Discover Financial fiscal 4th-quarter profit slips 19 percent as rate of bad loans increases

Discover Financial 4Q profit slips, bad loans rise

NEW YORK — Discover Financial Services on Thursday joined other major lenders in reporting more losses on credit card loans as Americans continue to struggle to pay off their debts.

The company said its fiscal fourth-quarter profit fell 19 percent as the rate of bad loans increased.

Shares of the credit card lender dropped $1.41, or 8.6 percent, to $15.01 in afternoon trading amid a broader market sell-off. The stock has ranged from $4.73 to $17.35 over the past year.

Net income available to common shareholders for the period ended Nov. 30 was $352.1 million, or 63 cents per share, down from $432.3 million, or 92 cents per share, in the same period a year earlier. Results in the most recent quarter included a $285 million gain from the settlement of an antitrust lawsuit with Visa Inc. and MasterCard Inc.

The percentage of loans the company expects not to be repaid rose to 8.43 percent from 5.48 percent. The rate of loans 30 days or more past due edged up to 5.31 percent to 4.56 percent.

Chairman and CEO David Nelms said during a conference call with investors that it appears as if loan losses are approaching their peak. He expects the rate of loan losses to range between 8.4 percent and 8.9 percent in the first quarter of 2010.

Nearly all lenders have faced mounting loan losses as customers fall behind on payments amid high unemployment. Credit-card losses traditionally mirror the unemployment rate, which currently stands at 10 percent. Discover rivals American Express Co. and Capital One Financial Corp. both reported higher levels of loan losses from a year ago in their most recent quarters.

Discover’s provision for loan losses, or the amount it sets aside to cover bad loans, was $989 million, down from $1.11 billion in the same quarter a year ago but up from $924.4 million in the second quarter.

On a positive note, sales volume, or the amount charged on Discover’s credit cards, was relatively stable. Sales volume slipped less than 1 percent to $21.9 billion. Also encouraging, Nelms said, is that sales volume has been positive on a year-over-year basis from October through the first two weeks of December.

For the full fiscal year, Discover earned $1.24 billion, or $2.42 per share, compared with $927.8 million, or $2.20 per share, in the previous year.

Earlier this year, Discover received $1.2 billion from the federal government under the Troubled Asset Relief Program.

Discover was one of hundreds of financial companies to get government assistance during the financial crisis, receiving $1.2 billion in federal bailout funds. Unlike many large financial companies, though, Discover has yet to pay back the government.

During the conference call, Nelms said he expects the company to repay the funds “sooner rather than later.”

Just this month, Bank of America Corp., Wells Fargo & Co. and Citigroup Inc. — all major credit card lenders — announced stock offerings to raise the cash needed to repay their own bailout loans.