Discover Financial Services(US:DFS)2023-10-25 16:00Financial Performance - Net income for the quarter was $683 million, or $2.59 per diluted share, down from $1.0 billion, or $3.56 per diluted share, in the prior year[217]. - Digital Banking segment reported pretax income of $803 million for Q3 2023, down from $1.3 billion in Q3 2022, and $3.1 billion for the nine months ended September 30, 2023, compared to $4.4 billion in the same period last year[241]. - Net income for the three months ended September 30, 2023, decreased by $330 million (33%) to $683 million, down from $1,013 million in 2022[256]. - The return on average assets decreased to 1.88% for the nine months ended September 30, 2023, down from 3.00% in 2022[265]. Loan Growth - Total loans increased by $17.8 billion, or 17%, reaching $122.7 billion[217]. - Credit card loans grew by $13.8 billion, or 16%, totaling $97.4 billion[217]. - The company expects continued loan growth driven by moderation in the payment rate and recent account growth[217]. - Total loan receivables increased to $120,380 million with a yield of 14.44% for the three months ended September 30, 2023, compared to $102,035 million and 12.67% in 2022[261]. - Total loan receivables rose to $122.676 billion in September 2023, compared to $112.120 billion in September 2022, marking an increase of 9.4%[271]. Credit Quality - The net charge-off rate for credit card loans rose by 211 basis points to 4.03%, while the delinquency rate over 30 days past due increased by 130 basis points to 3.41%[217]. - Provision for credit losses rose to $1.70 billion in Q3 2023, compared to $773 million in Q3 2022, and $4.11 billion for the nine months, up from $1.48 billion in the same period last year[239]. - The allowance for credit losses was $8.7 billion as of September 30, 2023, reflecting a $601 million increase from June 30, 2023[250]. - Net charge-offs for credit card loans were $2.5 billion for the nine months ended September 30, 2023, with a net charge-off rate of 3.62%, up from 1.93% in the same period of 2022[282]. - Delinquencies for credit card loans increased to $3.3 billion (3.41%) as of September 30, 2023, compared to $2.3 billion (2.53%) at December 31, 2022[284]. Interest Income and Expenses - Total interest income for Digital Banking increased to $4.61 billion in Q3 2023, up 37.3% from $3.36 billion in Q3 2022, and $12.98 billion for the nine months, a 44.1% increase from $9.01 billion in the same period last year[239]. - Interest income for the three months ended September 30, 2023, increased by $1,253 million (37%) to $4,610 million compared to $3,357 million in 2022[256]. - Interest expense for the three months ended September 30, 2023, surged by $774 million (151%) to $1,288 million, compared to $514 million in 2022[256]. - Net interest income for the three months ended September 30, 2023, rose by $479 million (17%) to $3,322 million, up from $2,843 million in 2022[256]. Expenses and Investments - Total expenses are anticipated to rise due to investments in acquisition, compliance, risk management, technology, and analytics[217]. - The company plans to manage expenses while investing in profitable long-term growth[217]. - Total other expense for Digital Banking increased to $1.41 billion in Q3 2023, up from $1.33 billion in Q3 2022, primarily due to higher professional fees and employee compensation[244]. - Employee compensation and benefits increased by 4% to $575 million for the three months ended September 30, 2023, compared to $551 million in the same period of 2022[289]. Liquidity and Capital Management - As of September 30, 2023, the company had $81.2 billion in direct-to-consumer deposits and $22.8 billion in brokered deposits[293]. - The liquidity portfolio and undrawn credit facilities totaled $75.5 billion, an increase of $8.3 billion from December 31, 2022[321]. - The Common Equity Tier 1 (CET1) capital ratio was impacted by the phase-in of the CECL accounting model, decreasing CET1 by $1.1 billion as of January 1, 2023[328]. - At September 30, 2023, total common stockholders' equity was $13.2 billion, with tangible common equity at $12.9 billion after excluding goodwill[334]. Regulatory and Compliance Issues - Moody's changed the outlook on Discover Financial Services' senior unsecured debt from "stable" to "negative" following compliance issues[312]. - The company has paused share repurchases pending an internal review of compliance and risk management[338]. - Regulatory reforms may impact the company's ability to pay dividends and repurchase shares in the future[338]. Market Outlook - The macroeconomic forecast projects an unemployment rate of 3.8% at the end of 2023, peaking at 4.2% in Q4 2024, and a 2.02% growth rate in real GDP for 2023[277]. - As of September 30, 2023, a hypothetical 100 basis point increase in interest rates would result in an estimated increase of $116 million (0.86%) in net interest income[348]. - Conversely, a hypothetical 100 basis point decrease in interest rates would lead to an estimated decrease of $113 million (0.83%) in net interest income[348].