Discover earnings beat estimates, stock rises

By @ibtimes on

Discover Financial Services posted stronger-than-expected quarterly earnings on Thursday as bad loans grew less than feared and the sixth-largest U.S. credit card issuer trimmed costs.

Discover shares rose 1.8 percent to $15.60 in afternoon trading, after touching a 52-week high of $16.37.

Net income for its fiscal third quarter, ended August 31, was $577.4 million, or $1.07 per share, compared with $180.1 million, or 37 cents per share, a year earlier.

The latest results included an after-tax gain of $287 million related to an antitrust settlement with Visa and MasterCard .

Excluding that gain, the Riverwoods, Illinois-based company earned 52 cents per share. On that basis, analysts had expected a loss of 12 cents per share, according to Reuters Estimates.

The results were generally strong across the board. The revenue line beat our expectation, the provision (for loan losses) was lower, expenses were lower, said Michael Taiano, an analyst at Sandler O'Neill.

Discover's expenses declined 14 percent as it cut jobs and reduced marketing expenses. Revenue net of interest expense rose 47 percent to $1.84 billion.

Its charge-off rate -- loans it does not expect to be repaid -- climbed to 8.39 percent in the third quarter from 7.79 percent in the second quarter, below the company's and analysts estimates.

Discover forecast a charge-off rate of 8.5 percent to 9.0 percent in the fourth quarter, also below analysts estimates.

The delinquency rate -- an indicator of future credit losses -- inched up to 5.10 percent from 5.08 percent in the second quarter.

Provisions for losses on U.S. credit cards declined to $924.4 million from $1.11 billion in the previous quarter.

I'm pleased it is decelerating, but we haven't seen the peak yet and if unemployment continues to rise into next year, losses are likely to rise next year as well, Chief Executive David Nelms told Reuters in an interview.

I'm certainly feeling much better than I did a number of months ago, but it is still a very difficult time, and we are seeing a lot of mixed signals, where some things are starting to improve, while others remain under stress, Nelms said.

Thanks to its conservative expansion policy in recent years, Discover is less exposed to bad loans than most of its bigger rivals, such as Bank of America Corp and Citigroup Inc .

However, the company still obtained $1.2 billion of government funds under the Troubled Asset Relief Program, after winning approval from the Federal Reserve in December to become a bank holding company.

Unlike banks such as Citigroup and JPMorgan Chase & Co , Discover lacks retail branches that would give it easy access to cheap deposit funding. It used to fund most of its operations in the asset-backed securities markets. Most recently it has been trying to raise money through certificates of deposit and deposits online.

Like its rivals, Discover has been closing accounts, and trimming lending to cushion credit card losses. It also faces a new credit card law that will limit its ability to increase fees and interest rates starting next February, which is expected to shrink revenue across the industry.

Discover has been trying to expand into student loans and other consumer credit businesses to offset the contraction in the credit card business.

Nelms said the company could repay the bailout funds this year.

(Reporting by Juan Lagorio; editing by John Wallace and Steve Orlofsky)

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