(Reuters) - Several brokerages raised their price targets on Discover Financial Services (DFS.N) after the credit card issuer's second-quarter results showed improved credit quality and higher loan growth.
On Tuesday, Discover reported a second-quarter profit in line with analysts' estimates and said net interest margin rose 16 basis points to 9.31 percent.
The delinquency rate for credit card loans over 30 days past due improved 31 basis points from the prior quarter to reach 1.91 percent.
Total loans at Discover were up 9 percent from the year-ago quarter. Discover also added $90 million to its legal reserves in the quarter, leading to an 18 percent increase in expenses.
In January, the company said it had been notified by U.S. regulators over its marketing practices for fee-based protection products.
JPMorgan, which raised its price target on Discover stock to $38 from $36.50, said its projection was based on the company's attractive return-on-equity profile and resilient asset growth.
Discover shares, which have risen nearly 37 percent this year, rose 2.3 percent on Tuesday to close at $33.57 on the New York Stock Exchange.
"While the legal provision could cause some to be concerned, we believe DFS remains a compelling story due to its attractive valuation relative to banking peers and our belief that multiple expansion is due," Keefe, Bruyette & Woods (KBW) analysts said in a note to clients.
KBW raised its price target on the stock to $40 from $38.
Citigroup, which hiked its price target to $37 from $35, said that the highlight of the quarter was a higher-than-expected net interest margin, which the management expected to maintain for the rest of the year.
"With a sizeable share buyback, excess capital and relatively stable credit metrics, we are hard pressed to see material downside for DFS even if the broader markets pull back," Citi Investment Research & Analysis said.
Jefferies analysts said that the legal reserve addition associated with the CFPB investigation was "the only mark on an otherwise impressive quarter." The brokerage raised its price target on Discover to $40 from $37.
Evercore, which hiked its price target on Discover to $33 from $30, said the company's results were a reflection of its solid net interest income.
All the brokerages maintained their ratings on the stock.
(Reporting by Sharanya Hrishikesh in Bangalore; Editing by Sreejiraj Eluvangal)