Discover’s credit card loan payments overshadow strong loan growth

Discover Financial Services’ revenue rose 27% in the fourth quarter and loans rose 20% as customer balances began to reverse after a long period of slow growth. growth during the disease.

The bad news: Card spending has increased and will continue to increase.

The Riverwoods, Illinois-based company said that debt payments for the quarter rose 76 basis points to 2.13% from 1.37% year-over-year, and may reach 3.9% for the full year. The news sent the market reeling on Wednesday, causing the company’s stock price to fall.

During Thursday’s conference call with analysts, Discover’s Chief Financial Officer John Greene tried to allay concerns about the rate hike, noting that Discover is looking at a arc clear in the latest situation. “We should see this pattern of the curve starting to bend down (this year) and maybe the biggest losses come in 2024 and then come back down,” he said. Greene.

Discover saw double-digit loan growth through mid-January 2022, but the company expects loan growth to increase to single digits for the rest of the year.

Discover testifies to its expectation that unemployment will rise to at least 5% this year; Greene also reminded analysts that Discover began tightening credit standards last year as consumer loans resumed after the epidemic era of low credit losses and slow loan growth is over.

Discover’s revenue for the quarter ended Dec. 31, 2022, net of interest expense, came in at $3.7 billion versus $2.9 billion a year earlier. Net income of $1 billion was down 3% from $1.1 billion year-over-year, due to an increase in bad debts and loan provisions. Total loans increased to $112 billion in the quarter compared to $93.7 billion a year earlier.

Discover’s credit card new accounts rose 23% in the quarter compared to a year earlier, and credit card sales rose 21%. During the same period, student loans rose 2% and personal loans rose 15%.

Operating expenses in the quarter rose 14% over the same quarter last year, to $18.3 million, as the company increased marketing for its credit cards, personal loans and student loans.

Strong credit card spending continued through mid-January—up 13% over the same period a year earlier—but is expected Discover has reduced expenses by single digit growth throughout the year.

“In our core revolver segment, we’re not seeing evidence of a general contraction, given the strength of the labor market,” Greene said.

Discover also said it plans to relaunch its cash-back debit card this year, its launch last year plagued by fraud.

In an interview, the CEO of Discover Roger Hochschild said, “fabricated” or embedded information, triggered the sudden level of fraud on credit products that use the company’s Pulse debit network. The company has added new features for the new launch in the first half of this year.

Of the Federal Trade recently activated Forcing Mastercard to open up its digital system to competitors could also be good for Pulse, he said.

“Making sure that as payment technology changes, the big players aren’t using it to stifle competition is critical,” Hochschild said, noting that some vendors haven’t been given the ability to facilitating the use of online transactions.

Hochschild doesn’t think Sen. Dick Durbin, D-Ill., to push through legislation to encourage equal competition between credit networks will soon succeed. Durbin last year presented the Credit Competition Act which will require merchants to have access to cheaper alternatives than major card networks for using credit card transactions.

“Credit cards were designed in the US to have both PIN and signature based credit, but it’s more challenging for credit cards. And in this regulatory environment, it’s hard to pass anything, so I guess I don’t expect to see it. The changes in credit card usage are imminent,” Hochschild said.

Discover stock on Friday recovered about half of its losses from the previous day, down about 8% by midday to around $100 a share. as analysts weigh the company’s long-term outlook.

“Given Discover’s low losses over the past two years, that means the whole (card) is in shape,” Brian Foran, a senior analyst with Autonomous Research, said in a statement. information Thursday to investors.

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