Discover Financial Services Faces Stock Drop After Q4 Earnings Miss | NYSE:DFS

Discover Financial Services (NYSE:DFS) stock took a nosedive of 5.5% in Wednesday’s after-hours trading following Q4 earnings that fell significantly below the Wall Street consensus. The company’s provision for credit losses skyrocketed, and a larger proportion of bad loans was written off.

Q4 GAAP EPS amounted to $1.54, a decrease from the average analyst estimate of $2.47, dwindling from $2.59 in Q3 and $3.74 in Q4 2022. Meanwhile, revenue, net of interest expense, jumped to $4.20B from $4.04B in the previous quarter and $3.72B in the year-ago period, surpassing the $4.11B consensus.

The provision for credit losses amounted to $1.91B, exceeding the Visible Alpha consensus of $1.66B, and surged from $1.70B in Q3 and $883M in Q4 2022. This surge in the PCL occurred as its net principal charge-off rate spiked to 4.11% in Q4 from 3.52% in Q3.

Interim CEO and President John Owen commented, “Discover’s (DFS) performance in 2023 was driven by strong asset and deposit growth and a resilient net interest margin. However, net charge-offs increased, albeit within the low end of our expected range.”

Additionally, during the quarter, the company took measures to fortify its risk management, introduced its Cashback Debit product, and revealed a new CEO. Recall that in August, former President and CEO Roger Hochschild departed the company amid regulatory and risk oversight issues. In July, it initiated a review of its compliance, risk management, and corporate governance practices after discovering a misclassification issue concerning refunds to merchants and merchant acquirers.

Q4 net interest income climbed to $3.47B from $3.32B in the previous quarter and $3.07B in the year-ago quarter.

Noninterest income stood at $7278M, compared to $722M in Q3 and $654M in Q4 2022.

Operating expenses escalated to $1.78B from $1.45B in the previous quarter and $1.50B in the year-ago period. Professional fees rose to $312M from $281M in Q3 and $264M in Q4 2022. Other expenses surged to $250M from $144M in the prior quarter and $154M in the year-ago period.

Discover Card sales volume ascended to $57.1B from $55.0B in the previous quarter and $55.7B a year earlier. Average credit card loans of $99.6B grew from $95.8B in the previous quarter. The credit card net principal charge-off rate increased to 4.68% from 4.03% in Q3 and 2.37% in Q4 2022.

Digital Banking pretax income fell to $458M from $803M in the previous quarter and $1.31B in the year-ago period.

A conference call is scheduled for Jan. 18 at 8:00 AM ET.

Earlier, Discover Financial (DFS) GAAP EPS of $1.54 missed by $0.93, while the revenue of $4.2B surpassed estimates by $90M.