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Discover had strong receivable growth in the third quarter, with total loans up 17% year-over-year. Personal loans were up 11% in the quarter, according to Discover CEO Roger Hochschild, due to tighter underwriting discipline.
Inflation was a double-edged sword. The impact on card balance growth was partially offset by rewards offered in the form of cash back by credit card companies based in Riverwoods, Illinois.
John Greene, Chief Financial Officer of Discover, told analysts Tuesday at a conference to discuss third-quarter earnings.
“Similar to the previous quarter, the reward rate was up 3 basis points year-over-year as the cost of our cashback program increased due to strong new account growth. Year-to-date reward rate is 2 basis points It’s up, which is in line with our expectation of 2-4 basis points of annual rate inflation,” Green said.
Discover, too, has increased its use of advanced analytical tools in recent times, and the current economic cycle applies “heavy manual processes” when required to verify employment and other details, Hoxchild said. said.
Student loans increased by 4%, which Hochschild said was unaffected by the federal government’s proposed student loan forgiveness program.
The company’s credit card accounts receivable increased 19% year-over-year, and credit card sales increased 15% during the quarter compared to 20% growth in the first half.
Discover’s net charge-offs were 1.7% in the quarter, up 25 basis points from the prior year period but down slightly from the prior quarter, so credit quality remains fairly healthy. The company expects net charge-offs for the full year to be 1.8% to 1.9% due to lower than expected credit losses.
According to Hochschild, Discover increased its loan loss reserves by $304 million in the third quarter and slightly tightened new account acceptance criteria to offset the increased risk.
“We’ve tightened some of the most volatile segments in a recession,” he told analysts.
Hockschild said new Discover credit card accounts were up 22% year-over-year, and card usage remained strong through October. But spending on travel and big-ticket consumer goods has slowed from its very high levels in the summer, he said.
Operating expenses increased 17% year over year. This was mainly due to higher marketing expenses, higher cashback reward payments, and an increase in personnel. Hire 75 professionals and place them in a new analytics center in Chicago to improve underwriting and customer targeting capabilities. He also employs an additional 2,000 loan service agents to manage the company’s expanding portfolio.
Inflation contributed 200-250 basis points of sales growth and increased the cost of Discover’s cashback rewards program by 2 basis points.
Discover’s share buybacks remain suspended, but the company plans to resume share buybacks by the end of the year, suggesting potential regulatory action has eased.
The company put a hold on share buybacks. last quarter In connection with an internal investigation related to student loan service practices and compliance issues.
“The moratorium on share buybacks will remain in place, but we hope to resume share buybacks by the end of the year,” Green told analysts.
Discover reported net income of $1 billion for the quarter ended September 30. This was down slightly from the prior-year period due to higher expenses, and revenues, net of interest expense, were $3.5 billion, up 25% year-over-year.
The expansion of the post-pandemic “buy now/pay later” market hasn’t shaken Discover, Hochschild said in a post-earnings interview.
“We have no plans to offer BNPL loans, nor have we seen any impact on revolving card balances,” he said, noting that while many BNPL loans target subprime borrowers, Discover offers middle-income loans. He added that he speculates that they are targeting customers in the upper-middle income segment. .
While Discover has some profit from the BNPL market by using card network acceptance rails from BNPL fintechs like Sezle to connect to merchants, Hochschild said certain network partnerships could be profitable. He said he did not disclose how much he contributed.
Brian Foran, a senior analyst at Autonomous Research, wrote in a note to investors on Thursday that the conference call with Discover analysts was, overall, “generally reassuring words” on credit and the resumption of share buybacks in the near future. provided optimism about the potential for
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