Shares of Discover Financial Services on Thursday were on pace for their lowest close since early 2021 after the credit-card provider set aside more money during the third quarter to cover loan losses amid what it said were “some indications of stress” among consumers.
The stock was down 8.2% Thursday afternoon, trading at $84.33, putting it on track for its lowest closing price since Feb. 1, 2021, when it closed at $82.19.
Consumers, particular those with lower incomes, have struggled with higher prices for essentials like groceries and gasoline, constraining spending elsewhere and raising concerns about their ability to pay bills on time. While recession concerns, at least for this year, have eased, the return of student-loan payments has also left Wall Street trying to gauge their impact on shoppers and businesses.
Discover
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in its third-quarter earnings release on Wednesday, reported a provision for credit losses of $1.7 billion, a $929 million increase from the prior year, driven by a reserve build that was $297 million higher and by a higher net charge-off rate, a gauge of debt that is unlikely to be repaid.
Chief Financial Officer John Greene said on the company’s earnings call on Thursday that the reserve increase reflected loan growth and “our view on the macros.”
“While the unemployment numbers remain relatively in line and strong by historical standards, we are seeing some indications of stress,” Greene said.
He said that household net worth and savings “have deteriorated,” particularly among borrowers with lower credit scores. Still, he said, consumer credit was generally holding up, and the company expects charge-offs to peak at some point around the second half of next year.
“So if we don’t see a slowing in delinquency rates between now and the first quarter, certainly, that could be an indication that we’ll have to take incremental provisions,” he said.
Discover reported the results after the company last month said it would improve corporate-governance and customer-compliance-management protocols as part of an agreement with the Federal Deposit Insurance Corp. In July, the company also disclosed that around mid-2007, it “incorrectly classified” some credit-card accounts, and it said would try to compensate the affected merchants. It also paused buybacks at that time.
Then, in August, the company said that Chief Executive Roger C. Hochschild had resigned, leading to deeper worries about the company. During the earnings call on Thursday, Discover said the board was considering several internal and external candidates and was confident it could choose a new CEO “in the coming months.”
William Blair analyst Robert Napoli, in a research note on Thursday, said the “lack of clarity on resuming buybacks” had likely also weighed on the stock. But he said he still liked the company’s prospects, despite rapid loan growth.
“We do have some concerns on the rapid growth of consumer loans, as that asset class has higher risk and is more volatile,” he said, “but we have high confidence in Discover’s ability to manage credit and returns as it has proved through many economic cycles like the Great Recession, for instance.”
