Top leaders at Discover Financial Services face a big test on Thursday: reassuring investors they can wrap their arms around sprawling compliance issues, which could prove quite costly to fix, while also finding a permanent new CEO.
The Riverwoods, Illinois, company, which announced the abrupt resignation of CEO Roger Hochschild on Monday, has scheduled a Thursday morning conference call with analysts.
Hochschild, a 25-year company veteran whom many observers expected to spend decades as Discover's chief executive, stepped down less than a month after the firm revealed that its regulatory woes are more extensive than previously known.
In July, Discover said that it had received a proposed consent order from the Federal Deposit Insurance Corp. in connection with consumer compliance matters, and that additional supervisory actions could occur. The company, which has spent years working through compliance concerns related to its student loan business, also revealed last month that it
"Really the big concern is: What business restrictions might be coming about for the company?" said Ryan Nash, an analyst at Goldman Sachs.
He noted that the range of possible outcomes seems wide — from minimal regulatory restrictions on Discover's business activities to much larger limitations.
Looming over the situation at Discover is the
"In a post-Wells Fargo world, the markets are obviously laser-focused on could there be any restrictions put on the company in terms of the amount of growth that it's allowed to have, the amount of account growth it's allowed to have? And what will that mean for the business model going forward?" Nash said in an interview Wednesday.
Since Monday, when Hochschild's hasty resignation was announced, analysts have been kept in the dark about the situation, raising the stakes for Thursday's call. Already over the last month, Discover's stock price has plunged 25%.
"Because there's been a several-day lag, I think that expectations are heightened for what we're going to hear," Nash said.
Nash said that he'll be listening for any information about what changed between the company's earnings call in July and the CEO's resignation this week.
He's also interested in whether the results of an internal review of Discover's compliance, risk management and corporate governance led to Hochschild's departure. In July, company executives said that they were pausing share buybacks pending the completion of that review. Investors are now wondering how long repurchases will be put on hold.
"The market obviously — if you think about the share price performance — is concerned that we could be on a longer-term delay until a lot of these reviews that they're doing are completed," Nash said.
Last year, Discover
After completing that earlier review, the company
"The chances of it getting turned on as quickly as it was last time is unlikely," said Dominick Gabriele, an analyst at Oppenheimer & Co.
Investors also hope to get more information Thursday about how costly it will be for Discover to fix its compliance problems. Discover executives have said that the pending FDIC enforcement action relates to the company's compliance management system.
The fallout from various regulatory actions could put a drag on the firm's earnings for some time as the company strives to improve its infrastructure. It could also have to refund customers and pay fines.
Nash said that the financial impact of long-term, ongoing regulatory infractions at larger banks has typically been pretty big. "So the market is looking for some clarity that that's not going to be the case here," he added.
The events of the last week have shaken investor confidence in a company that has long been viewed as a "safe haven" among lenders, said Vincent Caintic, an analyst at Stephens.
Investors have long seen Discover as a steady ship, but they are now discovering that it may have failed at the fundamentals, he said.
"If the management team doesn't communicate that they can handle this, we're going to get more selling tomorrow," Caintic said. "There needs to be some sort of plan."
Communicating a plan may be hard given that Discover's board hasn't announced a permanent CEO to replace Hochschild, who's headed the company since 2018.
Interim CEO John Owen, a former top executive at Regions Financial, is taking the helm after spending a year on Discover's board and its risk oversight committee. Discover said Monday that it has engaged an executive search firm to start the process of identifying a permanent CEO and president.
"If you look at past precedent, and past precedent might not be a perfect indicator of the future, a lot of times companies, when they run into these regulatory issues, tend to look for external candidates who have expertise in these areas," Nash said.
The company also said Monday that former BNP Paribas USA Chairman J. Michael Shepherd, a longtime banker with regulatory experience, is joining its board and risk oversight committee. Shepherd spent nearly two decades at Bank of the West —the U.S. retail arm of the French bank BNP that it recently sold to BMO Financial Group — and was its CEO in the years after the financial crisis.
Shepherd, a lawyer by training, spent years working in the government. He was deputy assistant attorney general, associate counsel to former President Ronald Reagan and senior deputy comptroller of the currency.
"He is an industry leader bringing significant expertise in financial services, decades of relevant banking industry experience and a valuable background in public affairs and regulatory matters to the bench of talent on our board," Tom Maheras, the chair of Discover's board, said in a statement.
Discover has not said whether Hochschild's departure is connected to its recent compliance issues, as analysts suspect. A company spokesperson declined further comment on Wednesday.
The CFPB entered into consent orders with Discover over its private student loan product in 2015 and 2020, as well as
Chopra's warnings in that speech were not directed toward any particular company. But his words are again drawing notice this week.
"For repeat offenders that are insured depository institutions, they can lose access to federal deposit insurance or their ability to continue operating," Chopra said in his 2022 speech. "Repeat offenses and, in particular, order violations, may be a sign that an institution's condition or behavior is unsafe and unsound."
In July, Hochschild acknowledged that Discover could have spent more on bolstering its compliance management in recent years.
"I do believe we underinvested, and that's something I take accountability for, but we are very focused on it now," he told analysts.
Even so, the general assumption among investors was that Discover was a safe investment.
"It's hard to imagine that you would let the compliance and governance checks and balances lapse the way they may have," said Oppenheimer's Gabriele.
