Discover Financial Services (NYSE: DFS) recently beat Street estimates for its quarter. The credit card issuer and payments network provider recorded a skyrocketing 132% jump in its bottom line, to $600 million, as delinquency rates fell sharply on improved credit quality.
Let's delve a little deeper into what the numbers might mean for investors.
Rocking numbers
Excluding loan losses, revenues for the quarter grew by 5% to $1.74 billion. The highlight of the quarter was a sharp drop in loan loss provisions -- to $176 million from $724 million in the year-ago quarter.
The company witnessed a 25-year low delinquency rate of 2.79%, significantly below last year's 4.85%. Accordingly, net charge-offs, indicating the debt unlikely to be recovered, fell to 4.42%, from 7.97% in the same period last year.
Customers are now in a better position to pay off debts, which is heartening news for Discover and its investors. As a result of better payments, the company could release $401 million from loan loss reserves this quarter.
Moreover, an 11% increase in total Discover card volumes, indicating new customer additions, and a 5% increase in total loans (including mortgage and other loans) from the year-ago quarter also speak of improving credit quality and business conditions. Whether you think it's a good thing, consumers are once again acquiring a taste for credit spending, which is good for credit operators like Discover and American Express (NYSE: AXP).
Beyond cards
Discover has been strategically looking beyond its cards business and it's clear that Discover is aiming a lot higher these days.
The Illinois-based company acquired Citigroup's (NYSE: C) student loan unit this year, which contributed around $25 million in pre-tax income to Discover's direct banking segment this quarter.
Direct residential mortgages are about to find a way into Discover's banking portfolio, with its recent agreement to acquire the home loan center subsidiary of Tree.com (Nasdaq: TREE).
Discover has also announced plans to get into mobile payments. Expanding further in banking and payment services would help Discover compete better with card network giants Visa (NYSE: V) and MasterCard (NYSE: MA), while strengthening market share.
Reasons to cheer
Discover has maintained an excellent return on equity, more than doubling that figure to 33% this quarter from 16% in the year-ago quarter. The dividend has also improved, from $0.02 per share to $0.06 this quarter. The company will also be repurchasing shares worth $1 billion, to create value for shareholders.
With a Tier 1 capital ratio of 13.2%, Discover appears well-capitalized. Another relatively uncommon metric, tangible common equity to tangible assets ratio, which depicts a company's ability to absorb losses before being insolvent, has increased from 9.1% in the year-ago quarter to 11.2% this quarter, also signaling strong capital levels.
The Foolish bottom line
With such robust numbers, strong financial position, and expansion plans in focus, the future's beginning to look bright for Discover. Once consumer confidence and employment in the U.S. recover, this company looks poised to perform well. Foolish investors should keep an eye on this one.
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