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Discover’s Direct Banking Segment: More Credit Card Loans?

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Discover’s Direct Banking segment

Discover Financial Services’ (DFS) Direct Banking segment generates most of its interest income from credit card loans. The division’s credit card loan growth mainly depends on global measures like employment levels and inflation. An increase in the employment levels would improve the purchasing power and the economy’s overall health, which would boost Discover Financial and Capital One Financial’s (COF) credit card loans.

In the second quarter, the Direct Banking segment might see a boost in its credit card loans due to the improving US economy, lower unemployment, and increased oil prices. Retail loans are also the primary driver of the segment’s interest income.

Segment’s performance in the first quarter

The Direct Banking segment generated total interest income of $2.56 billion in the first quarter. The interest income from credit card loans was $2.09 billion. The segment witnessed a boost in the net interest margin in the first quarter on a YoY (year-over-year) basis mainly due to credit card loans’ yields. However, a rise in the funding costs partially offsets the rise in the net interest margin.

The Direct Banking segment’s interest income rose in the first quarter on a YoY basis mainly due to yield expansion and a boost in loans. The segment’s provision for loan losses rose from $594 million in the first quarter of 2017 to $751 million in the first quarter.

Discover Financial, Capital One Financial, American Express (AXP), and Mastercard (MA) form 1.4% of the SPDR S&P 500 ETF (SPY).

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