Discover in Free Fall After Sounding Credit Alarm

Maybe all that credit card debt is bad, actually. 

BREAKING NEWS

Discover Financial is in a double-digit drop this morning after a brutal earnings call. The company is reserving an additional $1 billion to protect against potential credit losses. 

WHAT HAPPENED

While Discover beat the Street’s expectations—their expenses are crushing their ability to grow. Discover logged a solid 13% YoY increase in revenue to $4.19 billion—but their net income dropped by nearly 2/3rds to $388 million. The near-exponential explosion in costs is the factor killing Discover in the markets today, but there are more troubling factors at play.

DEBT BOMB

A net charge-off rate is simply the amount of debt a credit provider thinks won’t be paid back. The more people become insolvent thanks to credit card debt—the more that rate goes up. This time last year, Discover had a net charge-off rate of 2.13%. 

With all the concerns surrounding credit card debt, the U.S. consumer, and rising interest rates—those numbers may seem alarming at first. However, Discover management made it very clear that a 4.11% net charge-off rate is on the lower end of their expectations for Q4. It’s natural that more people are going to default on credit card debt with inflation this high and interest rates becoming punishing—but this could easily be the peak of that pressure and not the beginning. 

WHY IT MATTERS

But still, this is the era of efficiency and the market hates to see how much that credit caution is eating into Discover’s ability to turn a profit. We’ll have to wait and see from other large credit providers before the market can make a better determination about the state of consumer debt. For now, Discover is turning into a clear loser in that market—enough for investors to drop the stock over 7% in early trading.