Discover's profit rises on higher card use

The card company benefited between March and May not from issuing credit, but rather from milking its third-party payments business--which processes ATM and debit transactions and other banks' cards--and selling its British card business.

The trend toward plastic, whether it's credit or debit, appears to be the saving grace right now for companies like Discover, as customers fall behind on their debt payments and trim their spending.

Discover's third-party payments segment produced transaction volume of $29.4 billion, up 33 percent from a year ago. Since then, Discover has signed on many new financial institutions to use its card network. The company also saw transaction volumes rise at already existing issuers.

Discover takes a small cut every time a card is swiped to make a purchase.

That jump in third-party payments partially offset the U.S. card segment's 20 percent drop in pretax income to $309 million. Discover saw modest increases in sales on its own cards and in its portfolio of managed loans, but the company's loan-loss provision jumped 31 percent to $582 million. In addition, Discover had to write down $44 million on its investment in securitized loans and $31 million of its investment in the asset-backed commercial paper of the mortgage lender Golden Key.

Riverwoods, Ill.-based Discover Financial Services LLC's total earnings for the March to May period rose to $234 million, or 48 cents per share. That is up from $209 million, or 44 cents per share, in the same timeframe a year ago. Discover earned 6 cents per share from selling Goldfish, its U.K. card business.

"They had a decent quarter, given the circumstances," said Keefe, Bruyette & Woods analyst Sanjay Sakhrani. "But there's clear degradation in consumer credit quality. And we should kind of expect that for the remainder of this year."

Discover's shares fell $1.18, or 8.2 percent, to $13.15 Thursday along with the broader financial services sector. Discover's results beat the average prediction of 37 cents a share by analysts polled by Thomson Financial.

Discover's delinquency rates--or late-payment rates--were worse than last year, but slightly improved from earlier this year.