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Tech & Science Discover plunges to decade low after warning investors of rising expenses

21:25  24 january  2020
21:25  24 january  2020 Source:   businessinsider.com.au

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  • Discover stock fell the most in more than a decade after warning it may need to boost operating expenses as much as 11% in 2020.
  • The company's increased spending will drive marketing for non-card products and better technology, executives said on a call with analysts.
  • The company has been utilising new analytics technology to predict which clients will fall behind or default on credit card loans.
  • The practice bolsters Discover's growing troubled-debt restructuring program, but a jump in net charge-off rate through 2019 prompted fear among analysts that the company is fuelling an increasingly risky venture.
  • Watch Discover trade live here.

Discover stock sank the most in more than 10 years after warning investors it may need to increase spending as much as 11% in the new year.

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The financial services company's annual operating costs could rise as high as $US4.9 billion in 2020 compared to $US4.4 billion last year, bank executives noted in a call with analysts. The hiked costs will go toward marketing for non-card products and investment in new technology.

The company announced its fourth-quarter earnings after market close on Thursday, posting better-than-expected results for earnings per share and falling just below Wall Street's revenue estimate.

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The fourth quarter's net charge-off rate, which measures the debt owed to Discover that is unlikely to be paid back, rose to 3.19% from 3.08% in the year-ago period, signalling growing risk in one of the company's increasingly important troubled-debt restructuring, or TDR, unit.

Discover stock fell as much as 11.2% before paring some losses later Friday morning. Bloomberg first reported the decade-high stock fall.

The company has been utilising new analytics technology to predict which clients will fall behind or default on credit card loans. The practice benefits the TDR program, which allows clients to change repayment terms in times of need. Users previously needed to call the firm to qualify for the program, but Discover has since opened it to mobile and online banking users.

Receivables through the troubled-debt business surged 48% in the fourth quarter compared to the year-ago period, confirming the rapidly expanding use of the restructuring program. Some analysts questioned its quality and whether making the restructuring option easier to access would bring greater risk to the company. CEO Roger Hochschild looked to ease the concerns, and clarified Discover can maintain healthy credit while opening the program to more customers.

Australia's Woodside Petroleum signals higher output in 2020

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"What you're seeing flow through the financials is exactly what you would hope in terms of overall good credit performance and a solid book," Hochschild said. "And TDRs is an approach to work with customers and help cash flows."

Investors and analysts alike are set to watch net charge-offs and late payment rates in the coming quarters as Discover spends more on tech and its TDR business. Net charge-offs gained 10% to $US2.88 billion in 2019, on par with analyst estimates. The proportion of credit-card loans at least 90 days overdue increased to 1.32% from 1.22%.

Discover traded at $US77.76 per share as of 1:20 p.m. ET Friday, down about 8.1% year-to-date.

The company has 11 "buy" ratings, 12 "hold" ratings, and one "sell" rating from analysts, with a consensus price target of $US90.05, according to Bloomberg data.

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