Discover Financial Services Earnings: Record Rapid Growth Continues

For the second consecutive quarter, Discover Financial Services earnings set a new record, as its loan growth and share repurchase efforts continued to deliver impressive results.

Patrick Morris
Patrick Morris
Oct 21, 2014 at 5:46PM

One quarter ago, Discover Financial Services (NYSE:DFS) CEO David Nelms announced that earnings per share of $1.35 was a record result for the banking and payment services company. One quarter later, Discover topped its own record, with EPS of $1.37.

Discover announced its numbers after the market closed today, with its unprecedented EPS figure marking a 14% increase over the $1.20 in last year's comparable quarter. This quarter's finish also surpassed the estimate of 22 analysts surveyed by Yahoo! Finance, who expected the banking and payment services firm to report an EPS of $1.34.

Let's take a closer look.

Aggressive expansion
Two things propelled Discover's earnings growth this quarter: higher revenue, thanks to increased loan growth, and an expansion of its direct lending operations. Those factors, coupled with improved credit quality, resulted in a 9% rise in net income to $644 million.

But the dramatic EPS boost came from continued aggressive share repurchases. Discover paid $622 million to buy back 10 million shares of common stock during the quarter, enough to reduce its share count by 2%.

Source: company investor relations.

This quarter's buybacks follow $177 million in repurchases in Q2. Over the past year, Discover's common shares outstanding have fallen by 5%. And it's probably not done. The news came in April that the board of directors approved a $3.2 billion repurchase authorization to extend through April 2016.

Continued growth
Average loans for the quarter grew by $4.4 billion, or 7%, to stand at $66.5 billion. Credit card loans, which represent roughly 80% of the company's total loans, gained $3.1 billion, or 6%.

While the total gain in its personal-loan business was smaller at $835 million, that segment's relative growth was an even more impressive 21% over the third quarter of 2013, to $4.8 billion.

Credit quality also improved at Discover, as its reserve rate -- its allowance for loan losses divided by total loans -- fell from 2.55% to 2.44% year over year. At the same time, its net interest margin has expanded from 9.5% through the first nine months of 2013 to 9.8% in 2014.

Nelms, not surprisingly, was upbeat about Discover's performance:

I am very pleased with Discover's results this quarter, which were driven by robust card loan growth, strong revenue growth, and near historically low credit performance, resulting in continued better-than-industry returns. Our Direct Banking strategy continues to work as we grow consumer loans faster than our peers and return meaningful amounts of capital back to our shareholders.

The key takeaway
Discover's ability to expand its loan base and improve its credit quality has resulted in impressive growth in its core operations and profitability. Add in its commitment to share buybacks, and it's easy to understand why investors should be pleased with both the most recent quarter and the long-term outlook for Discover.