Discover's revenue grows, but credit performance dips

Andrew Harrer/Bloomberg

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Discover Financial's earnings beat analysts' expectations, a performance tempered by signs that borrowers are having a more difficult time paying their credit card bills. 

Thirty-plus-day credit card delinquencies for the third quarter ended September 30 came in at 3.84%, an increase of 43 basis points, or bps, from the same reporting period in 2023, according to the earnings supplement. Net charge-offs, meanwhile, landed at 5.28%, an increase of 125 bps year over year. Total net charge-offs, including personal loans, were up 134 bps to 4.86%. 

Still, provisions for credit losses decreased by $229 million to $1.5 billion. 

The decline in credit quality comes as the Riverwoods, Ill.-based credit card processing company beat analysts' expectations on revenue, net income and diluted earnings per share. Revenue tallied $4.5 billion, up 10% and ahead of analysts' estimates of $4.3 billion, according to S&P Capital IQ data. Net income hit $965 million, up 41% and above analysts' estimates of $869.1 million. Diluted EPS landed at $3.69 per share, above estimates of $3.61 per share. 

Net interest income increased 10% to $333 million "driven by higher average receivables and net interest margin expansion," according to the earnings supplement. 

Period-end credit card loans posted a modest 3% increase to an ending balance of $100.5 billion; total loans were up 4% to $127 billion.

Consumers last quarter have been squeezed by prolonged inflation and elevated interest rates. Credit card issuer Synchrony Financial in Q3 saw its 30-plus-day credit card delinquencies rise 38 bps year over year to 4.78%. JPMorgan Chase also forecasted more credit headwinds with a $1.7 billion loan-loss provision spurred by higher net charge-offs driven primarily by the bank's card services business.  

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Consumer spending could also be pressured in the next six months, with 85% of consumers considering cutbacks primarily in nonessentials like dining out, clothing and luxury items, according to PwC's Holiday report 2024. Those cutbacks would likely come after the end of Q4, as holiday spending is projected to rise 7% year over year. 

Synchrony Financial in Q3 said purchase volumes fell 4% to $45 million, but noted that tightened underwriting guidelines contributed to the decline. 

Meanwhile, Discover said it completed the first of four sales of its student loan portfolio during the quarter but made little mention of its looming merger with Capital One other than to say its merger application was under review by regulators and "integration planning activities are advancing as anticipated," according to the earnings presentation. 

Discover executives will hold a conference call tomorrow at 8 a.m. ET but will not take questions from analysts.

The remaining credit card processing companies are set to report earnings before the month ends. American Express is set to release its quarterly earnings Friday, Oct. 18, with Visa and Mastercard reporting Oct. 29 and Oct. 31, respectively.