Stimulus funds, recovery drove Discover’s 1Q earnings

Changing payment habits and two rounds of stimulus funds helped drive Discover Financial Services’ profitability in the first quarter of 2021

Net income of $1.6 billion for the first quarter was a sharp turnaround from the first quarter of 2020, when the card network reported a net loss of $61 million.

“Our first quarter results were characterized by sustained strong credit performance, robust sales growth, and solid execution on operating and funding costs,” Roger Hochschild, CEO and president of Discover, stated in a Wednesday first-quarter earnings press release.

Payment Services volume was $75.9 billion in the first quarter, up 19% year-over-year. Pulse debit network dollar volume was up 23% over 2020’s first quarter, mostly driven by stimulus funds distributed in January and March of this year, as well as higher spend per transaction as purchase patterns changed related to the pandemic, Discover reported.

“These results highlight that our value proposition continues to resonate with consumers, and underscores the efficiency and capital generation of our digital banking model,” Hochschild said. “As the economy recovers, we believe the actions we took through the pandemic to protect our employees, aid our customers, and invest in our franchise create a compelling position for Discover in 2021 and beyond.”

Total revenue came in at $2.79 billion for the first quarter, slightly below the $2.88 billion Discover reported a year earlier, while the total net charge-off rate on credit loans was 2.48% compared to 3.27% a year earlier, or 79 basis points lower with strong credit performance across the portfolio, the company stated.

Provision for credit losses of $365 million decreased $2.2 billion from the prior year, driven by a reserve release in the quarter and lower net charge-offs.

Total operating expenses were down $71 million year-over-year, or 6%, reflecting lower marketing expense partially offset by higher compensation. Higher average salaries and a higher bonus accrual drove the increase in compensation. Marketing expense decreased along with acquisition expense.

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