Discover Profit Beats Estimates as Card Spending Climbs

Discover Financial Services (DFS), the top performer for the past year in the Standard & Poor’s 500 Financials Index, said fiscal first-quarter profit rose 36 percent to a record as consumers spent more on credit cards.

Net income for the three months ended Feb. 29 increased to $631 million, or $1.18 a share, from $465 million, or 84 cents, a year earlier, the Riverwoods, Illinois-based firm said yesterday in a statement. That beat the average estimate of 94 cents by 22 analysts in a Bloomberg survey. Results included a $226 million reserve release.

Chairman and Chief Executive Officer David Nelms boosted the quarterly dividend 67 percent in December to 10 cents a share and bought back stock as the U.S. economy continued to mend. The lender acquired a portfolio of private student loans from Citigroup Inc. (C) in September and announced a $2 billion share-buyback plan last week after the Federal Reserve announced the results of bank stress tests.

“Consumers are continuing to gradually grow their spending,” Nelms, 51, said in a telephone interview. “They’ve finished a lot of the deleveraging that they’re going to do on credit cards and auto loans.”

Discover fell 22 cents to $31.64 in New York trading. The shares have climbed 40 percent in the past year, the most of 81 companies in the S&P financials index.

The lender was one of 30 firms subjected to the central bank’s stress tests to demonstrate whether the industry can withstand another severe economic shock. The Fed didn’t object to Discover’s plan to repurchase stock, the company said.

Revenue Increase

Revenue net of interest expense rose 6 percent to $1.84 billion as purchases made with Discover cards increased 7 percent, the lender said. Net interest income climbed 11 percent to $1.29 billion, and credit-card loans rose 3.6 percent to $45.9 billion. Net interest margin, the difference between what the firm pays for deposits and what it charges for loans, narrowed to 9.03 percent in the first quarter from 9.22 percent a year earlier, according to the statement.

Credit-card write-offs fell to 3.07 percent in the first quarter from 5.96 percent a year earlier, according to the statement. Loans at least 30 days overdue, a signal of future write-offs, fell to 2.22 percent from 3.59 percent. Provisions for future loan losses fell 64 percent to $152 million.

‘Good Stuff’

Delinquencies probably will improve in coming months, “which would mean charge-off rates would probably improve thereafter,” said Sanjay Sakhrani, an analyst at KBW Inc., who rates Discover outperform, meaning he expects the stock to return at least 15 percent over 12 months. “The question is, ‘How much of that good stuff is factored into the stock?’”

Total other expenses increased 14 percent to $677 million, according to a company financial supplement. The integration of the student loans business acquired from New York-based Citigroup, new business initiatives and reserves for litigation and regulatory matters drove expenses higher, Chief Financial Officer R. Mark Graf said in a conference call after the results were announced.

To contact the reporter on this story: Patrick Clark in New York at pclark48@bloomberg.net

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

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