Discover Financial Services DFS reported fourth-quarter 2024 adjusted earnings per share of $5.11, which comfortably beat the Zacks Consensus Estimate of $3.17. Also, the bottom line jumped more than three-fold year over year.
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Discover Financial's revenues, net of interest expenses, rose 13.9% year over year to $4.8 billion. The top line also beat the consensus mark by 8.4%.
DFS reported strong fourth-quarter results supported by interest income growth, thanks to personal and credit card loan growth and margin expansion. Rising PULSE volumes and Diners Club volumes also benefited the Payment Services segment. The positives were partially offset by higher expenses.
Discover Financial Services Price, Consensus and EPS Surprise
Discover Financial Services price-consensus-eps-surprise-chart | Discover Financial Services Quote
Q4 Operational Update
Interest income of $5 billion increased 2% year over year and matched our model estimate. Interest expense decreased 3% year over year to $1.4 billion and was lower than our model estimate of $1.5 billion. Non-interest income rose 59% year over year to $1.1 billion and beat the Zacks Consensus Estimate by 29.5%.
Total operating expenses of $1.9 billion escalated 4% year over year due to increased employee compensation and benefits expenses, professional fees, information processing & communications costs. The figure was higher than our estimate of $1.88 billion. Moreover, operating efficiency (total operating expenses divided by revenues, net of interest expenses) improved 380 basis points (bps) year over year to 39% in the fourth quarter.
Discover Financial’s net income of $1.3 billion surged more than three-fold year over year.
Q4 Segmental Performance
Digital Banking
The segment reported a pretax income of $1.6 billion, which rose nearly four-fold year over year in the fourth quarter. The increase was due to lower provisions for credit losses and growing revenues, net of interest expenses, partly offset by elevated operating expenses. The metric beat the consensus estimate by 54.5%. Provision for credit losses declined 37% year over year to $1.2 billion.
Total loans declined 4% year over year to $120.8 billion. Personal loans grew 7% year over year. Credit card loans improved 1% year over year, while private student loans declined 86% year over year.
Net interest income of $3.63 billion rose 5% year over year, thanks to net interest margin expansion. The figure surpassed our estimate of $3.56 billion. The net interest margin improved 98 bps year over year to 11.96%.
Payment Services
The segment's pretax income was $74 million compared with the prior-year quarter’s income of $54 million. The metric missed the Zacks Consensus Estimate of $76.6 million.
The Payment Services volume of $102.4 billion improved 4% year over year. The PULSE dollar volume rose 7% year over year on improved debit transaction volume. Meanwhile, the Diners Club volume increased 9% year over year, attributable to growth in Asia Pacific and Israel regions. The Network Partners’ volume decreased 30% year over year.
Financial Position (as of Dec. 31, 2024)
Discover Financial exited the fourth quarter with total assets of $147.6 billion, lower than $151.7 billion at 2023-end. The liquidity portfolio (comprising cash and cash equivalents and other investments, excluding cash-in-process) amounted to $27.3 billion, higher than $23.25 billion at 2023-end.
Borrowings decreased from $21.3 billion at 2023-end to $16.3 billion. Total liabilities of $129.7 billion at the fourth-quarter end were lower than $137.5 billion at 2023-end. Total equity rose from $14.2 billion at 2023-end to $17.9 billion.
Capital Deployment Update
Management has currently paused share repurchases through merger closing with Capital One Financial Corporation COF. DFS entered into a definitive agreement in February 2024 to merge with Capital One for $35.3 billion, and the integration planning efforts are advancing well. The company declared a quarterly cash dividend of 70 cents per share and expects the dividend to remain at this level.
2025 Guidance
Management expects loan growth to follow the pre-pandemic trend. The net interest margin is forecasted to be consistent with the fourth quarter level of 11.96%.
DFS’ expense base is not expected to change significantly prior to merger approval.
Net charge-off is beginning to see a downward trend.
DFS’ Zacks Rank & Key Picks
Discover Financial currently has a Zacks Rank #3 (Hold).
A couple of better-ranked stocks in the Finance space are Primerica, Inc. PRI and Palomar Holdings, Inc. PLMR. While Primerica currently sports a Zacks Rank #1 (Strong Buy), Palomar Holdings carries a Zacks Rank #2 (Buy). You can see the complete list of today’s Zacks #1 Rank stocks here.
Primerica’s earnings surpassed estimates in two of the last four quarters and missed the mark twice, the average surprise being 4.89%. The Zacks Consensus Estimate for PRI’s 2025 earnings indicates a rise of 5% while the same for revenues implies an improvement of 4.5% from the respective 2024 estimates. The consensus mark for PRI’s 2025 earnings has moved 0.2% north in the past 0 days.
Palomar Holdings’ earnings outpaced estimates in each of the trailing four quarters, the average surprise being 14.90%. The Zacks Consensus Estimate for PLMR’s 2025 earnings indicates a rise of 23.3% while the same for revenues implies an improvement of 27.1% from the respective year-ago estimates. The consensus mark for PLMR’s 2025 earnings has moved 0.5% north in the past 60 days.
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