DFS Discover Financial Services

Discover Financial Services (DFS) saw ongoing improvement in its delinquency and loan write-off rates in March as credit-card borrowers continued to pay their bills on time.

The Riverwoods, Ill., company said Monday that the delinquency rate of credit-card loans packaged into securities fell to 2.15%, down from 2.25% in February and 3.42% a year earlier. Its net charge-off rate, or percentage of loans deemed uncollectible, fell to 2.64%, from 2.8% in February and 5.18% a year earlier.

Discover, the sixth-largest credit-card lender based on customer spending, has seen dramatic improvements in its loan performance over the last year as borrowers have consistently paid on time and conservatively charged up new balances. Discover and other large credit-card issuers, including American Express Co. (AXP) and J.P. Morgan Chase & Co. (JPM), saw losses spike during the recession as many borrowers were unable to pay on time.

Industry analysts have predicted improvements in credit quality will start to wane this year as lenders pursue growth and borrowers start to slowly take on new debt, though Discover executives said recently they don't foresee a change in customer behavior this year.

"We don't expect to see a turn in credit performance in the forward 12-month period of time," Mark Graf, chief financial officer of Discover, told analysts last month.

The concern is if credit deteriorates, so will the benefits that Discover and other card lenders have enjoyed from releasing loan reserves set aside to cover future losses. Loan-loss releases have helped juice industry earnings in recent years.

Discover's fiscal first-quarter earnings were boosted by a $226 million release in loan-loss reserves, compared with a $68 million release in the previous quarter.

Any increase in reserves will be "directly related to growth" in card loans, Graf said. Balance growth has been tepid at best for most card issuers.

Moody's Investors Service recently said credit-card quality "will continue to improve, driving early stage delinquencies and the charge-off rate down until 2013," though it expects the industry-wide charge-off rate to hit a floor of about 4% at the end of this year or early next year.

-By Andrew R. Johnson, Dow Jones Newswires; 212-416-3214; andrew.r.johnson@dowjones.com

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