real-time news and commentary for investors
Monday, Oct 21
Discover management explains Q3 reserve build
- The Discover (DFS) earnings miss looks to have been driven by an unexpected loan-loss reserve build of $42M vs. last year's reserve release of $167M - made especially curious given current benign credit trends. Eliminating both years' reserve actions has EPS of $1.25 this Q, well ahead of $1.22 expectations and 12% higher than a year ago (see slide 3 of earnings call presentation).
- Immediately pressed on this during the earnings call (transcript), CFO Mark Graf says the key issue requiring the reserve build "was very clearly what we perceived to be something good" - the current book of business is having such good credit experience that the "recovery buckets" from a large block of soured loans are not getting refilled. Net charge-offs will therefore increase because the company isn't getting as much benefit from recoveries. "We don't see any situation where there is any type of a meaningful deterioration in credit in the near-term horizon at all," says Graf.
- Previous: Q3 results.
- Shares -4.2% AH to $51.50.