Here's one financial stock that seems undeterred by the economic gloom. I had earlier written about Discover Financial Services (NYSE: DFS ) and recommended keeping an eye on it. For those who did, the company's solid third-quarter numbers are enough to add to their enthusiasm about the company.
Does the staggering 149% jump in its bottom line now make the credit card issuer and payments network provider a must-watch?
On a high
All-time high sales volumes, record low delinquency rates, sharp drop in loan-loss provisions -- Discover seems to be riding high these days.
Card sales were up 9% from a year ago to $26.3 billion. While customers spent more, higher gas prices also helped add to total revenue. Customers are also showing their loyalty to Discover, as attrition rates fell to a 10-year low.
But what's amazing is the astounding dip in loan-loss provisions from $713 million to just $100 million year on year.
Discover's delinquency rates hit 2.43%, beating its own 25-year low rate of 2.79% it achieved in the preceding quarter. Alongside declining delinquencies, net charge-offs (indicating the debt unlikely to be recovered) also fell sharply to 3.85% from 7.73% year on year. As customer payments and overall credit outlook improved, Discover could release $359 million from its loan-loss reserves.
Volumes of transactions processed on Discover's payment networks also rose by 15%, indicating increased usage of its cards. These, along with higher card sales indicate how consumers are increasingly willing to pull out cards now when making purchases. An 8% rise in total loans also suggests improving business conditions -- all good news for the Illinois-based company.
Broadening portfolio
Discover has been investing aggressively outside cards to boost revenue.
Student loans acquired early this year have added $24 million to Discover's pretax income this quarter. Its private student loans are up to $3.8 billion. Discover will purchase a further $2.5 billion worth of such loans from Citigroup (NYSE: C ) .
Discover's entry into residential mortgage is also under way, with its transaction to acquire some assets from Tree.com (Nasdaq: TREE ) expected to close this year.
Watch out for...
Far more interesting is the whole new debit card regulations issue. Discover is keen on attracting more customers once regulations that require banks to issue cards having more than one network provider come into effect. Discover is already talking to issuers regarding this, hoping to tap new opportunities.
These developments should be particularly interesting to follow since other network providers such as Visa (NYSE: V ) and MasterCard (NYSE: MA ) will scramble to pull in customers at a time when their revenues are bound to be hit once debit fee caps go into effect.
The Foolish bottom line
Discover continues to pay dividends, and it has also been repurchasing shares. Its return on equity remains solid at 33%.
Though the company may start building loan reserves next year that might dilute ROE a bit, it shouldn't be a problem as long as sales and business continue to grow.
Consistently solid performance, dividends, and investments in growth -- this is one company you cannot ignore.
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