Discover has announced that the fees on all of its consumer loans, most of which are credit cards, will be subject to between 3.5% and 3.9% in 2023. In 2022, that figure is 1.82%, which is about 1.84% in 2021.
The researchers were surprised by the sight. They estimated a figure between 2% and 3%. Discover’s stock price fell more than 7% in early trading today but pared back much of that loss and fell. down to 2.3% in the afternoon.
The last time pay-offs at Discover were that high was in 2011, when the company posted a 3.97% rate. That’s when Discover and other card issuers were recovering from the ravages of the Great Recession. Discover’s loan losses peaked at 7.57% in 2010.
The economy today isn’t nearly as bad as it was back then, so analysts peppered Discover executives with questions about its surprising outlook on the board this morning.
Discover Chief Financial Officer John Greene pushed back on the idea that something unexpected was happening. With so many new cardholders and borrowers, losses from non-Discover customers tend to be higher in the first year or two than for long-time customers, he said. .
“There is nothing surprising about the performance,” he said.
“Overall, what we’re seeing here is a very strong and very competitive market that came through in ’21 and ’22 and it’s meeting conditions that are well within our expectations of the number of income,” he added.
What’s troubling for lenders targeting borrowers with poor credit scores, Greene said, is the small percentage of Discover Card borrowers who Falling in this category “definitely felt the effects of inflation.” But the company so far has been right to see how those customers react, he said.
He expects loan losses to peak in 2024 and then fall again after that. Discover predicts that unemployment will rise 1 percent this year. It is currently at 3.5%, according to the Bureau of Labor Statistics.
Asked if loan losses will exceed 4% in 2024, Greene would not offer a plan.
How credit card companies see 2023 key to Discover’s sales performance after today. If peers like Capital One, which lends to a riskier set of borrowers than Discover, see an increase in loan losses, it will be relieved. Investors are concerned about Discover in particular.
But it could raise concerns about the resilience of Americans in the face of continued inflation, rising interest rates and rising unemployment.