Discover Financial Services Reports Operating Results (10-K)
Discover Financial Services has a market cap of $19.76 billion; its shares were traded at around $39.14 with a P/E ratio of 9 and P/S ratio of 2.8. The dividend yield of Discover Financial Services stocks is 1.1%. Discover Financial Services had an annual average earning growth of 17.2% over the past 5 years.
Highlight of Business Operations:While certain economic conditions in the United States have shown signs of improvement, economic growth has been slow and uneven as consumers continue to be affected by high unemployment rates and depressed housing values. In addition, concerns and events such as economic uncertainty surrounding financial regulatory reform and its effect on the revenues of financial services companies and the economic and financial crises in Europe, may continue to impact economic recovery and the financial services industry. A prolonged period of slow economic growth or a significant deterioration in economic conditions would likely affect the ability and willingness of customers to pay amounts owed to us. A customer's ability to repay us also can be negatively impacted by increases in their payment obligations to other lenders under mortgage, credit card and other consumer loans. We believe that we are experiencing generally historical lows in our delinquency and charge-off rates and that they are likely to increase at some point. In addition, if economic conditions worsen, these rates may increase more than expected. The over 30 days delinquent rate was 1.75% at November 30, 2012, down from 2.29% at November 30, 2011 and 3.87% at November 30, 2010. The full-year net charge-off rate was 2.29% for 2012, down from 3.97% for 2011 and 7.53% for 2010. Growth in our loan portfolio led us to increase our allowance for loan losses in the fourth quarter of 2012. We expect further increases in our allowance for loan losses in 2013, which will negatively impact our net income compared to 2011 and 2012, when reserve releases significantly contributed to our net income.
Our business is always influenced by economic conditions. Poor economic conditions not only affect the ability and willingness of customers to pay amounts owed to us, increasing delinquencies, charge-offs and allowance for loan losses as described above, but can also reduce the usage of our cards and the average purchase amount of transactions on our cards, which reduces our interest income and transaction fees. We rely heavily on interest income from our credit card business to generate earnings. Our net interest income from credit card loans was $5.8 billion for the 2012 fiscal year, which was 75% of revenues (defined as net interest income plus other income), compared to $5.7 billion for the 2011 fiscal year, which was 80% of revenues. In the event of another market downturn, we may have to consider expense-reduction initiatives in order to offset our inability to generate increased interest and fee income due to existing legal and regulatory limitations on increasing interest and fees.
The ultimate impact of these laws and regulations will depend upon the actions of our competitors and the behavior of other marketplace participants. Following the implementation of the Federal Reserve regulations related to debit routing and fees in October 2011 and April 2012, large competing networks began to implement new merchant and acquirer pricing and transaction routing strategies, which we currently expect to result in fewer debit transactions being routed to PULSE and a decline in the rate of PULSE transaction volume growth. We are closely monitoring the implementation of these strategies in order to assess their impact on our business and on competition in the marketplace. The U.S. Department of Justice is examining some of these competitor pricing strategies. In addition, the Reform Act's network participation requirements impact PULSE's ability to enter into exclusivity arrangements, which affect PULSE's current business practices and may materially adversely affect its network transaction volume and revenue. Our transaction processing revenue was $218 million, $180 million and $150 million for the years ended November 30, 2012, 2011 and 2010, respectively. While we are still assessing all of our options for responding to these developments, we currently expect that they will adversely impact PULSE's ability to compete for issuer participation and merchant and acquirer routing, resulting in fewer debit transactions being routed to PULSE and a decline in the rate of PULSE transaction volume growth.
We continue to expand our marketing of our personal and private student loan products. Also, we significantly increased the size of our student loan portfolio through two acquisitions in the 2011 fiscal year. Our personal and private student loan portfolios grew to $3.3 billion and $7.7 billion, respectively, at November 30, 2012, compared to $2.6 billion and $7.3 billion, respectively, at November 30, 2011, and $1.9 billion and $1.0 billion, respectively, at November 30, 2010. We have less experience in these areas as compared to our traditional credit card lending business, and there can be no assurance that we will be able to grow these products in accordance with our strategies, manage our credit risk or generate sufficient revenue to cover our expenses in these markets. Our failure to manage our credit risks may materially adversely affect our profitability and our ability to grow these products, limiting our ability to further diversify our business.
We obtain deposits from consumers either directly or through affinity relationships and through third-party securities brokerage firms that offer our deposits to their customers. We had $27.9 billion in deposits acquired directly or through affinity relationships and $14.1 billion in deposits originated through securities brokerage firms as of November 30, 2012, compared to $26.2 billion and $13.3 billion, respectively, as of November 30, 2011. Competition from other financial services firms that use deposit funding and the rates we offer on our deposit products may affect deposit renewal rates, costs or availability. Changes we make to the rates offered on our deposit products may affect our profitability (through funding costs) and our liquidity (through volumes raised). In addition, our ability to maintain existing or obtain additional deposits may be impacted by factors beyond our control, including perceptions about our financial strength or online banking generally, which could reduce the number of consumers choosing to make deposits with us, third parties continuing or entering into affinity relationships with us, or third-party securities brokerage firms offering our deposit products.
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