Discover Financial Services (DFS) Q2 2024 earnings summary

Executive summary

• Net income for Q2 2024 was $1.5 billion ($6.06 per diluted share), up 70% year-over-year, driven by loan growth, higher net interest margin, and non-interest revenue growth.

• Entered agreement to sell private student loan portfolio for up to $10.8 billion, with Firstmark to service the loans; sale to be completed in tranches by year-end 2024.

• Settled merchant class actions and litigation in Payment Services, resulting in a monetary gain and sufficient remediation reserve.

• Pending merger with Capital One progressing, with integration planning, regulatory milestones, and shareholder votes expected in the fall.

• Credit performance remained in line with expectations, with a release of the private student loan credit reserve.

Financial highlights

• Revenue net of interest expense was $4.54 billion, up 17% year-over-year, driven by higher net interest income and a favorable litigation settlement.

• Net interest income rose to $3.52 billion, up 11% year-over-year; net interest margin reached 11.17%, up 14 bps sequentially.

• Card receivables increased 7% year-over-year to $100.1 billion; personal loans up 13%; student loans down 1%.

• Non-interest income rose 45% year-over-year to $1.01 billion, driven by higher discount/interchange revenue and a favorable legal settlement.

• Total operating expenses increased 23% year-over-year to $1.73 billion, mainly due to regulatory penalty charges, higher professional fees, and employee compensation.

Outlook and guidance

• 2024 loan growth now expected to be down low single digits due to the student loan sale.

• Net interest margin guidance raised to 11.1%-11.4%, reflecting higher card yields and student loan sale.

• Full-year average net charge-off rate expected at 4.9%-5.2%; net charge-off rate expected to rise due to seasoning of recent vintages.

• Operating expense guidance unchanged; base case for net charge-offs at low end of range.

• Share repurchases remain suspended through merger closing; dividend capped at $0.70 per share.