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Understanding Discover Financial Services’ Loan Business

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Oct. 9 2017, Updated 11:36 a.m. ET

Private student loans

Discover Financial Services (DFS) has seen strong growth in loans in 2Q17 compared to 2Q16. For credit card loans, it saw an 8.0% growth in 2Q17 compared to 2Q16. In 2Q17, credit card loans were $61.8 billion compared to $57.2 billion in 2Q16. Credit card loans make up 80.0% of the company’s total loans business. The company has managed to drive growth from other loan products.

Discover has generated a net income margin of 25.0% over the last 12 months. Its peers (XLF) PayPal Holdings (PYPL), American Express (AXP), and Mastercard (MA) have reported net income margins of 12.8%, 13.6%, and 38.3%, respectively, in the same period.

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Personal loans

Discover Financial has seen strong growth of 22.0% in personal loans in 2Q17 compared to 2Q16. In 2Q17, it reported personal loans of $7.0 billion compared to $5.7 billion in 2Q16. This substantial growth was mainly due to digitization and a hassle-free application experience. According to Discover’s top management, in the second half of 2017, the company’s personal loans business is expected to witness subdued growth, mainly due to strict underwriting standards.

Discover Financial has also witnessed a marginal rise of 2.0% in its private student loan business in 2Q17 compared to 2Q16. In 2Q17, the company posted private student loans of $8.9 billion compared to $8.7 billion in 2Q16.

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