Discover Financial Services’ (DFS) third quarter (ended Aug. 31, 2009) earnings came in at $1.07 per share, substantially ahead of the Zacks Consensus Estimate. This compares to earnings of 37 cents per share in the prior-year quarter. The results were bolstered primarily by an antitrust lawsuit settlement and cost containment measures.
The antitrust lawsuit, which claimed that Visa (V) and MasterCard (MA) harmed Discover’s business by preventing their member banks from issuing credit cards for Discover’s network, contributed $287 million (after-tax) to Discover’s earnings.
Net income available to common stockholders came in at $559.4 million, compared to $209.2 million in the prior quarter and $180.1 million in the prior-year quarter.
Managed revenue net of interest expense increased 14.5% sequentially and 45.6% year-over-year to $2.4 billion. Provision for loan losses on a managed basis decreased 16.8% sequentially but increased 22.6% year-over-year to $924.4 million.
Total managed expenses decreased 6.6% sequentially and 14.5% year-over-year to $523.8 million. The year-over-year decrease was due primarily to the decrease in all the expense items except professional fees. Overall, the decrease in expenses reflects efficient cost management during the quarter.
Managed loans at the end of the third quarter were $50.9 billion, up 0.9% compared to $50.4 billion in the prior-year quarter, as lower card-member payments and growth in both student and personal loans were largely offset by lower balance transfers and sales volume.
Discover card sales volume declined 7.4% year-over-year to $22.8 billion, reflecting lower gas prices and a general decline in consumer spending.
Credit quality significantly deteriorated during the quarter. The managed net charge-off rate for the reported quarter increased 60 basis points (bps) sequentially and 319 bps year-over-year to 8.39% as consumer bankruptcies and unemployment continued to rise. The delinquency rate (over 30 days) on managed loans was 5.10%, up 2 bps sequentially and 125 bps year-over-year, primarily due to the economic downturn. The company expects a managed net charge-off rate for the fourth quarter of 2009 between 8.5% and 9%.
Tangible common equity for the reported quarter came in at $12.49 per share, compared to $12.06 in the prior quarter and $11.55 in the prior-year quarter.
Book value per share at the end the third quarter increased to $15.45 from $15.40 in the prior quarter and $12.51 in the prior-year quarter.
The U.S. Card segment reported a pretax income of $912.8 million, compared to $245.2 million in the prior-year quarter. Revenue net of interest expense for this segment came in at $2.3 billion, up 46.8% year-over-year. Total expenses decreased 16.4% year-over-year to $489.6 million.
The Third-Party Payments segment’s pretax income was $27.1 million, down 4.9% year-over-year. Revenue net of interest expense for this segment came in at $61.4 million, up 10.9% from $55.3 million in the prior-year quarter. The expenses for this segment include a higher level of international marketing investments, partially offset by the impact of cost containment initiatives.
During the third quarter of 2009, Discover raised approximately $534 million through a common stock offering and issued debt of $400 million.
We think rising unemployment and reduced financial flexibility will continue to weigh upon Discover’s credit quality in the coming quarters. Also, the company could face increased pricing pressure from member banks and merchants. However, given its strong balance sheet and high degree of operational and financial flexibility, the company is better positioned than many of its peers in this stage of economic and financial recovery.
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