Shares of Discover Financial Services fell after hours on Wednesday, after the credit-card and financial services giant set aside more money to cover losses on souring credit and reported an uptick in a metric of credit-card debt that it likely won’t get back.
That metric, the credit-card net charge-off rate, rose to 4.03%. Discover’s provision of credit losses was $1.7 billion during the quarter, a $929 million increase driven by a reserve build that was $297 million higher. Discover’s third-quarter earnings call is set to take place on Thursday.
The figures in Discover’s
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third-quarter earnings release were released as Wall Street tries to parse consumer-spending habits as they deal with higher prices for essentials, begin trying to repay student loans and prepare for the holidays. One analyst on Wednesday noted that Discover’s card sales volumes had slowed — a trend he said has become more common outside of wealthier shoppers.
The reserve build caused the company to miss Wall Street’s profit estimates. Discover reported net income of $683 million, or $2.59 a share, compared with $1.01 billion, or $3.56 a share, in the same quarter last year. Revenue rose to $4.04 billion from $3.47 billion in the prior-year quarter.
Analysts polled by FactSet expected earnings per share of $3.17, on revenue of $3.95 billion.
Shares fell 2.6% after hours on Wednesday.
Piper Sandler analyst Kevin Barker, in a note published after Discover’s earnings, said the reserve build was “sizeable” and overshadowed higher net-interest income and fee revenue and slimmer expenses. Elsewhere, total loans at Discover rose during the quarter.
“We expect the stock to trade lower tomorrow due to credit concerns in an already skittish market,” Piper Sandler analyst Kevin J. Barker said in a note Wednesday.
Bill Ryan, an analyst at Seaport Research Partners, echoed that sentiment in a Wednesday note. And he said Discover card sales volumes only moved 0.3% higher, a slowdown from prior quarters.
“All other performance metrics were generally better than expected, including revenues, loan growth and expenses, although clearly not enough to offset the incremental reserve build,” he said.
“The credit sales slowdown is not surprising as several issuers that have already reported Q3 results indicated that credit sales growth is only positive among higher-income consumer brackets,” he said.
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