Discover Profit Beats Estimates as Write-Offs Decline

Discover Financial Services (DFS), the credit-card lender that boosted dividends after passing U.S. stress tests, posted a profit that beat analysts’ estimates as more customers kept up with their bills.

First-quarter net income slipped 6.2 percent to $631 million, or $1.31 a share, from $673 million, or $1.33, a year earlier, the Riverwoods, Illinois-based company said yesterday in a statement. The average estimate of 25 analysts surveyed by Bloomberg, excluding some items, was $1.25 a share.

Card issuers are getting a lift as more consumers pay on time. Write-offs at Discover fell to 2.3 percent in March from 2.5 percent in February and loans at least 30 days overdue dropped to 1.7 percent from 1.8 percent. Chief Executive Officer David Nelms, 53, is seeking to expand beyond credit cards, including student lending and direct checking.

“First and foremost, we are going to continue to focus on gaining market share in the credit-card business,” Nelms said yesterday in a phone interview. “We are continuing to grow our other banking products significantly -- private student loans, personal loans. I look forward to the launch of our direct checking accounts later this year.”

Shares of Discover decreased 1.7 percent to $55.70 in extended New York trading. The stock climbed 1.3 percent this year through the close of regular trading, compared with a 0.6 percent advance for the Standard & Poor’s 500 Financials Index.

While the quarter included increases in net revenue, total loans and card spending volume, profit dropped as the company set aside more money to cover loan losses and expenses rose.

Revenue Advances

Revenue net of interest expense rose 4.3 percent to $2.1 billion. Purchase volume expanded 4 percent to $50.8 billion and spending on Discover’s Pulse debit network increased 5 percent.

Total loans increased 6 percent to $63.8 billion and credit-card loans rose 5 percent to $50.9 billion. Provisions for loan losses increased by $111 million to $270 million. Expenses rose 3 percent from the prior year as the firm increased headcount, and spent more money on information processing and equipment.

Discover previously set plans to boost its dividend 20 percent to 24 cents a share and said it would repurchase as much as $3.2 billion of shares through April 15, 2016, after passing annual stress tests administered by the Federal Reserve.

Discover “is decidedly the ‘no-brainer’ to own in the card space,” Daniel Furtado, an analyst at Jefferies Group LLC, said in an April 8 note with a buy rating on the lender’s stock. “The shares will continue to work as the company continues to show strong card balance growth with conservative underwriting.”

American Express Co., the biggest credit-card issuer by customer spending, said April 16 that net income increased 12 percent to $1.43 billion as card purchases climbed and expenses fell. Capital One Financial Corp., the McLean, Virginia-based bank that gets more than half its revenue from credit cards, said first-quarter profit rose 9.3 percent to $1.15 billion.

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

To contact the editors responsible for this story: Peter Eichenbaum at peichenbaum@bloomberg.net Dan Reichl, David Scheer

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