Discover Financial Services Considers Sale of Student Loan Business
Discover Financial Services is reportedly considering selling its student loan business, a move that Wall Street analysts believe could significantly enhance the company's earnings. The credit card issuer announced on Wednesday that it would halt accepting new student loan applications by February 1, 2024, as part of its exploration of strategic alternatives. This includes the potential sale of the Discover Student Loans portfolio. Current customers will not be affected by this decision, as stated by the company.
Following this news, Discover's stock experienced a 1.9% increase on Thursday, reaching $88.89. However, despite this recent surge, the stock has observed a year-to-date decline of 9.1%.
Analysts anticipate a favorable reaction from investors regarding the potential sale of the student loan business. Richard Shane from J.P. Morgan predicts that if half of the capital from a potential sale is allocated to share repurchases, there could be a 3% boost to per-share earnings by 2025. It is important to note that share buybacks typically stimulate share prices and per-share earnings by reducing the number of outstanding shares.
Discover currently holds approximately $10 billion in student loans. Share repurchases were temporarily suspended by the company in July of this year due to an ongoing internal review of compliance, risk management, and corporate governance. As of now, stock buybacks have not yet been resumed.
Discover Considers Sale of Student Loan Business
Discover is reportedly considering the sale of its student loan business, a move that could streamline the company's operations and improve compliance. The decision comes after last year's temporary suspension of share buybacks due to an internal investigation into the student loan servicing business. In 2020, Discover settled with the Consumer Financial Protection Bureau for $35 million over allegations of non-compliance with debt collection practices.
RBC Capital Markets analyst Jon Arfstrom believes that divesting this segment would simplify Discover's structure and enable a greater focus on the core business. With an Outperform rating on Discover stock and a $108 target price, Arfstrom supports the company's decision.
This potential sale comes at a time of uncertainty regarding consumer spending, credit card default rates, and the creditworthiness of borrowers. Economic forecasts predict a looming recession, making it crucial for Discover to make strategic decisions. In addition to exploring the sale, the company is also searching for a new permanent CEO.
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