Discover Financial Services has reported that its
first-quarter net profit fell 65 percent, mostly related to a $158
million loss on the sale of its UK credit card unit Goldfish to
Barclays earlier this year. However, lower borrowing costs offset
the impact of sluggish consumer spending. The quarter’s results cap
a depressing year for Discover, which was spun off from Morgan
Stanley in mid-2007; the company’s share price has been on a
downward spiral since then, coinciding with a fall in consumer
spending in the US.

Excluding items, profit from continuing
operations fell 8 percent to $238.8 million from $259.8 million a
year earlier, due to the slowdown in the US housing sector and the
subsequent drop in consumer spending.
Charge-off rates

US card managed loans grew to $47.5 billion, up 2 percent from last
year, driven primarily by a 5 percent increase in sales volume.
Revenue net of interest expense grew 13 percent, while total other
expense increased by 2 percent over last year. But the first
quarter US card managed credit card net charge-off rate was 4.37
percent and the managed over 30 days delinquency rate was 3.93
percent, up 51 basis points and 62 basis points, respectively, from
last year.

Pre-tax earnings at Discover’s US card segment
fell 6 percent to $375 million as higher loan loss provisions more
than offset an 11 percent rise in net interest income. Provision
for loan losses increased 54 percent due to higher net charge-offs
and an increase in the reserve rate, reflecting recent delinquency
trends, the company said. Third-party payment debit and credit
volume was $26.3 billion for the first quarter, 24 percent above
last year.
“Our US card results this quarter demonstrated
strong profitability despite rising credit costs,” said David
Nelms, CEO of Discover Financial Services. “The net yield on our
loan portfolio expanded as lower funding costs largely offset a
higher level of provisioning for credit losses, which we attribute
primarily to US housing and mortgage issues and a deteriorating
economic environment.”

Mixed forecasts

Analysts were divided as to whether Discover’s fortunes will
improve over the coming months. Sanjay Sakhrani, an analyst at
Keefe, Bruyette & Woods, told CI: “On a go forward basis, we
think the focus remains on the economy. Certainly, we continue to
believe that the company is one of the better positioned card
issuers going into this credit cycle, given its well seasoned
portfolio and lower exposure to regions impacted by the housing
slowdown. However, we still believe there is likely to be continued
choppiness in the company’s shares as the impacts of higher
unemployment and a weaker consumer are felt in the operating

How well do you really know your competitors?

Access the most comprehensive Company Profiles on the market, powered by GlobalData. Save hours of research. Gain competitive edge.

Company Profile – free sample

Thank you!

Your download email will arrive shortly

Not ready to buy yet? Download a free sample

We are confident about the unique quality of our Company Profiles. However, we want you to make the most beneficial decision for your business, so we offer a free sample that you can download by submitting the below form

By GlobalData
Visit our Privacy Policy for more information about our services, how we may use, process and share your personal data, including information of your rights in respect of your personal data and how you can unsubscribe from future marketing communications. Our services are intended for corporate subscribers and you warrant that the email address submitted is your corporate email address.
“Managed receivables were down 1 percent
sequentially and up roughly 3 percent year on year at $47.5
billion. Management noted that they moderated growth given the
weakening economy. Anecdotally, balance transfer volume was down 43
percent relative to a year ago as the company pulled back on this
type of product,” he added.
“As long as credit stays benign, that will
support earnings growth.” said Michael Taiano, an analyst with
investment bank Sandler, O’Neill & Partners.

Risk management focus

Moshe Orenbuch, managing director, equity research at investment
bank Credit Suisse First Boston, highlighted Discover’s increased
emphasis on risk management as a positive indicator.

Speaking after Discover held an investor
conference, Orenbuch said: “Discover reaffirmed its full year loss
rate guidance of 4.75 percent to 5 percent, with losses expected to
continue to rise through the fourth quarter, and perhaps into 2009
depending on unemployment. The company has tightened underwriting
criteria to riskier cardholders, primarily those with overextended
mortgages and or living in certain geographies (Florida and
California). Approximately 54 percent of Discover’s cardholders
have mortgages, with 12 percent categorised as non-prime. Also,
Discover has proactively closed roughly 3 million inactive
accounts, further improving the company’s risk profile.
“The company continues the build-out of its
third-party payments business. There are now over 20 card issuers
on the Discover network. The company has also aggressively worked
to add new merchants, signing 55 acquirers that service over 6
million merchants. Some 34 percent of existing bank card accepting
merchants that did not accept Discover Network have been