Discover Financial Plunges After Suspending Buybacks on Student-Loan Probe
Jenny Surane
Thu, July 21, 2022
(Bloomberg) -- Discover Financial Services dropped the most in more than two years after the company suspended share repurchases, saying it started an internal investigation into compliance practices at the student-loan servicing business.
The board appointed an independent special committee to conduct the probe, Discover said in a statement late Wednesday. Chief Executive Officer Roger Hochschild said executives at the firm took the probe into account when they developed guidance for expenses for this year, and the company continues to expect costs to climb by a percentage in the mid-single digits.
“We can’t really give you anything to expect in timing,” Hochschild said on a call with analysts Thursday, noting the decision to pause buybacks was made by Discover. “As soon as we can, we hope to restart the buyback.”
Discover dropped 7.3% to $101.82 at 9:42 a.m. in New York, after falling 9.1% earlier Thursday, the biggest intraday decline since June 2020. The shares are down 12% this year compared with a 16% drop for the S&P 500 Financials Index.
The company has faced regulatory scrutiny of its student-loan business for years. In 2015, it agreed to a consent order with the Consumer Financial Protection Bureau linked to certain private student-loan servicing practices, and five years later it entered into an order resolving a CFPB investigation tied to the 2015 order. With the latest order, Discover was required to implement a compliance plan as well as shell out $35 million in penalties and redress for consumers.
“The only thing I can say is you’ve got both the consent orders and the investigation are in the areas of student-loan servicing,” Hochschild told analysts. “But beyond that, there really isn’t anything else I can add at this time.”
The probe overshadowed an otherwise rosy quarter, Sanjay Sakhrani, an analyst at Keefe Bruyette & Woods, said in a note to clients. Revenue for the quarter was $3.22 billion, topping the $3.19 billion average of analyst estimates compiled by Bloomberg, aided by a 14% increase in net interest income.
“The solid results likely take a bit of a back seat,” Sakhrani said. “Clearly, we need to get more details on the size and scope of any inappropriate practices and the associated financial ramifications.”
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