Discover shares drop as company sets aside an extra $1 billion to guard against souring credit

Shares of Discover Financial Services slid after hours on Wednesday after the credit-card giant reported fourth-quarter profit that missed expectations and said it has set aside more money to cover potentially tougher conditions for consumers.

The results are the latest in a bumpy ride over the past several months for Discover
which has dealt with a leadership shake-up and questions about controls internally.

The company’s provision for credit losses stood at $1.9 billion during the end of the quarter, up $1 billion from the same quarter of 2022, driven by an increase in net charge-offs, or debt a lender thinks it won’t be able to recover. The company’s total net charge-off rate was 4.11% in the fourth quarter, up from 2.13%.

John Owen, Discover’s interim chief executive, said that while net charge-offs increased, they were at the “low end of our expected range.”

But the provision ate into company profits. Discover reported fourth-quarter net income of $388 million, or $1.54 a share, a big drop from $1.03 billion, or $3.74 a share, in the same quarter of 2022. Revenue rose 13% to $4.19 billion from $3.72 billion in the prior-year quarter.

Analysts polled by FactSet expected Discover to to earn $2.50 a share for the fourth quarter, on revenue of $4.1 billion.

Net interest margin — the difference between what financial institutions collect on interest and what they pay out to depositors — slipped to 10.98%, above FactSet forecasts for 10.52%.

Discover’s conference call to discuss the results will take place on Thursday. Shares fell 6% after hours.

The company — which issues its own credit cards and offers personal, student and home loans — reported the results as Wall Street awaits more clarity from the Federal Reserve on whether it will cut interest rates this year.

Cutting the high interest rates the Fed has used to fight inflation could help jolt consumer borrowing and spending but could also threaten the finance industry’s profits. But some experts have warned that cutting too quickly could end up pushing prices higher, potentially putting renewed pressure on shoppers and businesses.

The company in November said it would explore selling off its student-loan portfolio. Last month, Discover appointed Michael Rhodes as its new chief executive, a move that takes effect on March 6. The company’s previous CEO, Roger Hochschild, resigned in August.

In July, Discover said it had overcharged some merchants for more than a decade after it “incorrectly classified certain credit card accounts into our highest merchant and merchant acquirer pricing tier.” It also disclosed a Federal Deposit Insurance Corp. probe related to consumer compliance.

Owen, in Discover’s earnings release on Wednesday, said “we have taken steps to strengthen our risk-management and compliance programs.”

Shares of Discover are up 6% over the past 12 months, while the S&P 500
is up 20.5% over that period.

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