June 26 (Bloomberg) -- Discover Financial Services, the credit-card company spun off from Morgan Stanley, dropped 8.2 percent after saying more overdue payments from customers curbed second-quarter profit.

Income from continuing operations in the period ended May 31 fell 19 percent to $202 million, or 42 cents a share, from $250 million, or 52 cents, a year earlier, the Riverwoods, Illinois- based company said in a statement today. Pretax income from the U.S. card unit slid 20 percent.

Discover has lost half its market value since it was spun off in June 2007, unable to capitalize on an increasing consumer appetite for credit cards. U.S. consumer borrowing in the first quarter rose to $34 billion, the most since 2001 when the economy was headed into recession. Investors are concerned that a weaker U.S. economy will hurt consumers' ability to pay debt.

Higher gasoline prices and unemployment are causing ``a gradual increase in delinquency rate and gradual increase in charge-off rates as consumers get more stressed,'' Chief Executive Officer David Nelms said in an interview.

The credit-card lender fell $1.18 to $13.15 at 4:03 p.m. in New York Stock Exchange composite trading.

Net income advanced to $234 million, or 48 cents a share, from $209.2 million, or 44 cents, aided by a $32 million contribution from discontinued international operations. Discover agreed to sell the U.K. Goldfish card unit to Barclays Bank Plc in February; the transaction wasn't completed until March 31 during the second fiscal quarter.

U.S. Results

Income from the U.S. card business dropped to $309 million before taxes. The provision for loan losses climbed 31 percent. Loans overdue by 30 days or more climbed to 3.54 percent from 2.71 percent a year earlier and 3.63 percent in the first quarter. As previously reported, the credit-card company wrote down a commercial paper investment by $31 million.

``Our losses are going up, but they're still lower than a number of our large competitors because of our conservatism over the last couple of years,'' Nelms said. Debt the credit-card company doesn't expect to be repaid was 4.99 percent in the second quarter, up from 3.97 percent a year earlier.

Eighty percent of Discover's cardholders have been members for more than five years, and that translates into a ``more stable group of customers who are probably less likely to get in sudden trouble,'' he said.

Discover bought Citigroup Inc.'s Diner's Club International for $165 million in April to add income to its payment network overseas as Americans struggled to repay their balances. The acquisition would add $10 million to $15 million a year in pretax profits, Nelms has said. Integrating Diner's Club may take about two years, he said in a conference call today.

Credit-Card Lenders

Like New York-based American Express Co., Discover extends credit and runs a network that processes transactions for other lenders. Visa Inc., the biggest credit-card network, and MasterCard Inc., ranked second, operate networks without making loans to consumers.

``We do expect continued deterioration in delinquencies and charge-offs, and that'll turn back the other direction as unemployment, gas prices, house prices change, as some of the stresses on consumers abate,'' Nelms said in the interview.

American Express, the largest U.S. credit-card company by purchases and cash advances, said yesterday that customers are falling further behind on debt, signaling a worsening economy.

Visa stock has risen 87 percent as of yesterday since completing its public offering earlier this year. MasterCard has soared more than 640 percent since its 2006 debut.

To contact the reporter on this story: Linda Shen in New York at lshen21@bloomberg.net

Last Updated: June 26, 2008 16:20 EDT