One of the reasons Discover’s stock price fell on Thursday
stock Explore financial services (NYSE:DFS) tumbled Thursday after the credit card issuer reported fourth-quarter results that missed expectations.
The company reported revenue of $4.2 billion, up 13% from the previous year, but net income fell about 61% to $386 million, or $1.54 per share. Discover beat revenue estimates but missed revenue estimates by a wide margin.
Discover’s stock price fell about 10% Thursday to trade at about $98 a share due to the revenue loss, which was one of the main reasons for the sharp drop in revenue.
Higher provisions for credit losses bring down income
As mentioned above, Discover’s sales were solid this quarter. Revenue increased 13% to $4.2 billion, $3.5 billion of which came in the form of net interest income.
Interest income for credit card issuers increased 26% year-over-year to approximately $4.9 billion, and total loans increased 15% to $128 billion. Of these, credit card loans amounted to $102 billion, a 13% increase compared to the fourth quarter of 2022. Offsetting this, interest expense rose 77% to $1.4 billion, but net interest income growth was still solid.
However, the biggest problem was the deterioration of credit rating. Gross net charge-off rates, which are loans that are not repaid, rose 181 basis points (bps) to 3.52% in the third quarter, while interest rates on credit card loans were even higher at 4.03%, up 211 basis points. . The delinquency rate also increased by 130bps to 3.41% in the third quarter.
The third quarter numbers raised some red flags, but things got even worse in the fourth quarter. Total net charge-offs in the fourth quarter were 4.11%, up 198 points year-over-year, and 46bps up from the third quarter, while credit card charge-off rates were 4.68%, up 231bps year-over-year and 65 points over the third quarter. In addition, the delinquency rate for credit card loans of 30 days or more in the fourth quarter was 3.87%, an increase of 134 basis points compared to the same period last year and an increase of 46 basis points compared to the previous quarter.
Due to deteriorating credit quality, Discover set aside $1.9 billion in quarterly credit losses to cover losses it expected to incur from bad debt. This is a significant increase compared to provisions of $883 million in the fourth quarter of 2022. Since this is calculated as an expense, it has had a significant impact on our bottom line. Combine this with an 18% increase in operating expenses in the quarter, and net income was just $388 million, down 61% from $1 billion in the fourth quarter of 2022.
The outlook is not good
Perhaps what surprised investors more than the fourth quarter numbers was Discover’s 2024 outlook. Discover Financial officials said in an earnings call that they expect full-year net amortization to be in the range of 4.9% to 5.3%. This is a significant increase compared to the net amortization rate of 3.42% at the end of 2023, and a sharp increase compared to 1.82% in 2021.
If predictions come true, Discover is expecting difficult economic conditions and will likely have to continue to allocate significant provisions for credit losses throughout the year, which will reduce its profits.
With Thursday’s drop, the credit card issuer’s stock is even cheaper than before, trading at just over eight times its net income. However, given the outlook for credit quality and guidance for net interest margin in the low 10.5-10.8% range from 11%, it doesn’t look like a bargain at the moment.
The other major credit card companies are scheduled to report earnings in the coming weeks, so it will be interesting to see how they perform and what their outlook looks like for 2024.
