Will High Interest Rates Prop Up Discover?

Discover Financial Services might find much financial happiness in higher interest rates, according to an analysis published by Barrons.

“Last year, we pointed out that Discover was gaining share in card balances from the big banks, and that it had plenty of growth potential in noncard lending, like personal and student loans. We predicted that the shares, then $52, could rise 20 percent. They’ve done just that, recently trading at $62.60—and they still look attractive,” Barrons reported. “Swelling card balances aren’t good news if they come with slipping credit quality or a jump in costs, but Discover’s charge-offs fell during the quarter. Delinquency rates ticked up, but just barely. Management called the borrowing environment ‘benign’ and stressed that it continues to go after prime-quality borrowers.”

The story argued that Discover is positioned for “another double-digit return for the stock over the next year, particularly if rates rise by mid-2015, as expected. Most of Discover’s loans have floating rates. As things stand now, management reckons a one percentage point jump in rates would add $130 million to yearly net interest income, or about 2 percent.”