Financial stock under pressure: Discover Financial Services (NYSE: DFS)

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Discover Financial Services (NYSE: DFS) stock lost over 9.6% on 24th January, 2020 (as of 10:38 am GMT-5; Source: Google finance) after the company posted mixed results for the fourth quarter of FY 19. DFS has reported net income of $708 million for the fourth quarter of 2019, as compared to $687 million for the fourth quarter of 2018. The company’s return on equity for the fourth quarter of 2019 stood at 24%. The company delivered the net interest income of $2.4 billion, which represent an increase of 5% from the prior year. The increase was mainly due to higher loan balances, a higher revolve rate, lower promotional balances and a favorable funding mix as the company continue to grow lower cost, direct to consumer deposits. This was however partially offset by the impact of a lower average prime rate in the fourth quarter; an unfavorable funding rate, reflecting maturities of lower coupon brokered and direct to consumer deposits; and higher interest charge-offs. The company’s net interest margin was at 10.29% for the fourth quarter, which was down 6 basis points year-over-year and 14 basis points sequentially. Compared to the prior year quarter, the decrease in NIM was mainly due to the unfavorable funding rate, the impact of a lower prime rate and higher interest charge-offs.

DFS in the fourth quarter of FY 19 has reported the adjusted earnings per share of $2.25, beating the analysts’ estimates for the adjusted earnings per share of $2.24, according to the analysts polled by FactSet. The company had reported the adjusted revenue growth of 4.9 percent to $2.94 billion in the fourth quarter of FY 19, missing the analysts’ estimates for revenue of $2.95 billion. The revenue growth is due to a 6% increase in average loans. Provisions for loan losses rose 5%, mainly on the back of loan growth and to a lesser extent by ongoing supply driven normalization in the consumer credit industry. Operating expenses had risen by 7% due to higher compensation expense and continued investments to support growth in collections, digital platforms and advanced analytics.

Moreover, the company’s average consumer deposits rose $3 billion in the fourth quarter and now forms 55% of total funding. Consumer deposit rates declined by 13 basis points from the third quarter as the company had actively managed the funding costs lower.

Additionally, during the fourth quarter of 2019, the company had repurchased approximately 4.9 million shares of common stock for $401 million.

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