Discover Financial Services (NYSE:DFS.PRB) Q3 2016 Earnings Conference Call Transcript

Oct 25, 2016 • 05:00 pm ET

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Discover Financial Services (NYSE:DFS.PRB) Q3 2016 Earnings Conference Call Transcript

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Presentation
Operator
Operator

Good day, ladies and gentlemen and welcome to the Discover Financial Services Third Quarter 2016 Earnings Conference Call. At this time, all participants are in a listen-only mode. (Operator Instructions) As a reminder, this conference is being recorded.

I would like to introduce your host for today's conference, Bill Franklin, Head of Investor Relations. You may begin your conference.

Executive
Bill Franklin

Thank you, Chantal. Good afternoon, everyone. We appreciate all of you for joining us. Let me begin with slide 2 of our earnings presentation, which is in the Investor Relations section of discover.com.

(Forward-Looking Cautionary Statements)

Our call today will include formal remarks from David Nelms, our Chairman and Chief Executive Officer; and Mark Graf, our Chief Financial Officer. After Mark completes his comments, there will be time for a question-and-answer session. During the Q&A period, it would be very helpful if you limit yourself to one question so we can make sure that everyone is accommodated. So, now it is my pleasure to turn the call over to David.

Executive
David Nelms

Thanks, Bill, and good afternoon everyone. For the third quarter, we reported net income of $639 million and diluted earnings per share of $1.56, including $0.07 of one-time tax benefits. Overall, we delivered another strong quarter, with EPS up 13% year-over-year and a return on equity of 23%. Our Direct Banking business continues to perform well, accelerating the pace of total loan growth to 5% over the prior year. In the card business, we grew receivables by 4%, once again much faster than card sales which grew by 1% over the prior year.

As I mentioned last quarter, we remain more disciplined than certain competitors in rewards spent, and as a result we have sacrificed some transactor sales volume. We are, however, taking some actions on rewards to accelerate card sales. But we are not chasing unprofitable volume. I'd remind you that loan growth, which drives most of our profits, is driven by revolver spend. Our product continues to resonate well with prime revolvers, and that has allowed us to achieve loan growth in our target range.

We are focused on delivering the best products to our customers, and we are continuously innovating, testing, and implementing new features and benefits, ways to serve our customers better or more efficiently, and we offer rewards that provide real value to our card members. Our cards continue to be well regarded in the marketplace as evidenced by MONEY Magazine naming three of our cards, Discover It, Discover It Miles, and Discover it Secured to their annual Best Credit Cards list last month.

I'll now move to our other Direct Banking products, which also delivered strong performance in the quarter. The organic student loan portfolio increased 14%, with strong performance during this year's peak back-to-school period. Personal loans grew 16% over the prior year, driven by product enhancements and opportunistic marketing which took advantage of pullbacks in advertising by some marketplace lenders. Both student and personal loans are on track for record originations again