2nd UPDATE:Discover Profit Up On Settlement,Cost Cuts;Charge-Offs Up
17 Settembre 2009 - 6:49PM
Dow Jones News
Discover Financial Services Inc.'s (DFS) fiscal third-quarter
net earnings more than tripled from a year ago, bolstered by a
legal settlement and lower expenses.
But the company also said it expected losses from souring card
accounts to rise next quarter.
"We believe we've not reached peak loan losses," David Nelms,
Discover's chief executive, during a Webcast of a discussion of the
company's results announced earlier Thursday.
The quarterly results reported Thursday morning /come as the
credit card industry is reeling from credit losses stemming from
higher unemployment and a bleak economic outlook. The U.S.
unemployment rate rose to 9.7% last month, and most economists
believe it is likely to rise further. Cash-strapped card users are
increasingly falling behind on payments and cutting back on
credit-card spending.
Card issuers are also coping with sweeping U.S. legislation that
will take a bite out of their income.
For the quarter ended Aug. 31, Discover posted net income of
$577.5 million, or $1.07 a share, up from $180.1 million, or 37
cents a share, a year earlier.
The latest results include an after-tax gain of $287 million
related to an antitrust settlement. The company will get another
payment related to this settlement.
The company's shares recently traded at $15.85, up 53 cents, or
3.46%. The stock is within striking distance of its 52-week high of
$17.70, reached last September.
Unlike most other card companies, which either issue plastic or
process the transactions, Discover and bigger rival American
Express Co. (AXP) do both. Therefore, in addition to the interest
Discover earns on its credit-card 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.
The Riverwoods, Ill., company reported rising delinquencies and
charge-offs, or card loans that the company doesn't expect to
collect on. Charge-offs for the third quarter totaled 8.39% of
Discover's credit card loans, up from 7.79% in the second quarter
and 5.20% a year ago. The charge-off rate for the third quarter,
although elevated, is at the lower end of Discover's 8.5%-9%
estimate for this period. The company expects credit card loan
losses to be between 8.5% and 9% in the fourth quarter.
Borrowers at least a month behind on their card payments totaled
5.10%, up from 5.08% in the prior quarter and 3.85% a year earlier.
The delinquency rate, a key gauge of future losses, is important
for issuers because higher delinquencies force them to squirrel
away capital to reserve for potential losses; ultimately, companies
must write off loans if customers can't pay up.
Despite the uptick in delinquencies, Discover's reserve for
credit losses, at $924.4 million, fell from the prior quarter's
$1.1 billion. This is because the company, taking advantage of a
federal program aimed at thawing the consumer debt market, sold to
investors $1.5 billion of securities made up of card loans on its
books.
In an attempt to offset losses stemming from souring card loans,
the company reined in expenses by 14% from the prior year, as it
cut its work force and marketing spending.
Investors have taken comfort from Discover's transformation into
a bank-holding company. With that status, Discover has participated
in government-led efforts aimed at stabilizing the industry. The
company got $1.2 billion in March from the U.S. Treasury's Troubled
Asset Relief Program in exchange for a stake in the company.
Discover isn't yet repaying the government's investment in the
company, said Nelms on Thursday.
"We do have a process we go through with regulators and the
board," before the federal funds may be repaid, said Nelms during
the Webcast.
While Discover is "feeling increasingly positive" about its
ability to successfully sell stock and tap the debt markets in the
most recent quarter, it has yet to go through the process that will
pave the way for repaying the government, said Nelms.
In July, at the time Discover commenced its $534 million stock
offering, the company said it may use a portion of the funds to
repay the government.
-By Aparajita Saha-Bubna, Dow Jones Newswires; 617-654-6729;
aparajita.saha-bubna@dowjones.com
-By Joan E. Solsman, Dow Jones Newswires; 212-416-2291;
joan.solsman@dowjones.com