Executive Summary

Strong headline quarter: Revenue net of interest expense rose 17% YoY to $4.54B, EPS printed $6.06 boosted by an $869M reserve release tied to classifying the private student loan portfolio as held for sale; underlying EPS was ~$3.63 excluding unusual items (litigation gain and expected regulatory penalties largely offset) .
Credit normalization steadied: Card net charge-off (NCO) rate fell QoQ to 5.55% (from 5.66%) and 30+ day delinquencies improved sequentially; management reiterated losses are near peak and should plateau in 2H24 .
Strategic catalysts: Agreed to sell ~$10.1B private student loan portfolio at a premium (up to ~$10.8B proceeds), boosting NIM guidance to 11.1–11.4% and simplifying the balance sheet; class action settlement in the card misclassification matter advanced remediation .
Mixed operating backdrop: PULSE debit network volume +18% YoY, but Discover card sales volume -3% YoY amid cautious low-income consumer spend; Payment Services pretax income benefited from a favorable litigation settlement .

What Went Well and What Went Wrong

What Went Well
- NIM expansion and deposit discipline: NIM rose to 11.17% (up 14 bps QoQ) on lower promotional mix; management proactively lowered deposit pricing and raised full-year NIM outlook .
- Payment Services strength: PULSE volume +18% YoY; Payment Services pretax income rose to $277M on higher debit processing and favorable litigation settlement .
- Portfolio actions de-risked: Student loan sale agreed at premium with multiple closings expected by year-end; reserve release aided capital (CET1 11.9%) and raised NIM guidance by ~10 bps .
- Management quote: “Discover's second quarter operating performance was very good, and we advanced several strategic priorities” — Interim CEO Michael Shepherd .
What Went Wrong
- Expense pressure: Operating expense +23% YoY to $1.73B, driven by a charge for expected regulatory penalties related to card misclassification and higher compliance/risk spend .
- Underlying consumer caution: Discover card sales -3% YoY; management cited lower spend among lower-income households and 5% category mix effects .
- Credit still elevated YoY: Total NCO rate 4.83% (up 161 bps YoY) despite sequential improvement; card NCO 5.55% (up 187 bps YoY) .

Financial Results

Metric	Q2 2023	Q1 2024	Q2 2024
Revenue net of interest expense ($MM)	$3,878	$4,210	$4,538
Diluted EPS ($)	$3.54	$1.10	$6.06
Net Interest Margin (%)	11.06%	11.03%	11.17%
Provision for credit losses ($MM)	$1,305	$1,497	$739
Total operating expense ($MM)	$1,404	$2,309	$1,729
Net income ($MM)	$901	$308	$1,530
ROE (%)	26%	8%	40%

Notes: Q2 EPS includes unusuals (reserve release, litigation settlement, expected regulatory penalties); CFO indicated underlying EPS ~ $3.63 excluding unusual items .

Segment performance (Revenue and pretax):

Segment	Q2 2023	Q2 2024
Digital Banking – Revenue net of interest expense ($MM)	$3,763	$4,215
Digital Banking – Pretax income ($MM)	$1,099	$1,793
Payment Services – Revenue ($MM)	$115	$323
Payment Services – Pretax income ($MM)	$70	$277

Key KPIs and credit metrics:

KPI	Q2 2023	Q1 2024	Q2 2024
Total loans ending ($MM)	$117,906	$126,555	$127,649
Credit card NCO rate (%)	3.68%	5.66%	5.55%
Card 30+ day DQ rate (%)	2.86%	3.83%	3.69%
Discover card sales volume ($MM)	$55,229	$50,137	$53,482
Rewards rate (%)	1.42%	1.39%	1.32%
CET1 capital ratio (%)	11.7%	10.9%	11.9%

Payment Services volumes:

Volume ($Bn)	Q2 2023	Q1 2024	Q2 2024
PULSE Network	$69.0	$79.1	$81.7
Diners Club	$9.9	$10.2	$9.4
Network Partners	$10.4	$11.1	$8.1
Total Payment Services	$89.3	$100.3	$99.3

Guidance Changes

Metric	Period	Previous Guidance (Q1’24)	Current Guidance (Q2’24)	Change
Loan growth	FY 2024	Up low single digits	Down low single digits (Δ driven by ~$10.1B student loan sale)	Lowered (sale impact)
Net interest margin	FY 2024	10.7%–11.0%	11.1%–11.4% (sale + ~10 bps)	Raised
Operating expense	FY 2024	Up mid-single digits excl. misclassification/merger costs	No change	Maintained
Net charge-offs	FY 2024	4.9%–5.2% (base case low end)	4.9%–5.2% (includes +10 bps from student loans; base case low end)	Maintained
Capital management	FY 2024	Repurchases suspended; dividend ≤ $0.70	No change	Maintained

Dividend actions: Board declared $0.70 per common share payable Sep 5, 2024; preferred dividends for Series C/D also declared .

Earnings Call Themes & Trends

Topic	Previous Mentions (Q4’23, Q1’24)	Current Period (Q2’24)	Trend
Regulatory/legal & misclassification	Elevated compliance spend; remediation reserve increased; FDIC consent order scope separate; ongoing regulator dialogue	Entered class action settlement agreement; charge recorded for expected regulatory penalties	Resolution progressing; residual expense risk noted
Credit cycle (losses/plateau)	Losses to peak mid-2024 then plateau; delinquency formation slowing; reserve near/at peak	Losses near peak; plateau expected in 2H24; sequential improvement in card delinquencies	Stabilizing
Deposit pricing/NIM	Managing betas; NIM guide 10.7–11.0% (Q1)	NIM guide raised to 11.1–11.4% with student loan sale; proactive deposit rate cuts	Positive
Consumer spend	Sales flat to slight negative; low-income cohort pressured	Card sales -3% YoY; cautious consumer; promo category effects	Mixed to soft
Private student loans	Ceased new originations; marketing sale; expected above-par price	Sale agreed at premium (up to ~$10.8B), multi-tranche closings by YE24	Executing exit
Payment Services	PULSE growth strong	PULSE +18% YoY; litigation settlement lift	Strength sustained
Capital One merger	S-4 process underway; integration planning	Planning and regulatory applications progressing; expected shareholder votes in fall	Advancing

Management Commentary

“Discover's second quarter operating performance was very good, and we advanced several strategic priorities.” — Interim CEO Michael Shepherd .
“Excluding unusual items, we would have reported net income of approximately $915 million and EPS of about $3.63 per share.” — CFO John Greene .
“Credit continues to perform in line with expectations, supporting our view that losses are near peak and will plateau during the second half of 2024.” — CFO John Greene .
“We entered into an agreement to sell our private student loan portfolio… This agreement represents an important milestone in our journey to simplify our operations and business mix.” — Interim CEO Michael Shepherd .
Press release highlight: “We advanced several critical initiatives including entering into an agreement to sell our student loan assets, favorably resolving litigation in our Payment Services segment, and entering into a class action settlement agreement for the card misclassification matter.” — Interim CEO Michael Shepherd .

Q&A Highlights

There was no Q&A session for Q2 2024; prepared remarks only, with IR available for follow-up .
For context from prior Q4 2023 Q&A: themes included credit normalization and plateau, loan growth building blocks and conservatism, student loan sale timing and capital/NIM benefits, compliance expense trajectory and long-term efficiency ratio sub-40% target, and deposit/NIM sensitivity to rate cuts .

Estimates Context

S&P Global consensus estimates for Q2 2024 were unavailable via our SPGI tool at the time of analysis, so we cannot provide an authoritative actuals-vs-consensus comparison. The company reported diluted EPS of $6.06 and revenue net of interest expense of $4.54B; underlying EPS excluding unusual items was ~ $3.63 for context .
Implication: Street models may adjust for non-recurring items (reserve release, litigation settlement, regulatory penalties) and the student loan sale’s impact on NIM, OpEx classification of student loan charge-offs, and loan growth trajectory .

Key Takeaways for Investors

Quality of beat: Headline EPS was inflated by reserve release; underlying ~$3.63 EPS showcases solid core profitability aided by NIM expansion and Payment Services, but expenses remain elevated from regulatory issues .
Credit nearing inflection: Sequential improvement in card delinquencies and reiterated plateau in 2H24 reduces downside tail risk on losses; monitor seasonality and credit actions in 2H .
Structural simplification: Student loan sale at premium is accretive to NIM (~+10 bps to guidance), simplifies risk, and should free capital as the sale completes in tranches by YE24; watch closing cadence and proceeds .
Network diversification: PULSE growth (+18% YoY) continues to offset softer proprietary card sales; favorable litigation buttressed Payment Services earnings this quarter .
Expense overhang persists: Expected regulatory penalties and ongoing compliance spend (with upside bias) keep a lid on margin expansion; sustained sub-40% efficiency ratio remains medium-term target post-remediation .
Merger optionality: Capital One transaction progressing through regulatory and shareholder processes; buybacks remain suspended, dividend capped at $0.70 until close .
Trading setup: Near-term sentiment hinges on regulatory clarity (misclassification settlement finalization), student loan sale closings, and validation of credit plateau; underlying NIM momentum and PULSE strength are offsets .

Appendix: Additional Press Releases (Q2 2024)

Private Student Loan Portfolio Sale: ~$10.1B principal as of 6/30, price up to ~$10.8B; servicing to Firstmark (Nelnet); multiple closings expected by end-2024 .

Discover Financial Services (DFS)·Q2 2024 Earnings Summary