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Discover Financial Services’ Direct Banking Segment in 4Q17

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Pre-tax income

The Direct Banking segment of Discover Financial Services (DFS) generated pre-tax income of $870 million in 4Q17 compared to $868 million in 4Q16, which was a marginal rise. Increased operating expenses and a provision for loan losses largely offset the favorable momentum in revenue.

As of December 31, 2017, total loans stood at $84.2 billion, which is a 9% increase on a YoY (year-over-year) basis. Credit card loans as of December 31, 2017, were $67.3 billion, which is an increase of 9% YoY.

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Net interest income

The Direct Banking segment’s net interest income rose $228 million in 4Q17 on a YoY basis, which represents a 12% rise due to positive momentum in net interest margins and loans. In 4Q17, its net interest margin was 10.3%, representing a rise of 21 basis points on a YoY basis.

The Direct Banking segment’s other income rose $22 million in 4Q17 on a YoY basis, representing a rise of 5% due to a rise in discount and interchange revenue. The segment’s expenses rose $149 million in 4Q17 on a YoY basis due to increased marketing and professional fees as well as compensation expenses.

Discover Financial’s market capitalization is $29.2 billion. Its peers (XLF) First Data Corporation (FDC), Ally Financial (ALLY), and Fidelity National Information Services (FIS) have market capitalizations of $16.8 billion, $13.3 billion, and $33.8 billion, respectively.

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