Discover Financial Services (NYSE:DFS) reported declines in the default rate as well as the number of late payments in the month of October. Discover’s default rate was 3.26% of credit card loan balances, on an annualized basis, which resulted in $46.8 million of write offs in October of this year. Last year, the default rate was 6.83% and it was 3.6% in September this year. 
In addition to the improved default rate, Discover also witnessed a decline in late payments in October. Just 2.5% of balances were delinquent or late by more than 30 days in October of this year compared to more than 4.3% a year earlier. The decline in defaults and late payments indicates the improving credit quality of Discover’s credit card loan portfolio. Discover’s default rate peaked in February 2010 at 9.1% and has declined since then. We expect the default rate to remain low in the short term and rise marginally when the macroeconomic economic outlook improves and credit card companies become less risk averse.
We have a price estimate of $26 on Discover’s stock, which is slightly ahead of the current market price.Notes: