Discover Financial Is RBC Capital's Favorite Card Issuer

RBC Capital said Discover Financial Services DFS is well poised for loan portfolio/EPS growth and expects a high-teens/low-20 percent ROE, despite excess capital.

Analyst Jason Arnold noted that Discover continues to be his Top Pick in the card space as a 12-month forward view on card charge-offs remains "all clear" based on 30 day + delinquencies at 1.63 percent.

"It is important to point out that portfolio growth benefits to EPS should be expected to outpace slow/steady increases in charge-offs, outside of a major US macro event driving substantially higher job losses," Arnold wrote in a note.

The analyst expects card loans to grow in the 5 percent range annually near term, with strong performance in other lending as well.

Further, Arnold said 4-6 percent annual expansion appears achievable as growth in all lending categories has been healthy. In addition, expenses are still set to come down following the uptick over the last five quarters on BSA/AML remediation.

Moreover, the analyst pointed out that Discover is earning about 20 percent ROE in spite of holding 30 percent more capital than the company's internal 11 percent target, with a 14.2 percent fully-phased in Common Equity Tier 1 Capital ratio.

"We expect DFS to earn $6.10 p/s in 2017, reflecting our outlook for credit performance to remain favorable and moderate loan growth," Arnold added.

At time of writing, shares of Discover rose 1.32 percent to $58.20. Arnold has a price target of $73.