Why Discover Financial Stock fell sharply on Thursday

What happened

Discover financial services(DFS 0.00%) the stock price fell significantly on Thursday morning after the release of its second-quarter earnings report. The credit card provider was down more than 10% at 11:16 a.m. ET, falling to $98.30 per share. The stock price is down about 14% a year for

While Discover’s earnings were down, as expected, the company beat earnings and revenue estimates.

So what

Discover Financial, the fourth-largest credit card company, reported revenue of $3.2 billion in the quarter, down 9.9% year-over-year, and a net income of $1.1 billion, down 35% year-over-year. Earnings per share were $3.96, down from $5.55 a year ago, but well above estimates of $3.75 per share.

However, Discover posted better revenue numbers in the second quarter compared to the first quarter of 2022, when revenue was $2.9 billion.

The company saw a 13% increase in net interest income due to higher interest rates and a 13% increase in loans year-over-year. Discover, unlike Visa (V -1.15%) and MasterCard (MY -0.88%)is a lender, not just a payment processor.

However, the drop in profits was linked to a 52% drop in non-interest income, mainly due to unrealized losses on assets resulting from the overall decline in the stock market and a higher provision for losses on receivables. Provision for credit losses jumped to $549 million from $135 million a year earlier, due to a build-up of reserves of $110 million in the second quarter, compared to a release of reserves of $321 million. dollars a year ago.

Now what

The release of reserves a year ago was common for most banks, as they had built up high reserves during the pandemic and then released excesses once things recovered. The build up of reserves here in the second quarter is not unusual, given the economic environment. Net write-offs – debt unlikely to be collected by the company – actually fell 32 basis points to 1.8%, a positive sign for its credit quality.

Both 30-day and 90-day loan default rates increased during the quarter, but are still fairly stable given the state of the economy. Overall, the increase in loans and the rise in rates are good signs for the company, despite the sale today. The decline may be more related to a report that jobless claims hit their highest level since November, raising concerns about the recession.

Discover Financial Services is an advertising partner of The Ascent, a Motley Fool company. Dave Kovaleski has no position in the stocks mentioned. The Motley Fool fills positions and recommends Mastercard and Visa. The Motley Fool recommends Discover Financial Services. The Motley Fool has a disclosure policy.

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