Discover’s Profit Surpasses Estimates as Card Spending Climbs

Discover Financial Services (DFS), owner of the fourth-biggest U.S. payments network, reported profit that beat analysts’ estimates as customer spending and demand for loans climbed.

Fourth-quarter net income rose 12 percent to $602 million, or $1.23 a share, from $539 million, or $1.06, a year earlier, the Riverwoods, Illinois-based firm said yesterday in a statement. The average estimate of 23 analysts surveyed by Bloomberg was for adjusted earnings of $1.18 a share.

Chief Executive Officer David Nelms is seeking to drive more transactions to Discover’s global network and move the firm beyond its core credit-card operations. Discover, which has become one of the biggest U.S. student lenders, began offering mortgages and partnered with EBay Inc.’s PayPal last year to help the online network extend its reach to brick-and-mortar merchants.

“The industry has been flat to slightly negative the last three years, and so the fact that we’ve been growing loans and credit cards says that we are taking share,” Nelms, 52, said in a phone interview. The firm can boost that share with its client base “if we’re better at service, better at rewards, don’t lose as many consumers, add new features, add acceptance points,” he said.

Discover rose 1.6 percent to $53.25 in extended trading in New York. The shares increased 35 percent in the past 12 months through yesterday’s close, outpacing the 25 percent advance of the 81-company Standard & Poor’s 500 Financials Index.

Revenue Increases

Total loans increased 5 percent to $65.8 billion in the fourth-quarter from a year earlier, according to the statement. Discover card sales rose 2.8 percent to $29.5 billion and the lender set aside 4.3 percent less money to cover soured loans, the company said.

Revenue increased 5.6 percent to $2.1 billion and net interest income rose 9.9 percent to $1.6 billion.

Discover “continues to gain spending and lending traction with current card members as well with selective new accounts,” Jason Arnold, an analyst at RBC Capital Markets, said in a Jan. 21 note. He rates the stock as a top pick.

Spending on Discover’s Pulse debit network was $40.4 billion or roughly flat from a year earlier, the company said. Private student loans increased 5 percent and personal loans rose 27 percent. The payment-services unit posted a 1 percent decline in transaction dollar volume.

American Express Co. (AXP), the biggest credit-card issuer by purchases, said Jan. 17 that fourth-quarter profit doubled on higher consumer spending. Capital One Financial Corp. (COF), based in McLean, Virginia, also said that day that net income rose 1.9 percent from the year earlier on lower loan-loss provisions.

To contact the reporter on this story: Elizabeth Dexheimer in New York at edexheimer@bloomberg.net

To contact the editors responsible for this story: David Scheer at dscheer@bloomberg.net; Peter Eichenbaum at peichenbaum@bloomberg.net

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