Discover Financial Sees Card Spending Decline as Consumers Remain ‘Cautious’

Discover Financial Services reported second-quarter results that indicated consumers are turning to debit transactions, while the company’s card sales slipped year on year.

CFO John Greene said on the Thursday (July 18) earnings call that Discover card sales were down 3% from the prior year. Supplemental materials from Discover indicate that Discover’s credit card sales volumes were $53.4 billion in the most recent quarter. The company’s PULSE volumes were up 18%, driven by an increase in debit transaction volumes.

Card receivables increased 7% year over year due to a lower payment rate and a smaller contribution from new accounts. Average overall deposit balances were up 15% to $10.3 billion.

Cautious Consumers

The data show that in the card portfolio, the 30-day delinquency rate was 3.7% in the June quarter, up from 2.9% a year ago. The net principal charge-off rate was 5.6%, up from 3.7% last year. Greene said losses should “peak and plateau” later this year. The supplementals reveal that net charge-off rates, overall, should be in the range of 4.9% to 5.2%.

“We continue to see a cautious consumer evidenced by less card member spend with lower income households being most affected,” said the CFO.

Personal loans were up 13% from the prior year, and Greene said that “we prudently tightened underwriting over the past year.”

Comments from management on the conference call conducted in tandem with the earnings release were confined to prepared remarks. There was no question-and-answer session, as is typical when mergers or other significant corporate events are underway. Capital One struck a deal earlier this year to acquire Discover.

Interim CEO Michael Shepherd said in his remarks that the second-quarter operating performance was “very good,” and noted that the company has struck an agreement to sell a portfolio of student loans to buyout firms Carlyle and KKR for a purchases price that may be as high as $10.8 billion. That purchase price, as has been widely reported, is a premium to the $10.1 billion of loans held in the portfolio. FirstMark, a division of Nelnet, will assume responsibility for servicing the portfolio upon sale.

The company’s financial data indicate that private student loan net charge-offs — at 1.9% in the June quarter vs. 1.3% last year — were higher due to “macroeconomic pressure on certain borrower segments.”

“This agreement represents an important milestone in our journey to simplify our operations and business mix,” Shepherd said on the call.

In discussing the ongoing deal with Capital One, he said that the acquirer “continue to lead the integration planning process.” Shareholder votes are expected to occur this fall.

“We are encouraged by how the merger planning and application processes are progressing,” said Shepherd.

Shares of Discover Financial Services were up 3.8% at the start of trading on Thursday.