Discover Financial Services posts net income drop amid elevated compliance costs

Investing.com -- Shares in Discover Financial Services (NYSE:DFS) fell sharply in premarket U.S. trading on Thursday, after the credit card lender reported a steep decline in fourth-quarter net income due in part to higher compliance-related expenses.

The Illinois-based group posted net income of $388 million in the three months ended on Dec. 31, a 62% decrease compared to corresponding period in the prior year. The result translated to diluted earnings per share of $1.54, well below Bloomberg consensus estimates of $2.52.

Weighing on the returns were operating costs, which jumped by 18% year-on-year to $1.78 billion, above Wall Street projections. Discover noted that employee compensation and professional fees were elevated due to "investments in compliance and risk management."

Expenses in its current fiscal year are seen climbing in the mid-single digits from a 2023 total of $6.0B, "subject to risk and compliance matters," Discover said in a presentation.

In July, the company disclosed a regulatory review looking into some incorrectly classified credit card accounts that stretched back to as far as 2007, and said that it had received a consent order from the Federal Deposit Insurance Corporation in relation to separate compliance issues. Discover suspended share buybacks in the wake of the announcement, causing shares to tank at the time.

Former chief executive and board member Roger Hothschild later resigned. He was replaced by interim boss John Owen, who is set to soon hand the position over to financial industry veteran Michael Rhodes.

Loan growth is expected to be "relatively flat" in 2024, Discover predicted, while net interest margin is dipping to 10.5%-10.8%, "depending on [the interest] rate outlook."