Discovery Financial Services Notches Earnings Beat As Healthy Credit Demand Delivers

by Stjepan Kalinic Benzinga Staff Writer

Zinger Key Points

Discover Financial Services posted a $4.5B net income in 2024, driven by loan growth, deposits, and margin expansion.
Payment rates remain robust, while card sales have slowed by 3%, reflecting credit-tightening actions since 2022.
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Discovery Financial Services DFS comfortably beat market expectations in its fourth quarter earnings report.

What Happened: The digital banking and payment services provider achieved a 41% growth in net income year over year.

"Despite a modest slowdown in US card sales, overall network volume increased driven by growth in our Pulse business, demonstrating the strength of our payments network," the interim CEO Michael Shepherd said in the earnings call.

Among the streamlining efforts, Shepherd highlighted:

$4.5 billion in income stemmed from loan growth, deposit expansion, and an improved net interest margin.
Total loans increased by 3% despite the sale of the student loan portfolio.
Personal loans grew 5% year over year.

The results underscore a strong consumer demand for credit, backed by a stable labor market and wage growth outpacing inflation. However, CFO John Greene noted a 3% contraction in Discover card sales, which he attributes to credit-tightening actions going as far as 2022.

Why It Matters: Despite this modest slowdown in card sales, the broader trends suggest stability and potential recovery. Payment rates, though slightly down sequentially, remain about 90 basis points above pre-pandemic levels, showing that consumers are still effectively managing their financial obligations.

In a note, Keefe, Bruyette & Woods analysts pointed to the net-interest-margin-driven pre-provision net revenue and highlighted credit quality. They maintained the $232 price target, deriving it from applying the 16x multiple to the 2026 EPS estimate of $14.5. This price target is approximately 15% above today's closing price of $201.20

Last month, Capital One COF announced the approval of the Office of the Delaware State Bank Commissioner regarding the DFS acquisition. Pending satisfaction of the remaining closing conditions, the all-stock transaction is expected to close early in 2025.

Although the proposed merger drew criticism, particularly from Sen. Elizabeth Waren (D-MA) and Rep. Alexandria Ocasio-Cortez, Shepherd remains undeterred that creating the largest domestic credit card operator is the best course of action.

"We continue to firmly believe that merger will advance our company’s shared mission to help our customers meet their financial goals, support the communities in which we operate, and create value for our shareholders," he noted.

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