Shares of Discover Financial Services (DFS, Financial) experienced a positive shift today, following initial concerns over its first-quarter results. The company, which is set to merge with Capital One (COF, Financial) in an all-stock deal announced in late February, saw its stock increase by 3%. The merger's approval by regulators remains uncertain, prompting DFS to halt share repurchases and maintain its dividend rate.
Key factors impacting the initial reaction to DFS's quarterly performance included:
- A year-over-year increase in the 30+ day credit card loan delinquency rate by 107 basis points to 3.83%, marking the eighth consecutive quarter of increases. Despite this, the rate showed a 4 basis point improvement from the previous quarter.
- A significant 68% drop in net income year-over-year, attributed to a $799 million addition to the card misclassification remediation reserve. This was addressed by interim CEO Michael Shepherd as a corrective action following internal and external reviews.
- The provision for credit losses rose by 36% year-over-year to $1.50 billion, alongside a 220 basis point increase in the total net charge-off rate, putting additional pressure on DFS's financials. Nonetheless, the company anticipates peak losses in mid to late 2024, suggesting a near peak in credit reserve rates barring major economic downturns.
- DFS revised its forecasts, projecting low-single-digit percentage year-over-year loan growth and an increase in net interest margin to 10.7%-11.0%, reflecting a more optimistic outlook with fewer expected rate cuts.
Despite facing several challenges in the first quarter, Discover Financial Services (DFS, Financial) demonstrated significant improvements and remains optimistic about its future performance. This outlook, however, is tempered by the ongoing uncertainty of the DFS/COF merger's regulatory approval. The company's resilience and positive adjustments are seen as a good indicator for the upcoming earnings season for peers such as American Express (AXP, Financial), Visa (V, Financial), and Mastercard (MA, Financial).
