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On Tuesday, Truist Securities began coverage on Discover Financial (NYSE:DFS) shares with a Buy rating and a price target of $233. The firm's analyst pointed out Discover's potential for robust return on tangible common equity (ROTCE) and tangible book value (TBV) growth, even as an independent entity. This optimism is based on several factors, including the resolution of past issues and the near completion of a student loan sale.
Discover Financial, a company with a market capitalization of $44 billion and assets worth $152 billion, operates in the credit card, payment network, and online banking sectors. The majority of its portfolio is in credit cards, complemented by student loans and personal installment loans, which make up around 15% of its business.
The company recently made headlines for selling off the majority of its underperforming student loan portfolio to investment firms Carlyle and KKR. Additionally, Discover has settled a class-action lawsuit for $1.2 billion stemming from a card misclassification issue disclosed last year, which also necessitated the restatement of some historical financial statements.
These developments are seen as tying up loose ends ahead of a potential deal approval, which has been a subject of speculation following the post-election period.
Truist Securities highlights Discover's strengths, noting its large pent-up capital optionality, reserve release, leading improvements in delinquencies, and deposit pricing power. All these factors contribute to the firm's confidence that Discover can return to its historical ROTCE levels of over 20%.
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