Discover’s Payment Services Drive Network Volumes Up 7 Pct

Discover Financial Services posted third-quarter results that topped expectations on the heels of loan growth and payments volume.

In terms of headline numbers, earnings of $2.36 were better than the Street expectation by nine cents.  Total net revenues were up 6 percent year over year to $2.9 billion.

Total loans at the end of the period were up 6 percent to $92.5 billion. And drilling down into credit quality, the total net charge off rate was up 8 percent year on year to 3.05 percent. Provision for loan losses was up $57 million on the higher charge offs.

The company said in supplemental materials filed alongside its earnings report that payment services drove network volume growth up 7 percent. Proprietary volume was up 6 percent to $38.7 billion.

Drilling down into results, the company said that card loans were up 7 percent to $74 billion, while student loans grew by 4 percent to $9.7 billion and personal loans gained 1 percent to $7.6 billion.

CEO Roger Hochschild said on the conference call with analysts that card receivables were up 7 percent in the quarter, “reflecting a healthy mix of volume from both new and existing customers. Activity skewed more to higher-yielding merchandise balances versus promotional balances. This demonstrates a positive degree of customer engagement while providing a favorable contribution to the overall net interest margin.”

Consumer deposits, he said, are now past the $50 billion mark and are now over half of total funding.

Macro conditions remain favorable, he said.

Chief Financial Officer John Greene said that the 8 percent boost in provision for loan losses was driven by the seasoning of newer loan vintages.

In response to analyst questions about Click to Pay, Hochschild said that “in terms of the announcement on SRC, we are very excited as a member of EMVCo to be part of that. I think it’s really fundamentally going to be great for consumers. It reflects the industry moving forward to significantly enhance the online checkout experience.”

Greene said, too that in terms of the unified pay button that the company is “in the early stages of implementation.  Clearly we try and make sure that our cardholders are using Discover. I think this is where there may be an advantage for us in terms of our integrated network and card issuer model.” He said Discover could integrate such functions “probably more seamlessly than, someone who uses a third-party issuer.”

Separately, and as pertains to B2B-related activity, the CEO said that “I think we tend to think about it in terms of a mix of acquisitions but also partnerships. So we see a lot of B2B volume coming through our partnership with SAP and Ariba.” And though margins are thinner for that part of the business, B2B still remains an area of focus.