Discover Profit Misses Estimates as Total Expenses Increase

Discover Financial Services (DFS) Inc., the sixth-biggest U.S. credit-card lender, posted a fiscal fourth-quarter profit that missed analysts’ estimates as increased expenses outpaced revenue growth.

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.

“Our strategy and business model are working as we achieved organic growth in all of our lending products,” Nelms, 51, said in the statement.

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. The firm raised its quarterly dividend 40 percent to 14 cents a share.

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.

Purchases Increase

Discover slipped 1.9 percent to $39.01 at 9:05 a.m. in New York trading. The shares gained 66 percent this year through yesterday, the second-biggest advance after Bank of America Corp. among 81 companies in the Standard & Poor’s 500 Financials Index.

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.

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.

To contact the reporters on this story: Donal Griffin in New York at dgriffin10@bloomberg.net; Dawn Kopecki in New York at dkopecki@bloomberg.net

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

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