NYSE:DFS Discover Financial Services Q2 2024 Earnings Report $185.02 -2.44 (-1.30%) Closing price 04/25/2025 03:59 PM EasternExtended Trading$183.46 -1.56 (-0.84%) As of 04/25/2025 07:59 PM Eastern Extended trading is trading that happens on electronic markets outside of regular trading hours. This is a fair market value extended hours price provided by Polygon.io. Learn more. Earnings HistoryForecast Discover Financial Services EPS ResultsActual EPS$6.06Consensus EPS $3.06Beat/MissBeat by +$3.00One Year Ago EPS$3.54Discover Financial Services Revenue ResultsActual Revenue$4.54 billionExpected Revenue$4.18 billionBeat/MissBeat by +$359.10 millionYoY Revenue Growth+17.00%Discover Financial Services Announcement DetailsQuarterQ2 2024Date7/17/2024TimeAfter Market ClosesConference Call DateThursday, July 18, 2024Conference Call Time9:00AM ETConference Call ResourcesConference Call AudioConference Call TranscriptSlide DeckPress Release (8-K)Quarterly Report (10-Q)Earnings HistoryCompany ProfileSlide DeckFull Screen Slide DeckPowered by Discover Financial Services Q2 2024 Earnings Call TranscriptProvided by QuartrJuly 18, 2024 ShareLink copied to clipboard.There are 4 speakers on the call. Operator00:00:00Good morning. My name is Todd, and I will be your conference operator today. At this time, I would like to welcome everyone to the Second Quarter 2024 Discover Financial Services Earnings Conference Call. All lines have been placed on mute to prevent any background noise. Please note there will be no question and answer period after this morning's prepared remarks. Operator00:00:23After the call ends, questions should be directed to the Discover Investor Relations team. Thank you. I will now turn the call over to Mr. Eric Wasserstrom, Senior Vice President of Corporate Strategy and Investor Relations. Please go ahead. Speaker 100:00:47Thank you, and welcome to this morning's call. I'll begin by referencing slides 23 of our earnings presentation, which you can find in the Financial section of our Investor Relations website, investorrelations. Discover.com. Our discussion today contains certain forward looking statements that are subject to risks and uncertainties that may cause actual results to differ materially. Please refer to our notices regarding forward looking statements that appear in the Q2 2024 earnings press release and presentation as well as the risk factors detailed in our annual report and other filings with the SEC. Speaker 100:01:20Our call today will include remarks from our Interim CEO, Michael Shepherd and John Green, our Chief Financial Officer. There will be no question and answer session following today's remarks. However, the Investor Relations team will be available for any inquiries. It is now my pleasure to turn the call over to Michael. Speaker 200:01:36Thank you, Eric. Good morning, and welcome to our guests who have joined today's call. Discovery's 2nd quarter operating performance was very good and we advanced several strategic priorities. Let me highlight a few of these accomplishments. On July 17, we entered into an agreement to sell our private student loan portfolio to affiliates and limited partners of Carlyle and KKR. Speaker 200:02:01Firstmark, a division of Nelnet, will assume responsibility for servicing the portfolio upon sale. This agreement represents an important milestone in our journey to simplify our operations and business mix. The completion of the sale also has financial implications, which John Green will detail in a few moments. As we continue to resolve past issues and strengthen our risk management and compliance posture, we have entered into a settlement agreement to resolve the merchant class actions associated with the card misclassification litigation subject to court approval. The decision to settle was based upon our internal reviews, extensive dialogue with key constituencies, including merchants and regulators and our pending merger with Capital One. Speaker 200:02:52The settlement agreement would resolve claims by parties affected by the card misclassification, including merchants, acquirers and intermediaries. Our current remediation reserve is sufficient to cover the expenses under the terms of the settlement agreement. Our results also benefited from a litigation settlement in our Payment Services segment, where Discover was the plaintiff. We are happy to have this matter resolved and are satisfied with the favorable financial outcome. Finally, turning to our pending merger with Capital One. Speaker 200:03:26Capital One continues to lead the integration planning process and the teams are working well together on integration planning and regulatory applications. Upcoming merger related milestones include a virtual public hearing hosted by the Federal Reserve and the OCC, the completion of the written comment period, an in person public hearing with the Delaware State Bank Commissioner and the filing of the definitive merger proxy. We expect shareholder votes to occur this fall. We are encouraged by how the merger planning and application processes are progressing and continue to believe that the strategic rationale, operating scale and economics of the combined company are compelling. With that, I'll now ask John Green to review our Q2 2024 financial results. Speaker 300:04:17Thank you, Michael, and good morning, everyone. I'll start with our summary financial results on Slide 5. In the quarter, we reported net income of $1,500,000,000 which was up 70% from the prior year quarter. Our fundamental performance in the period was driven by revenue expansion from loan growth, higher net interest margin and non interest revenue growth. Credit continues to perform in line with expectations, supporting our view that losses are near peak and will plateau during the second half of twenty twenty four. Speaker 300:04:51There are several unusual items which impacted the quarter. These included student loan reserve release, a gain of $26,000,000 from the sale of our Lake Park facility. And largely offsetting one another were the favorable litigation settlement and a charge for expected regulatory penalties related to the card misclassification matter. Excluding unusual items, we would have reported net income of approximately 9 $1,000,000 and EPS of about $3.63 per share. Let's review the details beginning on Slide 6. Speaker 300:05:36Our net interest margin ended the quarter at 11.17%, up 11 basis points from the prior year and up 14 basis points sequentially. On a quarter over quarter basis, margin expansion was primarily driven by a lower card promotional balance mix. As anticipated, receivable growth continues to normalize from its early 2023 peak. Card receivables increased 7% year over year due to a lower payment rate and a smaller contribution from new accounts. The payment rate declined about 130 basis points compared to last year and is now about 90 basis points above 2019 levels. Speaker 300:06:22Discover card sales were down 3% compared to the prior year. Spending at restaurants, which is a large category for sales volume declined sequentially as a result of being included in the 5 percent promotion during the Q1. Accounting for the influence of promotional categories, sales trends are relatively stable. We continue to see a cautious consumer evidenced by less card members spend with lower income households being most affected. Personal loans were up 13% from the prior year period. Speaker 300:06:58In response to market conditions, we prudently tightened underwriting over the past year, which has served to modestly reduce originations. Student loans were down 1% year over year. As Michael mentioned, we have entered into an agreement to sell our student loan portfolio. We expect the transaction to be completed in 4 tranches by the end of 2024. The purchase price is at a premium to the principal balance and is based on the formula that varies depending on the closing timing, interest rates and other factors. Speaker 300:07:34In association with this development, student loans are now accounted for as held for sale. The 2 most notable impacts to the financial statements are that we will no longer maintain a credit reserve for student loans and future student loan net charge offs will be recognized through operating expense rather than credit losses. Average consumer deposits were up 15% year over year and 1% sequentially. Deposit balances are being managed in relation to our liquidity needs, which will benefit from the student loan sale. Our disciplined approach to deposit pricing has led to a modest reduction in average deposit rates in the 2nd quarter, consistent with our practice of leading the industry on pricing in down parts of the cycle. Speaker 300:08:24Looking at other revenue on Slide 7. Non interest income increased $313,000,000 or 45%. Discount and interchange revenue was up $67,000,000 as a result of lower rewards cost. Our rewards rate was 132 basis points in the period, a decrease of 10 basis points versus the prior year quarter. The decline reflects lower cash back match. Speaker 300:08:51Other income increased due to unusual items, including the litigation settlement and the facility sale. On an adjusted basis, non interest revenue grew 14%. Moving to expenses on Slide 8. Total operating expenses were up $325,000,000 or 23% year over year. The most significant driver of this increase was a charge for expected regulatory penalties related to the card misclassification issue. Speaker 300:09:22It is important to note that actual penalties imposed are subject to further discussions and may be more or less than this amount. Adjusting for this charge, our expenses would have increased by 9% year over year. Looking at our major expense categories, compensation costs increased $70,000,000 or 12%, primarily due to an increase in business technology resources. Professional fees were up $80,000,000 or 37%, driven by higher recovery fees and investments in compliance and risk management. Our expectation for compliance and risk management expenses for the full year remains in the $500,000,000 range with an upside bias. Speaker 300:10:10This figure excludes card misclassification related cost. Moving to credit performance on Slide 9. Total net charge offs were 4.83%, 161 basis points higher than the prior year and down 9 basis points from the prior quarter. In card, delinquency formation improvement continued. The 30 plus day delinquency rate was down 14 basis points versus the prior quarter. Speaker 300:10:40From a vintage perspective, our 2023 card vintage continues to perform in line with our 2022 vintage. As we look into the second half of the year, we expect there could be some variability in monthly card losses from both seasonality and various credit management actions we've taken. This has not changed our broader outlook for losses to generally peak and plateau this year. Turning to the allowance for credit losses on Slide 10. Our credit reserve balances declined $777,000,000 from the prior quarter, reflecting the student loan reserve release, partially offset by a $92,000,000 reserve build primarily to support loan growth. Speaker 300:11:27Our reserve rate was just over 7.2%, largely unchanged after adjusting for student loans. Looking at Slide 11. Our common equity Tier 1 for the period was 11.9%, up 100 basis points bolstered by core earnings generation and the reserve release. We declared a quarterly cash dividend of $0.70 per share of common stock. Concluding on Slide 12. Speaker 300:11:57We have revised our 2024 outlook and have included the impacts of the pending student loan sale. We are updating our loan growth expectations to be down low single digits reflecting the roughly $10,000,000,000 asset sale. Absent this, year over year loan growth would be consistent with our prior review. We are increasing our net interest margin range to 11.1% to 11.4%. This change was driven by 2 factors. Speaker 300:12:28We now anticipate higher card yields reflecting a lower promotional balance mix and the student loan sale, which increases NIM by about 10 basis points. Our operating expense guidance is unchanged, withstanding the inclusion of the student loan net charge offs in this line item. Our base case for net charge offs remains at the low end of the 4.9% to 5.2% range. This includes the 10 basis points impact from student loans. And finally, our capital management expectations have not changed. Speaker 300:13:05To summarize, we continue to generate solid financial results, remain steadfast in our efforts to resolve compliance matters and look forward to consummating our planned merger. This concludes our remarks. I'll turn the call back over to the operator. This concludes today's call. The Discover Investor Relations team will be available for questions. Speaker 300:13:50Thank you for joining. You may now disconnect.Read morePowered by Conference Call Audio Live Call not available Earnings Conference CallDiscover Financial Services Q2 202400:00 / 00:00Speed:1x1.25x1.5x2x Earnings DocumentsSlide DeckPress Release(8-K)Quarterly report(10-Q) Discover Financial Services Earnings HeadlinesDiscover Financial Services (NYSE:DFS) Price Target Lowered to $184.00 at TD SecuritiesApril 26 at 3:33 AM | americanbankingnews.comDiscover Financial Services Target of Unusually Large Options Trading (NYSE:DFS)April 26 at 1:09 AM | americanbankingnews.comGold Alert: The Truth About Fort Knox Is ComingOwning physical gold isn’t the best way to profit. I’ve found a better way to invest in gold—one that’s already performing nearly twice as well as gold this year and looks ready to go much higher. If you wait for the news to hit, you’ll already be too late.April 26, 2025 | Golden Portfolio (Ad)Discover Financial Services (DFS) Gets a Hold from Evercore ISIApril 25 at 1:55 PM | markets.businessinsider.comDiscover Financial Services (NYSE:DFS) Q1 2025 Earnings Call TranscriptApril 25 at 8:55 AM | msn.comWhy Discover Financial Services Was Racing Higher This WeekApril 25 at 6:36 AM | fool.comSee More Discover Financial Services Headlines Get Earnings Announcements in your inboxWant to stay updated on the latest earnings announcements and upcoming reports for companies like Discover Financial Services? Sign up for Earnings360's daily newsletter to receive timely earnings updates on Discover Financial Services and other key companies, straight to your email. Email Address About Discover Financial ServicesDiscover Financial Services (NYSE:DFS), through its subsidiaries, provides digital banking products and services, and payment services in the United States. It operates in two segments, Digital Banking and Payment Services. The Digital Banking segment offers Discover-branded credit cards to individuals; personal loans, home loans, and other consumer lending; and direct-to-consumer deposit products comprising savings accounts, certificates of deposit, money market accounts, IRA certificates of deposit, IRA savings accounts and checking accounts, and sweep accounts. The Payment Services segment operates the PULSE to access automated teller machines, debit, and electronic funds transfer network; and Diners Club International, a payments network that issues Diners Club branded charge cards and/or provides card acceptance services, as well as offers payment transaction processing and settlement services. The company was incorporated in 1960 and is based in Riverwoods, Illinois.View Discover Financial Services ProfileRead more More Earnings Resources from MarketBeat Earnings Tools Today's Earnings Tomorrow's Earnings Next Week's Earnings Upcoming Earnings Calls Earnings Newsletter Earnings Call Transcripts Earnings Beats & Misses Corporate Guidance Earnings Screener Earnings By Country U.S. Earnings Reports Canadian Earnings Reports U.K. Earnings Reports Latest Articles Markets Think Robinhood Earnings Could Send the Stock UpIs the Floor in for Lam Research After Bullish Earnings?Market Anticipation Builds: Joby Stock Climbs Ahead of EarningsIs Intuitive Surgical a Buy After Volatile Reaction to Earnings?Seismic Shift at Intel: Massive Layoffs Precede Crucial EarningsRocket Lab Lands New Contract, Builds Momentum Ahead of EarningsAmazon's Earnings Could Fuel a Rapid Breakout Upcoming Earnings Cadence Design Systems (4/28/2025)Welltower (4/28/2025)Waste Management (4/28/2025)AstraZeneca (4/29/2025)Mondelez International (4/29/2025)PayPal (4/29/2025)Starbucks (4/29/2025)DoorDash (4/29/2025)Honeywell International (4/29/2025)Regeneron Pharmaceuticals (4/29/2025) Get 30 Days of MarketBeat All Access for Free Sign up for MarketBeat All Access to gain access to MarketBeat's full suite of research tools. 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There are 4 speakers on the call. Operator00:00:00Good morning. My name is Todd, and I will be your conference operator today. At this time, I would like to welcome everyone to the Second Quarter 2024 Discover Financial Services Earnings Conference Call. All lines have been placed on mute to prevent any background noise. Please note there will be no question and answer period after this morning's prepared remarks. Operator00:00:23After the call ends, questions should be directed to the Discover Investor Relations team. Thank you. I will now turn the call over to Mr. Eric Wasserstrom, Senior Vice President of Corporate Strategy and Investor Relations. Please go ahead. Speaker 100:00:47Thank you, and welcome to this morning's call. I'll begin by referencing slides 23 of our earnings presentation, which you can find in the Financial section of our Investor Relations website, investorrelations. Discover.com. Our discussion today contains certain forward looking statements that are subject to risks and uncertainties that may cause actual results to differ materially. Please refer to our notices regarding forward looking statements that appear in the Q2 2024 earnings press release and presentation as well as the risk factors detailed in our annual report and other filings with the SEC. Speaker 100:01:20Our call today will include remarks from our Interim CEO, Michael Shepherd and John Green, our Chief Financial Officer. There will be no question and answer session following today's remarks. However, the Investor Relations team will be available for any inquiries. It is now my pleasure to turn the call over to Michael. Speaker 200:01:36Thank you, Eric. Good morning, and welcome to our guests who have joined today's call. Discovery's 2nd quarter operating performance was very good and we advanced several strategic priorities. Let me highlight a few of these accomplishments. On July 17, we entered into an agreement to sell our private student loan portfolio to affiliates and limited partners of Carlyle and KKR. Speaker 200:02:01Firstmark, a division of Nelnet, will assume responsibility for servicing the portfolio upon sale. This agreement represents an important milestone in our journey to simplify our operations and business mix. The completion of the sale also has financial implications, which John Green will detail in a few moments. As we continue to resolve past issues and strengthen our risk management and compliance posture, we have entered into a settlement agreement to resolve the merchant class actions associated with the card misclassification litigation subject to court approval. The decision to settle was based upon our internal reviews, extensive dialogue with key constituencies, including merchants and regulators and our pending merger with Capital One. Speaker 200:02:52The settlement agreement would resolve claims by parties affected by the card misclassification, including merchants, acquirers and intermediaries. Our current remediation reserve is sufficient to cover the expenses under the terms of the settlement agreement. Our results also benefited from a litigation settlement in our Payment Services segment, where Discover was the plaintiff. We are happy to have this matter resolved and are satisfied with the favorable financial outcome. Finally, turning to our pending merger with Capital One. Speaker 200:03:26Capital One continues to lead the integration planning process and the teams are working well together on integration planning and regulatory applications. Upcoming merger related milestones include a virtual public hearing hosted by the Federal Reserve and the OCC, the completion of the written comment period, an in person public hearing with the Delaware State Bank Commissioner and the filing of the definitive merger proxy. We expect shareholder votes to occur this fall. We are encouraged by how the merger planning and application processes are progressing and continue to believe that the strategic rationale, operating scale and economics of the combined company are compelling. With that, I'll now ask John Green to review our Q2 2024 financial results. Speaker 300:04:17Thank you, Michael, and good morning, everyone. I'll start with our summary financial results on Slide 5. In the quarter, we reported net income of $1,500,000,000 which was up 70% from the prior year quarter. Our fundamental performance in the period was driven by revenue expansion from loan growth, higher net interest margin and non interest revenue growth. Credit continues to perform in line with expectations, supporting our view that losses are near peak and will plateau during the second half of twenty twenty four. Speaker 300:04:51There are several unusual items which impacted the quarter. These included student loan reserve release, a gain of $26,000,000 from the sale of our Lake Park facility. And largely offsetting one another were the favorable litigation settlement and a charge for expected regulatory penalties related to the card misclassification matter. Excluding unusual items, we would have reported net income of approximately 9 $1,000,000 and EPS of about $3.63 per share. Let's review the details beginning on Slide 6. Speaker 300:05:36Our net interest margin ended the quarter at 11.17%, up 11 basis points from the prior year and up 14 basis points sequentially. On a quarter over quarter basis, margin expansion was primarily driven by a lower card promotional balance mix. As anticipated, receivable growth continues to normalize from its early 2023 peak. Card receivables increased 7% year over year due to a lower payment rate and a smaller contribution from new accounts. The payment rate declined about 130 basis points compared to last year and is now about 90 basis points above 2019 levels. Speaker 300:06:22Discover card sales were down 3% compared to the prior year. Spending at restaurants, which is a large category for sales volume declined sequentially as a result of being included in the 5 percent promotion during the Q1. Accounting for the influence of promotional categories, sales trends are relatively stable. We continue to see a cautious consumer evidenced by less card members spend with lower income households being most affected. Personal loans were up 13% from the prior year period. Speaker 300:06:58In response to market conditions, we prudently tightened underwriting over the past year, which has served to modestly reduce originations. Student loans were down 1% year over year. As Michael mentioned, we have entered into an agreement to sell our student loan portfolio. We expect the transaction to be completed in 4 tranches by the end of 2024. The purchase price is at a premium to the principal balance and is based on the formula that varies depending on the closing timing, interest rates and other factors. Speaker 300:07:34In association with this development, student loans are now accounted for as held for sale. The 2 most notable impacts to the financial statements are that we will no longer maintain a credit reserve for student loans and future student loan net charge offs will be recognized through operating expense rather than credit losses. Average consumer deposits were up 15% year over year and 1% sequentially. Deposit balances are being managed in relation to our liquidity needs, which will benefit from the student loan sale. Our disciplined approach to deposit pricing has led to a modest reduction in average deposit rates in the 2nd quarter, consistent with our practice of leading the industry on pricing in down parts of the cycle. Speaker 300:08:24Looking at other revenue on Slide 7. Non interest income increased $313,000,000 or 45%. Discount and interchange revenue was up $67,000,000 as a result of lower rewards cost. Our rewards rate was 132 basis points in the period, a decrease of 10 basis points versus the prior year quarter. The decline reflects lower cash back match. Speaker 300:08:51Other income increased due to unusual items, including the litigation settlement and the facility sale. On an adjusted basis, non interest revenue grew 14%. Moving to expenses on Slide 8. Total operating expenses were up $325,000,000 or 23% year over year. The most significant driver of this increase was a charge for expected regulatory penalties related to the card misclassification issue. Speaker 300:09:22It is important to note that actual penalties imposed are subject to further discussions and may be more or less than this amount. Adjusting for this charge, our expenses would have increased by 9% year over year. Looking at our major expense categories, compensation costs increased $70,000,000 or 12%, primarily due to an increase in business technology resources. Professional fees were up $80,000,000 or 37%, driven by higher recovery fees and investments in compliance and risk management. Our expectation for compliance and risk management expenses for the full year remains in the $500,000,000 range with an upside bias. Speaker 300:10:10This figure excludes card misclassification related cost. Moving to credit performance on Slide 9. Total net charge offs were 4.83%, 161 basis points higher than the prior year and down 9 basis points from the prior quarter. In card, delinquency formation improvement continued. The 30 plus day delinquency rate was down 14 basis points versus the prior quarter. Speaker 300:10:40From a vintage perspective, our 2023 card vintage continues to perform in line with our 2022 vintage. As we look into the second half of the year, we expect there could be some variability in monthly card losses from both seasonality and various credit management actions we've taken. This has not changed our broader outlook for losses to generally peak and plateau this year. Turning to the allowance for credit losses on Slide 10. Our credit reserve balances declined $777,000,000 from the prior quarter, reflecting the student loan reserve release, partially offset by a $92,000,000 reserve build primarily to support loan growth. Speaker 300:11:27Our reserve rate was just over 7.2%, largely unchanged after adjusting for student loans. Looking at Slide 11. Our common equity Tier 1 for the period was 11.9%, up 100 basis points bolstered by core earnings generation and the reserve release. We declared a quarterly cash dividend of $0.70 per share of common stock. Concluding on Slide 12. Speaker 300:11:57We have revised our 2024 outlook and have included the impacts of the pending student loan sale. We are updating our loan growth expectations to be down low single digits reflecting the roughly $10,000,000,000 asset sale. Absent this, year over year loan growth would be consistent with our prior review. We are increasing our net interest margin range to 11.1% to 11.4%. This change was driven by 2 factors. Speaker 300:12:28We now anticipate higher card yields reflecting a lower promotional balance mix and the student loan sale, which increases NIM by about 10 basis points. Our operating expense guidance is unchanged, withstanding the inclusion of the student loan net charge offs in this line item. Our base case for net charge offs remains at the low end of the 4.9% to 5.2% range. This includes the 10 basis points impact from student loans. And finally, our capital management expectations have not changed. Speaker 300:13:05To summarize, we continue to generate solid financial results, remain steadfast in our efforts to resolve compliance matters and look forward to consummating our planned merger. This concludes our remarks. I'll turn the call back over to the operator. This concludes today's call. The Discover Investor Relations team will be available for questions. Speaker 300:13:50Thank you for joining. You may now disconnect.Read morePowered by