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Discover Financial Services (DFS)·Q1 2025 Earnings Summary

Executive Summary

  • Q1 2025 EPS was $4.25, up 31% YoY, with net income of $1.104B as net interest margin expanded to 12.18% and credit trends improved modestly .
  • Revenue net of interest expense rose 2% YoY to $4.251B, driven by margin expansion despite lower average receivables following the student loan sale; non‑interest income increased 3% YoY .
  • Credit quality was stable: total net charge-off rate was 4.99% (+7 bps YoY, +35 bps QoQ seasonally), card 30+ day delinquency fell to 3.66% (-17 bps YoY, -18 bps QoQ); allowance decreased by $215MM and reserve rate was 6.91% .
  • CET1 capital ratio improved to 14.7% (+60 bps QoQ) on core earnings; share repurchases remain suspended and the quarterly dividend was declared at $0.70, with the expectation holders will receive Capital One dividends post‑merger record date .
  • Merger catalyst: all required regulatory approvals received; closing expected on or about May 18, 2025; management did not update guidance due to the pending merger, focusing investor attention on closing dynamics .

What Went Well and What Went Wrong

What Went Well

  • “Discover's solid first quarter financial performance benefited from a strong net interest margin and positive credit trends,” said Interim CEO Michael Shepherd, as EPS rose to $4.25 and NIM expanded to 12.18% (+115 bps YoY) .
  • Funding costs declined: net funding rate fell to 3.17% (from 3.41% in Q4 2024), and direct-to-consumer deposits increased to 74% of funding, supporting margin expansion .
  • Card credit showed improvement YoY: card net charge-off rate 5.47% (-19 bps YoY) and 30+ day delinquency 3.66% (-17 bps YoY), with a reserve release of $190MM contributing to lower provision .

What Went Wrong

  • Sequential headwinds: total net charge-off rate rose to 4.99% (+35 bps QoQ) and card net charge-offs increased 44 bps QoQ due to seasonal trends; Discover card sales volume declined 2% YoY .
  • Operating expenses rose 1% YoY (+$19MM), with higher compensation (+$64MM) and information processing (+$17MM), partly offset by lower other expenses (-$59MM) .
  • Network volumes mixed: Discover Network proprietary volume down 1% YoY and Network Partners volume down 73% YoY due to anticipated partner exit, though PULSE and Diners grew .

Financial Results

MetricQ3 2024Q4 2024Q1 2025
Revenue Net of Interest Expense ($USD Billions)$4.453 $4.759 $4.251
Diluted EPS ($USD)$3.69 $5.11 $4.25
Net Income ($USD Millions)$965 $1,291 $1,104
Net Interest Margin %11.38% 11.96% 12.18%
Operating Efficiency %38.0% 39.0% 36.8%
Total Net Charge-off Rate %4.86% 4.64% 4.99%
CET1 Ratio %12.7% 14.1% 14.7%

Segment breakdown:

Segment MetricQ3 2024Q4 2024Q1 2025
Digital Banking Revenue Net of Interest Expense ($MM)$4,324 $4,631 $4,114
Digital Banking Pretax Income ($MM)$1,204 $1,628 $1,353
Payment Services Revenue Net of Interest Expense ($MM)$129 $128 $137
Payment Services Pretax Income ($MM)$84 $74 $91

Key KPIs:

KPIQ3 2024Q4 2024Q1 2025
Discover Card Sales Volume ($USD Billions)$53.380 $55.252 $49.305
Rewards Rate %1.44% 1.35% 1.40%
Direct-to-Consumer Deposits Share of Funding %69% 72% 74%
Card Net Principal Charge-off Rate %5.28% 5.03% 5.47%
Card 30+ Day Delinquency %3.84% 3.84% 3.66%
Total Loans Ending ($USD Billions)$126.993 $121.118 $117.403

Guidance Changes

MetricPeriodPrevious GuidanceCurrent GuidanceChange
Net Interest MarginFY 202411.2–11.4% (from Q3 2024 update) —Prior reference only; FY25 not provided
Loan GrowthFY 2024Down low to mid single digits —Prior reference only; FY25 not provided
Operating ExpenseFY 2024Up mid-single digits ex card misclassification and merger costs —Prior reference only; FY25 not provided
Net Charge-off RateFY 20244.9–5.0% —Prior reference only; FY25 not provided
Capital ManagementThrough merger closeShare repurchases suspended; dividend ≤ $0.70/share Dividend declared $0.70; repurchases suspended; expect Capital One dividend post-close record date Maintained
Forward Guidance Policy2025—No update due to upcoming merger Maintained silence

Earnings Call Themes & Trends

TopicPrevious Mentions (Q3 2024)Previous Mentions (Q4 2024)Current Period (Q1 2025)Trend
Merger with Capital OneApplications under review; integration planning advancing Transaction and regulatory process continued All regulatory approvals received; closing expected ~May 18, 2025 Progressing to close
Net Interest Margin driversNIM 11.38%; expansion via lower promo mix; modest funding cost changes NIM 11.96%; expansion with student loan sale benefit NIM 12.18%; sequential expansion from lower deposit costs; DTC funding share 74% Improving
Credit performanceNCO up YoY; delinquency plateauing; student loan reclassification effects NCO down QoQ; delinquency flat; personal loan NCO up YoY Total NCO 4.99% (+7 bps YoY, +35 bps QoQ seasonally); card NCO down YoY; delinquencies down QoQ Mixed but stabilizing
Deposit funding mix and costsDTC share ~69%; funding costs elevated DTC deposits grew; costs impacted by loan sale DTC share 74%; net funding rate down to 3.17% Positive
Payment Services volumesTotal network volume up 4% YoY; PULSE strong; partners down Volume up 4% YoY; PULSE +7% PULSE +3% YoY; Diners +18%; Network Partners -73% YoY Mixed
Guidance postureFY2024 ranges updated (NIM, NCO, opex) No major new long-term guidance in release No 2025 update due to merger Maintained pause

Management Commentary

  • Interim CEO Michael Shepherd: “Discover's solid first quarter financial performance benefited from a strong net interest margin and positive credit trends… We are pleased that Capital One has received all required approvals and look forward to completing our merger” .
  • CFO John Greene: NIM reached 12.18%, “up 115 basis points from the prior year and up 22 basis points sequentially,” with drivers including the student loan sale, lower promotional mix, and reduced deposit pricing; Q/Q driver was lower deposit costs .
  • Credit and reserves: Provision decreased $253MM YoY, “reflecting a reduction in our credit reserve balance and lower net charge-offs;” reserve rate was 6.91% (+4 bps QoQ) with a $215MM reserve decrease .
  • Capital and dividends: CET1 ratio 14.7% “up 60 basis points compared to the prior quarter,” with expectation that due to the planned closing date, holders will receive any Capital One dividend if on the applicable record date .
  • Guidance: “We have elected not to provide an update due to our upcoming merger,” signaling near-term focus on integration and closing .

Q&A Highlights

  • The company limited the call to prepared remarks and did not host a Q&A session, citing the pending merger timeline .

Estimates Context

  • S&P Global consensus estimates for Q1 2025 (EPS and revenue) were unavailable due to a Capital IQ mapping error for DFS; as a result, estimate comparisons are not provided. Values retrieved from S&P Global were unavailable due to missing CIQ mapping for DFS in our system [GetEstimates error].

Key Takeaways for Investors

  • Margin-led earnings: NIM expansion to 12.18% and lower funding costs supported EPS of $4.25; watch deposit pricing trajectory and DTC mix as margin levers .
  • Credit stabilization: Card delinquencies improved QoQ and YoY; total NCOs rose QoQ on seasonality but declined YoY when excluding student loan effects—monitor delinquency formation and personal loan seasoning .
  • Capital strength: CET1 at 14.7% and liquidity up support resilience into merger close; capital returns remain muted (buybacks suspended, dividend steady at $0.70) .
  • Network diversification: PULSE and Diners growth offset weakness in Network Partners; proprietary Discover Network volume down modestly—mixed payments backdrop .
  • Guidance pause and merger catalyst: No 2025 guidance update; all approvals obtained with expected closing around May 18, 2025—near-term narrative likely driven by merger timing and closing conditions .
  • Operational investment: Elevated information processing costs reflect ongoing tech investments and systems usage; retention actions increase compensation—focus on operating efficiency trajectory post-close .
  • Card sales softness: Discover card sales down 2% YoY and rewards rate up slightly; balance promotional mix and spend categories to sustain interchange/net discount revenue .