Discover Financial Services (DFS) shares in freefall after earnings on increasing provisions for credit losses

Discover Financial Services (DFS), a leading credit card and banking provider, reported its Q4 2023 earnings Wednesday after market close, revealing a 62% decrease in profit compared to the previous year. Despite this decline, the company managed to beat analysts' revenue expectations by 12.8%, reporting $4.2 billion in revenues for the quarter.

The reduction in net income was primarily due to an increase in provisions for credit losses. In the fourth quarter, Discover set aside $1.91 billion for potential loan losses, a significant increase from the $883 million it provisioned in the same period last year. The total net charge-off rate rose by 198 basis points year-over-year to 4.11%, reflecting the impact of the economic downturn.

However, the company's net interest income, which represents the difference between interest earned on loans and paid out on deposits, increased by 13% during the quarter. Total operating expenses also rose by 19% to $1.78 billion, mainly due to higher personnel costs and increased marketing expenses.

Despite the challenges, Discover's loan growth remained relatively strong, with a 15% increase in 2023. The company's net interest margin was 11.07% for the year, a solid performance in the face of rising interest rates.

Looking ahead to 2024, Discover expects net charge-offs to be between 4.9% and 5.3%, up from the 3.42% recorded in 2023. The company anticipates loan growth to be relatively flat year-over-year, and its net interest margin is projected to be in the range of 10.5% to 10.8%, depending on the rate outlook. Operating expenses are expected to rise in the mid-single digits, with an estimated $6.0 billion in 2023.

In addition to its financial performance, Discover also announced the appointment of a new CEO, further demonstrating the company's commitment to long-term growth and strategic development. The company also recently launched its Cashback Debit product, which is expected to contribute to future growth.

Despite the volatility in the financial markets and the economic uncertainty, Discover Financial Services has shown resilience in its earnings report. The company's focus on asset and deposit growth, a strong net interest margin, and a robust outlook for 2024 are indicative of its ability to navigate challenging economic conditions.

Investors should keep an eye on Discover's progress in managing credit risk, as well as the impact of its new product launches and strategic initiatives. With a solid financial foundation and a commitment to innovation, Discover Financial Services is well-positioned to capitalize on growth opportunities in the coming years.

DFS shares are down over 10% in after hours trade.