Discover Financial Services says it is set to overcome coronavirus slowdown
Buying into any type of financial company is difficult at this time. While many such stocks have seen their stock prices fall much more than the market, no one knows exactly what the COVID-19 recession will look like, how long it will last, or how government stimulus measures might affect. the result.
The fall in the market was particularly felt by credit card issuers such as Discover financial services, whose title is down 58% since the start of the year.
Credit card loans are unsecured, which means they are not backed by physical collateral. This makes them appear to be riskier than other low interest loans on houses, cars or office buildings.
Nonetheless, Discover managed to weather the 2008 global financial crisis and come out strong. Additionally, Discover’s management recently listed all of the ways the business is in balance. stronger position as the 2020 crisis approaches.
First Quarter Results
Discover recorded a small loss per share of $ 0.25 in the quarter as it set aside an additional $ 1 billion for loan losses compared to the allowance taken a year ago. Although net interest income increased by 4% and non-interest income by 7%, provisions were sufficient to fully offset profits. In addition, Discover had previously planned to increase marketing for its brand for the year, which resulted in increased operating expenses. Clearly, these investments are now reduced, with management forecasting $ 400 million in lower operating expenses for the remainder of the year.
Speaking on the conference call with analysts, management said the increase in provisions assumes more than 9% unemployment this year, with a slow recovery until 2022. This is roughly in line, though somewhat less severe, with the recession in 2008-2009, during which unemployment peaked at 10%. in October 2009.
How Discover is better positioned than it was in 2008
Management argued for the safety of Discover’s business by comparing the company today to that of 2007, on the eve of the last financial crisis.
First, thanks to the Dodd-Frank regulations implemented after the Great Recession, Discover has sufficient levels of capital, with a Common Equity Tier 1 ratio of 11.3% to company assets. Its record is therefore good.
Second, the proportion of Discover’s loan portfolio with FICO scores of 660 and below is only 19% before the current crisis, up from 26% in 2007. Overall, Discover’s average FICO scores have increased by five to six percentage points since 2007.
In addition, customers’ ‘readiness to buy’ levels, or the amount of available revolving credit they have, are $ 54 billion lower than in 2007. This means there is a limit to the amount of revolving credit available to them. amount of money customers can draw on their lines of credit. credit if they are in trouble.
Looking back on 2007-2011
Basically, Discover now appears to be positioned much more conservatively than it was in 2007. And while the COVID-19 pandemic could cause an even more severe slowdown, the government’s stimulus measures could help the industry. global economy to recover faster. We just don’t know at this point.
Looking at Discover’s results during the previous recession, we can see that she definitely felt the pain of the recession, although the results eventually recovered very sharply two years later.
Discover financial services (NYSE: DFS) |
2007 |
2008 |
2009 |
2010 |
2011 |
---|---|---|---|---|---|
Income from continuing operations (millions) |
$ 964 |
$ 528 |
$ 112 |
$ 765 |
$ 2,227 |
Unlike the previous recession, the current slowdown is occurring at the start of 2020, when the latest crash and panic struck at the end of 2008. Discover had to endure a year and a half of declining revenues, but remained in positive territory. on a full-year basis.
While Discover also cut its dividend in 2009, it recently declared its current dividend $ 0.44, although the company suspended share buybacks. However, in 2009, Discover only reduced the dividend in the May quarter, six months after the September and October crash. So a drop in dividends is always possible if things continue to deteriorate. Still, given the company’s better underwriting, more secure credit metrics, a better balance sheet, and more sophistication from a decade ago, I’d bet Discover’s current 5% dividend yield is enough. sure.
This means that for those looking for high potential share value in the financial industry today, Discover should definitely be on your shopping list.
This article represents the opinion of the author, who may disagree with the “official” recommendation position of a premium Motley Fool consulting service. We are heterogeneous! Challenging an investment thesis – even one of our own – helps us all to think critically about investing and make decisions that help us become smarter, happier, and richer.