Thursday, December 17, 2009

Discover Financial (DFS) Matches Earnings Estimates

The power of nearly free money from the Federal Reserve continues to be a boon to financial companies of all sorts.  Last quarter Discover Financial (DFS) earned 52 cents (excluding 1x gain) versus analysts -12 cents.  [Sep 17, 2009: Discover Financial - Solid Results all Things Considered]  This quarter the headline number is 63 cents but of $371M in earnings, $285M came from Visa/Mastercard antitrust litigation settlement, so that leaves us with $86M or approximately 15 cents.  While profits are down from a year ago considered the carnage in the economy, and to the US consumer these results continue to strike me as impressive, but then again every advantage is being handed to financial firms via Ben Bernanke. 

This quarter finished off fiscal year 2009 (November 2009).  Estimates for November 2010 range from 0.35 to $1.51 by 20 analysts; with a consensus of $0.77.  Assuming Bernanke will one day increase interest rates again, this massive spread these credit card companies are earnings by borrowing at nothing and lending to you at 15-29%+ will narrow but again even if we go back to 1% interest rates this is the level Greenspan juiced the entire world's financial system - so it's not exactly tight.  As I wrote in September:

As long as too many Americans don't join the "Debtors Revolution", and are happy to pay 23-30%+ interest rather than their old 5-12%, while the companies can borrow from the Fed at nearly zero; the business model could be the best on Earth. Even with 10, 15, 20% default rates.

I don't see any large movement in premarket so we'll see how the day goes.  After a huge move in the spring and summer, the stock has been consolidating the last quarter.  There are a lot of moving parts and one offs in the earnings, and year over year comparisons... I'd expect 2010 to be more of the same.  Many more consumers who cannot pay, but far less than otherwise due to people skipping out on their home payments to pay their cards.

  • Managed loans ended the quarter at $51 billion, essentially flat compared to the prior year, as lower cardmember payments and growth in both student and personal loans were largely offset by lower balance transfer activity and sales volume.
  • Sales volume declined 1% compared to the prior year, reflecting lower gas prices and a general decline in consumer spending.
  • Balance transfer volume declined 66% from the prior year as the company reduced its marketing of promotional rate balance transfer offers.
Net Yield
  • Net yield on loan receivables was 9.37%, an increase of 82 basis points from the prior year and a decrease of 53 basis points from the prior quarter. (so down from last quarter - but up almost 1% from a year ago period - thanks Uncle Ben) The net yield increased from the prior year as the rate on credit card balances declined less than the cost of funds, primarily due to higher interest rates on standard balances and a reduction in promotional rate balances.
Delinquency Rates
  • The managed net charge-off rate increased to 8.43% for the fourth quarter of 2009, up 295 basis points and 4 basis points from the prior year and the prior quarter, respectively. (obviously awful year over year, but we knew that a long time ago - quarter over quarter it finally seems to be stabilizing.  Remember, many people are defaulting on their homes - since many put little skin in the game - ahead of their credit cards at this point)
  • The over 30 days delinquency rate on managed loans was 5.31%, up 75 basis points from the prior year and 21 basis points from the prior quarter. (this level shows the continued strain on the 'recovering' US consumer)
  • The increase in both the net charge-off rate and delinquency rate was due to higher levels of consumer bankruptcies and unemployment partially offset by a higher mix of student loans.
  • The managed net charge-off rate for the first quarter of 2010 is expected to be between 8.4% and 8.9%.
Loan Loss Provision
  • Provision for loan losses decreased $117 million, or 11%, from the prior year due to a lower reserve build, partially offset by higher net charge-offs. The allowance for loan losses increased $383 million from the prior year, but decreased $75 million from the prior quarter.
[Jul 2, 2009: Beginning Discover Financial Stake]

Long Discover Financial in fund; no personal position

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