Discover Financial Services Q1 2025 Earnings Report

Discover Financial Services EPS Results

• Actual EPS: $4.25
• Consensus EPS: $3.33
• Beat/Miss: Beat by +$0.92
• One Year Ago EPS: $1.10

Discover Financial Services Revenue Results

• Actual Revenue: $4.25 billion
• Expected Revenue: $4.25 billion
• Beat/Miss: Missed by -$1.38 million
• YoY Revenue Growth: N/A

Discover Financial Services Announcement Details

• Quarter: Q1 2025
• Date: 4/23/2025
• Time: After Market Closes
• Conference Call Date: Thursday, April 24, 2025
• Conference Call Time: 8:00AM ET

Discover 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.

Discover Financial Services Q1 2025 Earnings Call Transcript

Key Takeaways

• Discover obtained Federal Reserve and OCC approval for its merger with Capital One, expected to close on May 18, 2025, aiming to enhance competition, innovation, and shareholder value.
• In Q1, Discover reported net income of $1.1 billion, up 30% year-over-year, and a 31% increase in earnings per share, driven by strong net interest margins and solid credit performance.
• The company achieved a net interest margin of 12.18%, up 115 basis points year-over-year and 22 basis points sequentially, largely due to lower deposit costs and a favorable funding mix.
• Credit quality remained robust as the 30-day card delinquency rate declined by 18 basis points sequentially and the net charge-off rate improved year-over-year, supporting continued conservative underwriting.
• Discover card sales fell 2% year-over-year, reflecting past credit-tightening measures and modestly lower receivables despite stable customer spending trends.

Presentation

[Operator]

Please Stand by. Your program is about to begin. If you need audio assistance during today's program, please press star zero. Good morning. My name is Margo, and I will be your operator today. At this time, I would like to welcome everyone to the first quarter 2025 Discover Financial Services earnings conference call. All lines have been placed on mute to prevent any background noise. If you should need operator assistance, please press star zero.

[Erin Stieber, CFO at Discover Financial Services]

Thank you, Operator. I'll begin by referencing slide two of our earnings presentation, which you can find in the financials 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 our first quarter 2025 earnings press release and presentation, as well as the risk factors detailed in our annual report and other filings with the SEC. Our call today will include remarks from our interim CEO and President, Michael Shepherd, and John Greene, our Chief Financial Officer. There will be no question-and-answer session following today's remarks. It is now my pleasure to turn the call over to Michael.

[Michael Shepherd, Interim CEO and President at Discover Financial Services]

Thank you, Erin. Good morning and welcome to today's call. I'd like to begin by providing a few brief comments about the merger with Capital One. Of course, we're very pleased to report that the Federal Reserve Board and the Office of the Comptroller of the Currency approved our merger with Capital One. These decisions follow the approval of the transaction by the Delaware State Bank Commissioner in December of last year and by our shareholders in February of this year, with over 99% of the ballots cast voting in favor of the merger. The transaction is expected to close on May 18, 2025, subject to the satisfaction of the customary closing conditions.

[Michael Shepherd, Interim CEO and President at Discover Financial Services]

We look forward to completing the merger and believe the combination of our two great companies will increase competition in payment networks, offer a wider range of products to our customers, increase the resources devoted to innovation and security, as well as bring meaningful benefits to our communities and shareholders. Shifting focus to our recently reported quarterly results, Discover's financial performance remained strong in the first quarter. Earnings per share increased by 31% compared to last year, driven by a healthy net interest margin and good credit performance. Discover customer behavior was stable, evidenced by spend, payment, and credit trends. The card 30-plus day delinquency rate decreased by 18 basis points compared to last quarter, and the card net charge-off rate improved year over year. Consequently, our acquisition and underwriting strategies did not change materially during the quarter.

[Michael Shepherd, Interim CEO and President at Discover Financial Services]

In light of increasing macroeconomic uncertainty, we are closely monitoring economic developments and consumer health. With that, I'll now ask John Greene to review our first quarter financial results.

[John Greene, CFO at Discover Financial Services]

Thank you, Michael. I'll start with our summary financial results on slide four. In the first quarter, we reported net income of $1.1 billion, which was up 30% from the prior year. Provision expense declined by $253 million, reflecting a reduction in our credit reserve balance and lower net charge-offs. Net interest income increased by $71 million from continued net interest margin expansion. Let's review the details, beginning with revenue on slide five. Our net interest margin ended the quarter at 12.18%, up 115 basis points from the prior year and up 22 basis points sequentially. Over the past year, margin expansion has been driven by the student loan sale, a lower card promotional balance mix, and a reduction in consumer deposit pricing. Quarter over quarter, the main driver was lower deposit cost. Card receivables were relatively stable, down half a percent year over year from modestly lower sales.

[John Greene, CFO at Discover Financial Services]

The payment rate increased 10 basis points from last year and was sequentially flat. Discover card sales were down 2% compared to the prior year. The decline in card sales was from past credit tightening actions. Personal loan balances were flat. Although demand remains robust, our conservative underwriting posture and increased competition have slowed the pace of new originations. Total loans, after adjusting for the student loan sale, increased 1% from last year. Average consumer deposits were up 6% year over year and 1% sequentially. We grew direct-to-consumer deposit balances by $2 billion in the quarter, while reducing average deposit rates by 22 basis points. Direct-to-consumer deposits now account for 74% of total funding. Looking at other revenue on slide six, non-interest income increased $20 million, or 3%, driven by an increase in net discount and interchange revenue.

[John Greene, CFO at Discover Financial Services]

The rewards rate was 140 basis points in the period, an increase of one basis point, driven by higher spend in the 5% category, which was largely offset by lower cashback match. Sequentially, the rewards rate was up five basis points from changes in the promotional category. Moving to expenses on slide seven, total operating expenses were up $19 million, or 1% year over year. Looking at our major expense categories, compensation costs increased $64 million, or 10%, primarily due to higher wages and benefits and proactive employee retention actions. Information processing increased $17 million, or 10%, as a result of technology investments related to software and increased systems usage. Other expenses decreased $59 million from a $45 million reduction in anticipated civil penalties and a $20 million decline in legal fees.

[John Greene, CFO at Discover Financial Services]

Moving to credit performance on slide eight, total net charge-offs were 4.99%, seven basis points higher than the prior year and up 35 basis points from the prior quarter. Excluding the impact of the student loan sale, the net charge-off rate would have been down 24 basis points year over year. In card, net charge-offs increased 44 basis points from the prior quarter, primarily driven by normal seasonal trends. The 30-plus day delinquency rate continued to improve, declining in the quarter after plateauing in the second half of 2024. Personal loan net charge-offs and delinquencies were stable compared to last quarter. Delinquency formation, vintage performance, and portfolio trends remained positive. Turning to the allowance for credit losses on slide nine, our credit reserve balance decreased $215 million from the prior quarter. The reserve rate was relatively unchanged at 6.91%, up four basis points.

[John Greene, CFO at Discover Financial Services]

Looking at slide ten, our common equity tier one ratio for the period was 14.7%, up 60 basis points compared to the prior quarter, driven by core earnings generation, partially offset by the impact of the final CECL phase-in, which reduced capital by approximately 43 basis points. We declared a quarterly cash dividend of $0.70 per share of common stock. Because the planned closing of the merger with Capital One is May 18th, we expect that holders of Discover's common stock will not receive any Discover dividend, but will instead receive any dividend declared on shares of Capital One common stock if they are holders of record of Capital One stock as of the applicable record date. As it relates to 2025 trends, we have elected not to provide an update due to our upcoming merger.

[John Greene, CFO at Discover Financial Services]

In summary, our fundamental performance in the first quarter was strong, underscored by our robust net interest margin, strong credit performance, and healthy capital and liquidity levels. Given the recent merger approval and anticipated closing date, this is likely Discover Financial Services' final earnings call. I want to take this opportunity to thank the covering analysts and our shareholders for your support over the years and for your support of our merger with Capital One. We wish you all the best. With that, I'll turn the call back over to the Operator.

[Operator]

Today's call has ended. Thank you for joining. You may now disconnect.

Participants

Executives

• John Greene, CFO
• Michael Shepherd, Interim CEO and President
• Erin Stieber, CFO