Shares of Discover Financial Services (DFS) slid after hours on Wednesday following the release of its fourth-quarter financial results. The credit-card giant reported a profit that missed expectations, and also announced that it has set aside more money to cover potentially tougher conditions for consumers.
Provision for Credit Losses Increases
During the end of the quarter, Discover’s provision for credit losses stood at $1.9 billion. This marked a $1 billion increase from the same quarter of 2022. The rise in provision was driven by an increase in net charge-offs, which refers to debt that a lender believes it won’t be able to recover. Discover’s total net charge-off rate was 4.11% in the fourth quarter, up from 2.13%.
Interim Chief Executive Comments on Net Charge-Offs
John Owen, Discover’s interim chief executive, acknowledged that net charge-offs increased, but stated that they were at the “low end of our expected range.”
Decline in Net Income and Rise in Revenue
Discover reported a fourth-quarter net income of $388 million, or $1.54 per share. This marked a significant drop from $1.03 billion, or $3.74 per share, in the same quarter of 2022. However, revenue rose by 13% to $4.19 billion from $3.72 billion in the prior-year quarter.
Analyst Expectations Not Met
Analysts polled by FactSet had expected Discover to earn $2.50 per share for the fourth quarter, on revenue of $4.1 billion. The company fell short of these expectations.
Net Interest Margin Slips
Discover’s net interest margin, which represents the difference between what financial institutions collect on interest and what they pay out to depositors, slipped to 10.98%. This was slightly above FactSet’s forecast of 10.52%.
Conference Call Scheduled
Discover will hold a conference call on Thursday to discuss the results.
Shares of Discover fell 6% after hours following the release of the fourth-quarter financial results.
Discover Reports Positive Earnings Amid Uncertainty on Interest Rates
Discover, the financial services company known for its credit cards and loan offerings, recently released its latest earnings report. As anticipation builds for the Federal Reserve’s decision on interest rate cuts, Discover’s results offer a glimpse into the current state of the finance industry.
The potential reduction of interest rates by the Federal Reserve presents both opportunities and challenges. While lower rates could stimulate consumer borrowing and spending, there is a risk of impacting the profitability of financial institutions. However, experts caution against hasty rate cuts, as it could lead to higher prices, ultimately burdening shoppers and businesses.
In line with its strategic direction, Discover announced in November its intention to explore the sale of its student-loan portfolio. To further bolster its operations, the company appointed Michael Rhodes as its new chief executive, effective March 6th. This leadership change follows the resignation of Roger Hochschild, the company’s previous CEO, in August.
Discover faced scrutiny in July after revealing that it had mistakenly classified certain credit card accounts for over a decade, resulting in overcharging some merchants. Additionally, the company disclosed a Federal Deposit Insurance Corp. investigation related to customer compliance. In response, Discover has taken measures to enhance its risk-management and compliance programs, as noted by Owen during the earnings release.
Despite these challenges, Discover’s stock has performed well in the market, showing a 6% increase over the past 12 months. In comparison, the S&P 500 has risen by 20.5% during the same period.