Why Discover Financial Services Stock Soared This Week: Key Drivers and What’s Next

Discover Financial Services’ stock surged this week, climbing nearly 12% between April 20 and April 25, 2025, after the company reported stellar first-quarter earnings and secured final regulatory approval for its merger with Capital One. The rally reflects investor enthusiasm over a combination of strong financial results, strategic clarity, and improving operational metrics.

The Catalyst: A Strong Earnings Report
The surge began on April 23, when Discover reported a 30% year-over-year jump in net income to $1.1 billion, driven by a 31% rise in diluted EPS to $4.25. Total revenue grew 2% to $4.25 billion, fueled by expansion in its net interest margin (NIM) and higher net discount/interchange revenue. The NIM hit 12.18%, up 115 basis points from a year earlier, as lower deposit rates and reduced promotional card balances reduced funding costs. This margin expansion is a critical driver of profitability for financial institutions, and Discover’s success here outpaced expectations.

Credit Stability Amid Rising Rates
While credit metrics showed modest year-over-year increases—such as a 7-basis-point rise in the total net charge-off rate to 4.99%—management emphasized that this was largely seasonal and not indicative of deteriorating credit quality. Delinquency rates improved sequentially, with credit card 30+ day delinquency dropping to 3.66%, down 18 basis points from the prior quarter. The provision for credit losses fell $253 million year-over-year, reflecting lower charge-offs and better-than-expected reserve adjustments. These metrics suggest that Discover’s borrowers remain resilient, even as the Federal Reserve’s rate hikes linger.

Segment Strength and Strategic Shifts
The Digital Banking segment, which includes credit cards and loans, was a standout performer, with pretax income soaring 30% year-over-year to $1.4 billion. This was driven by lower credit provisions and higher net interest income, while Payment Services saw a 11% rise in pretax income to $91 million, fueled by volume growth in its PULSE debit network and Diners Club. The Digital Banking unit’s performance underscores Discover’s success in leveraging its core strengths while diversifying its revenue streams.

The Capital One Merger: Closing in on Clarity
The most significant tailwind for the stock, however, was the final regulatory approval of the merger with Capital One, set to close on May 18. This removes a key overhang for investors, who had worried about potential delays or antitrust challenges. The merger creates a combined entity with over $400 billion in assets, enhancing Discover’s scale and diversifying its product offerings—from credit cards to commercial lending. Management framed the merger as a catalyst for long-term growth, citing synergies in cross-selling, technology, and innovation.

The pending deal also explains why Discover’s interim CEO, James Anderson, emphasized that the company’s capital position remains robust. The Common Equity Tier 1 (CET1) ratio rose to 14.7%, up 60 basis points sequentially, despite the impact of current expected credit loss (CECL) accounting. This strong capital buffer positions the company to navigate potential economic headwinds while benefiting from the merger’s strategic advantages.

Dividend Declaration and Merger Implications
Discover declared a quarterly dividend of $0.70 per share, payable June 5—a 5% increase from the previous quarter. However, shareholders who hold through the merger’s closing will instead receive Capital One’s dividends post-transaction. While this dividend boost signals confidence in Discover’s current financial health, the merger’s timing ensures investors focus on the long-term upside of the combined entity rather than near-term payouts.

Looking Ahead: Risks and Rewards
The stock’s surge reflects optimism about the merger’s benefits, but risks remain. The Federal Reserve’s interest rate path, which directly impacts NIM, and macroeconomic conditions could test credit quality. Yet Discover’s first-quarter results—especially its deposit growth (up 6% year-over-year to $220 billion at lower rates)—suggest it is well-positioned to capitalize on a stable consumer environment.

Conclusion: A Clear Path Forward
Discover’s stock surge this week was no accident. The combination of robust earnings, a strengthened balance sheet, and the removal of merger-related uncertainty has positioned the company for sustained growth. With a 30% year-over-year net income increase, a 12.18% NIM, and a CET1 ratio at 14.7%, Discover has demonstrated resilience in a challenging rate environment. The Capital One merger, now just two weeks away, promises to amplify these strengths, creating a more diversified and competitive financial powerhouse.

Investors should note that while Discover’s first-quarter results are impressive, the true test will come in the quarters ahead as the merger integrates and macroeconomic pressures evolve. For now, though, the stock’s trajectory reflects a market that is betting on Discover’s ability to execute—a bet that appears increasingly well-founded.