Analyst Note| Michael Miller |
Narrow-moat Discover reported strong second-quarter earnings with reported EPS of $5.55 easily beating the FactSet consensus of $4.11. Net revenue also grew 34% year over year and 28% sequentially. However, results benefited from a $321 million reserve release and $729 million unrealized gain on its investment in Marqeta. Without the one-time gain, revenue would have increased 7%, still a strong result relative to Discover’s peers. The bank’s net charge-off rate has remained low, at 2.45% for the quarter, and a 30+ day delinquency rate of 1.43% suggests that credit costs will likely remain low for Discover for the remainder of 2021. With the allowance for bad loans at 8.01% of total loans there is still room for further reserve releases, though the majority should be behind us and the timing of the remainder is difficult to predict. After incorporating these results, we are increasing our fair value estimate for Discover to $113 from $110 which includes our projection of a corporate tax hike to a statutory rate of 26% in 2022.