Discover CEO: Expect Positive Credit-Card Loan Growth In 2nd Half '11
23 Marzo 2011 - 12:17AM
Dow Jones News
Discover Financial Services (DFS) expects credit-card loan
balances, which have been dwindling for several quarters now, to
grow in the second half of this year.
Lower loan balances are plaguing issuers of plastic because they
erode revenue. Investors have been concerned for some time now that
the bump in quarterly profits being reported by card issuers stems
from lenders releasing loss reserves as credit trends improve
rather than an actual increase in revenue, which is a sign of
growth.
Discover expects "growth in core credit cards to turn positive
in the second half of this year," David Nelms, chairman and chief
executive officer of Discover, said in an interview. "We're
expecting low single-digit growth by the end of this year in credit
cards."
The growth in card loan balances will likely stem from fewer
defaulting loans and higher spending by cardholders, said
Nelms.
Earlier Tuesday, Discover reported its fiscal first quarter
results.
Its first-quarter profit for shareholders of $459 million got a
boost from a $271 million reserve release. Average credit card
loans dropped 5% to $45.4 billion during the same period.
The company's profits from lowering its loss reserves reinforce
the trend observed in companies, including Capital One Financial
Corp. (COF) and American Express Co. (AXP), whittling down their
reserves amid improving credit trends.
The company's shares were recently quoted at $22.69, up nearly
2%, in after-hours trading.
Unlike most other card companies that 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 nearly $24 billion on their cards, a 7% jump from a
year ago.
-By Aparajita Saha-Bubna, Dow Jones Newswires; 617-654-6729;
aparajita.saha-bubna@dowjones.com
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