Discover’s (DFS) financial performance will face downward pressure from a number of factors including increased competition, normalizing credit performance and heightened legal and compliance expenses this year. However, operating performance for DFS’ credit card Asset-Backed Securities (ABS) is likely to remain strong in 2015, despite a decline in net income last year.
Fitch Ratings says while net income declined to $2.3 billion in 2014, down 6% from the prior year period, the results were impacted by a number of non-recurring items in fourth-quarter 2014 (4Q’14) including a $178 million one-time charge related to the elimination of the credit card rewards forfeiture reserve, a $27 million goodwill impairment related to Discover Home Loans, and a $21 million fair value adjustment related to moving Diners Club Italy to held-for-sale.
The $27 million goodwill impairment charge related to its Discover Home Loans business was primarily driven by the company’s lack of progress in replacing lost mortgage refinance loan volume with new purchase volume.
Discover continues to evaluate its home loans strategy and the future of this business remains uncertain. Excluding these items, Fitch estimates that full-year 2014 net income was flat year-over-year at $2.4 billion despite a 33% year-over-year increase in provision expense.
Fitch expects Discover’s revenue margin to decline modestly in 2015 driven by some modest net interest margin compression due in part to normalizing credit performance and run-off of higher-priced loans. Additionally, operating performance will face downward pressure from lower fee-based product revenue, in particular protection products revenue, and higher rewards expenses.
Credit performance is expected to remain strong in 2015 although charge-offs and delinquencies will likely start to normalize. Fitch expects provision expenses to increase further in 2015 driven primarily by portfolio seasoning and growth, as well as some modest deterioration in credit metrics. Credit card net charge-offs increased 6 basis points (bps) to 2.27% in 2014 and remained well below other top credit card issuers and the industry average.
Reserve coverage for credit card loans remained strong at 2.63% of loans and 152% of loans 30+ past due at Dec. 31, 2014.
Discover is well positioned for a potential increase in interest rates. At Dec. 31, 2014, assuming an immediate 100bps increase in interest rates, DFS estimates that net interest income over the following 12-month period would increase by approximately $167 million, or 2%.
For data, background and forecasts on Discover: Search CardWeb.com’s CardFlash® Library of more than 58,000 archived articles; Access CardWeb.com’s CardData® for current and historical Performance, Portfolios, Profiles, etc. Visit RAM Research® (ramresearch.com) for quarterly and annual forecasts covering more than 150 metrics. [complimentary or deeply discounted access to CardWeb.com subscribers].
Additional database resources include CardWeb.com’s CardExecs® – comings & goings of payments movers & shakers; CardWeb.com’s CardWatch® – ears & eyes on marketing globally (57K items); and CardWeb.com’s CardPixes® – form & function of card design (7K items).