Discover Financial Services' (DFS) fiscal third-quarter profit
slipped 3.4% as the credit-card company saw its loan-loss
provisions rise and it took a hit from increased legal
expenses.
Shares rose 3.6% to $38.54 in recent premarket trading as
earnings beat expectations, delinquencies and charge-offs declined,
and loans grew. The stock is up 54% so far this year.
Discover, both a lender to cardholders and a processor of
transactions, had posted stronger results in recent quarters as
improving credit trends had meant the company could set aside less
for loan losses. However in its fiscal second quarter, this trend
reversed, as the company set aside higher reserves for potential
bad loans.
Last week, Discover agreed to pay $214 million in a deal with
federal regulators over its sales of credit-protection products,
controversial add-on services that have drawn scrutiny to large
credit-card lenders in recent months. Discover had said in filings
with the Securities and Exchange Commission since last year that
its sales practices for payment protection and other add-on
services were being reviewed by regulators.
The company on Thursday noted that its expenses were up $178
million, or 29%, from the prior year. The increase was primarily
due to a $94 million year-over-year increase in expenses for legal
reserves associated primarily with Federal Deposit Insurance Corp.
and Consumer Financial Protection Bureau regulatory matters.
Excluding the change in legal reserves, expenses increased 14%.
For the quarter ended Aug. 31, Discover reported a profit of
$627 million, or $1.21 a share, versus $649 million, or $1.18 a
share, a year earlier. Revenue net of interest expense improved
9.8% to $1.96 billion.
Analysts polled by Thomson Reuters expected earnings of $1.03 a
share on revenue of $1.9 billion.
Provisions for loan losses were $126 million, up from $100
million a year ago but down from $232 million in the prior
quarter.
The delinquency rate for loans over 30 days past due was down at
1.71%, from 2.35% a year ago and 1.81% in the prior quarter. Net
charge-offs, or loans the company doesn't expect to collect, were
2.12% versus 3.43% a year earlier and 2.42% in the prior
quarter.
Total loans grew 9% from the prior year to $59.2 billion. Credit
card loans grew 4% to $48.1 billion, while Discover card sales
volume increased 4%.
Write to Saabira Chaudhuri at saabira.chaudhuri@dowjones.com
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