Discover Financial Services Reports Fourth Quarter 2023 Net Income of $388 Million or $1.54 Per Diluted Share and Full Year Net Income of $2.9 Billion or $11.26 Per Diluted Share

Rhea-AI Summary

Discover Financial Services (NYSE: DFS) has reported a net income of $388 million or $1.54 per diluted share for the fourth quarter of 2023, down from $1.0 billion or $3.74 per diluted share for the same period in 2022. The company's total loans at the end of the period were $128.4 billion, up 15% year-over-year, with total revenue net of interest expense reaching $4,196 million, a 13% increase from the previous year. The total net charge-off rate increased to 4.11% from 2.13% in 2022, and the diluted EPS dropped by 59%. Discover has also declared a semi-annual dividend for preferred stock and a quarterly dividend for common stock.

Positive

• None.

Negative

• The net income and diluted EPS for the fourth quarter of 2023 have declined significantly compared to the same period in 2022, with a 62% and 59% decrease, respectively. The total net charge-off rate has also increased by 198 basis points year-over-year, raising concerns about the company's credit quality and risk management.

Insights

Financial Analyst

The reported net income decline of 62% for Discover Financial Services in Q4 2023 is a significant metric that warrants attention from investors and analysts alike. This sharp decrease, alongside a 59% drop in diluted EPS, may raise concerns about the company's profitability and operational efficiency. A detailed examination of the drivers behind these figures, such as the increased provision for credit losses and higher operating expenses, is crucial for assessing the company's financial health and future earnings potential.

Moreover, the rise in the total net charge-off rate by 198 basis points indicates a potential deterioration in the credit quality of the loan portfolio, which could have implications for future earnings and capital requirements. The increase in net charge-offs, particularly in the credit card segment, suggests that Discover may be experiencing higher delinquencies, which could be a result of macroeconomic factors or shifts in consumer credit behavior. This trend should be monitored closely as it could impact the company's risk profile and provisioning in upcoming quarters.

Market Research Analyst

Discover's growth in total loans by 15% year-over-year and the launch of the new Cashback Debit product reflect strategic moves to capture a larger market share and diversify revenue streams. The expansion of the loan book indicates a strong demand for Discover's lending products, which could be a positive sign for revenue growth. However, this expansion needs to be balanced against the increased credit risk signified by the higher charge-off rates.

From a competitive standpoint, the introduction of new products such as Cashback Debit is a proactive approach to remain relevant in the highly competitive digital banking space. The success of such initiatives in driving customer acquisition and enhancing engagement will be key factors in determining Discover's market position and its ability to leverage cross-selling opportunities.

Economist

The interest rate environment has a direct impact on Discover's business model, particularly in terms of net interest margin (NIM) and funding costs. The reported compression in NIM and increased interest expenses as a percentage of total loans are indicative of the challenging rate environment. With the Federal Reserve's actions in response to inflationary pressures, the cost of borrowing has increased, which could affect consumer spending and borrowing habits—factors that are central to Discover's credit card and loan businesses.

Furthermore, the macroeconomic context, including consumer confidence, unemployment rates and economic growth forecasts, should be considered when evaluating Discover's performance. Any shifts in these indicators could influence loan demand, credit quality and default rates, which in turn would affect Discover's financial outcomes and strategic direction.

Board of Directors Declares Semi-annual Dividend for Preferred Stock and Quarterly Dividend for Common Stock

RIVERWOODS, Ill.--(BUSINESS WIRE)-- Discover Financial Services (NYSE: DFS):

Fourth Quarter 2023 Results
	2023	2022(1)	YOY Change
Total loans, end of period (in billions)	$128.4	$112.1	15%
Total revenue net of interest expense (in millions)	$4,196	$3,721	13%
Total net charge-off rate	4.11%	2.13%	198 bps
Net income/(loss) (in millions)	$388	$1,025	(62%)
Diluted EPS	$1.54	$3.74	(59%)

Note(s)

1. The comparative prior quarter ended December 31, 2022 has been restated to reflect immaterial corrections to the financial statements. See Reconciliation of Prior Periods in the Financial Supplement for reconciliation to previously reported results

Discover Financial Services (NYSE: DFS) today reported net income of $388 million or $1.54 per diluted share for the fourth quarter of 2023, as compared to a net income of $1.0 billion or $3.74 per diluted share for the fourth quarter of 2022.

“Discover’s performance in 2023 was driven by strong asset and deposit growth and a resilient net interest margin, while net charge-offs increased but to the low end of our expected range,” said John Owen, Discover’s Interim CEO and President. “Additionally, we have taken steps to strengthen our risk management and compliance programs; launched an important new product, Cashback Debit; and announced our new CEO. These factors position Discover to generate strong shareholder value in 2024 and beyond.”

Segment Results

Digital Banking

Digital Banking pretax income of $458 million for the quarter was $848 million lower than the prior year period reflecting a higher provision for credit losses and higher operating expenses, partially offset by increased revenue net of interest expense.

Total loans ended the quarter at $128.4 billion, up 15% year-over-year, and up 5% sequentially. Credit card loans ended the quarter at $102.3 billion, up 13% year-over-year. Personal loans increased $1.9 billion, or 23%, and private student loans increased $44 million, relatively flat from the prior period. The organic student loan portfolio, which excludes purchased loans, increased $176 million, or 2% year-over-year.

Net interest income for the quarter increased $401 million, or 13% driven by higher average receivables partially offset by net interest margin compression. Net interest margin was 10.98%, down 29 basis points versus the prior year. Card yield was 15.63%, up 113 basis points from the prior year primarily driven by higher prime rate and lower payment rates, partially offset by higher interest charge-offs. Interest expense as a percent of total loans increased 153 basis points from the prior year period, primarily driven by higher funding costs.

Non-interest income increased $44 million, or 8%, from the prior year period driven by higher loan fee income and discount/ interchange revenue as well as lower rewards cost driven by lower Cashback Match and change in the 5% category.

The total net charge-off rate of 4.11% was 198 basis points higher versus the prior year period reflecting seasoning of recent vintages with higher delinquency trends. The credit card net charge-off rate was 4.68%, up 231 basis points from the prior year period and up 65 basis points from the prior quarter. The 30+ day delinquency rate for credit card loans was 3.87%, up 134 basis points year-over-year and up 46 basis points from the prior quarter. The student loan net charge-off rate was 1.52%, up 19 basis points from the prior year and up 20 basis points from the prior quarter. Personal loans net charge-off rate of 3.39% was up 190 basis points from the prior year and up 76 basis points from the prior quarter.

Provision for credit losses of $1.9 billion increased $1.0 billion from the prior year driven by a $305 million higher reserve build in the current quarter and a $717 million increase in net-charge offs.

Total operating expenses were up $267 million year-over-year, or 18%. Employee compensation and professional fees were up due to investments in compliance and risk management. Other expense increased as a result of a reserve for customer remediation and marketing expense grew to support the national Cashback Debit campaign.

Payment Services

Payment Services pretax income of $54 million was up $17 million year-over-year primarily driven by increased PULSE revenue.

Payment Services volume was $98.4 billion, up 14% from the prior year period. PULSE dollar volume was up 19% primarily driven by increased debit transaction volume. Diners Club volume was up 14% year-over-year reflecting continued strength across most regions. Network Partners volume decreased 16% from the prior year primarily reflecting lower AribaPay volume.

Dividend Declaration

The Board of Directors of Discover Financial Services declared a semi-annual cash dividend on its Fixed Rate Non-Cumulative Perpetual Preferred Stock, Series C, in the amount of $2,750 per share. The dividend equals $27.50 per depositary share, each representing 1/100th interest in a share of the Series C Preferred Stock. The dividend will be payable on April 30, 2024, to the holders of record at the close of business on April 15, 2024.

The Board of Directors of Discover Financial Services declared a semi-annual cash dividend on its Fixed Rate Non-Cumulative Perpetual Preferred Stock, Series D, in the amount of $3,062.50 per share. The dividend equals $30.625 per depositary share, each representing 1/100th interest in a share of the Series D Preferred Stock. The dividend will be payable on March 25, 2024, to the holders of record at the close of business on March 8, 2024.

The Board of Directors declared a quarterly cash dividend of $0.70 per share of common stock payable on March 7, 2024, to holders of record at the close of business on February 22, 2024.

Conference Call and Webcast Information

The company will host a conference call to discuss its fourth quarter results on Thursday, January 18, 2024, at 7:00 a.m. Central Time. Interested parties can listen to the conference call via a live audio webcast at https://investorrelations.discover.com.

About Discover

Discover Financial Services (NYSE: DFS) is a digital banking and payment services company with one of the most recognized brands in U.S. financial services. Since its inception in 1986, the company has become one of the largest card issuers in the United States. The company issues the Discover® card, America's cash rewards pioneer, and offers private student loans, personal loans, home loans, checking and savings accounts and certificates of deposit through its banking business. It operates the Discover Global Network® comprised of Discover Network, with millions of merchants and cash access locations; PULSE®, one of the nation's leading ATM/debit networks; and Diners Club International®, a global payments network with acceptance around the world. For more information, visit www.discover.com/company.

A financial summary follows. Financial, statistical, and business related information, as well as information regarding business and segment trends, is included in the financial supplement filed as Exhibit 99.2 to the company's Current Report on Form 8-K filed today with the Securities and Exchange Commission (“SEC”). Both the earnings release and the financial supplement are available online at the SEC's website (http://www.sec.gov) and the company's website (https://investorrelations.discover.com).

This press release contains forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. Such statements, which speak to our expected business and financial performance, among other matters, contain words such as "believe," "expect," "anticipate," "intend," "plan," "aim," "will," "may," "should," "could," "would," "likely," "forecast," and similar expressions. Such statements are based on the current beliefs and expectations of our management and are subject to significant risks and uncertainties. Actual results may differ materially from those set forth in the forward-looking statements. These forward-looking statements speak only as of the date of this press release and there is no undertaking to update or revise them as more information becomes available.

The following factors, among others, could cause actual results to differ materially from those set forth in the forward-looking statements: changes in economic variables, such as the availability of consumer credit, the housing market, energy costs, the number and size of personal bankruptcy filings, the rate of unemployment, the levels of consumer confidence and consumer debt and investor sentiment; the impact of current, pending and future legislation, regulation, supervisory guidance and regulatory and legal actions, including, but not limited to, those related to accounting guidance, tax reform, financial regulatory reform, consumer financial services practices, anti-corruption and funding, capital and liquidity; the actions and initiatives of current and potential competitors; our ability to manage our expenses; our ability to successfully achieve card acceptance across our networks and maintain relationships with network participants and merchants; our ability to sustain and grow our private student loan, personal loan and home loan products; difficulty obtaining regulatory approval for, financing, closing, transitioning, integrating or managing the expenses of acquisitions of or investments in new businesses, products or technologies; our ability to manage our credit risk, market risk, liquidity risk, operational risk, legal and compliance risk and strategic risk; the availability and cost of funding and capital; access to deposit, securitization, equity, debt and credit markets; the impact of rating agency actions; the level and volatility of equity prices, commodity prices and interest rates, currency values, investments, other market fluctuations and other market indices; losses in our investment portfolio; limits on our ability to pay dividends and repurchase our common stock; limits on our ability to receive payments from our subsidiaries; fraudulent activities or material security breaches of our or others' key systems; our ability to remain organizationally effective; our ability to increase or sustain Discover card usage or attract new customers; our ability to maintain relationships with merchants; the effect of political, economic and market conditions, geopolitical events, climate change, pandemics and unforeseen or catastrophic events; our ability to introduce new products and services; our ability to manage our relationships with third-party vendors, as well as those with which we have no direct relationship such as our employees' internet service providers; our ability to maintain current technology and integrate new and acquired systems and technology; our ability to collect amounts for disputed transactions from merchants and merchant acquirers; our ability to attract and retain employees; our ability to protect our reputation and our intellectual property; our ability to comply with regulatory requirements; and new lawsuits, investigations or similar matters or unanticipated developments related to current matters. We routinely evaluate and may pursue acquisitions of or investments in businesses, products, technologies, loan portfolios or deposits, which may involve payment in cash or our debt or equity securities.

Additional factors that could cause the company's results to differ materially from those described in the forward-looking statements can be found under “Risk Factors,” “Business - Competition,” “Business - Supervision and Regulation” and “Management's Discussion and Analysis of Financial Condition and Results of Operations” in the company's Annual Report on Form 10-K for the year ended December 31, 2022, "Risk Factors" and “Management's Discussion & Analysis of Financial Condition and Results of Operations” in the company's Quarterly Report on Form 10-Q for the quarters ended September 30, 2023, June 30, 2023 and March 31, 2023 which are filed with the SEC and available at the SEC's internet site (http://www.sec.gov) and subsequent reports on Forms 8-K and 10-Q, including the company's Current Report on Form 8-K filed today with the SEC.

DISCOVER FINANCIAL SERVICES
(unaudited, in millions, except per share statistics)
	Quarter Ended
	Dec 31, 2023			Sep 30, 2023			Dec 31, 20221
EARNINGS SUMMARY
Interest Income	$4,868			$4,610			$3,856
Interest Expense	1,400			1,288			789
Net Interest Income	3,468			3,322			3,067
Discount/Interchange Revenue	1,158			1,164			1,154
Rewards Cost	788			787			797
Discount and Interchange Revenue, net	370			377			357
Protection Products Revenue	43			42			44
Loan Fee Income	217			194			182
Transaction Processing Revenue	82			82			66
Gains/Losses on Equity Investments	2			6			(6	)
Other Income	14			21			11
Total Non-Interest Income	728			722			654
Revenue Net of Interest Expense	4,196			4,044			3,721
Provision for Credit Losses	1,909			1,702			883
Employee Compensation and Benefits	646			575			573
Marketing and Business Development	372			283			313
Information Processing & Communications	170			149			143
Professional Fees	312			281			264
Premises and Equipment	25			22			48
Other Expense	250			144			154
Total Operating Expense	1,775			1,454			1,495
Income/(Loss) Before Income Taxes	512			888			1,343
Tax Expense	124			205			318
Net Income/(Loss)	$388			$683			$1,025
Net Income/(Loss) Allocated to Common Stockholders	$386			$647			$1,019
PER SHARE STATISTICS
Basic EPS	$1.54			$2.59			$3.74
Diluted EPS	$1.54			$2.59			$3.74
Common Stock Price (period end)	$112.40			$86.63			$97.83
Book Value per share	$59.29			$56.93			$53.65
BALANCE SHEET SUMMARY
Total Assets	$151,522			$143,432			$131,706
Total Liabilities	136,694			129,196			117,362
Total Equity	14,828			14,236			14,344
Total Liabilities and Stockholders' Equity	$151,522			$143,432			$131,706
TOTAL LOAN RECEIVABLES
Ending Loans 2	$128,409			$122,676			$112,120
Average Loans 2	$125,387			$120,380			$108,036
Interest Yield	14.61	%		14.44	%		13.53	%
Gross Principal Charge-off Rate	4.82	%		4.24	%		2.87	%
Net Principal Charge-off Rate	4.11	%		3.52	%		2.13	%
Delinquency Rate (30 or more days)	3.45	%		3.06	%		2.30	%
Delinquency Rate (90 or more days)	1.59	%		1.34	%		0.98	%
Gross Principal Charge-off Dollars	$1,521			$1,287			$781
Net Principal Charge-off Dollars	$1,298			$1,070			$581
Net Interest and Fee Charge-off Dollars	$279			$223			$126
Loans Delinquent 30 or more days	$4,427			$3,756			$2,578
Loans Delinquent 90 or more days	$2,045			$1,637			$1,101
Allowance for Credit Losses (period end)	$9,283			$8,665			$7,374
Reserve Change Build/(Release) 3	$618			$601			$313
Reserve Rate	7.23	%		7.06	%		6.58	%
CREDIT CARD LOANS
Ending Loans	$102,259			$97,389			$90,113
Average Loans	$99,610			$95,796			$86,396
Interest Yield	15.63	%		15.43	%		14.50	%
Gross Principal Charge-off Rate	5.50	%		4.85	%		3.20	%
Net Principal Charge-off Rate	4.68	%		4.03	%		2.37	%
Delinquency Rate (30 or more days)	3.87	%		3.41	%		2.53	%
Delinquency Rate (90 or more days)	1.87	%		1.57	%		1.14	%
Gross Principal Charge-off Dollars	$1,380			$1,171			$697
Net Principal Charge-off Dollars	$1,175			$973			$516
Loans Delinquent 30 or more days	$3,955			$3,324			$2,278
Loans Delinquent 90 or more days	$1,917			$1,527			$1,028
Allowance for Credit Losses (period end)	$7,619			$7,070			$5,883
Reserve Change Build/(Release) 3	$549			$545			$322
Reserve Rate	7.45	%		7.26	%		6.53	%
Total Discover Card Volume	$60,917			$58,965			$59,153
Discover Card Sales Volume	$57,145			$54,952			$55,663
Rewards Rate	1.37	%		1.42	%		1.42	%
SEGMENT- INCOME/(LOSS) BEFORE INCOME TAXES
Digital Banking	$458			$803			$1,306
Payment Services	54			85			37
Total	$512			$888			$1,343
NETWORK VOLUME
PULSE Network	$79,194			$72,146			$66,807
Network Partners	8,736			9,899			10,433
Diners Club International 4	10,468			9,723			9,155
Total Payment Services	98,398			91,768			86,395
Discover Network - Proprietary	58,419			57,228			58,138
Total	$156,817			$148,996			$144,533

1 The comparative prior quarter ended December 31, 2022 has been restated to reflect immaterial corrections to the financial statements. See Reconciliation of Prior Periods for reconciliation to previously reported results.
2 Total Loans includes Home Equity and other loans.
3 Excludes any build/release of the liability for expected credit losses on unfunded commitments as the offset is recorded in accrued expenses and other liabilities in the Company's condensed consolidated statements of financial condition
4 Volume is derived from data provided by licencees for Diners Club branded cards issued outside of North America and is subject to subsequent revision or amendment
Note: See Glossary for definitions of financial terms in the financial supplement which is available online at the SEC's website (http://www.sec.gov) and the Company's website (http://investorrelations.discoverfinancial.com).

RECONCILIATION OF PRIOR PERIOD RESTATED FINANCIAL RESULTS
Quarter Ended - December 31, 2022	As Previously Reported		Restated Impacts		As Restated
EARNINGS SUMMARY
Discount/Interchange Revenue	$1,165		($11)		$1,154
Discount and Interchange Revenue, net	368		(11)		357
Total Non-Interest Income	665		(11)		654
Revenue Net of Interest Expense	$3,732		($11)		$3,721
Other Expense	$154		$0		$154
Total Operating Expense	$1,495		$0		$1,495
Income/(Loss) Before Income Taxes	$1,354		($11)		$1,343
Tax Expense	321		(3)		318
Net Income/(Loss)	$1,033		($8)		$1,025
Net Income/(Loss) Allocated to Common Stockholders	$1,027		($8)		$1,019
PER SHARE STATISTICS
Basic EPS	$3.77		($0.03)		$3.74
Diluted EPS	$3.77		($0.03)		$3.74
Book Value per share	$54.57		($0.92)		$53.65
BALANCE SHEET SUMMARY
Total Assets	$131,628		$78		$131,706
Total Liabilities	117,038		324		117,362
Total Equity	14,590		(246)		14,344
Total Liabilities and Stockholders' Equity	$131,628		$78		$131,706
SEGMENT- INCOME/(LOSS) BEFORE INCOME TAXES
Digital Banking	$1,317		($11)		$1,306

 

View source version on businesswire.com: https://www.businesswire.com/news/home/20240116878616/en/

Investors:

Eric Wasserstrom, 224-405-4555

investorrelations@discover.com

Media:

Matthew Towson, 224-405-5649

matthewtowson@discover.com

Source: Discover Financial Services

FAQ

What is the net income for Discover Financial Services in the fourth quarter of 2023?

The net income for Discover Financial Services in the fourth quarter of 2023 is $388 million.

What is the total revenue net of interest expense for Discover Financial Services in the fourth quarter of 2023?

The total revenue net of interest expense for Discover Financial Services in the fourth quarter of 2023 is $4,196 million.

What is the total net charge-off rate for Discover Financial Services in the fourth quarter of 2023?

The total net charge-off rate for Discover Financial Services in the fourth quarter of 2023 is 4.11%.

What is the diluted EPS for Discover Financial Services in the fourth quarter of 2023?

The diluted EPS for Discover Financial Services in the fourth quarter of 2023 is $1.54.

What dividends were declared by Discover Financial Services?

Discover Financial Services declared a semi-annual cash dividend for preferred stock and a quarterly cash dividend for common stock.