Discover Financial Services' (DFS) fiscal second-quarter
earnings surprisingly rose 14% as the credit-card lender and
payment processor reported lower delinquency rates for a
second-straight quarter and loan-loss provisions declined.
Shares were up 2.8% at $14.40 in premarket trading as
card-spending volume climbed 6% from a year ago. The stock through
Wednesday's close was up 45% the past year, more than the broader
market.
Credit-card delinquencies, a key gauge of future losses, have
slowed in recent months. A continued decline is important because
higher delinquencies force issuers to set more capital aside for
potential losses; ultimately, companies must write off loans that
aren't repaid. And while credit losses remain at elevated levels,
the pace of the increase has been slowing for most card
issuers.
Meanwhile, consumers have been reopening their wallets lately,
which potentially could translate to higher fee revenue for card
companies like Discover, which also processes card
transactions.
For the quarter ended May 31, the credit-card issuer turned
bank-holding company reported a profit of $258.1 million, or 33
cents a share, up from $225.8 million, or 43 cents a share, a year
earlier. The latest quarter was helped by the release of $277
million of reserves. Analysts polled by Thomson Reuters most
recently forecast earnings of 11 cents.
The latest period included a 13-cent impact from repaying the
$1.2 billion it got last year from the Treasury Department's
Troubled Asset Relief Program. The prior year included an after-tax
gain of $295 million related to an antitrust settlement.
Discover's card business swung to a profit as net charge-offs,
or loans the company doesn't expect to collect, increased to a
lower-than-expected 7.97% from 7.79% from a year earlier and 8.51%
in the prior quarter. A rate of 7.5% to 8% is expected for the
current quarter. Delinquencies of 30 days or more were down at
4.52% from 5.08% a year earlier and 5.05% sequentially.
Discover's provisions for credit losses fell 44% on an adjusted
basis to $724 million. Improved credit performance the past two
quarters resulted in the reserve release.
-By Tess Stynes, Dow Jones Newswires; 212-416-2481;
Tess.Stynes@dowjones.com