Morgan Stanley Comments On Discover Financial Services Investor Day

According to Morgan Stanley, Discover Financial Services (NYSE: DFS) reiterated long-term goals during its investor day, including growth targets for its business lines, a normalized 15%+ ROE, and an ~8% TCE/TA ratio.

Morgan Stanley reported that it believes keys for DFS to get to these targets include continued credit recovery, increased profitable account acquisition, and growth in newer loan products (e.g. student loans). “In 2011, we expect earnings growth to be driven by credit improvement, and we forecast card NCOs declining from 5.96% in 1Q11 to 4.95% in 4Q11. Reserve levels expected to also decline from 5.87% of total loans, to 4.88% over the same time period. Higher levels of marketing expenses expected to be a partial offset to the benefit of lower credit costs as DFS builds its customer footprint. Credit improvement should clear the way for further capital management for DFS in 2011 (higher dividends and initiating buybacks). We forecast a dividend hike in 3Q11 to get to a ~20% dividend payout ratio, and share repurchases in 4Q11 (~3% of shares outstanding).”

Discover Financial Services closed yesterday at $23.44.