What happened
Shares of the consumer digital bank and payments company Discover Financial Services (DFS 1.06%) traded as much as 7.7% lower earlier this morning before paring some of those losses. As of 10:34 a.m. ET today, the stock traded roughly 3% lower.
So what
Discover reported its fourth-quarter earnings results last night and held a conference call this morning. The company reported diluted earnings per share of $3.77 on total revenue of more than $3.7 billion. Both numbers beat estimates.
However, investors seem concerned by the outlook for credit as the company heads into tougher economic conditions in 2023.
Discover saw its companywide net charge-off rate, which looks at debt unlikely to be collected as a percentage of total loans, rise 42 basis points (0.42%) in the fourth quarter to 2.13%. Delinquencies also rose 36 basis points in Q4. Discover holds credit cards, private student loans, and personal loans on its balance sheet, so it is very exposed to the consumer.
Discover is also guiding for a full-year average net charge-off rate in the range of 3.5% to 3.9%, which suggests a significant move higher this year.
Discover ended 2019 with a net charge-off rate of 3.19%, which means the company expects loan losses to exceed pre-pandemic levels by the end of the year.
Now what
The bad news is that credit is normalizing at Discover perhaps faster than the market expected. But the good news is that Discover is holding a coverage ratio for loan losses of 6.58%, so it is well reserved for expected charge-offs.
Obviously, economic conditions could change for the better or for the worse, but Discover is an experienced bank, and the stock now only trades at just 6 times forward earnings.
