Discover Financial Services stock experienced a 10% tumble in premarket trading on Thursday following the company’s failure to meet earnings estimates and its decision to allocate more funds to cover bad loans.
In the fourth quarter, Discover reported a provision for credit losses amounting to $1.9 billion, an increase of $1 billion compared to the previous year. This increase includes a $305 million surge in reserves and a $717 million rise in net charge-offs – debt that lenders consider unlikely to be repaid.
The net charge-off rate for Discover rose from 2.13% in the same period last year to 4.11%, indicating the impact of higher interest rates on consumers and households.
Seaport Research analyst Bill Ryan commented in a research note that various factors contributed to offsetting the revenue upside, such as a higher provision for loan losses, marketing expenses, other expenses, and employee costs. Ryan has a Buy rating on the stock with a target price of $128, but he mentioned that his estimates are currently under review.
For the fourth quarter, Discover reported earnings of $1.54 per share on revenue of $4.2 billion. Analysts had anticipated a profit of $2.49 per share on revenue of $4.1 billion, according to a FactSet survey.
In November, the company announced its plan to explore the sale of its student-loan business and mentioned that it will no longer accept new loan applications beginning on February 1.
Prior to the opening of trading on Thursday, Discover’s stock was down 10.1%, while other credit-card companies experienced mixed outcomes, with Visa declining 0.4% and Mastercard rising 0.5%.
