Discover Financial posts 2Q net income as consumer spending picks up, delinquencies ease

Discover posts profit as credit card use jumps

NEW YORK — Discover Financial Services said Thursday that it returned to profitability in its fiscal second quarter as consumers spent more with their credit cards.

The company also said the rate of accounts in early delinquency continued declining. Discover put aside $724 million for bad debt in the quarter. That was 44 percent less than last year.

The company’s shares ended Thursday up 7 cents, or 0.5 percent, at $14.08, backing off a session high of $14.73.

The results reinforce recent signs that the consumer credit landscape is improving. Still, the national credit card charge-off rate remains elevated at 9.95 percent, compared with about 4 percent before the downturn, according to data from the Federal Reserve.

For the three months ended May 31, Discover reported net income of $184.6 million, or 33 cents per share. That compared with a net loss of $148.9 million, or 31 cents per share, a year earlier. Discover says its net income was cut by 13 cents per share in the latest period because it redeemed $1.2 billion of preferred stock.

On average, analysts expected the Riverwoods, Ill., company to earn 11 cents per share on revenue of $1.62 billion.

Discover card sales volume grew 6 percent to $23 billion, a sign that consumers are gaining confidence in their financial situations. The company says improving consumer credit will continue to push earnings upward.

In the quarter, Discover’s credit card charge-off rate was 7.97 percent. That was up from 7.79 percent in the year-ago period, but down from 8.51 percent in the previous quarter.

The company expects the rate to fall to between 7.5 percent and 8 percent in the next quarter.

Although national unemployment remains high, Discover CEO David Nelms said it shouldn’t continue driving up the company’s charge-offs. He noted that most of those who are unemployed have already moved through the delinquency and charge-off phases.

On Wednesday, Moody’s Investor Service also said charge-offs industrywide should start showing a year-over-year improvement in coming months. The last time the year-over-year rate improved was December 2006.

Even with the improving outlook, however, the credit card industry is facing sweeping new regulations.

For instance, new rules that limit penalty fees to $25 per violation are expected to cost Discover $80 million to $90 million over a year.

That may explain why the company is growing its consumer banking segment. The division now accounts for about a third of Discover’s funding, compared with about 15 percent a year ago. It should eventually account for more than half, Nelms said.

But he said the company’s card segment represents its biggest opportunity. That’s because a quarter of U.S. households already have Discover cards. Nelms said the company is working on getting those households to expand usage of those cards.

Looking ahead, Nelms said Discover plans to ramp up marketing for both its consumer banking and credit card segments in the final two quarters of 2010.

Meanwhile, income from Discover’s third-party payments business — which processes ATM and debit transactions — rose 36 percent. That unit is now the company’s biggest money maker.

AP Business Writer Stephen Bernard contributed to this report.