Discover’s Card Charge-Offs Improve and Delinquencies Show Stability

Discover Financial Services posted earnings results on Thursday morning (Jan. 23) that indicated improving credit quality metrics tied to its credit cards, as well as an outlook that includes loan growth and a “stable” consumer.

During the conference call with analysts — where there was no question-and-answer session — CEO Michael Shepherd said that the company grew its average loans and deposit base and that “delinquency formation and net charge-offs began to improve.”

The executive added: “Despite a modest slowdown in U.S. card sales, overall network volume increased, driven by growth in our PULSE business and demonstrating the strength of our payments network.” Earnings materials revealed that PULSE volumes were up 7% year over year, driven by an increase in debit card volume. The latest quarterly results showed $84.9 billion in PULSE-related volumes.

Outlook for the Consumer

CFO John Greene said on the call that during the quarter, card receivables were up 1%, tied in part to a “slightly lower” repayment rate as measured year on year. The card loan portfolio ending loan balances were $102.8 billion as of the fourth quarter.

“Over the past several quarters, payment rates have stabilized,” said the CFO, adding that card sales were lower by 3%, due to “credit tightening actions.” The net charge-off rate on card loans, as seen in the company materials, were 5%, down from 5.3% in the third quarter.

Greene continued: “Holiday sales were strong, and we currently see an opportunity to increase new account acquisition in the coming year. This is expected to provide a modest boost to 2025 sales with more substantial benefits expected in 2026.”

Personal loans were up 5% from the prior year, to $10.3 billion.

“Demand remains strong, and we continue to take a conservative approach to underwriting,” Greene told analysts.

Average consumer deposits gathered 10% year on year and added 2% from the third quarter’s levels. The company’s direct-to-consumer deposits now account for 72% of total company funding, according to Greene. The average direct-to-consumer deposits in the fourth quarter, overall, were $89.2 billion.

Drilling down into overall charge-offs data, the ratio was 4.6% — 0.53% higher than last year but down 0.22% from the third quarter. Card charge-offs were 0.25% lower than the third quarter and delinquency rates were flat.

“This marks the third consecutive quarter the card net charge off rate has declined,” Greene said. “The 2023 card vintage is maturing and is now expected to modestly outperform the 2022 vintage. We are seeing improvements across the portfolio. Personal loan net charge offs and delinquencies continue to be within historical norms.”

At a high level, per Greene’s commentary, “our view on the consumer has not changed. We continue to observe a stable consumer supported by wage growth and a resilient labor market providing a foundation for sales and credit headed into 2025.”

Company guidance indicated that, in qualitative terms, 2025 should see loan growth that aligns “more closely with pre-pandemic norms” and net charge offs that are on a “downward trend.”

Early intraday trading on Thursday morning was positive, as Discover shares were 1.5% higher.