Discover Earnings: Higher Net Charge-Offs and Expenses Pressure Bottom-Line Results

Narrow-moat-rated Discover reported weak fourth-quarter results as higher credit costs and operating expenses led to lower earnings. The bank’s revenue increased 13% from last year and 3.7% from last quarter to $4.2 billion. Meanwhile, net income fell 62% from a year ago to $388 million, which translates to a return on equity of 11%. The decline in earnings was primarily due to a $1 billion increase in Discover’s credit provisioning expense, which was due to both higher net charge-offs and a $305 million increase in reserve build. The earnings release was worse than we had anticipated, and as we incorporate these results, we expect to reduce our $150 fair value estimate for Discover by mid to high single digits.