Discover’s profits fall short as company prepares for potential credit troubles

January 19, 2024 | by


Discover Financial Services is facing potential trouble as its profits fall short of expectations and the company sets aside an extra $1 billion to guard against souring credit. Shares of Discover dropped after the credit-card giant reported lower-than-expected fourth-quarter profits and revealed increased provisions for credit losses. The company’s net charge-offs increased, leading to a drop in profits. Discover’s provision for credit losses stood at $1.9 billion at the end of the quarter, up $1 billion from the same period in 2022. The company’s total net charge-off rate also rose significantly. As the company prepares for potential credit troubles, analysts and investors are eagerly awaiting its conference call to discuss the results.

Discovers profits fall short as company prepares for potential credit troubles

Earnings Results

Discover’s profits fall short

Discover Financial Services, a credit-card giant, reported fourth-quarter profits that missed expectations, causing shares to drop after hours. The company has been facing challenges in recent months, including a leadership shake-up, internal control issues, and higher compliance costs. As a result, Discover prepared for potential credit troubles by setting aside an additional $1 billion to cushion against potentially tougher conditions for consumers. The company’s conference call to discuss its fourth-quarter results is scheduled for Thursday.

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Financial Overview

Discover’s fourth-quarter profits miss expectations

Discover reported a fourth-quarter net income of $388 million, or $1.54 per share. This is a significant drop from the same quarter in 2022, when the company earned $1.03 billion, or $3.74 per share. The decrease in profits was due to an increase in operating expenses and a provision for credit losses of $1.9 billion, up $1 billion from the previous year.

Company sets aside extra $1 billion for credit losses

Discover’s provision for credit losses increased to $1.9 billion in the fourth quarter, reflecting the company’s cautious approach towards potential credit troubles. This additional allocation is intended to cover potential loan losses and mitigate the impact of challenging economic conditions.

Credit Losses and Charge-offs

Discover’s provision for credit losses increases to $1.9 billion

Discover’s provision for credit losses rose to $1.9 billion during the fourth quarter, up from $900 million during the same period in 2022. This increase highlights the company’s concern for potential credit troubles and its proactive approach in safeguarding against them.

Net charge-off rate rises to 4.11% in the fourth quarter

Discover’s net charge-off rate, which represents the debt that the company believes it will be unable to recover, increased to 4.11% in the fourth quarter, up from 2.13% year over year. Despite this rise, the company noted that the net charge-offs were at the low end of their expected range.

Operating Expenses

Operating expenses increase by 18%

Discover experienced an 18% increase in operating expenses during the fourth quarter, impacting its overall profitability. The increase in expenses can be attributed to higher compliance costs, as well as other factors related to maintaining and expanding the company’s operations.

Impact on company profits

The rise in operating expenses had a significant impact on Discover’s profits for the fourth quarter. Net income dropped to $388 million, compared to $1.03 billion in the same quarter of the previous year. This decline in profitability highlights the challenges faced by the company and emphasizes the importance of managing expenses effectively.

Net Income and Revenue

Discover reports fourth-quarter net income of $388 million

Discover’s fourth-quarter net income stood at $388 million, representing a significant decrease from the previous year’s figure of $1.03 billion. This decline was primarily due to the increase in operating expenses and the provision for credit losses.

Revenue rises by 13% to $4.19 billion

Discover saw a 13% increase in revenue during the fourth quarter, with total revenue reaching $4.19 billion. The growth in revenue can be attributed to various factors, including an increase in consumer spending and the company’s efforts to expand its customer base.

Analysts’ Expectations

FactSet analysts expected earnings of $2.50 per share

Analysts polled by FactSet had projected Discover to earn $2.50 per share for the fourth quarter. However, the company fell short of these expectations, reporting earnings of only $1.54 per share. This disparity between projected and actual earnings contributed to the disappointment among investors.

Revenue projection was $4.1 billion

In addition to the earnings projections, analysts had also estimated Discover’s fourth-quarter revenue to be around $4.1 billion. The company surpassed this projection, reporting total revenue of $4.19 billion. While revenue exceeded expectations, the lower-than-expected earnings still had a negative impact on investor sentiment.

Net-Interest Margin

Net-interest margin slips to 10.98%

Discover’s net-interest margin, which represents the difference between what the company collects on interest and what it pays out to depositors, slipped to 10.98% in the fourth quarter. While this figure reflects a decline, it still surpassed FactSet’s forecast of 10.52%. The net-interest margin is an important metric for financial institutions, as it indicates the profitability of their borrowing and lending activities.

Still beats FactSet forecasts

Despite the decline in net-interest margin, Discover’s performance exceeded the expectations set by FactSet analysts. This positive outcome suggests that the company was able to manage its interest rate differentials effectively, generating better-than-anticipated returns on its interest-based activities.

Stock Performance

Discover shares fall 7% after hours

Following the announcement of its fourth-quarter results, Discover shares experienced a 7% decline in after-hours trading. This negative reaction from the market indicates investor disappointment with the company’s earnings miss and the additional provision for credit losses.


Conference call scheduled to discuss results

To address investor concerns and provide further insights into the fourth-quarter results, Discover has scheduled a conference call. This call will offer an opportunity for company executives to explain the factors behind the earnings miss and the rationale for increasing the provision for credit losses.

Impact of Federal Reserve Policy

Wall Street awaits clarity on interest rate cuts

As Discover releases its fourth-quarter results, Wall Street is eagerly awaiting further clarification on the Federal Reserve’s interest rate cuts. The potential impact of these cuts on consumer borrowing and financial industry profits has raised concerns among investors and industry experts.

Potential effects on consumer borrowing and financial industry profits

The Federal Reserve’s decision to cut interest rates could have significant implications for Discover’s business and the broader financial industry. While lower interest rates could stimulate consumer borrowing and spending, they could also pose a threat to financial institutions’ profitability. Discover, like other banks, must closely monitor the potential effects of interest rate cuts and adjust its strategies accordingly.

Leadership Changes and Compliance Issues

Michael Rhodes appointed as new CEO

In an effort to address the challenges faced by Discover, the company announced the appointment of Michael Rhodes as its new chief executive. Rhodes’ appointment aims to bring stability and drive strategic initiatives that will help overcome the company’s current difficulties.

Steps taken to strengthen risk-management and compliance programs

Discover recognized the need to strengthen its risk-management and compliance programs to address the compliance issues it faced in the past. The company has taken steps in this direction, implementing measures to improve controls and ensure regulatory compliance. These actions are vital for maintaining the trust of investors and customers, as well as safeguarding the company’s reputation in the financial industry.


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