Discover Financial Services

Discover boasted 2022 was one of their best years ever, with billions shoveled back to their investors 

Discover’s CEO boasted 2022 was the “second strongest year for earnings in our company’s history.” “Roger Hochschild, CEO: I’m very pleased to say that 2022 was the second strongest year for earnings in our company’s history. We reported [a] net income of $1 billion or $3.77 per share for the fourth quarter and $4.4 billion or $15.50 per share for the full year. This was accomplished against a fluid and unusual macroeconomic and monetary policy backdrop, and I want to thank the entire Discover team for their solid execution. This performance gives us significant momentum going into 2023 and beyond.” (Discover Financial Services Q4 2022 Earnings Call, 1/19/2023)

Discover crowed about the “highly capital generative nature of our business model,” noting they repurchased $2.4 billion in stock in 2022 and increased their dividend by over 20%. “Roger Hochschild, CEO: We’re also prudently investing for growth, including an acquisition and brand marketing, the continuing build-out of our data and analytic capabilities, and increasing field personnel for both servicing and collections, all while achieving a 39% efficiency ratio. The combination of revenue expansion and disciplined cost management contributed to our 31% return on equity this past year and underscores the highly capital-generative nature of our business model. Over the course of 2022, we repurchased $2.4 billion in common stock and increased our dividend by over 20%, and we expect to sustain attractive levels of capital return to our shareholders into the future.” (Discover Financial Services Q4 2022 Earnings Call, 1/19/2023)

Discover spent over $600 million on stock buybacks in the 4th quarter alone. “John Greene, CFO: Looking at Slide 10. Our common equity Tier 1 for the period was 13.3%. Our longer-term target remains at 10.5%. We expect to make progress against this target over the next four to six quarters. Yesterday, we announced a quarterly common dividend of $0.60 per share. And in the fourth quarter of 2022, we repurchased $602 million of common stock.” (Discover Financial Services Q4 2022 Earnings Call, 1/19/2023)

Discover told analysts it expected to spend $2.2 billion on stock buybacks in just the first half of 2023.“John Greene, CFO: Lastly, we have $2.8 billion of remaining capacity under the $4.2 billion share repurchase program that expires in June of this year. We expect to repurchase around $2.2 billion of shares in the first half of 2023. We’ll provide an update on future share repurchase authorizations after we complete our stress testing process and review recommendations with our Board.” (Discover Financial Services Q4 2022 Earnings Call, 1/19/2023)

Discover appeared to repeatedly credit the Fed’s actions for growth in their net interest margin and income

Discovers CFO credited “the higher prime rate” for their increased net interest margin. “John Greene, CFO: Let’s review the details starting on Slide 5. Net interest income was up $584 million year-over-year or 24%. Our net interest margin expanded, benefiting from the higher prime rate partially offset by higher funding costs and increased promotional balances. NIM ended the quarter at 11.27%, up 46 basis points from the prior year and 22 basis points sequentially.” (Discover Financial Services Q4 2022 Earnings Call, 1/19/2023)

Discover’s CFO repeated their net interest margin “continues to benefit from prime rate increases.” “John Greene, CFO: In summary, receivable growth continued to benefit from new account acquisition, payment rate moderation, and positive sales. NIM continues to benefit from prime rate increases with funding costs consistent with expectations, and credit is performing in line with our approach through-the-cycle underwriting process and conservative credit management. Our perspective for 2023 reflect[s] our focus on advancing our strategic priorities generating high returns and capital while remaining disciplined in our credit and expense management.” (Discover Financial Services Q4 2022 Earnings Call, 1/19/2023)

Discover’s CFO specifically called out the Fed rate hikes as a driver for growth in Net Interest Margin, along with a higher yield in loans thanks to the “increase in rate environment.” “John Greene, CFO: Yes. Yes. So I’m going to run through the primary drivers. So first would be the Fed rate changes in the second half of ’22 as well as what we’ve anticipated, either two or three increases in 2023. The second impact is the yield on our investments, which is improving with the increase in the rate environment. And then, the third piece has been some pricing actions we took in the consumer banking products. So, think about the non-card products. So offsetting that would be kind of the cost of funding. So DTC and external funding costs have increased. And then we’re also anticipating an impact from [the] credit, all of which the net of those gives us a high level of confidence that certainly, we’re going to see peak NIM in the first quarter and then stepping down from there through 2023.” (Discover Financial Services Q4 2022 Earnings Call, 1/19/2023)

Discover’s earnings presentation noted total loan yield increased “primary due to higher prime rate.” Total loan yield was up 86bps QOQ primarily due to higher prime rate” (Discover Financial Services 2022 & Q4 2022 Financial Results Presentation, 1/18/2023)

Discover’s earnings presentation noted net interest margin increased “primarily due to higher market rates.” “Net interest margin was 11.27%, up 46 bps primarily driven by higher market rates, partially offset by higher funding costs” (Discover Financial Services 2022 & Q4 2022 Financial Results Presentation, 1/18/2023)

Discover’s earning presentation credited higher late fees for increased loan fee income.“Loan fee income increased primarily reflecting higher late fees” (Discover Financial Services 2022 & Q4 2022 Financial Results Presentation, 1/18/2023)

Discover also appeared to benefit from increased interchange fees

Discover told analysts their non-interest income increased 47% thanks in part to higher interchange revenue. “John Greene, CFO: Looking at other revenue on Slide 6. Non-interest income increased $212 million or 47%. This was partially due to a $138 million loss on our equity investments in the prior year quarter, compared to a $6 million loss this quarter. Adjusting for these, our non-interest income was up 14%. This increase was primarily driven by two items. First, loan fee income was up $51 million or 39%, driven by volume. And second, we had higher net discount and interchange revenue, which was up $23 million or 7%, reflecting strong sales and a favorable sales mix, partially offset by higher rewards costs.” (Discover Financial Services Q4 2022 Earnings Call, 1/19/2023)

Discover’s earning presentation said higher sales volume had increased interchange revenue. “Net discount and interchange revenue was driven by higher sales volume partially offset by increased rewards costs” (Discover Financial Services 2022 & Q4 2022 Financial Results Presentation, 1/18/2023)