Discover Financial Services posts 2Q profit as consumer spending picks up, delinquencies ease

Discover posts profit on credit card spending jump

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 delinquent for more than a month continued declining. In the quarter, Discover put aside $724 million for bad debt. That was 44 percent less than last year.

The company’s shares rose 41 cents, or 2.9 percent, to $14.42 in morning trading.

The results reinforce recent signs that the consumer credit landscape is improving. Still, the recovery has a long way to go. 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 in the period.

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 as the economy improves. The company thinks that improvements in consumer credit will continue to push earnings upward.

In the quarter, Discover’s credit card charge-off rate was 7.97 percent. The company expects the rate to fall to between 7.5 percent and 8 percent in the next quarter.

The rate was up from 7.79 percent in the year-ago period, but down from 8.51 percent in the previous quarter.

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

Moody’s Investor Service also said Wednesday that 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.

Further, Moody’s said its report showed that accounts 30 to 69 days past due declined for a seventh-straight month, and is now close to the historically low range seen in 2006 and 2007.

That improvement in early stage delinquencies should translate to lower charge-off rates in the coming months, Moody’s said.

Even with the improving consumer landscape, however, Discover and other credit card companies are facing a new regulatory landscape. The industry has had to adjust to sweeping new regulations in the past year.

Discover’s Nelms said implementation of the new rules is now largely behind the company. But the company estimates that new rules limiting late fees to $25 per violation will result in an impact of $80 million to $90 million.

That may explain why the company has focused on growing its consumer banking segment in the past year. That division now accounts for about a third of Discover’s funding, compared with about 15 percent a year ago.

Still, Nelms said Discover’s card segment represents its biggest opportunity since a quarter of U.S. households already have Discover cards. He said the company is working on getting those households to expand their usage of the cards.

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

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.