Economy

Discover Financial's profit falls 8 percent in 3Q

LOS ANGELES (AP) — Discover Financial Services' net income fell 8 percent in the third quarter, as the lender set aside more funds to cover potential loan losses.

The credit card issuer also said Monday that sales volume for its namesake credit card rose 3 percent to about $28 billion in the July-September period versus a year earlier, while card loans rose 4 percent to $50.4 billion. Overall loans, including private education and personal loans, increased 5 percent to $62.7 billion in the quarter, which coincides with the annual back-to-school spending season.

"These results show that in a tepid economic environment, Discover continues to achieve profitable loan growth," David Nelms, Discover's chairman and CEO, told Wall Street analysts during a conference call.

Even so, the Riverwoods, Ill.-based company's latest earnings just missed Wall Street expectations, and its shares dropped about 4 percent in after-market trading Monday. Credit card issuers such as Discover typically benefit from an improving economy and increasing consumer spending. When cardholders charge more on their Discover cards, the company earns even more in interest income and a variety of fees.

Between January and August, the most recent figures available, the economy added an average of 180,250 jobs a month. Unemployment, meanwhile, was 7.3 percent in August, down from 7.9 percent in January.

Last week, American Express and Capital One Financial each reported increased spending by cardholders. The federal budget standoff that led to a 16-day partial government shutdown earlier this month didn't have an impact on sales or loan growth at Discover, Nelms said in an interview.

But the executive noted that if consumers felt more certain about the economy, government spending, health care and other concerns, Discover's sales and loan growth would be stronger. "I do not see consumers right now being willing to spend a little more or even gradually to increase their overall spending," Nelms said. "The consumer is still being very cautious."

Discover has been working to grow its credit card business, while also pushing further into direct banking, offering auto, personal and student loans. It also began offering home equity loans in August.

In the third quarter, private education loans rose 5 percent to $387 million, while personal loans jumped 26 percent to $830 million. For the three months ended Sept. 30, Discover said that it posted a profit after paying preferred dividends of $579 million, or $1.20 per share, in the three months ended Sept. 30.

That compares with net income of $631 million, or $1.24 per share, in the same months a year earlier. Revenue net of interest expense rose 3 percent to $2.06 billion. Analysts polled by FactSet expected earnings of $1.21 per share on $2.06 billion in revenue.

Net interest income, or money earned from loans after factoring in interest expense, grew nearly 9 percent to $1.79 billion. In the company's payments services business, which competes with Visa and MasterCard, revenue dropped 11 percent as volume declined about 2 percent.

The latest quarter included a provision for potential loan losses of $333 million, up from $136 million a year earlier. The twofold increase came about as the company amped up its reserves in anticipation of lower recoveries on older accounts that have been written off as unpaid and growth in loans. The prior-year quarter also included a hefty release of reserves for loan losses.

Despite the loan loss reserve boost, the rate of credit card loans at least 30 days past due improved to 1.67 percent. And card charge-offs declined to 2.05 percent. Shares in Discover ended regular trading down 21 cents at $53.74. The stock fell $2.14 to $51.60 in extended trading.

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