Discover Financial shares drop on outlook for credit card net charge-offs

Discover Financial Services stock fell more than 7% in premarket trades on Thursday after the credit card’s forecast for net charge-offs on credit card transactions came in worse than Wall Street’s targets.

While Discover Financial’s

fourth-quarter earnings of $3.77 a share blasted past the analyst estimate of $3.65 a share, the company’s view on debt that will be owed to it and not collected is sparking jitters around the stock.

“Despite the earnings beat, we expect shares to trade lower on net-charge-off (NCO) guidance that is above expectations,” JPMorgan analysts said Thursday.

Discover said it expects full-year average net charge-off rate to be in the range of $3.5% to 3.9%, above JPMorgan’s estimate of 3%.

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Net charge-offs are defined as the dollar amount representing the difference between gross charge-offs and any subsequent recoveries of delinquent debt, according to Investopedia. The Net charge-offs figure reflect the debt owed to a company that it doesn’t expect to be recovered.

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Discover Financial said its fourth-quarter net charge-off rate rose 0.76% — to 2.13% — in a move that reflects “credit normalization across the portfolio.”

The company said it set aside $883 million for potential credit losses during the quarter, up $620 million from the same quarter last year.

Overall net charge-off rate nearly doubled in the fourth quarter to 2.13% from 1.37% in the prior-year quarter.

Fourth-quarter net income rose to $1.03 billion, or $3.77 a share, from $1.07 billion, or $3.64 a share, in the same quarter last year.

Revenue jumped 27% to $3.73 billion from $2.94 billion.

Discover ended the quarter with $112.1 billion in loans, up 20% from the same quarter in 2021.

Management also said its board declared semi-annual cash dividends, as well as a quarterly cash dividend of 60 cents a share.

MarketWatch reporter Bill Peters contributed to this report.

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