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Discover Financial Services (DFS)·Q4 2024 Earnings Summary

Executive Summary

  • Q4 2024 revenue net of interest expense rose 14% year over year to $4.759B, driven by net interest margin expansion (11.96%) and a $381M gain on the private student loan sale; diluted EPS was $5.11 versus $1.45 in Q4 2023 .
  • Net income surged to $1.291B (+253% YoY), as provision for credit losses decreased $707M due to an $807M favorable reserve change; operating expenses increased 4% YoY to $1.855B .
  • Credit trends modestly improved sequentially: total net charge-off rate declined 22 bps QoQ to 4.64% (credit card NCO 5.03%, -25 bps QoQ); 30+ day card delinquencies were stable at 3.84% .
  • Capital and funding strengthened: CET1 ratio rose to 14.1% and direct-to-consumer deposits reached 72% of funding; common dividend declared at $0.70 with buybacks suspended pending the Capital One merger (Delaware approval obtained; shareholder vote scheduled) .
  • Catalysts: margin expansion, credit improvement and merger progress; management expects net charge-offs to begin a downward trend and NIM to remain near Q4 levels, though formal numerical guidance is suspended due to the pending merger .

What Went Well and What Went Wrong

What Went Well

  • Net interest margin expanded 98 bps YoY to 11.96% and 58 bps QoQ, lifting net interest income by $162M YoY; product mix and lower promotional balances were key drivers .
  • Non-interest income rose 59% YoY (+$417M) on the $381M student loan sale gain; payment services pretax income increased 37% YoY to $74M on 4% volume growth .
  • Strong capital and funding profile: CET1 ratio improved to 14.1% and direct-to-consumer deposits reached 72% of funding, lowering funding costs and improving resilience .
  • Quote: “Discover's fourth quarter results capped off a successful 2024 as loan growth, margin expansion, and credit improvement led to strong financial performance.” – Michael Shepherd, Interim CEO .
  • Quote: “Provision expense declined by $707 million… student loan portfolio sale resulted in a gain of $381 million… net interest income grew $162 million.” – John Greene, CFO .

What Went Wrong

  • Discover card sales volume declined 3% YoY (to $55.252B), reflecting credit tightening actions since 2022; rewards rate fell 9 bps sequentially to 1.35% .
  • Personal loan credit metrics deteriorated with NCO at 4.24% (+85 bps YoY) and 30+ day delinquency at 1.69% (+24 bps YoY) amid seasoning of recent growth .
  • Expenses increased 4% YoY (+$67M), with compensation (+$146M), information processing (+$38M incl. a $22M student loan software write-off), and professional fees (+$51M; $44M merger/integration & loan sale costs) offset partially by lower marketing and other expense .
  • Accounting and regulatory overhang persisted through year: restatements related to card tiering accrual, incremental $60M misclassification charges, and higher accrual for potential regulatory penalties ($90M in Q3); no numerical guidance due to merger .
  • Network partners volume fell 30% YoY (AribaPay), partially offset by PULSE (+7%) and Diners (+9%) .

Financial Results

MetricQ4 2023Q2 2024Q3 2024Q4 2024
Revenue Net of Interest Expense ($USD Millions)$4,180 $4,538 $4,453 $4,759
Net Income ($USD Millions)$366 $1,530 $965 $1,291
Diluted EPS ($USD)$1.45 $6.06 $3.69 $5.11
Net Interest Margin (%)10.98% 11.17% 11.38% 11.96%
Operating Efficiency (%)42.8% 38.1% 38.0% 39.0%
Provision for Credit Losses ($USD Millions)$1,909 $739 $1,473 $1,202

Segment breakdown:

SegmentQ4 2023Q2 2024Q3 2024Q4 2024
Digital Banking – Revenue Net of Interest Expense ($MM)$4,063 $4,215 $4,324 $4,631
Digital Banking – Provision ($MM)$1,909 $739 $1,473 $1,202
Digital Banking – Operating Expense ($MM)$1,725 $1,683 $1,647 $1,801
Digital Banking – Pretax Income ($MM)$429 $1,793 $1,204 $1,628
Payment Services – Revenue Net of Interest Expense ($MM)$117 $323 $129 $128
Payment Services – Operating Expense ($MM)$63 $46 $45 $54
Payment Services – Pretax Income ($MM)$54 $277 $84 $74

Key KPIs:

KPIQ4 2023Q2 2024Q3 2024Q4 2024
Total Loans Ending ($MM)$128,409 $127,649 $126,993 $121,118
Credit Card Loans Ending ($MM)$102,259 $100,066 $100,489 $102,786
Total Net Charge-off Rate (%)4.11% 4.83% 4.86% 4.64%
Credit Card Net Charge-off Rate (%)4.68% 5.55% 5.28% 5.03%
Credit Card 30+ Day Delinquency (%)3.87% 3.69% 3.84% 3.84%
Discover Card Sales Volume ($MM)$57,145 $53,482 $53,380 $55,252
Rewards Rate (%)1.37% 1.32% 1.44% 1.35%
CET1 Capital Ratio (%)10.8% 11.9% 12.7% 14.1%
Direct-to-Consumer Deposits (% of Funding, avg)65% 66% 69% 72%

Guidance Changes

MetricPeriodPrevious GuidanceCurrent Guidance/TrendChange
Loan GrowthFY 2024 → 2025Down low to mid single digits (3Q24 outlook) To align more closely with pre-pandemic norms (2025 trend) Updated narrative (directionally stable)
Net Interest MarginFY 202411.2–11.4% (3Q24 outlook) NIM to remain relatively consistent with Q4 level (2025 trend) Maintained at elevated level
Operating ExpenseFY 2024 → Pre-mergerUp mid-single digits ex card misclassification & merger costs (3Q24 outlook) No significant changes to expense base prior to merger approval Maintained
Net Charge-offsFY 20244.9–5.0% (3Q24 outlook) Beginning to see a downward trend (2025 view) Lowering trend vs prior plateau
Capital ManagementOngoingShare repurchases suspended; common dividend ≤ $0.70 per share Repurchases suspended; quarterly cash dividend $0.70 declared Maintained

Note: Given pending merger, management did not provide numerical 2025 guidance; directional commentary provided above .

Earnings Call Themes & Trends

TopicPrevious Mentions (Q2 2024 and Q3 2024)Current Period (Q4 2024)Trend
Merger with Capital OneIntegration planning underway; regulatory process proceeding Delaware approval obtained; definitive proxy finalized; shareholder vote scheduled Feb 18 Progressing toward vote/approvals
Funding mix & depositsDTC deposits 66–69% of funding; improving mix DTC deposits 72% of funding, within target 70–80% Positive mix shift
Net interest margin11.17% (Q2); 11.38% (Q3); expansion from lower promo balances 11.96%; expected to remain near Q4 level Sustained elevated NIM
Card sales & acquisitionDiscover sales down 3% YoY (Q2, Q3) Sales down 3% YoY; opportunity to boost 2025 sales via new account acquisition Gradual improvement expected
Credit performanceNCOs peaked and plateaued; seasoning impact Total NCO 4.64% (-22 bps QoQ); beginning downward trend in 2025 Improving sequentially
Regulatory/accountingCard misclassification matter accruals & restatements; SEC staff comment in Q3 Restated periods; +$60M additional charges; increased regulatory penalty accrual in Q3; resolved in financials Resolution in progress
Technology investmentElevated information processing costs; software depreciation (student loan) Tech investments continued; $22M student loan infra write-off Ongoing investment
Macro outlookStable consumer; payment rates stabilized; unemployment/GDP assumptions unchanged Stable consumer; assume peak unemployment 4.7%; GDP 1–3% Stable

Management Commentary

  • Michael Shepherd (Interim CEO): “Discover's fourth quarter results capped off a successful 2024 as loan growth, margin expansion, and credit improvement led to strong financial performance… transformative year… pending merger with Capital One… exited student lending… enhanced our risk management and compliance programs” .
  • John Greene (CFO): “Results were driven by three main factors: provision expense decline of $707M… $381M gain from student loan portfolio sale… net interest income grew $162M from continued NIM expansion” .
  • Greene on funding and deposits: “Average consumer deposits were up 10% YoY… direct-to-consumer deposits now account for 72% of total funding” .
  • Greene on 2025 trends: “We expect NIM to remain relatively consistent with the fourth quarter level… net charge-offs beginning to see a downward trend… no significant changes to our expense base prior to merger approval” .
  • Shepherd on merger progress: “Capital One received approval of the merger from the Delaware State Bank Commissioner… definitive merger proxy has been transmitted to shareholders… integration planning efforts are progressing well” .

Q&A Highlights

  • The call consisted of prepared remarks only; there was no Q&A session. Investor Relations invited follow-up inquiries post-call .
  • Clarifications provided in prepared remarks included: rationale for EPS uplift (reserve release and student loan sale), expected stabilization of payment rates, and directional 2025 views on NIM and net charge-offs without formal numerical guidance .

Estimates Context

  • S&P Global/Capital IQ consensus estimates for DFS could not be retrieved due to missing CIQ mapping; therefore, comparisons vs Wall Street consensus are unavailable at this time. Values retrieved from S&P Global were unavailable due to a mapping error.
  • Implication: Given the outsized non-interest income gain ($381M) and reserve release dynamics, we expect analysts to adjust FY 2025 models for non-interest income normalization and a lower provision trajectory, with limited operating expense change pre-merger .

Key Takeaways for Investors

  • Margin strength and deposit mix should support earnings quality near-term; NIM expected to hold near Q4 levels, with potential modest back-half pressure if new account generation accelerates .
  • Credit is improving sequentially, with total NCOs down QoQ and management indicating a downward trend into 2025; watch vintage seasoning and personal loan credit normalization .
  • Non-interest income benefited from one-off student loan sale gains in Q4; expect normalization in subsequent periods as sale impacts roll off .
  • Expense discipline remains intact pre-merger, but professional fees and tech investments (including write-offs) keep a floor under OpEx; model modest OpEx growth .
  • Funding resilience: DTC deposits at 72% of total, supporting lower funding costs and improved liquidity; CET1 at 14.1% provides capital flexibility, though buybacks suspended .
  • Merger milestones: Delaware approval obtained, proxy completed, shareholder vote scheduled; stock narrative sensitive to regulatory timelines and integration planning updates .
  • Card sales softness reflects prior credit tightening; management anticipates improved sales via new account acquisition in 2025—key for volume and rewards dynamics .