Discover posts 1Q profit as payment habits improve

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Posted: Mar 22, 2011 7:06 PM
Discover posts 1Q profit as payment habits improve

Discover Financial Services on Tuesday said higher card use and fewer unpaid customer balances helped it post better-than-expected first-quarter profit.

The Riverwoods, Ill.-based credit card company reported net income of $459 million, or 84 cents per share, for the three months ended Feb. 28. That reversed a year-ago loss of $122 million, or 22 cents per share.

Analysts, on average, were expecting profit of 60 cents per share, according to data provided by FactSet.

Sales volume on Discover cards rose 7 percent, to $24 billion, which contributed to the gains. Net interest income rose to $1.17 billion, compared with $1.15 billion last year. Income from processing card payments and fees rose to $563 million, from $546 million a year ago.

"Clearly, cash back and our rewards program is driving incremental sales," said Chairman and CEO David Nelms in an interview. He said the company is advertising more and raising its profile through marketing such as its sponsorship of the Orange Bowl. "All of those things have an impact."

But while increased use contributed to the results, the main boost came from improved customer payment habits. Discover wrote off $668 million that it could not collect, or 5.96 percent of balances on an annualized basis. That compared with $1.06 billion, or 9 percent, a year ago.

Card payments over 30 days past due, a precursor of default, dropped to $1.59 billion, or 3.59 percent of balances, from $2.47 billion, or 5.39 percent, a year ago.

Those continuing payment improvements meant higher use didn't translate into higher balances. Outstanding credit card loans fell 3 percent to $44.3 million.

The improvements also meant Discover was able to sharply cut the amount it set aside to cover bad loans to $418 million for the quarter, compared with $1.39 billion in the year-ago period.

Nelms said the company hasn't seen any slowdown in the rate of improvement yet, but he acknowledged the pace is likely to moderate. The company in the past viewed a range of 5 percent to 6 percent as a normal charge-off rate, he said. "We're already at the top end of that normal." Some now think the rate could drop below 5 percent.

During the quarter, Discover completed its acquisition of The Student Loan Corp., adding student loans worth $3.1 billion to its private student portfolio. The acquisition will help drive Discover lending to students in the future, Nelms said. It has increased the number of schools that are recommending Discover and increased its capability to service loans. "We think this will really help drive more growth into the future," he said.

Discover also declared a dividend of 6 cents, restoring its dividend to where it was before the financial crisis.

In after-hours trading, Discover shares rose 50 cents, or 2.3 percent, to $22.75. The stock closed the regular session at $22.25, down 39 cents on the day.