Discover Financial Services Earnings - Q1 2025 Analysis & Highlights
Discover Financial Services' Q1 2025 earnings call highlighted strong financial performance driven by a healthy net interest margin and good credit performance, along with updates on the pending merger with Capital One, which is expected to close on May 18, 2025. The call also covered stable customer behavior, a decrease in delinquency rates, and strategic monitoring of macroeconomic uncertainty.
Key Financial Results
Earnings per share increased by 31% compared to last year.
Net income was reported at $1.1 billion, up 30% from the prior year.
Net interest margin ended the quarter at 12.18%, up 115 basis points from the prior year and 22 basis points sequentially.
Provision expense declined by $253 million, reflecting a reduction in the credit reserve balance and lower net charge-offs.
Net interest income increased by $71 million from continued net interest margin expansions.
Business Segment Results
Card receivables were relatively stable, down 0.5% year-over-year from modestly lower sales.
Discover card sales were down 2% compared to the prior year due to past credit-tightening actions.
Personal loan balances were flat due to conservative underwriting and increased competition.
Total loans, after adjusting for the student loan sale, increased 1% from last year.
Average consumer deposits were up 6% year-over-year and 1% sequentially.
Direct-to-consumer deposit balances grew by $2 billion in the quarter, while average deposit rates decreased by 22 basis points.
Direct-to-consumer deposits now account for 74% of total funding.
Capital Allocation
A quarterly cash dividend of $0.70 per share of common stock was declared.
However, due to the planned closing of the merger with Capital One on May 18, Discover's common stockholders are not expected to receive any Discover dividend. They will instead receive any dividend declared on shares of Capital One common stock if they are holders of record of Capital One stock as of the applicable record date.
Industry Trends and Dynamics
Increased competition has slowed the pace of new personal loan originations.
Competitive Landscape
The merger with Capital One is expected to increase competition in payment networks.
Macroeconomic Environment
The company is closely monitoring economic developments and consumer health in light of increasing macroeconomic uncertainty.
Growth Opportunities and Strategies
The company believes the combination of Discover and Capital One will offer a wider range of products to customers and increase resources devoted to innovation and security.
Financial Guidance and Outlook
Due to the upcoming merger, the company elected not to provide an update on 2025 trends.
Credit Performance
The card 30-plus day delinquency rate decreased by 18 basis points compared to last quarter.
The card net charge-off rate improved year-over-year.
Total net charge-offs were 4.99%, 7 basis points higher than the prior year and up 35 basis points from the prior quarter.
Excluding the impact of the student loan sale, the net charge-off rate would have been down 24 basis points year-over-year.
In card, net charge-offs increased 44 basis points from the prior quarter, primarily driven by normal seasonal trends.
Personal loan net charge-offs and delinquencies were stable compared to last quarter.
Delinquency formation, vintage performance, and portfolio trends remained positive.
The credit reserve balance decreased $215 million from the prior quarter.
The reserve rate was relatively unchanged at 6.91%, up 4 basis points.
Other Expenses
Total operating expenses were up $19 million or 1% year-over-year.
Compensation costs increased $64 million or 10%, primarily due to higher wages and benefits and proactive employee retention actions.
Information processing increased $17 million or 10% as a result of technology investments related to software and increased systems usage.
Other expenses decreased $59 million from a $45 million reduction in anticipated civil penalties and a $20 million decline in legal fees.
Capital Ratios
The Common Equity Tier 1 ratio for the period was 14.7%, up 60 basis points compared to the prior quarter, driven by core earnings generation, partially offset by the impact of the final CECL phase-in, which reduced capital by approximately 43 basis points.
