Discover Financial Services 4th-qtr. net income climbs, writes off fewer unpaid balances

LOS ANGELES, Calif. – Discover Financial Services on Thursday reported higher earnings for its fiscal fourth quarter, as users of its namesake credit card stepped up purchases and the company wrote off fewer unpaid balances.

Even so, the Riverwoods, Ill.-based company’s results fell short of Wall Street expectations, and investors sent its shares down 3.7 per cent in afternoon trading.

Discover, the nation’s sixth-largest credit card issuer, said total loans, credit card loans and Discover card sales volume increased 6 per cent in the quarter, which coincided with the tail end of the back-to-school shopping season and the ramp up to the December holidays — key periods when consumers traditionally spend more.

Discover card sales volume increased to $26.5 billion, while credit card loans at the end of the quarter totalled $49.6 billion. Private student loans rose 6 per cent, while personal loans climbed 24 per cent, the company said.

“Our strong receivables and sales growth results demonstrate the effectiveness of our marketing programs, consumers’ preference for cash rewards and our acceptance and awareness initiatives,” Chairman and CEO David Nelms said during a conference call with analysts.

While Discover’s customers racked up more debt, more of them paid off credit card balances on time. The delinquency rate on credit-card loans over 30 days past due was 1.86 per cent, an improvement of 53 basis points from a year earlier. The rate of charge-offs, when the company writes off unpaid credit card balances, dropped to a historic low of 2.29 per cent.

“While the continued improvement in credit appears to be nearing an end, we don’t believe we are at a point where charge-offs are poised to rise significantly,” Nelms said.

Nationwide the rate of credit card payments at least 90 days overdue edged up in the third quarter to 0.75 per cent, according to credit reporting agency TransUnion. The rate is coming off historically low levels, however.

Discover has traditionally had one of the lowest rates for default and delinquency in the credit card industry, the result of tighter lending standards and close monitoring of problem accounts.

The company has reported improvement in its customers’ default and late-payment rates since the Great Recession, as cardholders moved to pay down debt and boost savings.

Late-payment rates tend to creep higher in the fall, particularly as cardholders spend more money on holiday shopping, travel and other expenses. The company said that seasonal factor led to a slight increase in its credit card loan delinquency rate between the third and fourth quarter.

While Discover’s rates for late payments and defaults remain low, the company has been making more loans. As a result, it has been setting aside more funds to cover potential loan losses.

In the September-to-November quarter, Discover increased its provision for loan losses by 6 per cent to $338 million, noting that was somewhat offset by a drop in the number of unpaid credit card balances that had to be written off.

Meanwhile Discover’s payment-services business, which competes with Visa and MasterCard, saw dollar volume increase 13 per cent in the latest quarter.

In a client note Thursday, RBC Capital Markets analyst Jason Arnold said Discover is benefiting from increased acceptance of its cards and favourable credit trends.

“We remain very enthused by Discover’s fundamental position and believe the company remains well positioned for loan and (earnings per share) growth,” wrote Arnold, who has a $50 price target on the stock.

For the period ended Nov. 30, Discover earned $541 million, or $1.07 per share. That compares with $513 million, or 95 cents per share, a year earlier.

Analysts surveyed by FactSet expected earnings of $1.12 per share.

Revenue climbed 11 per cent to $2 billion, after interest expense. Wall Street forecast $1.96 billion.

Also on Thursday, Discover declared a dividend of 14 cents per share. It will be paid on Jan. 17 to shareholders of record on Jan. 3.

Discover shares fell $1.53, or 3.8 per cent, to $38.24 in afternoon trading. The stock is up nearly 60 per cent this year.