The consensus was mixed among analysts as to what to expect out of Discover Financial when its Q2 earnings hit the wires yesterday afternoon (July 23). Discover, as it turned out, beat expectations on both the top and bottom line — driven by strong loan growth, particularly in card products, and what CEO Roger Hochschild described as better management and discipline exerting downward pressure on charge-offs and delinquencies in its personal loan business.
“Our ability to balance loan growth with disciplined credit management continues to generate very strong returns, while our investments in the Discover brand and advanced technology enhance our ability to drive a differentiated customer experience and competitive advantage,” Hochschild told investors in a call immediately following the release.
By the numbers, Discover reported profits of $753 million, or $2.32 a share — up from from $669 million, or $1.91 a share reported this time last year. Revenue picked up to $2.85 billion from $2.6 billion in 2018. Both figures came in ahead of pre-release consensus estimates of an EPS of $2.11 a share and $2.8 billion in revenue.
Net interest income — a key measure for financial services institutions that tracks the difference between what it makes on lending and what it pays on deposits — rose to $2.33 billion, above analysts’ projected $2.3 billion and driven by loan growth and net interest margin expansion.
Net interest margin continues to tick up, coming in at 10.47 percent in Q2 2019, compared with 10.46 percent in the previous quarter and 10.21 percent a year earlier. Loans, on the other hand, were up 6 percent in Q2, though charge-offs were as well, up to 3.22 percent from 3.11 percent a year ago.
The increase in charge-offs, Executive Vice President and Chief Financial Officer Mark Graf told investors, was primarily driven by the seasoning of loan growth in the past few years and to a lesser extent supply-driven credit normalization. Credit card net charge-offs increased by 15 basis points year over year, according to Graf. That is an increase, he noted, but also the seventh consecutive quarter of slowing year-on-year increases in card charge-offs.
“This trend reflects the fact that normalization continues to moderate,” he said.
Card receivables were up 7 percent during the quarter, and owed to a healthy mix of new and existing customers’ combined spending activity, according to Hochschild.
“In terms of card portfolio mix, growth was primarily from higher yielding merchandise balances versus promotional balances. We have previously shared with you our intent to decrease the level of growth from promotional activity and that trend continued in the second quarter. This provided a meaningful contribution to our net interest margin performance this quarter,” Hochschild said.
Investors mostly liked what they saw out of Discover, as the stock was up around 3 percent in after-hours trading. Discover shares have added about 39.6 percent since the beginning of the year.
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