Discover Financial (NYSE:DFS) Remains Attractive to Barclays (NYSE:BCS)

Saying investors need to focus on earnings power using normalized provisions, rather than adjust earnings for the "reserve release," which results in core earnings far below the GAAP results, Barclays (NYSE:BCS) considers Discover Financial (NYSE:DFS) as attractive.

Barclays said, "DFS's 4Q10 earnings beat was due exclusively to the large $414MM reserve release, but after accounting for a number of non-recurring items, it appears revenues were in-line, expenses were a little high, but credit was better than expected, so our view of normalized earnings is unchanged. Some investors adjust earnings for the "reserve release" and get "core" earnings well below the GAAP results, but we believe it is important to focus on the earnings power using normalized provisions, which we estimate at $500MM-$600MM per quarter (equates to a 4%-5% of annual charge-off rate). Using this level of credit costs along with another 40 bps of NIM compression and modest loan growth for 2011, we arrive at EPS of $2.00 for 2011 and $2.20 for 2012. With the shares trading at only 8.4x our 2012 estimate, we continue to view the stock as attractive."

Barclays reiterates an "Overweight" on Discover Financial, which closed Friday at $18.02, down $0.51, or 2.75 percent. Barclays has a price target on them of $23.