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.

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Comments (2)
  • imac007
    , contributor
    Comments (742) | Send Message
    Solid performer. Steady hand at the wheel. Controlled growth with balanced expansion. Unwavering dedication to protecting shareholder assets and delivering both growth and profits. Coming off of ever increasing 52 week highs, this stock is a buy on any pullback. The addition of a new mortgage portfolio means they aren't dogged by decreasing terms from renewals. The well timed entry should benefit from increasing interest rates in the next few years. Their strength has been careful selection of clients limiting losses. Their instincts have served the well with a stellar default rate. Adding to reserves hardly constitutes a miss. Allocations designed to solidify their position can only serve as an opportunity platform. Growth and future stability have the makings of long term potential.
    21 Oct 2013, 09:32 PM Reply Like
  • James_B
    , contributor
    Comments (232) | Send Message
    I agree 100%. I'm interested to see how the market reacts to the miss EPS. Clearly, after the explanation, the company remains a solid investment.
    21 Oct 2013, 11:14 PM Reply Like
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