(Bloomberg) — Discover Financial Services shares dropped the most in six months after the credit-card company warned investors that write-off rates may double this year.
(Bloomberg) — Discover Financial Services shares dropped the most in six months after the credit-card company warned investors that write-off rates may double this year.
The firm expects net charge-offs to climb as high as 3.9% this year, Riverwoods, Illinois-based Discover said Wednesday in a presentation posted on its website. That compares with the 1.82% it booked for all of 2022 and is higher than the 2.8% analysts in a Bloomberg survey were expecting.
Net revenue jumped 27% to $3.73 billion. That helped counter a steep increase in provisions for souring loans, but profits still dipped slightly to $1.03 billion, or $3.77 a share. Even so, that was higher than analysts expected.
“The losses are going up from artificially low levels,” Chief Executive Officer Roger Hochschild said in an interview. “Overall, we feel really good about what we’re seeing in our portfolio.”
Discover shares dropped 3.5% to $98.77 at 10:12 a.m. in New York after earlier falling as much as 7.7%, their biggest intraday decline since July. The company’s results also weighed on rivals Capital One Financial Corp. and Synchrony Financial, with all three credit-card issuers among the worst performers in the 67-company S&P 500 Financials Index.
Credit cards typically reach their peak loss rates about 18 months after origination. That means that Discover is expecting losses to tick up this year on accounts it started in 2021, which was a much bigger year for credit-card growth than 2020, when the pandemic forced the company to curtail new business.
“In 2022, the loans that would have been hitting peak losses were the 2020 vintage, which was extraordinarily small and extraordinarily clean as opposed to when you look forward to 2023 and beyond, you start to see the vintages we booked in 2021 and 2022,” Hochschild said.
Starting last year, Discover began gradually tightening underwriting standards by offering smaller lines of credit to new customers.
(Updates with CEO comment, details beginning in fourth paragraph.)
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