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Discover Financial Profit Beats as Consumers Spend More

Thursday, 27 September 2012 12:51 PM

Discover Financial Services' third-quarter profit handily beat Wall Street estimates as more Americans used its credit cards, highlighting improving consumer sentiment.

U.S. credit card loans fell during the financial crisis as people paid down debt and cut back on purchases. But a brightening job market is now encouraging consumers to spend.

Consumer confidence in the United States jumped to its highest level in seven months in September, a private sector report showed earlier this week.

Discover Financial said credit card loans rose 4 percent to $48.1 billion, on top of a similar rise in card sales volumes.

"Card sales and receivables grew in a challenging environment while credit quality continued to improve," Chief Executive David Nelms said in a statement.

Like American Express Inc., Discover lends directly to consumers but its business is a quarter of its rival's size. It competes with AmEx, Visa Inc. and MasterCard Inc. to process transactions for banks.

Transaction volume for the payment services segment rose 13 percent to $50.3 billion.

Discover has been expanding its payment services division and signed a deal with eBay Inc's online payment service, PayPal, in August that will raise transaction volumes.

PayPal will issue cards to its more than 50 million active users in the United States next year that can be used to buy from merchants in the Discover Network.

Discover is also making mobile payments available on its cards. The company has tied up with Google Inc to allow cardmembers to link their cards directly to Google Wallet.

The company's shares, which have risen over 50 percent so far this year, were up 3 percent at $38.10 in early trading on the New York Stock Exchange.


Earnings, however, were hurt by higher costs and bad-loan provisions. Net profit fell to $627 million, or $1.21 per share, from $649 million, or $1.18 per share, a year earlier.

Analysts on average had expected earnings of $1.03 per share, excluding items, according to Thomson Reuters I/B/E/S.

Shares outstanding declined by 1.9 percent from prior quarter as the company bought back shares during the quarter.

Provisions for loan losses rose 26 percent to $126 million.

Discover's large loan portfolio has resulted in an increase in provisions even as its bad debts have fallen to historical lows. Less than 2 percent of its loans were in default at the end of the third quarter.

Earlier this month, Discover said its banking unit would pay about $200 million to cardholders who bought certain credit-protection products over the phone, as part of an enforcement action by the Consumer Financial Protection Bureau (CFPB).

Discover said it increased its legal reserves by $94 million in the quarter, related to the regulatory action.

CFPB Director Richard Cordray has said more enforcement action by the agency against card companies will likely follow.

The agency fined Capital One Financial Corp. $210 million in July to resolve charges that its call-center representatives misled consumers into paying for extra credit card products.

© 2019 Thomson/Reuters. All rights reserved.

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Discover Financial Services' third-quarter profit handily beat Wall Street estimates as more Americans used its credit cards, highlighting improving consumer sentiment.
Thursday, 27 September 2012 12:51 PM
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