High interest rates have generally impacted net interest income (NII) across the banking sector in Q3, but Discover Financial Services (DFS, Financial) bucked this trend. The credit card company reported strong Q3 results, exceeding EPS estimates with a 10% increase in NII to $333.0 million. This growth was supported by an increase in net interest margin by 43 basis points year-over-year to 11.38%.
- In February, Capital One (COF, Financial) announced plans to acquire DFS in an all-stock deal valued at over $35 billion. However, the merger faces significant regulatory and consumer scrutiny, casting doubt on its completion. While the merger offers strategic benefits, DFS is currently performing well independently.
- Year-over-year, EPS rose by 42% to $3.69, driven by the NII increase, a 4% rise in total loans to $127.0 billion, and a $229 million decrease in provision for credit losses to $1.5 billion. Credit card net charge-offs improved slightly from last quarter, dropping 27 basis points to 5.28%, with 30-day delinquencies stable at 3.84%.
- DFS is progressing with its plan to divest its student loan portfolio, having completed the first of four sale closings. On July 17, DFS announced the sale of its private student loan portfolio to Carlyle Group (CG, Financial) and KKR (KKR, Financial), expecting up to $10.8 billion in proceeds. This divestiture aims to streamline DFS's operations, allowing a sharper focus on its core credit card and personal loan businesses.
DFS's robust performance sets a positive precedent for other credit card companies like American Express (AXP, Financial), Mastercard (MA, Financial), and Visa (V, Financial) as they prepare to release their earnings. AXP is scheduled to report tomorrow morning, followed by Visa on October 29 and Mastercard on October 31.
