Shares of Discover Financial Services slid after hours on Wednesday after the credit-card giant reported fourth-quarter profits that missed expectations and said it had set aside more money to cushion against potentially tougher conditions for consumers.
The results are the latest in a bumpy ride over the past several months for Discover
DFS,
which has dealt with a leadership shake-up, questions about controls internally and higher costs related to compliance.
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% year over year.
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, as well as an 18% jump in operating expenses overall, 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 in 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%, but still beat FactSet forecasts for 10.52%.
Discover shares fell 7% after hours. The company’s conference call to discuss the results will take place on Thursday.
Discover — 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 that the Fed has used to fight inflation could help jolt consumer borrowing and spending, but also could threaten the financial industry’s profits. Some experts have warned that cutting too quickly could end up pushing prices higher, adding to the existing pressure on shoppers and businesses.
Against that backdrop, some banks are treading with caution. Wells Fargo & Co.
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last week also designated more money to cover for potential loan losses, as a combination of still-high prices and interest rates eat at consumer savings. The bank said it was “closely monitoring credit and while we see modest deterioration, it remains consistent with our expectations.”
Discover in November said it would explore selling off its student-loan portfolio. Last month, it 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.
In Discover’s earnings release on Wednesday, Owen said the company has “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
SPX
is up 20.5% over that period.
