Discover Financial Services grapples with rising credit card delinquencies

  • Stock Market News
Discover Financial Services grapples with rising credit card delinquencies
Credit: © Reuters.

Discover Financial Services (NYSE: DFS ), a leading consumer finance company, is grappling with an increase in credit card delinquencies, significantly impacting its bottom line. Despite a robust economy, consumer spending shows signs of strain due to inflation and dwindling savings.

On Thursday, Discover reported higher-than-expected Q3 loan losses. The company's net charge-off rate on credit card loans marked its fourth consecutive quarterly increase, reaching 4.03% in Q3. Provisions for credit losses saw a substantial rise to $773 million from $549 million in Q2, and $185 million in Q3 last year, according to CFO John Greene.

Greene attributed the rise to changing economic conditions and household liquidity issues. He predicted a peak in net charge-offs by mid to late 2024, particularly among consumers with lower FICO scores. This prediction follows the upward trajectory of charge-offs and delinquencies since the Federal Reserve began hiking interest rates in early 2022.

Despite these challenges, Discover's Q3 revenue rose by 17% year-on-year to reach $4 billion, marginally surpassing analyst expectations. Total loans also grew by 17%. However, the earnings per share (EPS) of $2.59 fell significantly short of the projected $3.17.

Compared to its peers, Discover's earnings were disappointing. The St. Louis Federal Reserve Bank reported a Q2 charge-off rate on credit card loans of 3.15% for all commercial banks. American Express (NYSE: AXP ), which caters to a premium customer base, had credit card write-offs of about 2%.

Despite the financial strain, Discover's stock is currently undervalued, trading at 1.6 times its tangible book value and 1.4 times sales - levels unseen since the pandemic-induced sell-off in March 2020. The company anticipates 2023 annual net charge-offs to be between 3.4% and 3.6%.

However, the consumer finance sector faces uncertainties over the coming quarters due to potential consumer stress and the abrupt exit of Discover's CEO. This moderately negative outlook is influenced by declining consumer savings and increasing debt burdens.

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