Discover Financial: Inflation Is Pressuring Lower Income Consumers

The $35 billion deal for Capital One to buy Discover Financial Services remains on track.

And in a truncated first-quarter earnings call — where the usual question-and-answer session was not part of the proceedings — Discover’s management noted that consumer loans are on the upswing. In the meantime, credit card spending has been pressured by inflation.

CFO John Greene said in his prepared remarks on the Thursday (April 18) call that card sales were down 1% compared to the prior year quarter.

“Sales slowed across categories with the largest decline occurring in the everyday category, which includes supermarkets, gas, and wholesale clubs,” he said.

“While we continue to add new accounts, in general, we are seeing card members spend less, particularly among lower income households, which are most impacted by the cumulative effects of inflation,” the executive said. “Based on trends in the period, we expect sales to be flat to slightly negative this year.”

Total loans were up 12% to $126.5 billion. Credit card loans, Discover noted in its earnings supplementals, were 11% higher to $99.4 billion.

​Interim CEO Michael Shepherd said on the call that loan growth was tied to “payment rate normalization.”

As for delinquencies, he said, that metric has stabilized. The company’s overall net charge-off rate was 4.9% in the March quarter, up from the 4.1% at the 2023. Digging into credit card net charge off ratios, that metric was 5.7% in the most recent quarter, higher than 4.7% seen at the end of the year. Management commentary on the call said that the company was tightening its net charge-off range to 4.9% to 5.2% based largely on current delinquency trends. Loan growth is expected to be in the low single digits in the current year.

Greene said on the call that credit performance has been “consistent with our view that losses will peak and plateau in mid to late 2024.”

He said approximately 50% of first quarter originations and personal loans were utilized for debt consolidation, with disbursements primarily made directly to creditors.

Impact of Late Fee Cap

With a nod toward the looming Consumer Financial Protection Bureau (CFPB) rule that would cap credit card late fees, Greene said, “If the rule were to be implemented, on an annualized basis, we estimate a pretax reduction of around $600 million or approximately 4% of revenues.”

Additional materials filed by the company in tandem with earnings noted that transactions processed on the PULSE network were up 42%, and the Discover network transaction counts were up 4%. Discover card sales volume, with the slight dip noted above stood at $50.1 billion in the most recent quarter.

Investors bid the shares of Discover Financial 2.4% higher in intraday trading on Thursday morning.