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Discover Financial’s profit declines 6 pct. in 1Q

April 23, 2014

LOS ANGELES (AP) — Discover Financial Services’ net income fell 6 percent in the first three months of the year as the company set aside more money to cover potential loan losses, offsetting loan growth.

The credit card issuer and lender said Tuesday that total loans grew 6 percent in the first quarter from a year earlier. Personal loans jumped 27 percent, while private student loans rose 5 percent. Credit card loans increased 5 percent, while sales volume for the company’s namesake card rose 3 percent.

During a conference call with Wall Street analysts, Discover Chairman and CEO David Nelms said he feels good about the pace of card loan growth in the first quarter, but would like to see more of a pickup in card sales growth. He said card sales growth might rise if retail sales increase.

Wall Street is watching results for Discover and other card issuers to gauge how the U.S. economy fares following an unusually bitter winter that sent factories, hiring and consumer spending into hibernation.

Recent data show consumers started spending more toward the end of the first quarter. U.S. retail sales rose last month by 1.1 percent.

Discover has also been working to expand its credit card business, adding features like free credit scores on cardholder statements. It also plans to offer student loan consolidation later this year and direct checking next year.

Discover’s payments services business didn’t fare as well in the latest quarter, however. Pretax income plunged 40 percent even as transaction dollar volume grew 4 percent. Both Discover and American Express are pushing into the payments processing business, where they compete with Visa and MasterCard, payment processing networks that don’t issue credit cards or lend money.

All told, Discover’s profit after paying preferred dividends was $618 million, or $1.31 per share, in the three months ended March 31. That compares with $659 million, or $1.33 per share, in the prior-year quarter.

Loan growth helped drive revenue net of interest expense up about 4 percent, to $2.08 billion from $1.99 billion.

Analysts polled by FactSet expected earnings of $1.25 per share on $2.11 billion in revenue.

The company’s latest results included a provision for potential loan losses of $272 million, up from $159 million a year earlier.

Last week, American Express reported better-than-expected first-quarter earnings growth, reflecting increased spending by its cardholders. Capital One Financial, meanwhile, posted a slight increase in first-quarter profit. But the credit card issuer and lender’s revenue declined as U.S. card-related loans declined.

Shares in Riverwoods, Illinois-based Discover ended regular trading down 10 cents at $56.67. The stock added a penny to $55.80 in after-hours trading.

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