DFS Discover Financial Services

Shares of Discover Financial Services (DFS) rose 3.4% Monday to $25.07 after the company said its credit-card borrowers were more timely in their payments in April.

The lender also said in a monthly report that it charged off fewer loans than in the prior month.

Investors, emboldened by hopes of a quicker turnaround in the credit-card industry, also pushed up shares of Capital One Financial Corp. (COF) and American Express Co. (AXP), which climbed 2.2% and 1.2% respectively. American Express and Capital One also reported better credit performance.

This is the "second month of [Discover's] quarter, and the data seems to indicate a sustained trend of outperformance [versus] expectations and that may be driving investors interest into the shares at these levels," said Sanjay Sakhrani, an analyst at Keefe, Bruyette & Woods. Sakhrani has the equivalent of a 'buy' rating on Discover stock.

At Discover, the 30-day delinquency rate for credit-card loans packaged into bonds fell to an annualized 3.15% in April from 3.42% in March. This delinquency rate is a key gauge of future losses and it is important because higher delinquencies force issuers to set aside capital to reserve for potential losses. Ultimately, companies must write off loans if customers can't repay them.

Discover wrote off 5.02% of card loans packaged into bonds last month, down from 5.18% in March.

The next challenge for Discover will be the growth of its book of card loans. To fight losses from card loans, Discover and its peers have been scaling back on credit in the last several months and getting tougher about lending standards. Now, with the worst likely behind them, they must balance their efforts at increasing lending to spur revenue without loosening standards.

To this end, Discover agreed last week to buy for $55.9 million the mortgage assets of Home Loan Center, a unit of Tree.com Inc. (TREE). Discover has also been doing personal loans and private student loans.

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 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.

In March, Discover, of Riverwoods, Ill., swung to a fiscal first-quarter profit as improving credit trends allowed the company to free up funds in reserves and cardholders spent more. Discover's first quarter got a boost from a $271 million reserve release.

Charge-offs for the first quarter totaled 5.42%, down from 8.51% a year earlier and 6.58% in the fourth quarter.

Loans at least a month past their due payments totaled 3.44%, down from 5.05% a year ago and 3.89% in the prior quarter.

-By Aparajita Saha-Bubna, Dow Jones Newswires; 617-654-6729; aparajita.saha-bubna@dowjones.com

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