By Louis Juricic
Discover Financial Services (NYSE:DFS) traded lower Thursday after reporting fourth-quarter results that failed to impress Wall Street. Discover's results impacted other names in the sector, sending peers Capital One Financial (NYSE:COF) and American Express (NYSE:AXP) lower, along with several other companies including Synchrony Financial (NYSE:SYF) and Bread Financial Holdings Inc (NYSE:BFH). The issue impacting Discover's peers appears to be tied to net charge off guidance.
A net charge offs (NCO) refers to debt that is deemed as unlikely to be collected.
Oppenheimer analysts discussed the guidance in a note to clients, characterizing it as a "shocker."
"4Q22 EPS of $3.77 vs. our/consensus' $3.73E/$3.65E. 2023FY guidance has some efficiency YoY gains while the consensus shocker is DFS' 3.5–3.9% NCO guidance. Even to reach the low end, it likely means card NCOs near 5%. The Street currently has ~2.8% 2023FY NCO. We still think peak NCOs are ~5.5% and likely in 2Q24, yet some of DFS' expectations could indicate they believe peak NCO rates are sooner than our expectations," explained the analysts.
Commenting on read-through for Discover peers, the analysts said, "We believe DFS is overall a conservative management team and some investors will likely question DFS's NCO guidance as too bearish. NT maybe, but its NCO guidance likely indicates a ramp in NCOs through the quarters and, we believe, should be a guide for investors thinking about lower FICO peers (worse ramp). BFH/COF/SYF likely slightly worse ramp than DFS all else equal."
BofA analysts also commented, saying the credit outlook in particular has "spooked investors."
"We believe the 2023 credit outlook in particular has spooked investors. Specifically, DFS’ guidance calls for NCOs to increase to 3.5-3.9% in 2023, up from 1.82% in 2022 and consensus expectations for 2023e NCOs at 3.05%. Coming into the print, the narrative around a 'soft landing' and ‘lower for longer unemployment rate’ had been gaining steam."
They added, "We suspect shares of Capital One (COF), Synchrony (SYF) and Bread (BFH) could also see some pressure as investors read-thru on what DFS’ report could mean for their earnings."