CORRECT:=UPDATE:Discover Financial 1Q Net Rises 48% On Gain
19 Marzo 2009 - 6:42PM
Dow Jones News
Discover Financial Services (DFS) posted a 48% rise in fiscal
first-quarter net income fueled by a gain related to a settlement.
The company on Monday also said it slashed its dividend and
squirreled away more funds to reserve for potential losses.
For the quarter ended Feb. 28, Discover posted net income of
$120.4 million, or 25 cents a share, up from $81.2 million, or 17
cents a share a year earlier.
The latest results include an after tax gain of $297 million
related to an antitrust settlement. Net income a year ago included
a $158 million charge on discontinued operations. Excluding this
charge, Discover's earnings from continuing operations fell by half
compared with a year earlier.
Discover also slashed its quarterly dividend to 2 cents per
share from 6 cents in efforts to shore up capital. This move will
save $80 million annually.
Investors, who had driven up Discover shares by 1.5% ahead of
regular trading on the New York Stock Exchange, sold off shares
after the U.S. stock market opened. Discover shares recently traded
at $7.11, down 13 cents or 1.8%. So far this year, its stock has
lost about 26% of its value.
Unlike most of its peers, which either issue plastic or process
the transactions, Discover does both.
"All of what we have now is backward looking," said Sanjay
Sakhrani, an analyst at Keefe, Bruyette & Woods.
"There are a lot of things in flux from an economic standpoint,"
said Sakhrani. "There's risk to any consumer-loan intensive balance
sheet."
The Riverwoods, Ill.-based company reported rising delinquencies
and charge-offs, that is, card loans that are deemed uncollectible.
Its reserve for credit losses increased $707 million, or 113%, from
a year earlier. The large increase in reserve stems from higher
delinquencies and $3 billion of card loans that the company brought
on to its balance sheet after bonds made up of these loans
matured.
The quarterly results come as little surprise in an industry
that is reeling from credit losses stemming from higher
unemployment and a bleak economic outlook. Cash strapped card users
are increasingly falling behind payments and are also cutting back
on credit card spending. The more times consumers use
Discover-branded cards and the more they charge on them, the more
the company earns by way of fees.
"Put simply, we are in a severe consumer-led recession and
continued weak credit card spending and credit-related losses show
that the industry's problems have not yet abated," said John
Williams, an analyst at Macquarie Securities, in a note published
Wednesday.
The company's U.S. card business earned $167 million in the
first quarter, down 55% from $375 million a year earlier. Discover
wrote off 6.48% of its card loans, up from 5.48% in the fourth
quarter and 4.33% a year ago.
Investors have taken some comfort from Discover's recent
transformation into a bank-holding company. Under that status,
Discover can participate in government-led efforts aimed at
stabilizing the industry.
The company last week got $1.2 billion from the U.S. Treasury's
Troubled Asset Relief Program in exchange for a stake in the
company.
-By Aparajita Saha-Bubna, Dow Jones Newswires; 617-654-6729;
aparajita.saha-bubna@dowjones.com
(Kerry E. Grace contributed to this report.)