Discover Posts a Strong Quarter As Executives Stay Mostly Mum About Performance

For the second consecutive quarterly earnings call, executives at Discover Financial Services had little to say about the company’s financial performance, plans going forward, or anything else. With a proposed $35.3-billion merger with Capital One Financial Corp. hanging over them, Discover executives again took no questions, and equity analysts were told to direct queries to Discover’s investor-relations team. 

For the quarter, Discover posted net income of $1.53 billion, up 70% from $901 million in the same period a year ago.

Payment Services volume for the quarter totaled $99.3 billion, up 11%, while Discover Network volume was down 3%, reflecting a slowdown in Discover card sales volume.

Dollar volume for Discover’s Pulse debit network for the quarter increased 18% from a year ago, while Diners Club volume decreased 5% year-over-year due to lower volumes in India. Network Partners volume for the quarter decreased 22% from a year ago owing to lower AribaPay volume. Net interchange revenue totaled $437 million for the quarter, up 18% from a year ago, largely due to lower rewards costs.

During his brief remarks about the company’s financial performance, Discover’s interim chief executive and president Michael Shepherd said the company’s operating performance remains “very good” and that Discover “advanced several key priorities” during the quarter, including entering into an agreement to sell its student-loan portfolio and reaching a settlement in its card-misclassification lawsuit.

The decision to sell the student-loan portfolio to one or more strategic partnerships comprised of investment vehicles and accounts managed by The Carlyle Group Inc. and KKR & Co. Inc. was driven by the goal of “simplifying operations,” in which the pending merger with Capital One played a part. Capital One entered into an agreement in February to acquire Discover in an all-stock deal.

Shepherd noted the merger with Capital One is well under way and regulatory approval is proceeding. A shareholder vote on the merger is expected to take place this fall, he added.

Shepherd expects the sale of Discover’s student-loan portfolio, which the company announced July 17, to be completed by year’s end. Upon completion of the sale, Firstmark Services, a division of Nelnet Inc., will assume responsibility for servicing the portfolio.

In regard to the settlement of the class-action lawsuit over Discover’s misclassification of merchants, Shepherd says the money set aside to settle the matter is adequate to cover the terms of the settlement. During its second-quarter earnings call a year ago, Discover said it had set aside $365 million to compensate merchants and acquirers in its network that had been overcharged for transactions due to the misclassification issue.