Discover Financial Services

This is our first report on Discover Financial Services, a prominent consumer finance company. The company experienced a strong performance in the quarter, characterized by robust revenue growth, ongoing credit normalization, and a slight adjustment to the macroeconomic outlook. Net interest income grew significantly, supported by an expanding net interest margin driven by higher prime rates. Receivables increased, particularly in the card segment, driven by stable sales growth and moderate new account expansion. Sales growth remained positive. Noninterest income increased, primarily due to loan fee income, higher net discount, and interchange revenue. Operating expenses also rose, driven by compensation costs, marketing expenses, and professional fees. Credit performance saw an increase in net charge-offs, consistent with expectations regarding the seasoning of new account vintages and normalization of older vintages. Discover increased its allowance and reserve rate due to the runoff of seasonal transactor balances and a deterioration in expectations for the macroeconomic environment. Additionally, the company introduced Discover Financial Health Improvement Fund to improve the financial well-being of low- and middle-income individuals, communities, and small enterprises. We initiate coverage on the stock of Discover Financial Services with a ‘Hold’ rating.