Evercore ISI analyst, John Pancari, remains constructive on shares of Discover Financial (NYSE: DFS) due to the higher than average returns, low risk profile and (now) low valuation.

DFS reported 4Q15 EPS of $1.14, which compares to cons of $1.30, the analyst was below consensus at $1.25. Downside was driven by higher LLP (-$0.09), lower fees (-$0.02), and lower than expected NII (-$0.01), partly offset by a lower tax rate (+$0.01).

4Q results were marked by a higher LLP than we expected given seasoning of credit card loan growth at loss rates above the portfolio charge-off rate. This resulted in an LLR build of 9bps LQ to 2.58% despite higher NCOs (up 11% LQ to 2.03% of avg loans). While mgmt noted that the credit environment remains relatively benign, DFS expects the LLP to more closely track loan growth. Additionally, mgmt expects the FY16 NCO ratio to be slightly higher than FY15. We project a LLR ratio of 2.62% by YE16, and FY16 NCOs of 2.22% (vs FY15 of 2.12%)

Loan growth is likely in the mid-single digits with a slight upward bias to the NIM. EOP loans increased 3% LQ, modestly below our up 4% est. Mgmt indicated that lower gas prices continued to impact card loan growth. Going fwd, mgmt expects overall loan growth to total 4-6% in 2016, and expects such trends to continue longer term. They project 5% loan growth in 2016 and 2017. Separately, the GAAP NIM increased 11bps LQ to 8.19%, and the NIM on receivables increased 13bps to 9.75%. Mgmt expects the NIM to be relatively stable in 2016, with a slight upward bias (assumes 1-2 rate hikes in 2016). They project an FY16 GAAP NIM of 8.14% and a NIM on receivables of 9.78% vs FY15 of 8.11% and 9.68%, resp (we assume one 25bps rate hike in 2016).

Fourth quarter non-II decreased 6% LQ (vs our down 3% est), mainly driven by lower net interchange fees (higher rewards costs). Mgmt expects the rewards rate in 2016 to approximate 115bps (above our previous est of 111bps). Also, mgmt expects noninterchange fee income to decrease ~$125M YOY in 2016 mainly due to continued runoff in protection products rev, lower payment services fees, and exit of mtg banking business. We project total non-II to decrease 10% in 2016.

The magnitude of the 4Q reserve build was a surprise but the constructive thesis remains largely intact. Discover's returns remain comfortably above peers with a generally lower risk profile and an attractive 8.7x P/E valuation.

They are lowering 2016 and 2017 EPS ests from $5.73 and $6.20, to $5.60 and $6.03, respectively. This is primarily driven by lower than previously modeled fee income and NII. Earnings growth of 7-8% should be driven by continued moderate loan growth, a relatively stable NIM, solid expense control, and strong capital returns given robust profitability. No change to Buy rating or $57 PT.

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Shares of Discover Financial closed at $48.72 yesterday.