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Discover Falls Most Since June as Profit Misses: Chicago Mover

Discover Financial Services (DFS) Inc. fell the most on the Standard & Poor’s 500 Financials Index (S5FINL) after posting fiscal fourth-quarter profit that missed analysts’ estimates on higher expenses.

Discover, the sixth-largest U.S. credit-card lender, slid as much as 5.5 percent in New York, the biggest intraday drop since June. Net income for the three months ended Nov. 30 climbed 7.4 percent to $551 million, or $1.07 a share, from $513 million, or 95 cents, a year earlier, the Riverwoods, Illinois- based company said today in a statement. The average estimate of 24 analysts surveyed by Bloomberg News was $1.13 a share.

Discover is adding staff and increasing marketing costs as Chief Executive Officer David Nelms seeks to move Discover beyond its core credit-card operations. Under Nelms, the firm has become one of the biggest U.S. student lenders and also started offering mortgages in June.

“When you are investing for organic growth, the expenses lead to revenues,” Chief Financial Officer Mark Graf said on a conference call with analysts. “But given the ROIs and the opportunities we see in these products, we are very comfortable going ahead and making those investments.”

Discover fell $1.99, or 5 percent, to $37.78 at 12:40 p.m. The shares had gained 66 percent this year through yesterday, trailing only Bank of America Corp. among 81 companies in the financials index.

Photographer: Scott Eells/Bloomberg

Purchases made with Discover cards increased 6 percent to $26.5 billion from a year earlier, the firm said. Close

Purchases made with Discover cards increased 6 percent to $26.5 billion from a year... Read More

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Photographer: Scott Eells/Bloomberg

Purchases made with Discover cards increased 6 percent to $26.5 billion from a year earlier, the firm said.

‘Too Rich’

Total expenses rose 20 percent to $800 million from a year earlier, partially driven by higher employee compensation costs, which climbed 21 percent to $278 million, according to the statement. The company’s expenses in 2013 will likely be slightly higher than this year’s $3.05 billion, Graf said on the call.

Purchases made with Discover cards increased 6 percent to $26.5 billion from a year earlier, the firm said. Net interest income climbed 11 percent to $1.39 billion and credit-card loans rose 6 percent to $49.6 billion, the lender said. Rewards expenses were higher than the company expected as Discover offered a 5 percent cash-back promotion in the quarter, Graf said.

“The program was probably a little bit too rich in retrospect, but it did drive fabulous cardmember engagement, which is great,” Graf said.

The firm raised its quarterly dividend 40 percent to 14 cents a share, payable on Jan. 17. Discover plans to be “more aggressive” in asking the Federal Reserve for approval to return capital to shareholders in 2013, Graf said.

Soured Loans

Write-offs of loans deemed uncollectible fell to 2.02 percent in November from 3.04 percent a year earlier. Loans at least 30 days overdue, a signal of future defaults, dropped to 1.84 percent from 2.43 percent. Only New York-based American Express Co. (AXP) posted lower rates among the six biggest U.S. credit-card issuers.

Net interest margin, the difference between what a firm pays in deposits and charges for loans, rose to 9.44 percent from 9.1 percent a year earlier on lower funding costs. Graf said while the margin may decline next year as yield on assets declines, it’s likely to stay above the firm’s long-term target of 8.5 percent to 9 percent.

To contact the reporters on this story: Donal Griffin in New York at dgriffin10@bloomberg.net; Michael J. Moore in New York at mmoore55@bloomberg.net

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

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