidance:
      1. Loan Growth: End-of-period flat; average up modestly .
      2. Net Interest Margin: 10.5% to 10.8% .
      3. Operating Expenses: Increase by mid-single digits .
      4. Net Charge-Offs: 4.9% to 5.3% .
      5. Capital Management: Focus on organic growth and returning capital .
      6. Efficiency Ratio: Long-term sub-40% .

    Competitors

    Competitors mentioned in the company's latest 10K filing.

    • Visa: Enjoys greater merchant acceptance and broader global brand recognition than Discover. Has entered into long-term arrangements with financial institutions that may discourage them from issuing cards on the Discover Network or PULSE network .
    • MasterCard: Similar to Visa, has greater merchant acceptance and global brand recognition. Also has long-term arrangements with financial institutions that may limit Discover's business opportunities .
    • American Express: A strong competitor with international acceptance, high transaction fees, and an upscale brand image. Competes in the same market segments as Diners Club internationally .

    Latest news

    Recent developments and announcements about DFS.

    Financial Reporting

      Earnings Report

      ·
      Dec 23, 2024, 12:58 PM

      Discover Financial Services (DFS) has released updated financial results for the quarter ended September 30, 2024. Net Income for this quarter was $870 million, and the Net Income Allocated to Common Stockholders was $834 million. The Basic and Diluted EPS were both $3.32. The Revenue Net of Interest Expense was $4,453 million, and the Total Operating Expense was $1,788 million. The Operating Efficiency was reported at 40.1%, and the Return on Equity (ROE) was 21%. Additionally, the company faced a $90 million charge due to probable penalties related to card product misclassification, which impacted the financial results for this quarter .

      Financial Restatements

      ·
      Nov 25, 2024, 10:54 PM

      Discover Financial Services Financial Restatement

      Discover Financial Services (DFS) has announced a decision to restate certain prior period financial statements. This decision follows a notice from the New York Stock Exchange (NYSE) regarding the company's non-compliance due to a delay in filing its Quarterly Report on Form 10-Q for the fiscal quarter ended September 30, 2024 .

      Details of the Restatement

      The restatement involves adjustments to the company's financial statements for the fiscal years ended December 31, 2023, and 2022, as well as for the interim periods in 2023 and 2024. The restatement is primarily due to the misclassification of certain credit card accounts, which led to an incorrect revenue recognition .

      • Impact on Financials: The restated financial statements are expected to show an increase in assets by $190 million, an increase in liabilities by $783 million, and a decrease in retained earnings by $593 million as of December 31, 2023. Pre-tax income for 2023 and 2022 will be reduced by $190 million and $77 million, respectively .

      • Reason for Restatement: The restatement is necessary to correct the revenue recognition related to the card product misclassification, which was initially recorded as a $365 million liability. This amount has been revised to approximately $1,047 million following discussions with the SEC .

      Potential Effects on the Company

      The restatement could affect investor confidence and the company's stock price due to the perceived instability in financial reporting. However, the company is taking steps to address these issues, including revising its internal controls over financial reporting .

      The restatement also impacts the ongoing merger with Capital One, as the financial statements need to be accurate for the merger process to proceed smoothly .

      Conclusion

      Discover Financial Services is actively working to file the restated financial statements and address the issues raised by the NYSE and SEC. The company aims to complete these filings by the end of the year, although the exact timing is uncertain .

      Investors are advised to monitor the situation closely as the company works through these financial adjustments and the implications for its merger with Capital One.

    Financial Actions

      Dividend Policy

      ·
      Feb 22, 2024, 12:00 AM

      Discover Financial Services (DFS) and Capital One Financial Corporation Announce Merger Agreement

      On February 19, 2024, Discover Financial Services (DFS) entered into an Agreement and Plan of Merger with Capital One Financial Corporation and Vega Merger Sub, Inc. The merger agreement outlines that Vega Merger Sub will merge with and into Discover, with Discover continuing as the surviving corporation. Immediately following this merger, Discover will merge with and into Capital One, with Capital One continuing as the surviving corporation. Additionally, Discover Bank will merge with and into Capital One, National Association, Capital One's wholly-owned national bank subsidiary .

      Dividend Policy Coordination

      As part of the merger agreement, Discover and Capital One have agreed to coordinate the declaration of any dividends in respect of their common stocks to ensure that holders of Discover Common Stock do not receive two dividends or fail to receive one dividend in any quarter with respect to their shares of Discover Common Stock and any shares of Capital One Common Stock received in exchange .

      Dividend Rates

      The agreement specifies that Discover may continue to pay regular quarterly cash dividends at a rate not exceeding $0.700 per share of Discover Common Stock .

      Conversion of Equity Awards

      At the effective time of the merger, each outstanding Discover restricted stock unit award will be converted into a corresponding award with respect to Capital One Common Stock, adjusted based on the exchange ratio. Each outstanding Discover performance stock unit award will be converted into a cash-based award, with the number of shares determined based on performance and the exchange ratio .

      Effective Dates and Conditions

      The merger is subject to various conditions, including regulatory approvals and the approval of the stockholders of both Discover and Capital One. The effective time of the merger will be determined upon the fulfillment of these conditions .