Discover Financial Services stocks are continuing to rise, thanks to news of its stellar fourth-quarter 2017 results that were highlighted when its earnings were released in January. That led to more confidence in Discover stock, which had been riding high at year’s end.
After being off to an unimpressive start in most of 2017, the last three months proved to be a strong finish, with the stock rising nearly 25 percent.
Why Investors Should Be Happy With the Fourth Quarter
Investors had plenty of reason to celebrate that fourth quarter. Net revenue went up 11 percent year over year, reaching $2.614 billion, compared to a total of $2.358 billion in the fourth quarter of 2016. Diluted earnings per share also went up 11 percent from year over year.
That solid performance was spurred on by the growth of Discover’s loan portfolio. The company’s total loans for 2017 were $84.2 billion, which represented a 9 percent increase from the prior year when the amount was $77.3 billion.
As companies take on more loans, they also increase their risk some won’t be paid back. Discover’s net charge-off rate also went up with their increase in loans. Charge-offs are the loans companies write off as lost causes – they don’t believe they’ll ever be paid back that money.
The charge-off rate increased to 2.85 percent, which was up from a rate of 2.31 percent in the fourth quarter of 2016.
The charge-off rate for the entire year was 2.7 percent, which was considerably higher than the rates they had in the past four years.
While loan losses are never a good thing, it becomes more of a problem when a pattern of increases in losses begins to emerge.
More About Discover’s Loan Portfolio
Discover has a three-pronged loan portfolio comprised of credit card, personal, and student loans.
The biggest bulk of Discover’s loan portfolio is credit cards. At 80 percent of the loan portfolio total, that number was $67.3 billion by the end of the fourth quarter of 2017.
Student loans are the next biggest segment of Discover’s loan portfolio. That amount edged up slightly last year to $9.2 billion. That’s a part of the portfolio that is continuing to climb for Discover.
“We continue to expand our presence in the student loan market, focusing on early awareness with the website, collegecovered.com, designed to help students and their families prepare for making decisions about college and how to pay for it,” Discover CEO David Nelms said in an article on The Motley Fool website.
One reason the student loan segment is so appealing to Discover right now is the charge-off rate, which is much lower than it is with credit cards or with personal loans. The charge-off rate is only 1.03 percent for student loans for Discover.
Personal loans are the smallest share of Discover’s portfolio, but it is the quickest growing one. It showed a 14 percent increase from the year before, which amounted to a total of $7.4 billion. Despite being the smallest portion of its portfolio, it’s the one Discover is trying to scale back on because of the higher charge-off level of 3.62 percent.
Author: Mike Brown
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