This past July, Discover released its second-quarter results. Although the company’s overall loan portfolio increased by eight percent, Discover shareholders immediately became concerned by the company’s credit risk and loan loss rates. This is nothing new for Discover, who dealt with similar fears at the end of quarter-one.
Here are some of the biggest issues that the second-quarter results revealed:
- Net principal charge-offs were up to $520 million, which was a 35 percent increase from the previous year
- Provisions for loan losses were up to $640 million, which was a 55 percent increase from the previous year.
A charge-off refers to an outstanding loan the company is unlikely to receive payment on. Provisions for loan losses refer to money that has been set aside by Discover for loan payments that have not been collected.
And to add insult to injury, the Federal Reserve conducted their annual stress test earlier this year. The results showed that Discover stands to lose $11 billion in the event of a sudden economic downturn.
There are many different factors that contribute to Discover’s mixed second-quarter results. One contributing factor is that 80 percent of Discover’s loan portfolio comes from credit card debt alone.
When asked to comment on the second-quarter results, the company stated that there was not much they needed to fix. And CFO Mark Graf pointed out that while Discover’s charge-off rates have risen “…they remained below both historical norms and the industry averages.” However, management did indicate that going forward they are only looking to do business with prime lenders.
However, while credit cards continue to make up the majority of Discover’s business, they have also seen incredible growth in their personal loan portfolio. July’s results showed that personal loans grew to $7 billion in 2017, which is a 22 percent increase. Discover credited this growth to their increased online presence and a simplified online application process.
However, they indicated they are looking to scale back quite a bit in this area. One of the biggest problems Discover has run into is that many of their personal loan borrowers have high credit scores but limited credit history.
Discover recently conducted a survey of 2,000 of their personal loan borrowers. Medical expenses, debt consolidation, and funding a small business were cited as the main reasons for taking out a personal loan. And when asked about the benefits of taking out a personal loan, 22 percent of the borrowers surveyed said that they made their decision based on low-interest rates. Meanwhile, 21 percent cited the quick access to cash as their main motivator.
Dan Matysik, who is the Vice President of Discover Personal Loans, said that the survey results also revealed that over half of the participants did not have $5,000 available to cover an emergency expense. This could indicate that Discover’s increase in charge-offs may be due to the fact that more people are taking out personal loans without immediate capability for paying them back securely.
Author: Dave Rathmanner
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