Why Discover Financial Services Stock Dropped Today
Shares of Discover Financial Services (NYSE: DFS) fell 10.8% on Thursday after the company announced mixed fourth-quarter 2023 results relative to Wall Street's expectations.
The source of Discover's profit miss
More specifically, Discover's fourth-quarter revenue (net of interest expense) grew 13% year over year to $4.196 billion, beating consensus estimates for $4.11 billion. On the bottom line, however, Discover's net income declined to $388 million, or $1.54 per share, down 59% from $3.74 per share in the same year-ago period and well below estimates for $2.51 per share.
Discover Interim CEO John Owen stated the company enjoyed "strong asset and deposit growth and a resilient net interest margin." And while total net charge-off rates -- that is, the rate of debts that the company believes are no longer collectable -- grew by 198 basis points to 4.11%, Owen noted that was near the low end of the company's expected range.
Indeed, Discover increased its provision for credit losses to $1.9 billion as of the end of 2023, up $1 billion from the same year-ago period. That included a $305 million reserve build in the fourth quarter alone as well as a $717 million increase in net charge-offs.
What's next for Discover shareholders?
Looking ahead to the new year, Discover expects loan growth to be relatively flat in 2024 (after growing 15% in 2023), while net interest margin will likely contract to between 10.5% and 10.8% (down from 11.07% for all of 2023). Discover also called for net charge-offs of roughly 4.9% to 5.3% in 2024, up from 3.42% last year.
In the end, while it seems Discover is doing a good job mitigating risk and remaining solidly profitable in spite of rising charge-off rates, investors are understandably unsettled given its big profit shortfall this quarter. The stock is simply responding in kind.
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Discover Financial Services is an advertising partner of The Ascent, a Motley Fool company. Steve Symington has no position in any of the stocks mentioned. The Motley Fool recommends Discover Financial Services. The Motley Fool has a disclosure policy.
