DFS Discover Financial Services

By Robin Sidel and Josh Beckerman 

Discover Financial Services said its profit rose 4.4% in the third quarter amid strong growth in credit-card and personal loans.

Delinquencies also rose, but the company said the credit environment remains healthy with few signs of significant deterioration.

The results reflect the latest in several quarters of strong loan growth reported by the Riverwoods, Ill.-based lender. Discover, which issues credit cards and operates a card-processing network, has expanded into other loan products in recent years.

Total loans rose 5% to $73.6 billion. In January, Chief Executive David Nelms set a target to increase total loans by between 4% and 6% in 2016.

Credit loans rose 4% to $58 billion, while Discover card sales volume rose 1%.

Like other card issuers, Discover is spending more on rewards programs to attract new customers. Mr. Nelms has repeatedly said some issuers are pushing rewards that will likely be uneconomical in the long-run.

"There are certain offers out there that we scratch our heads about how they could possibly make anyone's potential hurdle rate," he said on a conference call with analysts.

Personal loans increased 16% following a move by the company to raise loan limits to $35,000 from $25,000. Chief Financial Officer Mark Graf, seeking to allay any concerns about the creditworthiness of personal-loan customers, said that 96% of those borrowers have a FICO score that is above 660.

Discover's PULSE debit network continued to struggle, with its transaction dollar volume falling 6% from prior-year levels due to the loss of a large debit issuer. Mr. Nelms said the results are flat from the previous quarter and show some signs of stabilizing at those levels.

"We're hopefully through the worst of some of that challenge," he said, but added that other smaller debit networks are also struggling. Visa Inc. and Mastercard Inc. operate the largest debit networks.

In an interview, Mr. Nelms declined to comment on whether Discover had received a formal letter from its regulators seeking information about its sales practices and incentive-compensation structures following the recent cross-selling scandal at Wells Fargo & Co.

He said, however, that Discover doesn't have any cross-sell incentives for its employees. The company doesn't operate a branch network and mainly sells its products through direct marketing and online channels.

"It's not part of our business model," he said, noting that even call-center employees don't try to sell products when a customer calls for assistance. Still, the company is assessing its practices, he said.

Overall, Discover earned $639 million, or $1.56 a share, up from $612 million, or $1.38 a share, a year earlier. Revenue net of interest expense increased 5.2% to $2.3 billion. Analysts expected earnings of $1.47 a share on revenue of $2.27 billion.

Discover, which previously reported some charge-off and delinquency metrics in a securities filing, said the delinquency rate for credit card loans over 30 days past due was 1.87%, up 22 basis points from a year earlier.

Provision for loan losses was $445 million, up $113 million from the prior year.

Shares were flat at $56.14 in after-hours trading.

Write to Robin Sidel at robin.sidel@wsj.com and Josh Beckerman at josh.beckerman@wsj.com

(END) Dow Jones Newswires

October 25, 2016 19:17 ET (23:17 GMT)

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