Discover Financial (DFS) Could Raise Payout Ratio Above 100% - Nomura

Nomura analyst, Bill Carcache, believes this could be the year regulators allow Discover Financial (NYSE: DFS) to raise its payout ratio above 100%. For modeling purposes, the analyst is assuming that DFS's payout ratio in 2016 will remain unchanged at 95%, the analyst sees upside. In prior-year stress tests, DFS is one of only three CCAR banks that the Fed believed would generate enough PPNR to absorb loan losses over a 9-quarter period in a severely adverse scenario. The Fed also viewed DFS as one of only three CCAR banks that could turn a profit in the same scenario.

Even if DFS were to increase its payout ratio to 135%, they estimate that it would still carry ~150bps of excess capital, suggesting that capital return will likely remain a critical component of the DFS story beyond this year. In fact, we show that DFS’s payout ratio would have to exceed 200% for its CET1 ratio to fall to its CET1 target of 11%.

No change to Buy rating or $61 PT.

For an analyst ratings summary and ratings history on Discover Financial click here. For more ratings news on Discover Financial click here.

Shares of Discover Financial closed at $56.58 yesterday.

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