Discover Financial Services (DFS) reported fourth-quarter earnings per share of 95 cents, modestly ahead of the Zacks Consensus Estimate of 91 cents but way higher than 64 cents recorded in the year-ago quarter. Net income spiked 46.4% year over year to $508 million from $347 million.
Net income allocated to common shareholders also surged to $513 million from $350 million in the year-ago quarter.
The surge in profits was driven by sales volume growth, complemented by higher interest income, reduced provision for loan losses and lower delinquency rates due to improved credit quality. The profit was also boosted by the escalated income from both direct banking and payment services business, which also drove the book value per share.
Total revenue, net of interest expense, increased 13.2% year over year to $1.81 billion, also exceeding the Zacks Consensus Estimate of $1.50 billion. Net interest income increased 12% year over year to $1.26 billion. However, total expenses also increased 6.5% year over year to $669 million.
Direct Banking Segment
The Direct Banking segment reported a pre-tax income of $776 million, reflecting a $222 million increase from the year-ago quarter. Discover card sales volume grew 8% year over year to $25.0 billion, primarily due to increased spending by existing consumers and growth of new customers.
Total loans improved 17% year over year to $57.3 billion, driven by an increase of $1.5 billion in credit card loans, $6.3 billion in private student loans (including purchases of $2.4 billion and $3.1 billion in the fourth and first quarters of 2011, respectively) and $770 million in personal loans.
Other income increased 16% year over year, primarily due to increases in late fees income, net discount and interchange revenue. The reported quarter’s figure includes a $28 million charge related to federal student loans classified as held for sale.
The credit card net charge-off rate declined 371 basis points (bps) year over year and 61 bps from the prior quarter to 3.24%. Moreover, the over-30-days delinquency rate was at an all-time low of 2.39%, having improved substantially by 167 bps year over year and 4 bps sequentially, reflecting an overall better credit trend since the fourth quarter of 2009.
Provisions for losses declined 17% or $64 million year over year to $319 million, reflecting lower charge-offs, which was partly offset by lower reserve release of $68 million in the reported quarter, down substantially from $414 million in the year-ago quarter.
Additionally, expenses in the segment soared 7% year over year based on higher compensation expenses, investments in growth initiatives and expenses related to the SLC.
Payment Services Segment
The Payment Services segment’s pre-tax income grew 35% year over year to $42 million. Revenues were up $8 million, reflecting higher margin volume and an increase in transactions on the PULSE network. However, expenses also decreased $3 million, primarily due to lower marketing costs related to timing of programs.
Payment Services dollar volume accelerated 7% from the year-ago quarter to $43.3 billion, reflecting higher PULSE, Diners Club International and third-party issuer volume.
Share Repurchase Update
Discover repurchased 9.6 million shares in the reported quarter under the $1 billion share repurchase program authorized in June 2011. The total purchase price for the shares was $227 million.
Dividend Update
Concurrently, Discover declared an increased quarterly dividend of 10 cents per share on its common stock, payable on January 19, 2012, to stockholders of record as on December 29, 2011. This marks the second dividend hike this year, as the company had increased its dividend from 2 cents to 6 cents per share in the first quarter.
Discover competes with other card companies like MasterCard Incorporated (MA) and Visa Inc. (V).
Currently, the company caries a Zacks #3 Rank, implying a Hold rating in the short term.
