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Discover Drops as Lender’s Net Interest Margin Narrows in Fourth Quarter

Discover Financial Services (DFS), the fourth-largest U.S. payments network, fell 3.2 percent as fiscal fourth-quarter net interest margin narrowed.

Net income in the period ended Nov. 30 climbed 47 percent to $513 million, or 95 cents a share, from $350 million, or 64 cents, a year earlier, the Riverwoods, Illinois-based company said today in a statement. That beat the average estimate of 92 cents by 21 analysts in a Bloomberg survey. Discover increased the quarterly dividend 67 percent to 10 cents a share and repurchased $227 million of stock during the quarter.

Net interest margin, the difference between what a firm pays in deposits and charges for loans, narrowed to 9.1 percent from 9.28 percent in the same quarter last year and 9.26 percent in the previous quarter, according to the bank. Its purchase of student loans, which have lower yields, and new credit-card regulations contributed to the shrinkage, Discover said.

“It never helps to have the NIM coming down on a quarter- over-quarter basis,” Donald Fandetti, a Citigroup Inc. analyst, said in a phone interview. “It was a beat, but there’s nothing overly exciting.”

Discover fell 75 cents to $23.07 in New York. The stock has advanced 25 percent this year.

Chairman and Chief Executive Officer David Nelms, 50, has sought to expand beyond Discover’s core card-lending and processing businesses with the purchase of Student Loan Corp. from New York-based Citigroup.

Purchases Increase

“We generated organic growth in all loan products, had continued improvement in credit and demonstrated solid expense control,” Nelms said in the statement.

Purchases made with Discover cards increased 8 percent to $25 billion from a year earlier, the lender said. Net interest income climbed 12 percent to $1.26 billion, and credit-card loans rose 3 percent to $1.5 billion.

Write-offs for credit-card loans deemed uncollectible fell to 3.04 percent in November from 6.72 percent in the same month last year, according to regulatory filings. Loans at least 30 days overdue, a signal of future write-offs, dropped to 2.43 percent from 4.15 percent.

Discover posted a $319 million provision for losses on soured loans, down from $383 million a year earlier. Moshe Orenbuch, an analyst with Credit Suisse Group AG (CSGN), had predicted a $220 million provision. Net interest income increased 12 percent to $1.26 billion from the previous year.

To contact the reporters on this story: Donal Griffin in New York at Dgriffin10@bloomberg.net;

To contact the editor responsible for this story: David Scheer at dscheer@bloomberg.net.

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