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Why Discover Financial Stock Dropped This Morning

By Evan Niu, CFA – Apr 23, 2020 at 2:51PM

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The credit card issuer reported a net loss due to the novel coronavirus pandemic.

What happened

Shares of Discover Financial (DFS 3.19%) opened down by nearly 8% this morning after the company reported first-quarter earnings results. The payment network operator's stock had recovered those losses and was trading roughly flat on the day as of 1 p.m. EDT.

So what

Total revenue net of interest expense increased 5% to $2.9 billion in the first quarter, but Discover swung to a net loss of $61 million, or $0.25 per share. The financial services company had posted net income of $726 million, or $2.15 per share, in the prior-year period. Total loans were $93 billion at the end of the quarter, up 5% from a year ago.

Close-up of several overlapping credit cards

Image source: Getty Images.

The COVID-19 pandemic was the primary culprit for the losses, as Discover's loan loss reserves skyrocketed because many consumers are expected to struggle in meeting debt payments. This week's jobless claims were 4.4 million, bringing job losses over the past five weeks to 26 million and wiping out all job gains since the Great Recession.

Discover's provision for credit losses nearly doubled to $1.8 billion and the reserve build in the first quarter was $1.1 billion, compared to a reserve build of just $94 million in the year-ago quarter. The company noted that it adopted the current expected credit losses (CECL) methodology on Jan. 1, and the reserve build in the first quarter reflected the new methodology, as well as "an updated macroeconomic outlook."

Now what

"While our results this quarter were heavily impacted by the emerging effects of the coronavirus, I could not be prouder of the team here at Discover and the work they did protecting employees and serving our customers in these challenging times," CEO Roger Hochschild said in a statement.

Discover is also implementing $400 million in expense reductions while enabling almost all employees to work remotely. The company suspended its stock buyback program last month but declared its quarterly dividend of $0.44 per share earlier this week.

Evan Niu, CFA 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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