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Discover Financial Services Dips on Earnings Miss

By Eric Volkman – Updated Apr 23, 2020 at 5:44PM

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The company flips into the red on the bottom line due to the now-expected heavy provisioning.

Investors seem to be getting used to the fact that banks and other financial service providers are going to post significantly reduced net profits, or even losses, as they provision for sharp increases in credit losses.

This has been the dynamic for most of these companies during this reporting season, and it was no different for Discover Financial Services (DFS -1.31%), which reported its first-quarter results late Wednesday.

For the quarter, the company's net revenue rose by 5% over the same period last year to $2.89 billion, on total loans that rose at the same rate. On the bottom line, Discover flipped to a net loss of $61 million, or $0.25 per share, from a profit of $726 million ($2.15).

Crumpled 100 dollar bill.

Image source: Getty Images.

On average, analysts tracking the company were modeling $0.94 per share in net profit. Their top-line projections were in line with the actual result.

Conforming with the general trend in banking and finance companies lately, Discover's plunge into the red was due almost entirely to much heavier loan-loss provisioning. The company more than doubled the amount it set aside to shield itself from loans gone sour, to over $1.8 billion this past quarter from the year-ago figure of $809 million.

It almost goes without saying that the reason for this is the devastating economic effects of the SARS-CoV-2 coronavirus outbreak, which are touching nearly every business sector around the world. It follows that many clients will be unable to pay back loans due to this, hence the emphasis on provisioning.

By now, though, this is expected of companies in the finance sector. On Thursday, Discover stock fell -- but only marginally, slipping by less than 1% on the day. This was slightly worse than the essentially flat performance of the wider stock market.


Eric Volkman has no position in any of the stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.

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