DFS Discover Financial Services

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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