Discover Sinks After Warning of Rising Losses Later This Year

Discover Financial Services shares plunged after the credit-card company warned that losses are likely to rise in the second half of the year.

The firm has already been tightening underwriting standards for new customers and pulling back on promotional rate offers to better manage risk in the lending portfolio, executives said on a conference call Thursday. Recent data showing rising unemployment among white-collar workers could ultimately lead to greater losses on Discover’s cards, Chief Executive Officer Roger Hochschild said.

“Credit performance so far during the pandemic has been, I would argue, extraordinarily good, and the reason for that is white-collar employment has held up well,” Hochschild said in a phone interview. “Those rising white-collar job losses will, over time, push up charge-offs.”

Discover dropped as much as 6.9% Thursday morning in New York, its biggest intraday decline in four months, making it the day’s worst performer in the 65-company S&P 500 Financials Index. Shares of rivals Capital One Financial Corp. and Synchrony Financial, which are scheduled to report earnings later this month, were also among the index’s biggest decliners.

Discover Sinks After Warning of Rising Losses Later This Year

Roughly a year after Covid-19 made its way to the U.S., unemployment remains elevated. Despite recent gains, employment in professional and business services is still 858,000 below its pre-pandemic peak, and the financial industry has recovered just 177,000 of the 279,000 jobs it lost in March and April, U.S. Labor Department figures show.

As part of its attempts to contain losses, Discover has pulled back on offering proactive increases for customers’ credit lines and is being more selective about boosting lines when customers call in, Hochschild said.

“The message from management was that of exercising prudence in a very challenged backdrop,” Sanjay Sakhrani, an analyst at Keefe, Bruyette & Woods, said in a note to clients.

The percentage of Discover’s credit-card loans that were more than 30 days past due dropped 55 basis points to 2.07% in the fourth quarter. The company charged off $463 million in card loans, a 28% decline from a year earlier.

Discover said it successfully shaved $400 million in expenses last year as part of its response to the pandemic, which hurt spending on the firm’s cards as stores and restaurants across the country shuttered their doors. Still, total operating expenses climbed 8% to $1.28 billion during the quarter after the company initiated a voluntary early retirement program within its business technology area.

“We’re investing significantly in the area and part of it is just looking at the mix of people we have in terms of engineering to non-engineering or support roles,” Hochschild said. “We’re happy with the number of people who took us up on that.”

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