Discover Financial Services DFS reported first-quarter 2025 adjusted earnings per share of $4.25, which surpassed the Zacks Consensus Estimate by 28.8%. Also, the bottom line climbed 31% year over year. (See the Zacks Earnings Calendar to stay ahead of market-making news.)
DFS’ revenues, net of interest expenses, were $4.3 billion. The metric inched up 2% year over year and beat the consensus mark by 0.7%.
The quarterly results were aided by reduced provisions for credit losses, improved net interest margin and strong pretax income growth in both the Digital Banking and Payment Services segments. However, the upside was partly offset by higher operating costs, a decline in total loans and lower Payment Services volume due to a 73% plunge in Network Partners’ volume following a partner exit.
Discover Financial Services Price, Consensus and EPS Surprise
Discover Financial Services Price, Consensus and EPS Surprise
Interest income slipped 3% year over year to $4.8 billion and missed our estimate of $5 billion. Interest expense of $1.2 billion fell 15% year over year, lower than our estimate of $1.4 billion. Non-interest income grew 3% year over year to $693 million, which beat the Zacks Consensus Estimate of $691.2 million but lagged our estimate of $708.1 million.
Total operating expenses were $1.6 billion, up 1% year over year due to increased employee compensation and benefits expenses as well as higher information processing & communications costs. However, the figure came lower than our estimate of $1.8 billion.
Operating efficiency (total operating expenses divided by revenues, net of interest expenses) of 36.8% deteriorated 30 basis points (bps) year over year in the first quarter.
Discover Financial’s net income climbed 30% year over year to $1.1 billion.
Q1 Segmental Performance
Digital Banking
The segment’s pretax income advanced 30% year over year to $1.4 billion in the first quarter, which outpaced the Zacks Consensus Estimate of $1.06 billion and our estimate of $1.04 billion. The year-over-year increase came on the back of reduced provisions for credit losses and improved revenues, net of interest expenses. Provision for credit losses of $1.2 billion tumbled 17% year over year.
Total loans decreased 7% year over year to $117.4 billion. Personal loans and credit card loans remained relatively flat year over year.
Net interest income increased 2% year over year to $3.56 billion, attributable to improved net interest margin. The metric beat the consensus estimate of $3.52 billion but fell short of our estimate of $3.6 billion. Net interest margin was 12.18%, which improved 115 bps year over year on the back of the divestiture of the student loan portfolio.
Payment Services
The segment reported a pretax income of $91 million in the quarter under review, which rose 11% year over year on the back of higher volumes across PULSE and Diners Club, coupled with reduced expenses. The metric outpaced the Zacks Consensus Estimate of $83.5 million but missed our estimate of $99 million.
The Payment Services volume slipped 4% year over year to $96 billion. The PULSE dollar volume grew 3% year over year, thanks to improved debit transaction volume. Meanwhile, the Diners Club volume advanced 18% year over year on the back of strong operations in India and Israel. However, the Network Partners’ volume plunged 73% year over year due to the expected exit of a partner.
Financial Position (as of March 31, 2025)
Discover Financial exited the first quarter with total assets of $147.9 billion, which inched up 0.2% from the 2024-end level.
The liquidity portfolio (comprising cash and cash equivalents and other investments, excluding cash-in-process) amounted to $30.2 billion, which improved 10.7% from the figure as of Dec. 31, 2024.
Borrowings tumbled 10.6% from the 2024-end level to $14.5 billion.
Total liabilities of $129 billion dipped 0.6% from the figure at 2024-end. Total equity improved 5.8% from the 2024-end level to $19 billion.
Merger Update
On April 18, 2025, Capital One Financial Corporation COF secured the regulatory approvals required to finalize its merger with DFS. On the fulfillment of standard closing conditions, the transaction is anticipated to close on or around May 18, 2025.’
Dividend Update
Management sanctioned a quarterly cash dividend of 70 cents per share of common stock, which will be paid out on June 5, 2025, to shareholders of record as of the close of business on May 23, 2025. However, since the merger with Capital One is expected to be completed by May 18, 2025, Discover Financial shareholders are unlikely to receive this dividend. Instead, eligible shareholders who hold Capital One common stock as of the relevant record date may receive any dividend declared by it.
2025 Guidance
Earlier, management anticipated loan growth to follow the pre-pandemic trend. The net interest margin was forecasted to be relatively consistent with the fourth-quarter 2024 level of 11.96%.
DFS’ expense base was not expected to change significantly before merger approval.
Net charge-off was forecasted to start seeing a downward trend in 2025.
DFS’ Zacks Rank
Discover Financial currently carries a Zacks Rank #3 (Hold). You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.
Other Finance Sector Releases
Of the other Finance sector players that have reported first-quarter results so far, the bottom-line results of American Express Company AXP and Synchrony Financial SYF beat the respective Zacks Consensus Estimate.
American Express reported first-quarter 2025 EPS of $3.64, which beat the Zacks Consensus Estimate by 5.5%. The bottom line climbed 9% year over year. Total revenues, net of interest expense, amounted to $16.97 billion, which missed the consensus estimate by 0.2%. The top line improved 7% year over year. Network volumes of $439.6 billion rose 5% year over year in the first quarter. Total interest income of $6.1 billion increased 6% year over year and beat the consensus mark by 1%.
The U.S. Consumer Services segment’s pre-tax income of $1.7 billion improved 7% year over year in the first quarter. Total revenues, net of interest expenses, climbed 10% year over year to $8.2 billion. The Commercial Services segment recorded a pre-tax income of $836 million, which fell 5% year over year. The International Card Services segment reported a pre-tax income of $381 million, which jumped 51% year over year. Total revenues, net of interest expense, improved 8% year over year to $2.9 billion.
Synchrony Financial’s first-quarter 2025 adjusted EPS of $1.89 outpaced the Zacks Consensus Estimate by 16%. However, the bottom line declined 39.8% year over year. Net interest income was $4.5 billion, which inched up 1.3% year over year. However, it missed the consensus mark by 1.8%. Retailer share arrangements of Synchrony advanced 17% year over year to $895 million in the first quarter. Total loan receivables of $99.6 billion slipped 2% year over year. Total deposits dipped 0.1% year over year to $83.4 billion.
Provision for credit losses was $1.5 billion, which tumbled 20.9% year over year. Synchrony’s purchase volume fell 4% year over year to $40.7 billion. Interest and fees on loans totaled $5.3 billion, which remained relatively flat year over year. Net interest margin improved 19 bps year over year to 14.74% in the first quarter. Average active accounts of 69.3 million slipped 3% year over year. Home & Auto period-end loan receivables decreased 6.6% year over year in the first quarter, while Digital period-end loan receivables inched up 0.1% year over year.
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