2nd UPDATE:Discover Posts 3Q Profit On Reserve Release, Card Spend
20 Settembre 2010 - 7:26PM
Dow Jones News
Discover Financial Services (DFS) reported a fiscal third
quarter profit of $260.6 million as improving credit trends allowed
the company to free up funds in reserves and cardholders spent
more.
The company's profits from lowering its loss reserves reinforces
the trend observed earlier this year in companies, including
Capital One Financial Corp. (COF) and American Express Co. (AXP),
whittling down their reserves amid improving credit trends.
Discover expects losses from souring card accounts to further
decline. For the quarter ended Aug. 31, delinquency rates, a key
gauge of future losses, also continued to drop.
"We expect to continue to see general improvements in our
charge-off rates," Chief Executive David Nelms said in an interview
with Dow Jones Newswires.
But Nelms struck a cautious note on the economy. "I remain
concerned about the strength of the economy and recovery of the
unemployment rate," he said. "We as a company are past the worst of
it because of our customer base and our focus on the prime
consumer."
Investors, optimistic that borrowers falling behind on payments
and losses stemming from souring loans are on the mend, pushed up
Discover's shares 3.47% to $16.11 amid gains in the broader
market.
For the third quarter, the Riverwoods, Ill.-based company
reported a profit of $260.6 million, or 47 cents a share, down 55%
from $577.5 million, or $1.07 a share, a year earlier. The results
from a year ago were bolstered by an after-tax gain of $287 million
related to an antitrust settlement. Analysts polled by Thomson
Reuters forecast earnings of 38 cents a share for the latest
quarter.
Unlike most other card companies, which either issue plastic or
process the transactions, Discover and bigger rival American
Express do both.
Therefore, in addition to the interest Discover earns on its
credit-card loans, a chunk of its revenue comes from fees it
charges banks and merchants, such as grocery stores or gas
stations, to process card payments.
The more times consumers use Discover-branded cards and the more
they charge on them, the more the company earns in fees. Discover
customers spent $24 billion on their cards, a 5% jump from a year
ago.
Discover reported lower delinquencies and charge-offs, or card
loans that the company doesn't expect to collect on. Charge-offs
for the third quarter totaled 7.18% of Discover's credit-card
loans, lower than the 8.05% a year earlier and the 7.97% in the
second quarter. The charge-off rate for the third quarter, although
elevated, is lower than Discover's 7.5%-8% estimate for this
period.
Borrowers at least a month behind on their card payments totaled
4.16%, down from 4.86% a year ago and 4.52% in the prior quarter.
The delinquency rate is important for issuers because higher
delinquencies force them to put away capital to reserve for
potential losses; ultimately, companies must write off loans if
customers can't pay up.
Discover's provision for credit losses, at $712.6 million, fell
34% from a year earlier, with the company releasing $187 million
from its reserve in the third quarter.
Revenue declined 7% from a year earlier to $1.7 billion as new
rules enacted earlier this year took a bite out of income.
Friday, the company agreed to acquire private student-loan
operations of Student Loan Corp. (STU) for $600 million and $4.2
billion of the company's assets for 91.5 cents on the dollar. The
company has been ramping up its business in personal and private
student loans, seeking revenue growth. The acquisition will add 9
cents to earnings per share in 2011.
-By Aparajita Saha-Bubna, Dow Jones Newswires; 617-654-6729;
aparajita.saha-bubna@dowjones.com
(Matt Jarzemsky contributed to the article.)
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