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Discover to cut back on origination activity in personal loans

As competition in personal loans "continues to intensify" and delinquency rates trend upward, Discover Financial Services sees "less opportunity" for near-term profitable growth in that portfolio, its chief executive said.

"Industry pricing and credit standards seemed to be focused more on near-term growth than long-term returns," Chairman and CEO David Nelms said on a call to discuss second-quarter earnings. Although the company is not exiting its personal loans portfolio, it will "[continue] to cut back on origination activity."

The company reported a 5% increase in personal loans year over year to $349 million. Discover expects personal loans receivables to be flat to potentially down over the second half of this year, Nelms said. Personal loans net charge-off rate jumped 79 basis points to 3.97%.

Discover needs to scale back on originations in order to maintain its returns, the CEO said, adding that the company is still adding some new accounts.

Companies like Goldman Sachs Group Inc., and many financial technology companies that traditionally have not been in the personal loans business, are now entering the space. But R. Mark Graf, Discover's CFO, said that "global domination" has never made sense, calling personal loans a business where discipline and humility "matter a great deal" and risk-adjusted returns "rule the way we think about things at Discover."

"It's just time to feather the accelerator a little bit," Graf said.

Nelms also noted that the personal loans marketplace is "by far" the easiest product to enter, much easier than the credit card or student loan marketplaces. However, oftentimes, "a credit cycles sorts things out," he added.

Increased marketing spend in personal loans impacts Discover's cost per account. Although the personal loans market is about 15% of the size of the credit card market, the executive said new entrants in personal loans have sent out more direct mail in the first half of 2018 than they did in the credit card market.

"To maintain our discipline, we need to selectively tighten and be more selective on how we are marketing," Nelms said.