Discover management explains Q3 reserve build

|About: Discover Financial Services (DFS)|By:, SA News Editor

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.

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