Discover Financial Service’s earnings, released Wednesday (Jan. 17), showed growth in card loans and rising delinquency rates.
Chief Financial Officer John Greene noted on a conference call with analysts that, with a nod to credit performance, “charge-offs increased but landed at the low end of our expected range.”
Payment rates declined 1.1% from the prior quarter, although management noted on the call that the payment rates are still above 2019 levels. Average consumer deposits were up 21% year over year and 4% sequentially. Direct-to-consumer balances grew $3 billion in the period and $14 billion in the year to an average balance of $81 billion in the most recent period.
The company’s earnings materials revealed that PULSE volumes were up 19% year over year in the December quarter to $79.2 billion, driven in part by a boost in debit transaction volumes.
Total charge-offs across the loan book were 4.1%, up about 2% from a year ago. Supplemental materials show that the 30-day delinquency rate on credit card loans stood at 3.9% in the December quarter, up from 3.4% in the third quarter and 2.5% a year ago.
“We expect our losses to rise through the mid-year and then plateau through the back half with some seasonal variation,” Greene said on the call. “In terms of our macro-economic outlook, our view of unemployment was relatively unchanged.”
Overall, the company increased its provision for credit losses by $1 billion to $1.9 billion. Card charge-offs, according to the call, may rise this year into a 5%+ range, where that rate stands at about 3% today. Loan growth, according to company guidance, is set to be “relatively flat” after having sported a 15% growth rate through all of 2023.
Investors sent the shares sharply lower by nearly 9% at the start of trading Thursday (Jan. 18).
During a question-and-answer session with analysts, Greene observed that loan growth came amid a “strong” holiday season and contended that the payment rates will remain “elevated” when measured against 2019’s levels.
Asked on the call about credit performance, Greene said the rise in delinquencies and charge-offs comes after “we had about two years of unusually low charge-offs and delinquencies.”
Coming off the trough of the pandemic, he said, normalization will take about two years.
“My expectation is that charge-offs will plateau,” said Greene, and “then beginning in 2025, I would expect those charge-offs to ‘step down.’”
As charge-offs decline, management said on the call, the company will become more aggressive in its efforts to spur growth in new account openings. Elsewhere, management said that the (possible) sale of its student loan business continues to be explored and is on track to take place over the next several months, with a deal closing in the second half of the year.
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