Discover Financial Services
stock tumbled 8% in early trading Thursday after the company missed earnings estimates and set aside more money to cover bad loans.
Discover
said its provision for credit losses was $1.9 billion in the fourth quarter, an increase of $1 billion from the previous year. The increase included a $305 million higher reserve build and a $717 million increase in net-charge offs—debt that a lender deems unlikely to be repaid.
The lender’s net charge-off rate rose to 4.11% from 2.13% in the same period last year. For the full-year 2024, Discover expects a net charge-off rate of between 4.9% and 5.3%.
It’s a sign that higher interest rates are impacting consumers and households.
Citi
analyst Arren Cyganovich said Discover’s 2024 guidance was disappointing, most notably the net charge-off midpoint of 5.1%. However, he recommended buying the stock on the post-earnings weakness.
“We are still buyers of the shares given clarity on credit losses, a pull-forward of reserves in the fourth quarter, catalysts of resuming share repurchases in the second half of the year and the sale of its student loan portfolio later in the year,” he said.
Discover reported earnings of $1.54 a share on revenue of $4.2 billion in the fourth quarter. Analysts were expecting profit of $2.49 a share on revenue of $4.1 billion, according to a FactSet survey of estimates.
“A combination of factors more than offset the revenue upside, including a higher provision for loan losses, marketing expenses, other expenses and employee costs,” Seaport Research analyst Bill Ryan said in a research note. He has a Buy rating on the stock and target price of $128 but said his estimates were under review.
The company is exploring the sale of its student-loan business, and said in November that it will stop accepting new loan applications from Feb.1.
The stock was down 8.2% early Thursday. Fellow credit-card companies traded up.
Visa
rose 0.3%, while
Mastercard
was up 0.3%.
Write to Callum Keown at callum.keown@barrons.com
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