Discover 3Q Shows Higher Card Spending, Charge-Offs Too

Amid what management termed “healthy broader economic trends” in the United States, Discover Financial Services said that rising rates – coupled with increased credit card activity – helped to propel top- and bottom-line growth in the third quarter.

At the same time, results showed growth in loan losses, reserves and charge-offs.

In a news release, Discover said 3Q results showed total loans at $80.4 billion, up 9 percent, while credit cards grew at the same pace to $63.5 billion.

Headline metrics included net income of $1.59 a share, compared to $1.56 from a year ago, beating consensus by a nickel. Total revenues were $2.5 billion, up 10 percent year over year.

Delving into the numbers a bit, the company said that Discover card sales volumes were up five percent compared to the third quarter of last year.

Payment services transaction dollar volume was $51.6 billion, up 16 percent from the prior year, while consumer deposits were up 10 percent at $38.7 billion.

CEO David Nelms said on the earnings call that card growth was roughly evenly split between new accounts and growth from existing customers. While the third quarter was characterized by what he termed “unusually aggressive” card offerings from a number of competitors, “this year some of the issuers appear to have pulled back a bit.”

Speaking generally of the credit card market’s competitive environment (and Discover’s own growth rates), the CEO said, “the market is growing faster now than it was two, three years ago – and one year ago is when we saw the absolute peak in competitive intensity, particularly around cash reward programs.”

Looking at losses and charge-offs, Discover’s reported net charge-off rates for its loans, excluding PCU loans, were 3.2 percent, about 56 basis points higher than the third quarter of 2016.

Credit card net charge-off rates for the period stood at 2.8 percent, up 63 basis points from the prior year but showing sequential improvement, as that number was down 14 basis points from the prior quarter.

The delinquency rate for credit card loans over 30 days past due was 2.1 percent, up 27 basis points from the prior year and 14 basis points sequentially.

The net charge-off rates were generally higher because of “supply-driven credit normalization and the seasoning of loan growth from the last few years,” the company said in its earnings release. Management noted in the call that charge-off metrics are lower relative to industry averages.

During the conference call with analysts, management offered viewpoints on the credit environment. Credit performance remains within expectations, and spending from prime consumers remains buoyant amid what Nelms termed “a robust labor market, rising home prices and manageable debt service levels.” Consumer sentiment is at its highest level in well over a decade, he added. The company is scaling back efforts in personal loans, with an eye on originations sourced through broader market channels.

With a nod toward operating expenses, which were up six percent in the quarter, management noted that investments in technology – such as alert services – proceed apace, with a focus on digital initiatives, advanced analytics and machine learning.