Discover Financial Services is taking a financial hit from the end of rock-bottom loss rates in the credit card business.
The $94.8 billion-asset firm reported solid revenue growth during the first quarter, as its flagship credit card portfolio expanded by 7%. But Discover’s chargeoff rate climbed to its highest level in five years, and the firm increased its provision for loan losses by 38%, which more than offset the revenue gains.
The Riverwoods, Ill., company reported net income of $564 million during the first quarter, down slightly from $575 million in the same period a year earlier. Earnings per share of $1.43 fell a penny short of the consensus estimates of analysts surveyed by FactSet Research Systems.
Overall, Discover’s loan book grew by 8% to $75.9 billion. The company’s relatively small personal loan portfolio enjoyed the fastest expansion, growing by 20% to $6.7 billion.
The loan growth helped to fuel an 8% rise in net interest income. Discover’s net interest margin rose by 13 basis points to 10.07%. And the firm’s operating expenses were virtually flat from a year earlier at $885 million.
But Discover’s first-quarter performance was hurt by credit deterioration, particularly in its card business. The rate of credit card loans that were at least 30 days delinquent rose to 2.06%, up from 1.68% a year earlier. The net chargeoff rate in the cards business climbed to 2.84%, up from 2.34% in the first quarter of 2016.
The company said that it set aside more money for loan losses primarily because net chargeoffs rose.
Discover CEO David Nelms said in a press release that the higher loss provision is a byproduct of loan growth in recent quarters, and he sought to keep the rising losses in perspective.
“The credit environment remains favorable relative to historical norms,” he said.