Financial Services (DFS) Q4 Revenue Touches on Record Loan Growth

Find Financial Services DFS reported its fourth-quarter 2022 adjusted earnings of $3.77 per share, which exceeded the Zacks Consensus Estimate of $3.58 by 5.3%. The bottom line improved 4% year over year.

Revenue – net of interest expense – of DFS was $3,732 million, which was up 27% year over year. The top line was better than the consensus estimate of $3,649 million and our estimate of $3,532.9 million.

Quarterly results were successful on the back of loan growth and improved interest rates. The strong performance of its Totogi Totogi division also contributed to the high. However, the high level was partly offset by higher investment in the digital Banking sector.

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Operational Update

Operating margin (total expenses divided by revenue, net of interest expense) came in at 40%, which was down 470 basis points (bps). year over year in the fourth quarter.

Total expenses increased 14% year-over-year to $1,495 million due to higher expenses related to compensation and benefits. personnel, marketing and business development, information and communications management, professional fees and facilities and equipment. Our estimate for DFS expenditures is $1,530.9 million.

Interest expense of $789 million rose three times year over year in the quarter under review.

Discover Financial reported net income of $1,033 million, down 3% year over year. Our estimate for the metric is $871.8 million.

Group Performance

Digital banking

The segment’s pretax income came in at $1,317 million, which was down 10% year-over-year in the fourth quarter. The decrease was due to an increase in provisions for bad debts and an increase in operating expenses, partially offset by an increase in revenue, net of interest expense.

Allowance for credit losses increased more than three-fold year-over-year to $883 million, while our estimate for the metric was $860.8 million.

Total loans of $112.1 billion increased by 20% year-on-year in the quarter under review. Credit card loans rose 21% year over year, while student loans rose 2% year over year. Personal loans increased by 15% year over year.

Interest income rose over 24% year over year to $3,067 million in the fourth quarter on the back of higher average income and expanded interest income. The metric was higher than the Zacks Consensus Estimate of $2,891 million. Interest rate of 11.27% increased by 46 bps year over year.

Payment Services

The group’s pre-tax profit of $37 million compared favorably with a first-quarter loss of $97 million but was lower than the consensus estimate of $49.3 million. . The improved ratio came on the back of losses on equity investments of about $138 million reported in the year-ago quarter. Improved volumes of PULSE and Diners Club drove the segment’s results.

Total Paid Services grew 4% year over year to $86.4 billion. High transaction volume contributed to a 3% year-over-year growth in total PULSE dollars. Diners Club revenue increased 24% year over year due to improved travel and entertainment (T&E) spending. However, the number of Network Partners fell 7% year-over-year due to lower transaction volume.

Financial Statements (as of December 31, 2022)

Discover Financial exited the fourth quarter with total assets of $131.6 billion, which was up 19% year over year. Operating expenses (including cash and cash equivalents and other investments but excluding cash in) increased 32% year over year to $19,798 million.

Loans of $20,108 million were down 1% year over year. Total liabilities increased 21% year over year to $117 billion. Comparable revenue of $14,590 million grew 9% year-over-year at the end of the fourth quarter.

Share Capital

The share buyback program, which was suspended by DFS, has resumed in the fourth quarter. In the quarter under review, it bought back 5.9 million shares worth $602 million.

Shares of common stock outstanding decreased 2.1% sequentially.

The board of directors approved a quarterly cash dividend of 60 cents per common share, which will be paid on March 9, 2023, to shareholders of record on February 23, 2023.

At the same time, management also announced a quarterly dividend on Discover Financial’s preferred stock. On the Non-Cumulative Perpetual Preferred Stock, Series C, a dividend of $27.50 per stock was approved. Meanwhile, a dividend of $30.625 per depositary share was declared on the Non-Cumulative Perpetual Preferred Stock, Series D.

Updates Throughout the Year

For 2022, DFS reported adjusted earnings per share of $15.50, which was down 13% year over year.

Income – interest expense – improved 10% year over year to $13,337 million.

Net income of $4,392 million was down 19% year over year.

2023 Leadership

The administration expects to increase loan growth in the low double digits in 2023, but the metric recorded a 20% increase last year. Interest rate increases are likely to remain higher than the 2022 data reported at 11.04%.

Operating expenses are projected to remain less than 10% higher from 2022 to a reported $5,236 million.

The average wage rate is estimated at 3.5-3.9%, higher than the 2022 figure of 1.82%.

The current repayment plan, which runs until the end of June 2023, has $2.8 billion left.

Zacks Index

Discover Financial currently carries a Zacks Rank #3 (Hold). You can see the full list of today’s Zacks #1 Rank (Strong Buy) stocks here.

Finance Division Announcement

Of the Money The sports group has reported its fourth-quarter results so far, the lowest results of Bank of New York Mellon Corporation BK, JPMorgan Chase & Co. JPM and Morgan Stanley MS just the Zacks Consensus Estimate.

BNY Mellon’s fourth-quarter 2022 adjusted earnings of $1.30 per share beat the Zacks Consensus Estimate of $1.22. The bottom line reflects an increase of 25% from the previous quarter. BK’s earnings per common stock (GAAP basis) were $509 million or 62 cents per share, down from $822 million or $1.01 per share reported in the last quarter. Total revenue grew 6% year over year to $4.28 billion.

JPMorgan’s fourth-quarter 2022 adjusted earnings were $3.56 per share, which exceeded the Zacks Consensus Estimate of $3.11. Mortgage fees and combined income decreased 69% while mortgage rates remained above the 6% mark in the fourth quarter. JPM’s marketing revenue grew in the quarter to $3.8 billion, but comparable trading numbers were disappointing at $1.9 billion. Total market revenue was $5.7 billion up 7%.

Morgan Stanley reported fourth-quarter 2022 adjusted earnings of $1.31 per share, beating the Zacks Consensus Estimate of $1.25. The bottom line reflects a decline of 37% from the previous quarter. MS’s like-for-like marketing fees were down 73% from the year-ago quarter and fixed income was down 38%. Advisory fees fell 34% year over year. Therefore, IB fees were reduced by 49%.

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