Shares of Discover Financial Services took a hit in after-hours trading on Wednesday, following the company’s decision to allocate additional funds to cover losses on credit card debt. Furthermore, there was an increase in the credit-card net charge-off rate, indicating that the company may not recover some of the outstanding debt.
A Closer Look at the Numbers
Discover’s provision for credit losses during the quarter stood at $1.7 billion, which marks a significant $929 million increase compared to the previous period. This surge was primarily driven by a $297 million rise in reserves. While investors await the third-quarter earnings call scheduled for Thursday, it is essential to understand the implications of these figures.
Insights into Consumer Behavior
The release of Discover’s third-quarter earnings coincides with Wall Street’s attempt to understand consumer-spending patterns. As prices for essential items soar and individuals grapple with student loan repayments, consumer behavior is crucial to observe. Interestingly, one analyst pointed out that Discover’s card sales volumes have slowed, indicating a trend that extends beyond affluent shoppers.
Impact on Profitability
Discover’s decision to bolster its reserves has had a direct impact on the company’s profitability. As a result, it fell short of Wall Street’s profit estimates. Net income for the quarter stood at $683 million, or $2.59 per share, a decrease from $1.01 billion, or $3.56 per share, during the same period last year. However, revenue rose to $4.04 billion from $3.47 billion in the prior-year quarter.
In conclusion, Discover Financial Services faces challenges as it navigates the current economic landscape. The company’s increased provision for credit losses and the rise in the credit-card net charge-off rate are indicators of potential difficulties ahead.
Earnings Disappoint for Discover
Analysts’ Projections Fall Short
Analysts polled by FactSet had high expectations for Discover Financial Services’ earnings per share, predicting a figure of $3.17. However, the company’s results fell short, with earnings coming in at a lower value. This disappointment led to a 2.6% drop in share price after hours on Wednesday.
Reserve Build Takes Center Stage
Piper Sandler analyst Kevin Barker highlighted the significance of Discover’s reserve build in a note published following the earnings report. He described it as “sizeable,” and emphasized that it overshadowed positive aspects such as higher net-interest income, increased fee revenue, and reduced expenses. Despite these favorable metrics, the reserve build had a significant impact on investor sentiment.
Mixed Results in Loan Performance
Discover did see some positive growth in total loans during the quarter, but these gains were not enough to offset concerns surrounding credit sales. Analyst Bill Ryan from Seaport Research Partners noted that Discover card sales volumes increased by only 0.3%, marking a slowdown compared to previous quarters. This trend aligned with their observations of other issuers’ Q3 results, which indicated that credit sales growth was primarily limited to higher-income consumer brackets.
Despite some positive performance metrics such as revenues, loan growth, and expense management, the disappointing earnings and concerns over credit sales led to a potential decrease in Discover’s stock value. Investors will need to carefully monitor the situation and evaluate future developments in this skittish market.