Discover Financial Services Management Discusses Q3 2012 Results - Earnings Call Transcript
September 27, 2012 1:50 PM ET
Discover Financial Services (DFS)
Q3 2012 Earnings Call
September 27, 2012 10:00 am ET
David W. Nelms - Chairman and Chief Executive Officer
R. Mark Graf - Chief Financial Officer, Chief Accounting Officer and Executive Vice President
Ryan M. Nash - Goldman Sachs Group Inc., Research Division
Sanjay Sakhrani - Keefe, Bruyette, & Woods, Inc., Research Division
Eric Beardsley - Barclays Capital, Research Division
Donald Fandetti - Citigroup Inc, Research Division
Bradley G. Ball - Evercore Partners Inc., Research Division
Andrew McNellis - Evercore Partners Inc., Research Division
Kenneth Bruce - BofA Merrill Lynch, Research Division
David S. Hochstim - The Buckingham Research Group Incorporated
Scott Valentin - FBR Capital Markets & Co., Research Division
Richard B. Shane - JP Morgan Chase & Co, Research Division
Christopher Brendler - Stifel, Nicolaus & Co., Inc., Research Division
Matthew O'Neill - Credit Agricole Securities (USA) Inc., Research Division
Daniel Furtado - Jefferies & Company, Inc., Research Division
Michael P. Taiano - Telsey Advisory Group LLC
Henry J. Coffey - Sterne Agee & Leach Inc., Research Division
Welcome to the third quarter 2012 Discover Financial Services earnings conference call. My name is Sandra, and I will be your operator for today's call. [Operator Instructions] Please note that this conference is being recorded.
I will now turn the call over to Mr. Bill Franklin, Vice President, Investor Relations. Mr. Franklin, you may begin.
Thank you, Sandra. Good morning, everyone. We appreciate all of you for joining us on this morning's call. The discussion today contains certain forward-looking statements about the company's future financial performance and business prospects, which are subject to risks and uncertainties and speak only as of today. Factors that could cause actual results to differ materially from these forward-looking statements are set forth within today's earnings press release, which was furnished to the SEC in an 8-K report, in our Form 10-K for the year ended November 30, 2011, and in our Form 10-Q for the quarter ended May 31, 2012, which are on our website and on file with the SEC.
In the third quarter 2012 earnings release and supplement, which are now posted on our website at discoverfinancial.com and have been furnished to the SEC, we have provided information that compares and reconciles the company's non-GAAP financial measures with the GAAP financial information, and we explained why these presentations are useful to management and investors. We urge you to review that information in conjunction with today's discussion.
Our call this morning will include formal remarks from David Nelms, our Chairman and Chief Executive Officer; and Mark Graf, our Chief Financial Officer. After Mark completes his comments, there will time for a question-and-answer session. [Operator Instructions]
Now it's my pleasure to turn the call over to David.
David W. Nelms
Thanks, Bill. Good morning, everyone, and thank you for joining us. Before the market opened, we reported quarterly earnings of $627 million or $1.21 per share, driven by continued improvements in credit, robust loan growth and share repurchases. During the quarter, we generated a return on equity of 28% and returned approximately $400 million of capital to shareholders through share repurchases and dividends.
Before I further discuss our third quarter, let me first acknowledge that during the past week, we entered into a consent order with the FDIC and CFPB regarding the previously disclosed matters related to the telephone marketing practices of certain credit protection products. We agreed to provide refunds of approximately $200 million to cardholders who bought the products from December 2007 to August 2011 and to enhance our marketing practices. We will also pay an additional $14 million in civil monetary penalties. I am pleased that this settlement has been concluded. All of us at Discover are committed to doing the right thing for our customers.
Now let's talk about our third quarter performance. We achieved strong growth over the prior year as revenues were up 10% and total receivables grew 9%. Credit quality continued to improve for our card business, which, once again, realized historic lows for the over 30-day delinquency and principal charge-off rates. Another achievement during the quarter was an all-time high level of active merchants generating Discover card sales, a direct consequence of our acceptance and awareness initiatives.
Discover year-over-year sales growth moderated somewhat over the prior quarter, in line with the movements in lower consumer confidence. August, however, was the strongest month in the quarter, and one thing I am particularly pleased with is that at a time when revolving debt for the industry is roughly flat over last year, we grew our card receivables by 4%. We also continued to grow private student and personal loans, which we expect will offer similar normalized returns to card.
In addition to growing our loan portfolio, we are executing on our strategy to be the leading direct banking and payments company with the launch of Discover Home Loans in June. Acquiring the assets of Home Loan Center from Tree.com allowed us to enter the mortgage business with a low-cost acquisition and an originate and sell model. During the first 100 days after launch, we originated approximately $1 billion in mortgages through this platform.
Our payments business continues to leverage existing assets in unique ways and build upon acceptance achievements. We have created momentum and established ourselves as a flexible partner in the evolving payments landscape. For instance, in the U.S., we will bring PayPal to the physical point-of-sale at millions of merchant locations currently accepting Discover. Over the next few quarters, we will be working hard to accommodate PayPal's launch.
On the international front, Diners Club added Industrial and Commercial Bank of China, which is the largest Chinese credit card issuer, as a franchisee. Also, we've recently extended our existing relationship with Russian Standard Bank, the largest Russian credit card issuer, which will now issue and promote Discover-branded cards in Russia. This is the second Discover card agreement outside of the U.S.
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