Discover Financial Services (DFS)·Q3 2024 Earnings Summary

Executive Summary

• Strong Q3 with revenue net of interest expense up 10% YoY to $4.45B, EPS $3.69 (+42% YoY), and NIM up 43 bps YoY to 11.38%; sequentially, revenue eased vs Q2 on lower noninterest income after unusual items last quarter .
• Credit trends broadly in line; total net charge-off rate was 4.86% (up 3 bps QoQ, +134 bps YoY), while card NCOs improved 27 bps QoQ to 5.28% and delinquencies followed seasonal patterns .
• Guidance tightened: 2024 NIM narrowed to 11.2–11.4% (from 11.1–11.4%), net charge-offs tightened to 4.9–5.0% (from 4.9–5.2%), loan growth guided down low-to-mid single digits; buybacks suspended, dividend capped at $0.70 .
• Strategic catalysts: first closing of student loan portfolio sale completed with $70MM gain; second tranche closed post-quarter; integration planning for Capital One merger advancing; SEC staff raised accounting allocation comments on card misclassification (no expected impact to cumulative earnings or capital) .

What Went Well and What Went Wrong

• What Went Well

  • Net interest income rose 10% YoY on higher average receivables and margin expansion; NIM reached 11.38% with favorable mix from lower promotional balances .
  • Executed student loan portfolio exit: first of four tranches closed in Q3 (recognized $70MM gain); management said ~55% sold shortly after quarter end with completion targeted by mid-November .
  • Credit stable to improving sequentially: card NCOs declined QoQ and management noted net charge-offs are “plateauing”; CET1 strengthened to 12.7% and $0.70 dividend declared .
  • Management quote: “Discover's financial performance remained strong in the third quarter, benefiting from increased net interest margin, modest loan growth, and some credit improvement.” – Interim CEO Michael Shepherd .

• What Went Wrong

  • Expenses up 16–17% YoY (employee compensation, information processing, professional fees); student loan net charge-offs recognized in Other expense following held-for-sale reclassification .
  • Core Discover card sales volume down 3% YoY; Discover Network proprietary volume fell 4% YoY; Network Partners volume -24% YoY, though PULSE debit volume remained a bright spot (+14% YoY) .
  • SEC staff disagreed with aspects of the accounting allocation for card misclassification charges (revenue vs expense); management working to resolve, with no expected impact to cumulative historical earnings or capital .

Financial Results

Segment performance:

KPIs:

Drivers and context:

• YoY revenue growth benefited from higher net interest income and noninterest income (including a $70MM gain from the private student loan sale) .
• Expense growth was driven by wage increases, technology investments and professional fees (including merger and integration planning costs) and recognition of private student loan charge-offs within Other expense .
• Card sales slowed as consumers remained cautious and underwriting tightened; rewards rate increased vs Q2 given promotional category mix (5% Grocery/Walmart in Q3) .

Guidance Changes

Management reiterated on the call: NIM range tightened to 11.2%–11.4%; NCO range tightened to 4.9%–5.0%; loan growth revised to down low-to-mid single digits .

Earnings Call Themes & Trends

Management Commentary

• Strategic focus: “We continue to advance our critical strategic priorities of driving business results, strengthening risk management and compliance and planning for the merger with Capital One.” – Interim CEO Michael Shepherd .
• Student loan sale: “We recognized a gain of $70 million in the quarter... Approximately 55% of the portfolio has been sold to date. We expect to sell the remaining portions... by mid-November.” – CFO John Greene .
• NIM and loan trends: “Net interest margin ended the quarter at 11.38%... expansion primarily driven by a lower card promotional balance mix. Card receivables increased 3% year-over-year due to a lower payment rate, partially offset by a decrease in sales volume.” – CFO .
• Credit and macro: “Credit is performing in line with expectations with net charge-offs plateauing… We continue to see a stable yet cautious consumer.” – CFO .
• Regulatory update: “The staff of the SEC has indicated that they disagree with certain aspects of Discover's accounting approach for the card misclassification matter… We do not anticipate… impact to cumulative historical earnings [or] capital.” – CFO (also reflected in press release) .

Q&A Highlights

• There was no Q&A session; remarks were prepared statements (investor relations available for inquiries) .
• Guidance clarifications were provided in prepared remarks: NIM tightened to 11.2–11.4%; NCO range to 4.9–5.0%; loan growth revised to down low-to-mid single digits; merger-related costs ~ $125MM in 2024 .
• Accounting clarification: SEC staff comments focused on revenue vs expense allocation of prior misclassification charges; no expected impact to cumulative earnings or capital .

Estimates Context

• Wall Street consensus estimates (S&P Global) were not available via our data connection for DFS this quarter; as a result, we cannot quantify beats/misses versus consensus at this time.
• Based on management’s tightened ranges (higher NIM floor, lower NCO range) and the $70MM gain from the student loan sale, estimate revisions may reflect slightly higher NIM, slightly lower loan growth (given sale/soft sales), and modestly improved full-year loss outlook .

Key Takeaways for Investors

• Core earnings power intact: double-digit YoY revenue growth and NIM expansion to 11.38% underscore resilient spread income despite softer card sales; watch mix-driven NIM tailwinds vs deposit pricing trajectory .
• Credit nearing plateau: total NCO rate largely stable QoQ; card NCOs improved QoQ; delinquency trends seasonal; full-year NCO guidance tightened lower (4.9–5.0%) .
• Expense pressure persists: ongoing compliance, technology and merger planning costs keep opex elevated; 2024 opex guide maintained (mid-single-digit growth excl. misclassification/merger) .
• Student loan exit simplifies model: sale progressing (first two tranches closed), CET1 climbed to 12.7%; one-time gain helps noninterest income; near-term opex bears reclassified student loan charge-offs .
• Consumer spending is steady but cautious: proprietary network and card sales volumes softer YoY; PULSE debit remains growth driver; monitor macro-sensitive spend categories .
• Regulatory overhang manageable (per management): SEC staff accounting comments on misclassification allocation expected to have no cumulative earnings/capital impact; merger with Capital One progressing through regulatory review .
• Trading setup: Tightened guidance and improving credit cadence can support sentiment; however, sustained expense elevation and soft sales trends are watch items into year-end .

Sources

• Q3 2024 8-K and exhibits (press release, financial supplement, results presentation):
• Q3 2024 earnings call transcript (prepared remarks):
• Prior quarters for trend analysis: Q2 2024 press release and call ; ; Q1 2024 8-K and call ;
• Q3 earnings release scheduling press release: