Tags: Discover | thrives | credit | DFS

Discover Thrives as Credit Conditions Improve

By    |   Friday, 09 Dec 2011 03:12 PM

Discover Financial Services (DFS) is thriving as consumer credit conditions continue to improve. Discover possesses the only closed-loop credit card network in the United States beside American Express (AXP). That means Discover makes its own loans to cardholders.

Unlike Amex, Discover doesn’t garner huge revenue from fees, so it’s more dependent on income from loans. And the loan picture is looking good for Discover. Its delinquency rate for credit card loans over 30 days past due hit a new record low of 2.43 percent in the quarter ended Aug. 31. Its credit card net charge-off rate dropped to 3.85 percent.

Discover has a debit card network, called Pulse, in addition to its credit card network. That’s a nice addition, given that debit card use is growing much faster than credit card use.

The company’s costs are rising. But that’s because it’s in expansion mode, rather than dealing with loan-loss problems like other lenders.

Discover’s profit soared 149 percent in the quarter ended Aug. 31, to $649 million from $261 million a year earlier. Revenue gained 5 percent to $1.8 billion.

Proprietary network

Standard & Poor’s analyst Robert McMillan has a four-star buy rating on Discover shares. “We believe that the outlook for DFS has improved significantly since the financial crisis, driven by a rebound in consumer spending and still historically low interest rates,” he writes.

“We see DFS benefiting from its strategy of issuing credit cards on its proprietary network, primarily in the U.S. And we see its managed charge-offs continuing to trend below peers, reflecting what we see as its conservative customer base and solid credit risk management.”

Discover also should see growing use of its Diners Club International card overseas, McMillan says. He expects revenue to gain 5 percent in the year ending Nov. 30, 2012.

The company next reports earnings Dec. 15.

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Discover Financial Services (DFS) is thrivingas consumer credit conditions continue to improve. Discover possesses the only closed-loop credit card network in the United States beside American Express (AXP). That means Discover makes its own loans to cardholders. Unlike...
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2011-12-09
Friday, 09 Dec 2011 03:12 PM
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