Discover profit falls due to year-ago settlement

September 20, 2010 GMT

NEW YORK (AP) — Increased use of its credit cards and improved customer payment habits helped lift Discover Financial Services Co.’s fiscal third-quarter results, the company said Monday.

Sales volume for purchases made with its cards rose 5 percent over a year ago, to $24 billion. “I think that bodes well,” said Chairman and CEO David Nelms in an interview after the results were released. “Some of the discretionary spending is gradually coming back as consumers get a little more confidence in their financial situation.”

At the same time, late payments and write downs due to nonpayments fell. Nelms said those statistics reflect more cautious consumer who is spending less and more careful about managing their debt. “I think there are many consumers who are in better shape than they were three years ago,” he said.

For the three months ended Aug. 31, Discover Financial said net income attributable to common stockholders was $258.2 million, or 47 cents per share.


That compares with $552.9 million, or $1.07 cents per share, last year, which included a $287 million legal settlement related to antitrust litigation with Visa and MasterCard. Adjusted to remove that and other one-time items, the 2009 quarter profit was $131 million, or 25 cents per share.

Revenue fell 7 percent to $1.71 billion from $1.84 billion a year ago.

The drop in revenue reflects in part lower fees collected from customers making payments late, and the company’s elimination of overlimit fees beginning in February.

Analysts polled by Thomson Reuters, on average, expected the Riverwoods, Ill., company to post profit of 37 cents per share, on $1.66 billion revenue.

Nelms said the sales volume increase also reflected an increasing number of merchants that accept Discover. “I do think part of that is because our growing acceptance means more consumer spending is going on our cards,” he said.

During a conference call to discuss the results, Nelms said recent deals mean the card will soon be accepted by merchants that handle over 97 percent of U.S. credit card purchase volume, and will bring Discover closer to the number of outlets that accept MasterCard and Visa cards. The wider acceptance rate will help increase future profits, he said.

Total outstanding credit cards loans were $45.2 billion, down $2.9 billion from a year ago, a drop the company said was driven by lower balances with promotional interest rates and an increased payment rate.

Total loans ended the quarter at $50.1 billion, down 2 percent from a year ago. The decline in credit card loans was somewhat offset by an increase in student loans, Discover said.

Discover last week said it was increasing its footprint in the student loan business by buying Student Loan Corp. from Citigroup Inc. for $600 million. During the call, Nelms said the acquisition is expected to add 9 cents per share to 2011 profit.


The CEO told The Associated Press the acquisition will bring student loans to 10 percent of its outstanding lending, and he expects that share of the business to grow. “I do think it will be a growing share, because I expect that student loans are going to grow faster over the next five to 10 years than credit cards,” he said.

That growth will come even though private companies are no longer able to write government-backed student loans. “The government will be directly originating all the government-insured loans, but I don’t see the government providing 100 percent of the cost of education, particularly for the middle class,” he said.

Increasing the portion of student loans will help improve Discover’s results, he added, because they tend to be less risky than credit cards, particularly since a large portion are co-signed by parents.

During the third quarter, loans over 30 days past due fell by $180 million, to a rate of 4.16 percent of balances, from 5.11 percent a year ago. Late payments peaked in the fourth quarter of 2009 and have continued to improve, the company said.

Discover also wrote off fewer balances as uncollectable. Net charge-offs dropped to 7.18 percent of balances, or $899. 5 million, from 8.4 percent, or $1.08 billion, last year.

The company reduced its provision for loan losses, or money set aside to cover uncollectable loans, by 34 percent, to $713 million, from an adjusted $1.09 billion a year ago. The reduction reflects a better outlook for payments in coming months, the company said.

Discover shares rose 59 cents, or 3.8 percent, to close at $16.16.