Discover to Reduce Costs, Tighten Lending Amid Pandemic
Discover to Cut Costs, Tighten Lending to Deal With Virus Impact
(Bloomberg) -- Discover Financial Services said it plans to cut costs by $400 million this year after the coronavirus pandemic weighed on first-quarter results.
The company also pulled back on balance-transfer offers and tightened underwriting strategies for new accounts, according to an investor presentation Wednesday. Discover reported a net loss of $61 million, or 25 cents a share, for the first quarter, and abandoned its guidance for full-year results, executives said on a conference call with analysts Thursday.
Discover joins lenders including Synchrony Financial, the largest U.S. provider of store credit cards, in being hurt by the coronavirus pandemic, which has eviscerated consumer spending amid mandatory business shutdowns and surging unemployment across the country. Synchrony this week abandoned its 2020 guidance, and Alliance Data Systems Corp., which provides credit cards for Victoria’s Secret and J. Crew, took similar actions Thursday.
Discover boosted provisions for loan losses to $1.81 billion. The total reserve rate for its card business rose to 7.2% from 3.7% a year earlier. In its student-loan business, that rate increased to 7.7% from 1.8%.
“We will have some challenging quarters ahead,” Roger Hochschild, chief executive officer of the Riverwoods, Illinois-based company, said on the conference call. “None of us can perceive when the pandemic impacts will subside and allow the U.S. economy to begin to recover. But Discover is well-positioned for the recovery that we know will eventually come.”
Climbing Costs
Discover had previously said expenses would climb this year as it made continued investments in its brand, technology and the acceptance of its cards.
The company said Wednesday that it handled more than 600,000 requests tied to coronavirus and enrolled 454,000 customer accounts into its “skip-a-payment” programs, including about 1.6% of its active credit-card accounts.
Discover said it saw a “significant drop” in spending on its cards in the second half of March. Spending on discretionary items -- including restaurants, retail and travel -- has dropped 33% so far in April compared with a year earlier, while spending on everyday items like gas and groceries declined 14%.
The company’s shares fell 4.1% to $33.70 at 8:33 a.m. in early New York trading. They had dropped 59% this year through the close of regular trading Wednesday, almost double the decline for the S&P 500 Financials Index.
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