Shares of Discover Financial Services fell after hours on Wednesday after the credit card giant reported fourth-quarter earnings that beat expectations and said it had set aside more money to cover tougher conditions for consumers.
The results are the latest in a bumpy ride over the past few months for Discover DFS,
Which dealt with a change in leadership and questions about internal controls.
The company's provision for credit losses was $1.9 billion through the end of the quarter, $1 billion more than in the same quarter in 2022, driven by an increase in net charge-offs, or debt that a lender believes it won't be able to recover. . The company's total net discount rate was 4.11% in the fourth quarter, up from 2.13%.
John Owen, Discover's interim chief executive, said that although net discounts increased, they were at the “low end of the expected range”.
But this allocation ate the company's profits. Discover reported fourth-quarter net income of $388 million, or $1.54 per share, down significantly from $1.03 billion, or $3.74 per share, in the same quarter of 2022. Revenue rose 13% to $4.19 billion from $3.72 billion in The previous year is a quarter.
Analysts surveyed by FactSet expected Discover to earn $2.50 per 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 to depositors — fell to 10.98%, above the FactSet forecast of 10.52%.
A Discover conference call to discuss the results will be held on Thursday. Shares fell 6% after hours.
The company — which issues its own credit cards and offers personal, student and residential loans — announced the results as Wall Street awaits more clarity from the Federal Reserve on whether it will cut interest rates this year.
Lowering the high interest rates the Fed has used to combat inflation could help stimulate consumer borrowing and spending, but it could also threaten finance industry profits. But some experts have warned that reducing too quickly could end up pushing up prices, which could put renewed pressure on shoppers and businesses.
The company said in November that it would explore selling its student loan portfolio. Last month, Discover appointed Michael Rhodes as its new CEO, 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 “improperly classified certain credit card accounts among the highest pricing tier for our merchants and merchant acquirers.” It also revealed an investigation by the Federal Deposit Insurance Corporation regarding consumer compliance.
“We have taken steps to strengthen our risk management and compliance programs,” Owen said in Discover's earnings release on Wednesday.
Shares of Discover are up 6% over the past 12 months, while the S&P 500 SPX is up 20.5% over that period.
