Discover Earnings: Strong Loan Growth Drives Higher Revenue, but Credit Costs Are Rising

Narrow-moat-rated Discover Financial reported solid earnings as strong loan growth and rising interest rates drove net interest income higher, offset by higher credit costs. Net revenue increased 29% from last year to $3.75 billion. However, earnings per share fell 15% from last year to $3.58, which translates to a return on equity of 27%. The decline in earnings was due to a higher provisioning expense, which increased to $1.1 billion from $154 million last year. As we incorporate these results, we are maintaining our $146 per share fair value estimate for Discover and see the shares as undervalued.