Discover's shares tumble after warnings on costs, credit quality

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Shares of Discover Financial Services slumped the most in more than a decade after credit card lender warned that it will spend more on marketing and technology, including to beef up collections on troubled debt.

Full-year operating expenses could rise to as high as $4.9 billion from $4.4 billion in 2019, Discover executives said late Thursday on a conference call. Marketing non-card products such as a new digital checking account will contribute to higher costs, as will investments in analytics.

Shares of Discover were down nearly 11% as of 2:30 Friday, to $76.67.

The company has been using some of its new analytics capabilities to identify customers who might be close to falling behind on their payments, Chief Financial Officer John Greene said. Discover has long had a program for “troubled debt restructurings,” or TDRs, that allows customers experiencing financial hardship to modify their repayment terms.

In the past, those customers had to call Discover to qualify, but the lender has now made it part of its online and mobile-banking capabilities. That’s led to an increase in usage: The amount of receivables it classifies as TDRs rose to $3.4 billion as of Dec. 31, a 48% increase from a year earlier.

Analysts on Discover’s earnings conference call pressed executives to explain their view on the credit quality of the portfolio.

“We have seen growth in TDRs because we now make them available not just when you call but as part of our expansion of digital collections,” Chief Executive Officer Roger Hochschild said. Still, he said, “we feel good about credit. Look at charge-offs. Look at delinquencies.”

For the year, net charge-offs rose 10% to $2.88 billion, in line with analysts’ estimates. The percentage of credit-card loans that were at least 90 days overdue rose to 1.32% from 1.22% a year earlier.

Bloomberg News